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As filed with the Securities and Exchange Commission on May 10, 2004
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-15279
GENERAL COMMUNICATION, INC.
(Exact name of registrant as specified in its charter)
STATE OF ALASKA 92-0072737
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2550 Denali Street
Suite 1000
Anchorage, Alaska 99503
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (907) 868-5600
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (l) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No .
The number of shares outstanding of the registrant's classes of common stock as
of April 30, 2004 was:
53,468,060 shares of Class A common stock; and
3,866,003 shares of Class B common stock.
1
GENERAL COMMUNICATION, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2004
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, 2004
(unaudited) and December 31, 2003..................................................6
Consolidated Statements of Income for the
three months ended March 31, 2004
(unaudited) and 2003 (unaudited)...................................................8
Consolidated Statements of Stockholders' Equity
for the three months ended March 31, 2004
(unaudited) and 2003 (unaudited)...................................................9
Consolidated Statements of Cash Flows for the three
months ended March 31, 2004 (unaudited)
and 2003 (unaudited)...............................................................11
Notes to Interim Condensed Consolidated Financial
Statements.........................................................................12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................................27
Item 3. Quantitative and Qualitative Disclosures About
Market Risk...........................................................................48
Item 4. Controls and Procedures...............................................................49
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.....................................................................49
Item 6. Exhibits and Reports on Form 8-K......................................................50
Other items are omitted, as they are not applicable.
SIGNATURES................................................................................................51
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, 2003 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 following on the communications industry: high levels of
competition in the long-distance market resulting in pressures to
reduce prices; an oversupply of long-haul capacity; excessive debt
loads; and several high-profile company failures and potentially
fraudulent accounting practices by some companies;
o The efficacy of laws enacted by Congress and the State of Alaska
legislature; rules and regulations to be adopted by the Federal
Communications Commission ("FCC") and state public regulatory agencies
to implement the provisions of the 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
communications industries are able to offer combined or full service
packages prior to our being able to do so;
o The degree to which we experience material competitive impacts to our
traditional service offerings prior to achieving adequate local service
entry;
o Competitor responses to our products and services and overall market
acceptance of such products and services;
o The outcome of our negotiations with Incumbent Local Exchange Carriers
("ILECs") and state regulatory arbitrations and approvals with respect
to interconnection agreements;
3
o Our ability to purchase network elements or wholesale services from
ILECs at a price sufficient to permit the profitable offering of local
telephone service at competitive rates;
o Success and market acceptance for new initiatives, many of which are
untested;
o The level and timing of the growth and profitability of existing and
new initiatives, particularly yellow page directories, local telephone
services expansion including deploying digital local phone service
("DLPS") and wireless services;
o Start-up costs associated with entering new markets, including
advertising and promotional efforts;
o Risks relating to the operations of new systems and technologies and
applications to support new initiatives;
o Local conditions and obstacles;
o The impact on our industry and indirectly on us of oversupply of
capacity resulting from excessive deployment of network capacity in
certain markets we do not serve;
o Uncertainties inherent in new business strategies, new product launches
and development plans, including local telephone services, wireless
services, and yellow page directories, and the offering of these
services in geographic areas with which we are unfamiliar;
o The risks associated with technological requirements, technology
substitution and changes and other technological developments;
o Prolonged service interruptions which could affect our business;
o Development and financing of communications, local telephone, wireless,
Internet and cable networks and services;
o Future financial performance, including the availability, terms and
deployment of capital; the impact of regulatory and competitive
developments on capital outlays, and the ability to achieve cost
savings and realize productivity improvements and the consequences of
increased leverage;
o Availability of qualified personnel;
o Changes in, or failure, or inability, to comply with, government
regulations, including, without limitation, regulations of the FCC, the
Regulatory Commission of Alaska ("RCA"), and adverse outcomes from
regulatory proceedings;
o Changes in regulations governing unbundled network elements ("UNEs");
o Uncertainties in federal military spending levels and military base
closures in markets in which we operate;
o The ongoing global and domestic trend towards consolidation in the
communications industry, which may result in our competitors being
larger and better financed, and provide these competitors with
extensive resources and greater geographic reach, allowing them to
compete more effectively;
o Any continuing financial, credit and economic impacts of the MCI, Inc.
("MCI") bankruptcy filing on the industry in general and on us in
particular;
o The success of MCI's emergence from bankruptcy protection,
o A migration of MCI's or Sprint'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 significant customers, MCI
and Sprint Corporation ("Sprint");
o The effect on us of industry consolidation including the potential
acquisition of one or more of our large wholesale customers by a
company with commercial relationships with other providers;
4
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 our cable certificates or
goodwill and could have a material adverse impact on our financial
position, results of operations or liquidity; and
o Other risks detailed from time to time in our periodic reports filed
with the SEC.
You should not place undue reliance on any such forward-looking statements.
Further, any forward-looking statement, and such risks, uncertainties and other
factors speak only as of the date on which they were originally made and we
expressly disclaim any obligation or undertaking to disseminate any updates or
revisions to any forward-looking statement to reflect any change in our
expectations with regard to those statements or any other change in events,
conditions or circumstances on which any such statement is based, except as
required by law. New factors emerge from time to time, and it is not possible
for us to predict what factors will arise or when. In addition, we cannot assess
the impact of each factor on our business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements.
5
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands) (Unaudited)
March 31, December 31,
ASSETS 2004 2003
- --------------------------------------------------------------------------------------- ----------------- -----------------
Current assets:
Cash and cash equivalents $ 10,841 10,435
----------------- -----------------
Receivables 64,089 70,235
Less allowance for doubtful receivables 2,018 1,954
----------------- -----------------
Net receivables 62,071 68,281
Deferred income taxes, net 6,726 7,195
Prepaid and other current assets 6,257 12,159
Notes receivable from related parties 1,673 1,885
Property held for sale 1,176 2,173
Inventories 984 1,513
----------------- -----------------
Total current assets 89,728 103,641
----------------- -----------------
Property and equipment in service, net of depreciation 360,361 369,039
Construction in progress 51,802 33,618
----------------- -----------------
Net property and equipment 412,163 402,657
----------------- -----------------
Cable certificates 191,241 191,241
Goodwill 41,972 41,972
Other intangible assets, net of amortization of $1,815 and $1,656 at March 31, 2004
and December 31, 2003, respectively 4,136 3,895
Deferred loan and senior notes costs, net of amortization of $1,438 and $5,308 at
March 31, 2004 and December 31, 2003, respectively 9,559 5,757
Notes receivable from related parties 3,903 4,281
Other assets 9,147 9,576
----------------- -----------------
Total other assets 259,958 256,722
----------------- -----------------
Total assets $ 761,849 763,020
================= =================
See accompanying notes to interim condensed consolidated financial statements.
6 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
(Unaudited)
(Amounts in thousands) March 31, December 31,
LIABILITIES, REDEEMABLE PREFERRED STOCK, AND STOCKHOLDERS' EQUITY 2004 2003
- ---------------------------------------------------------------------------------- ----------------- ----------------
Current liabilities:
Current maturities of obligations under capital leases $ 6,293 5,139
Accounts payable 23,571 34,133
Deferred revenue 14,736 21,275
Accrued payroll and payroll related obligations 14,311 17,545
Accrued liabilities 7,369 8,156
Accrued interest 2,920 8,645
Subscriber deposits 577 651
----------------- ----------------
Total current liabilities 69,777 95,544
Long-term debt 366,912 345,000
Obligations under capital leases, excluding current maturities 37,378 38,959
Obligation under capital lease due to related party, excluding current maturity 695 677
Deferred income taxes, net of deferred income tax benefit 24,805 24,168
Other liabilities 6,507 6,366
----------------- ----------------
Total liabilities 506,074 510,714
----------------- ----------------
Redeemable preferred stock 22,572 25,664
----------------- ----------------
Stockholders' equity:
Common stock (no par):
Class A. Authorized 100,000 shares; issued 53,343 and 52,589 shares at
March 31, 2004 and December 31, 2003, respectively 206,451 202,362
Class B. Authorized 10,000 shares; issued 3,866 and 3,868 shares at March
31, 2004 and December 31, 2003, respectively; convertible on a
share-per-share basis into Class A common stock 3,267 3,269
Less cost of 338 Class A common shares held in treasury at March 31, 2004
and December 31, 2003 (1,917) (1,917)
Paid-in capital 13,173 12,836
Notes receivable with related parties issued upon stock option exercise (4,370) (4,971)
Retained earnings 16,812 15,371
Accumulated other comprehensive loss (213) (308)
----------------- -----------------
Total stockholders' equity 233,203 226,642
----------------- -----------------
Commitments and contingencies
Total liabilities, redeemable preferred stock, and stockholders' equity $ 761,849 763,020
================= =================
See accompanying notes to interim condensed consolidated financial statements.
7
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
(Amounts in thousands, except per share amounts) 2004 2003
----------------- -----------------
Revenues $ 108,916 92,777
Cost of sales and services 38,745 30,248
Selling, general and administrative expenses 35,404 32,993
Bad debt expense (recovery) (397) 597
Depreciation, amortization and accretion expense 15,758 13,501
----------------- -----------------
Operating income 19,406 15,438
----------------- -----------------
Other income (expense):
Interest expense (7,517) (9,154)
Loss on early extinguishment of debt (6,136) ---
Amortization and write-off of loan and senior notes fees (2,627) (1,073)
Interest income 108 166
----------------- -----------------
Other expense, net (16,172) (10,061)
----------------- -----------------
Net income before income taxes and cumulative effect of a change in
accounting principle 3,234 5,377
Income tax expense 1,309 2,282
----------------- -----------------
Net income before cumulative effect of a change in accounting principle 1,925 3,095
Cumulative effect of a change in accounting principle, net of income tax benefit
of $367 --- (544)
----------------- -----------------
Net income $ 1,925 2,551
================= =================
Basic net income per common share:
Net income before cumulative effect of a change in accounting principle $ 0.03 0.05
Cumulative effect of a change in accounting principle, net of income tax
benefit of $367 --- (0.01)
----------------- -----------------
Net income $ 0.03 0.04
================= =================
Diluted net income per common share:
Net income before cumulative effect of a change in accounting principle $ 0.02 0.05
Cumulative effect of a change in accounting principle, net of income tax
benefit of $367 --- (0.01)
----------------- -----------------
Net income $ 0.02 0.04
================= =================
See accompanying notes to interim condensed consolidated financial statements.
8
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(Unaudited)
Notes
Class A Receivable Accumulated
Class A Class B Shares Issued to Other
Common Common Held in Paid-in Related Retained Comprehensive
(Amounts in thousands) Stock Stock Treasury Capital Parties Earnings Loss Total
----------------------------------------------------------------------------------------
Balances at December 31, 2002 $199,903 3,274 (1,836) 11,222 (5,650) 1,847 (540) 208,220
Components of comprehensive income:
Net income --- --- --- --- --- 2,551 --- 2,551
Change in fair value of cash flow
hedge, net of change in income tax
liability 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.
9 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(Unaudited)
(Continued)
Notes
Class A Receivable Accumulated
Class A Class B Shares Issued to Other
Common Common Held in Paid-in Related Retained Comprehensive
(Amounts in thousands) Stock Stock Treasury Capital Parties Earnings Loss Total
----------------------------------------------------------------------------------------
Balances at December 31, 2003 $202,362 3,269 (1,917) 12,836 (4,971) 15,371 (308) 226,642
Components of comprehensive income:
Net income --- --- --- --- --- 1,925 --- 1,925
Change in fair value of cash flow
hedge, net of change in income tax
benefit of $58 --- --- --- --- --- --- 95 95
-------
Comprehensive income 2,020
Tax effect of excess stock compensation
expense for tax purposes over amounts
recognized for financial reporting
purposes --- --- --- 260 --- --- --- 260
Class B shares converted to Class A 2 (2) --- --- --- --- --- ---
Shares issued under stock option plan 995 --- --- --- --- --- --- 995
Amortization of the excess of GCI stock
market value over stock option exercise
cost on date of stock option grant --- --- --- 77 --- --- --- 77
Conversion of Series B preferred stock to
Class A common stock 3,092 --- --- --- --- --- --- 3,092
Payments received on notes receivable
issued to related parties upon stock
option exercise --- --- --- --- 601 --- --- 601
Preferred stock dividends --- --- --- --- --- (484) --- (484)
----------------------------------------------------------------------------------------
Balances at March 31, 2004 $206,451 3,267 (1,917) 13,173 (4,370) 16,812 (213) 233,203
========================================================================================
See accompanying notes to interim condensed consolidated financial statements.
10
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(Unaudited)
(Amounts in thousands) 2004 2003
-------------- -------------
Cash flows from operating activities:
Net income $ 1,925 2,551
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation, amortization and accretion expense 15,758 13,501
Loss on early extinguishment of debt 6,136 ---
Deferred income tax expense 1,309 2,282
Amortization of loan and senior notes fees 2,627 1,073
Compensatory stock options 77 114
Bad debt expense (recovery), net of write-offs 64 (81)
Deferred compensation 127 133
Cumulative effect of a change in accounting principle, net --- 544
Other noncash income and expense items 311 (118)
Change in operating assets and liabilities (14,554) (5,651)
-------------- -------------
Net cash provided by operating activities 13,780 14,348
-------------- -------------
Cash flows from investing activities:
Purchases of property and equipment, including construction period interest (25,201) (6,474)
Proceeds from sales of assets 859 ---
Purchases of other assets and intangible assets (672) (922)
Refund of deposit 699 ---
Payments received on notes receivable from related parties 662 22
Additions to property held for sale (81) ---
Notes receivable issued to related parties --- (22)
-------------- -------------
Net cash used in investing activities (23,734) (7,396)
-------------- -------------
Cash flows from financing activities:
Issuance of new Senior Notes 245,720 ---
Repayment of old Senior Notes (180,000) ---
Borrowing on new Senior Credit Facility 10,000 ---
Repayment of new Senior Credit Facility (53,832) ---
Repayments of capital lease obligations (409) (478)
Payment of debt issuance costs (6,429) (12)
Payment of bond call premiums (6,136) ---
Payment of preferred stock dividends (150) (148)
Proceeds from common stock issuance 995 ---
Payment received on note receivable from related parties issued upon stock
option exercise 601 ---
Purchase of treasury stock --- (81)
-------------- -------------
Net cash provided by (used in) financing activities 10,360 (719)
-------------- -------------
Net increase in cash and cash equivalents 406 6,233
Cash and cash equivalents at beginning of period 10,435 11,940
-------------- -------------
Cash and cash equivalents at end of period $ 10,841 18,173
============== =============
See accompanying notes to interim condensed consolidated financial statements.
11
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
The accompanying unaudited interim condensed consolidated financial statements
include the accounts of General Communication, Inc. ("GCI") and its subsidiaries
and have been prepared in accordance with generally accepted accounting
principles for interim financial information. Accordingly, they do not include
all of the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements. They
should be read in conjunction with our audited consolidated financial statements
for the year ended December 31, 2003, filed as part of our annual report on Form
10-K. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. The results of operations for interim periods are not necessarily
indicative of the results that may be expected for an entire year or any other
period.
(l) Business and Summary of Significant Accounting Principles
In the following discussion, GCI and its direct and indirect subsidiaries
are referred to as "we," "us" and "our".
(a) Business
GCI, an Alaska corporation, was incorporated in 1979. We offer the
following services:
o Long-distance telephone service between Alaska and the
remaining United States and foreign countries,
o Cable television services throughout Alaska,
o Facilities-based competitive local access services in
Anchorage, Fairbanks and Juneau, Alaska,
o Internet access services,
o 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 an undersea fiber optic cable
system used in the transmission of interstate and intrastate
Private Line, switched message long-distance and Internet
services between Alaska and the remaining United States and
foreign countries, and
o Distribution of a white and yellow pages directory to
residential and business customers in Anchorage and an on-line
directory product
(b) Principles of Consolidation
The consolidated financial statements include the consolidated
accounts of GCI and its wholly owned subsidiaries with all
significant intercompany transactions eliminated.
12 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
(c) Earnings per Common Share
Earnings per common share ("EPS") and common shares used to
calculate basic and diluted EPS consist of the following (amounts
in thousands, except per share amounts):
Three Months Ended March 31,
2004 2003
---------------------------------- ----------------------------------
Income Shares Income Shares
(Num- (Denom- Per-share (Num- (Denom- Per-share
erator) inator) Amounts erator) inator) Amounts
---------- ----------- ----------- ---------- ----------- -----------
Net income before cumulative
effect of a change in accounting
principle, net of deferred tax
benefit of $367 in 2003 $ 1,925 $ 3,095
---------- ----------
Less preferred stock dividends:
Series B 334 361
Series C 150 148
---------- ----------
484 509
---------- ----------
Basic EPS:
Net income before cumulative
effect of a change in accounting
principle, net of deferred tax
benefit of $367 in 2003,
available to common stockholders 1,441 56,752 $ 0.03 2,586 55,367 $ 0.05
Effect of Dilutive Securities:
Unexercised stock options --- 1,285 --- --- 293 ---
---------- ----------- ----------- ---------- ----------- -----------
Diluted EPS:
Net income before cumulative
effect of a change in accounting
principle, net of deferred tax
benefit of $367 in 2003,
available to common stockholders $ 1,441 58,037 $ 0.02 $ 2,586 55,660 $ 0.05
========== =========== =========== ========== =========== ===========
13 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Common equivalent shares outstanding which are anti-dilutive for
purposes of calculating EPS for the three months ended March 31,
2004 and 2003 are not included in the diluted EPS calculations and
consist of the following (shares, in thousands):
Three Months Ended
March 31,
2004 2003
------------- --------------
Series B redeemable preferred stock 2,277 3,062
Series C redeemable preferred stock 833 833
------------- --------------
Anti-dilutive common equivalent shares
outstanding 3,110 3,895
============= ==============
Weighted average shares associated with outstanding stock options
for the three months ended March 31, 2004 and 2003 which have been
excluded from the diluted EPS calculations because the options'
exercise price was greater than the average market price of the
common shares consist of the following (shares, in thousands):
Three Months Ended
March 31,
2004 2003
------------- --------------
Weighted average shares associated with
outstanding stock options 156 4,510
============= ==============
(d) Common Stock
Following are the changes in common stock for the three months
ended March 31, 2004 and 2003 (shares, in thousands):
Class A Class B
------------- --------------
Balances at December 31, 2002 51,795 3,875
Class B shares converted to Class A 1 (1)
Shares issued under stock option plan 13 ---
Shares issued per G.C. Cablevision, Inc.
acquisition agreement 223 ---
------------- --------------
Balances at March 31, 2003 52,032 3,874
============= ==============
Balances at December 31, 2003 52,589 3,868
Class B shares converted to Class A 2 (2)
Shares issued under stock option plan 192 ---
Conversion of preferred stock Series B to
Class A common stock 560 ---
------------- --------------
Balances at March 31, 2004 53,343 3,866
============= ==============
14 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
(e) Redeemable Preferred Stocks
Redeemable preferred stocks consist of the following (amounts in
thousands):
March 31, 2004 December 31, 2003
--------------- -----------------
Series B $ 12,572 15,664
Series C 10,000 10,000
--------------- -----------------
$ 22,572 25,664
=============== =================
We have 1,000,000 shares of preferred stock authorized with the
following shares issued (in thousands):
Series B Series C
------------- --------------
Shares at December 31, 2002 and March 31,
2003 17 10
============= ==============
Shares at December 31, 2003 16 10
Shares converted to GCI Class A common stock (3) ---
------------- --------------
Shares at March 31, 2004 13 10
============= ==============
As of March 31, 2004, the combined aggregate amount of preferred
stock mandatory redemption requirements, including dividends,
follow (amounts in thousands):
Years Ending
March 31:
-------------
2004 $ ---
2005 ---
2006 10,150
2007 ---
2008 ---
--------
$ 10,150
========
Series B
The redemption amount of our Series B preferred stock at March 31,
2004 and December 31, 2003 was $13,129,000 and $15,887,000,
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, 2004 and December 31, 2003
was $10,000,000.
15 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
(f) Asset Retirement Obligations
Upon adoption of SFAS No. 143, "Accounting for Asset Retirement
Obligations," we recorded the cumulative effect of accretion and
depreciation expense as a cumulative effect of a change in
accounting principle of approximately $544,000, net of income tax
benefit of $367,000, during the three months ended March 31, 2003.
Following is a reconciliation of the beginning and ending aggregate
carrying amount of our asset retirement obligations at March 31,
2004 and 2003 (amounts in thousands):
Balance at December 31, 2002 $ ---
Liability recognized upon adoption of SFAS
No. 143 1,565
Accretion expense for the three months
ended March 31, 2003 128
--------
Balance at March 31, 2003 $ 1,693
========
Balance at December 31, 2003 $ 2,005
Accretion expense for the three months ended
March 31, 2004 43
Other (11)
--------
Balance at March 31, 2004 $ 2,037
========
(g) Stock Option Plan
At March 31, 2004, we had one stock-based employee compensation
plan. We account for this plan under the recognition and
measurement principles of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. We use the intrinsic-value method and
compensation expense is recorded on the date of grant only if the
current market price of the underlying stock exceeds the exercise
price. We have adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," and SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure." We have elected to
continue to apply the provisions of APB Opinion No. 25 and provide
the pro forma disclosure as required by SFAS No. 148.
16 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Stock-based employee compensation cost is reflected over the
options' vesting period of generally five years and compensation
cost for options granted prior to January 1, 1996 is not
considered. The following table illustrates the effect on net
income and EPS for the three months ended March 31, 2004 and 2003,
if we had applied the fair-value recognition provisions of SFAS No.
123 to stock-based employee compensation (amounts in thousands,
except per share amounts):
Three Months Ended
March 31,
------------------------
2004 2003
---------- ----------
Net income, as reported $ 1,925 2,551
Total stock-based employee compensation expense included in
reported net income, net of related tax effects 45 23
Total stock-based employee compensation expense under the
fair-value based method for all awards, net of related tax
effects (523) (474)
---------- ----------
Pro forma net income $ 1,447 2,100
========== ==========
Basic net income per common share after cumulative
effect of a change in accounting principle, as reported $ 0.03 0.04
========== ==========
Diluted net income per common share after cumulative
effect of a change in accounting principle, as reported $ 0.02 0.04
========== ==========
Basic and diluted net income per common share after cumulative
effect of a change in accounting principle, pro forma $ 0.02 0.03
========== ==========
The calculation of total stock-based employee compensation expense
under the fair-value based method includes weighted-average
assumptions of a risk-free interest rate, volatility and an
expected life.
(h) Variable Interest Entities
In December 2003, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. ("FIN") 46 (revised December 2003),
"Consolidation of Variable Interest Entities," which addresses how
a business enterprise should evaluate whether it has a controlling
financial interest in an entity through means other than voting
rights and accordingly should consolidate the entity. FIN 46R,
which was issued in January 2003, replaces FIN 46. We will be
required to apply FIN 46R to variable interests in Variable
Interest Entities ("VIEs") created after December 31, 2003. For
variable interests in VIEs created before January 1, 2004, the
Interpretation will be applied beginning on January 1, 2005. For
any VIEs that must be consolidated under FIN 46R that were created
before January 1, 2004, the assets, liabilities and non-controlling
interests of the VIE initially would be measured at their carrying
amounts with any difference between the net amount added to the
balance sheet and any previously recognized interest being
recognized as the cumulative effect of an accounting change. If
determining the carrying amounts is not practicable, fair value at
the date FIN 46R first applies may be used to measure the assets,
liabilities and non-controlling interest of the VIE. At December
31, 2003, we did not have
17 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
VIEs. Adoption of this statement on January 1, 2004 did not have a
material effect on our results of operations, financial position
and cash flows.
(i) Reclassifications
Reclassifications have been made to the 2003 financial statements
to make them comparable with the 2004 presentation.
(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, 2004 2003
------------ ------------
Decrease in accounts receivable $ 6,146 5,066
(Increase) decrease in inventories 529 (688)
Decrease in prepaid and other current assets 5,902 630
Decrease in accounts payable (10,562) (6,075)
Decrease in deferred revenues (6,539) (1,662)
Increase (decrease) in accrued payroll and payroll
related obligations (3,234) 1,002
Decrease in accrued interest (5,725) (3,119)
Decrease in accrued liabilities (634) (391)
Decrease in subscriber deposits (74) (64)
Decrease in components of other long-term liabilities (363) (350)
------------ ------------
$ (14,554) (5,651)
============ ============
We paid interest totaling approximately $13,658,000 and $12,273,000
during the three months ended March 31, 2004 and 2003, respectively.
(3) Intangible Assets
Cable certificates are allocated to our cable services segment. Goodwill
is primarily allocated to the cable services segment and the remaining
amount is not allocated to a reportable segment, but is included in the
All Other category as described in note 6.
Amortization expense for amortizable intangible assets was $159,000 and
$173,000 during the three months ended March 31, 2004 and 2003,
respectively.
Amortization expense for amortizable intangible assets for each of the
five succeeding fiscal years is estimated to be (amounts in thousands):
Years Ending
December 31,
-------------
2004 $ 712
2005 595
2006 590
2007 529
2008 279
18 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
No indicators of impairment have occurred since the impairment testing
was performed as of December 31, 2003.
(4) MCI Settlement and Release Agreement
On July 21, 2002 MCI and substantially all of its active United States
subsidiaries filed voluntary petitions for reorganization under Chapter
11 of the United States Bankruptcy Code in the United States Bankruptcy
Court. On July 22, 2003, the United States Bankruptcy Court approved a
settlement agreement for pre-petition amounts owed to us by MCI and
affirmed all of our existing contracts with MCI. The remaining
pre-petition accounts receivable balance owed by MCI to us after this
settlement was $11.1 million ("MCI credit") which we have used and will
continue to use as a credit against amounts payable for services
purchased from MCI.
After settlement, we began reducing the MCI credit as we utilized it for
services otherwise payable to MCI. The use of the credit is recorded as a
reduction of bad debt expense. During the three months ended March 31,
2004 and 2003 we realized approximately $1.2 million and $0,
respectively, of the MCI credit against amounts payable for services
received from MCI.
The remaining unused MCI credit totaled $6.7 million and $7.9 million at
March 31, 2004 and December 31, 2003, respectively. The credit balance is
not recorded on the Consolidated Balance Sheet as we are recognizing
recovery of bad debt expense as the credit is realized. We have accounted
for our use of the MCI credit as a gain contingency, and, accordingly,
will recognize a reduction of bad debt expense as services are provided
by MCI and the credit is realized. MCI emerged from bankruptcy protection
in April 2004; see note 8.
(5) Long-term Debt
Draw on New Senior Credit Facility
In January 2004 we drew $10.0 million under the revolving credit portion
of our new Senior Credit Facility. The draw was re-paid in February 2004
from proceeds of our new Senior Notes offering discussed below.
Senior Notes Refinancing
In February 2004 GCI's wholly owned subsidiary GCI, Inc. sold $250
million in aggregate principal amount of senior debt securities due in
2014 ("new Senior Notes"). The new Senior Notes are an unsecured senior
obligation. We pay interest of 7.25% on the new Senior Notes. The new
Senior Notes were sold at a discount of $4.3 million. The Senior Notes
are carried on our Consolidated Balance Sheet net of the unamortized
portion of the discount, which is being amortized to Interest Expense
over the life of the new Senior Notes.
The net proceeds of the offering were primarily used to repay our
existing $180.0 million 9.75% Senior Notes ("old Senior Notes") and to
repay approximately $43.8 million of the term portion and $10.0 million
of the revolving portion of our new Senior Credit Facility. Semi-annual
interest payments of approximately $9.1 million will be due beginning
August 15, 2004. In connection with the issuance, we paid fees and other
expenses of approximately $6.3 million which are being amortized over the
life of the new Senior Notes.
19 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
The new Senior Notes were offered only to qualified institutional buyers
pursuant to exemptions from registration under the Securities Act. The
new Senior Notes have not been registered under the Securities Act and,
unless so registered, may not be offered or sold except pursuant to an
exemption from, or in a transaction not subject to, the registration
requirements of the Securities Act and applicable state securities laws.
We plan to register our new Senior Notes during the second quarter of
2004.
The new Senior Notes are not redeemable prior to February 15, 2009. At
any time on or after February 15, 2009, the new Senior Notes are
redeemable at our option, in whole or in part, on not less than thirty
days nor more than sixty days notice, at the following redemption prices,
plus accrued and unpaid interest (if any) to the date of redemption:
If redeemed during the twelve month period
commencing February 1 of the year indicated: Redemption Price
------------------------------------------------- --------------------
2009 103.625%
2010 102.417%
2011 101.208%
2012 and thereafter 100.000%
We may, on or prior to February 17, 2007, at our option, use the net
cash proceeds of one or more underwritten public offerings of our
qualified stock to redeem up to a maximum of 35% of the initially
outstanding aggregate principal amount of our new Senior Notes at a
redemption price equal to 107.25% of the principal amount of the new
Senior Notes, together with accrued and unpaid interest, if any, thereon
to the date of redemption, provided that not less than 65% of the
principal amount of the new Senior Notes originally issued remain
outstanding following such a redemption.
The new Senior Notes restrict GCI, Inc. and certain of its subsidiaries
from incurring debt in most circumstances unless the result of incurring
debt does not cause our leverage ratio to exceed 6.0 to one. The new
Senior Notes do not allow debt under the new Senior Credit Facility to
exceed the greater of (and reduced by certain stated items):
o $250 million, reduced by the amount of any prepayments, or
o 3.0 times earnings before interest, taxes, depreciation and
amortization for the last four full fiscal quarters of GCI, Inc.
and certain of its subsidiaries.
The new Senior Notes limit our ability to make cash dividend payments.
We conducted a Consent Solicitation and Tender Offer for the old Senior
Notes. Through February 13, 2004 we accepted for payment $114.6 million
principal amount of notes which were validly tendered. Such notes
accepted for payment received additional consideration as follows:
o $4.0 million based upon a payment of $1,035 per $1,000 principal
amount, consisting of the purchase price of $1,025 per $1,000
principal amount and the consent payment of $10 per $1,000
principal amount, and
o $497,000 in accrued and unpaid interest through February 16, 2004.
20 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
The remaining principal amount of $65.4 million was redeemed on March 18,
2004 for additional consideration as follows:
o $2.1 million based upon a payment of $1,032.50 per $1,000
principal amount, and
o $833,000 in accrued and unpaid interest through March 18, 2004.
The total redemption cost was $186.1 million. The premium to redeem our
old Senior Notes was $6.1 million (excluding interest cost of $1.3
million) and was recognized as a loss on early extinguishment of debt, a
component of Other Income (Expense), during the three months ended March
31, 2004.
Compliance with the redemption notice requirements in the Indenture
resulted in a delay before final payment of some of the old Senior Notes.
As a result of such delay, our total debt increased during the overlap
period between the redemption of the old Senior Notes and the issuance of
the new Senior Notes making us out of compliance with Section 6.11 of our
Credit, Guaranty, Security and Pledge Agreement, dated as of October 30,
2003. We received a waiver from compliance with Section 6.11 until April
30, 2004. After the final redemption payment on March 18, 2004 we were in
compliance with Section 6.11.
(6) Industry Segments Data
Our reportable segments are business units that offer different products.
The reportable segments are each managed separately and offer distinct
products with different production and delivery processes.
We have four reportable segments as follows:
Long-distance services. We offer a full range of common carrier
long-distance services to commercial, government, other
telecommunications companies and residential customers, through our
networks of fiber optic cables, digital microwave, and fixed and
transportable satellite earth stations and our SchoolAccess(TM)
offering to rural school districts and a similar offering to rural
hospitals and health clinics.
Cable services. We provide cable television services to residential,
commercial and government users in the State of Alaska. Our cable
systems serve 35 communities and areas in Alaska, including the state's
four largest urban areas, Anchorage, Fairbanks, the Matanuska-Susitna
Valley, and Juneau. We offer digital cable television services in
Anchorage, the Matanuska-Susitna Valley, Fairbanks, Juneau, Ketchikan,
Kenai and Soldotna and retail cable modem service (through our Internet
services segment) in all of our locations in Alaska except Kotzebue.
Local access services. We offer facilities based competitive local
exchange services in Anchorage, Fairbanks and Juneau and plan to
provide similar competitive local exchange services in other locations
pending regulatory approval and subject to availability of capital.
Revenue, costs of sales and service and operating expenses for our new
phone directory are included in the local access services segment.
21 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Internet services. We offer wholesale and retail Internet services to
both consumer and commercial customers. We offer cable modem service as
further described in Cable services above. Our undersea fiber optic
cable system 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 and accretion
expense, net other expense and income taxes, and (2) operating income or
loss. The accounting policies of the reportable segments are the same as
those described in the summary of significant accounting policies in note
1. Intersegment sales are recorded at cost plus an agreed upon
intercompany profit.
We earn all revenues through sales of services and products within the
United States. All of our long-lived assets are located within the United
States of America, except approximately 84% 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, 2004 and 2003 follows (amounts in
thousands):
Reportable Segments
---------------------------------------------------------
Long- Local Total
Distance Cable Access Internet Reportable All
Services Services Services Services Segments Other Total
-------------------------------------------------------------------------------
2004
----
Revenues:
Intersegment $ 3,434 617 2,340 926 7,317 186 7,503
External 51,896 24,852 11,792 6,406 94,946 13,970 108,916
-------------------------------------------------------------------------------
Total revenues $ 55,330 25,469 14,132 7,332 102,263 14,156 116,419
===============================================================================
Earnings (loss) from
operations before
depreciation,
amortization, accretion,
net interest expense and
income taxes $ 26,733 11,645 2,314 1,723 42,415 (12,609) 29,806
===============================================================================
Operating income (loss) $ 19,811 6,966 1,422 799 28,998 (8,814) 20,184
===============================================================================
22 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Reportable Segments
---------------------------------------------------------
Long- Local Total
Distance Cable Access Internet Reportable All
Services Services Services Services Segments Other Total
-------------------------------------------------------------------------------
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, accretion,
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
===============================================================================
A reconciliation of reportable segment revenues to consolidated revenues
follows (amounts in thousands):
Three months ended March 31, 2004 2003
--------------- ---------------
Reportable segment revenues $ 102,263 94,876
Plus All Other revenues 14,156 8,023
Less intersegment revenues eliminated in consolidation 7,503 10,122
--------------- ---------------
Consolidated revenues $ 108,916 92,777
=============== ===============
23 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
A reconciliation of reportable segment earnings from operations before
depreciation, amortization and accretion expense, net other expense and
income taxes to consolidated net income before income taxes and
cumulative effect of a change in accounting principle follows (amounts in
thousands):
Three months ended March 31, 2004 2003
-------------- ----------------
Reportable segment earnings from operations before
depreciation, amortization and accretion expense, net other
expense and income taxes $ 42,415 38,114
Less All Other loss from operations before depreciation,
amortization and accretion expense, net other expense and
income taxes 12,609 8,550
Less intersegment contribution eliminated in consolidation 778 625
-------------- ----------------
Consolidated earnings from operations before
depreciation, amortization and accretion expense, net
other expense and income taxes 29,028 28,939
Less depreciation, amortization and accretion expense 15,758 13,501
Add loss on early extinguishment of debt 6,136 ---
-------------- ----------------
Consolidated operating income 19,406 15,438
Less other expense, net 16,172 10,061
-------------- ----------------
Consolidated net income before income taxes and
cumulative effect of a change in accounting principle $ 3,234 5,377
============== ================
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, 2004 2003
--------------- ---------------
Reportable segment operating income $ 28,998 26,593
Less All Other operating loss 8,814 10,530
Less intersegment contribution eliminated in consolidation 778 625
--------------- ---------------
Consolidated operating income 19,406 15,438
Less other expense, net 16,172 10,061
--------------- ---------------
Consolidated net income before income taxes and cumulative
effect of a change in accounting principle $ 3,234 5,377
=============== ===============
(7) Commitments and Contingencies
Litigation and Disputes
We are routinely involved in various lawsuits, billing disputes, legal
proceedings and regulatory matters that have arisen in the normal course
of business. While the ultimate results of these
24 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
items cannot be predicted with certainty we do not expect at this time
the resolution of them to have a material adverse effect on our financial
position, results of operations or liquidity.
Fiber Optic Cable System Construction Commitment
In June 2003 we began work on the construction of a fiber optic cable
system connecting Seward, Alaska and Warrenton, Oregon, with leased
backhaul facilities to connect it to our switching and distribution
centers in Anchorage, Alaska and Seattle, Washington ("AU West"). A
consortium of companies was selected to design, engineer, manufacture and
install the undersea fiber optic cable system and a contract has been
signed at a total cost to us of $35.2 million. From inception through
March 31, 2004 our capital expenditures for this project have totaled
approximately $28.4 million, most of which have been funded through our
operating cash flows and are classified as Construction in Progress in
our Consolidated Balance Sheets. We expect to fund the remaining
construction costs of the fiber optic cable system through our operating
cash flows and, to the extent necessary, with draws on our new Senior
Credit Facility. We expect to place AULP West into service during the
second quarter of 2004.
Fiber Optic Cable System Repair
Our undersea fiber optic cable system connecting Whittier, Valdez and
Juneau, Alaska and Seattle, Washington ("AULP East") began experiencing
powering irregularities during the first quarter of 2004. We expect to
repair AU East after AULP West is placed into service without any
significant service disruption. Depending on the nature of the
malfunction and the necessary corrective action, repair costs are
expected to range between $225,000 and $950,000 excluding salvage value,
if any. If AULP East must be repaired before AULP West is placed into
service, we expect to lease additional temporary transmission capacity
the cost of which is not expected to have a material effect on our
results of operations.
Internal Revenue Service Examination
Our United States income tax return for 2000 was selected for examination
by the Internal Revenue Service during 2003. The examination began during
the fourth quarter of 2003. We believe this examination will not have a
material adverse effect on our financial position, results of operations
or our liquidity.
Anchorage Unbundled Network Elements Arbitration
We are currently involved in arbitration to revise the rates, terms, and
conditions that govern our access to unbundled network elements in
Anchorage, and a RCA decision is pending. The RCA's decisions in these
proceedings could result in a change in our costs of serving new and
existing markets via the facilities of the ILEC or via wholesale
offerings.
(8) Subsequent Events
MCI's Emergence from Bankruptcy Protection
MCI emerged from bankruptcy protection on April 20, 2004. Uncertainties
exist with respect to the potential realization and the timing of our
utilization of the MCI credit. We have accounted for our use of the MCI
credit as a gain contingency, and, accordingly, will recognize a
reduction of bad debt expense as services are provided by MCI and the
credit is realized.
25 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Rural Exemption
Alaska Communications Systems Group, Inc. ("ACS"), through subsidiary
companies, provides local services in Fairbanks and Juneau, Alaska. These
ACS subsidiaries are classified as Rural Telephone Companies under the
1996 Telecom Act, which entitles them to an exemption of certain material
interconnection terms of the 1996 Telecom Act, until and unless such
"rural exemption" is examined and discontinued by the RCA. An April 2004
proceeding to decide the matter of rural exemption was canceled upon
GCI's and ACS' joint settlement. The settlement agreement includes the
following terms, among others:
o ACS relinquishes all claims to exemptions from full local
telephone competition in Fairbanks and Juneau,
o New rates for unbundled loops in Fairbanks and Juneau will begin
January 1, 2005. We estimate the agreed upon rates will increase
our local services segment cost of sales and service
approximately $600,000 to $700,000 during the year ended
December 31, 2005,
o Extension of existing interconnection agreements between ACS and
GCI for Fairbanks and Juneau until January 1, 2008, and
o Resolution of unbundled network element leasing issues for the
Fairbanks and Juneau markets.
26
PART I.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
In the following discussion, General Communication, Inc. and its direct and
indirect subsidiaries are referred to as "we," "us" and "our."
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and assumptions that affect the reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. On an on-going basis, we evaluate our
estimates and judgments, including those related to unbilled revenues, cost of
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
Through our focus on long-term results, acquisitions, and strategic capital
investments, we strive to consistently grow our revenues and expand our margins.
We have historically met our cash needs for operations, regular capital
expenditures and maintenance capital expenditures through our cash flows from
operating activities. Historically, cash requirements for significant
acquisitions and major capital expenditures have been provided largely through
our financing activities. We are funding the construction of a new fiber optic
cable system through our operating cash flows and, to the extent necessary, with
draws on our new Senior Credit Facility, as further discussed in Liquidity and
Capital Resources in this report.
27
Results of Operations
The following table sets forth selected Statement of Operations data as a
percentage of total revenues for the periods indicated (underlying data rounded
to the nearest thousands):
Percentage
Change (1)
Three Months Ended 2004
March 31, vs.
(Unaudited) 2004 2003 2003
---- ---- ----
Statement of Operations Data:
Revenues:
Long-distance services 47.7% 52.2% 7.0%
Cable services 22.8% 25.3% 6.0%
Local access services 10.8% 9.1% 39.9%
Internet services 5.9% 4.9% 39.6%
All other services 12.8% 8.5% 78.3%
-----------------------------------------------
Total revenues 100.0% 100.0% 17.4%
Cost of sales and services 35.6% 32.6% 28.1%
Selling, general and administrative expenses 32.5% 35.6% 7.3%
Bad debt expense (recovery) (0.4%) 0.6% (166.5%)
Depreciation, amortization and accretion
expense 14.5% 14.6% 16.7%
-----------------------------------------------
Operating income 17.8% 16.6% 25.7%
Net income before income taxes and
cumulative effect of a change in
accounting principle in 2003 3.0% 5.8% (39.9%)
Net income before cumulative effect of a
change in accounting principle in 2003 1.8% 3.3% (37.8%)
Net income 1.8% 2.7% (24.5%)
28
Percentage
Change (1)
Three Months Ended 2004
March 31, vs.
(Unaudited) 2004 2003 2003
---- ---- ----
Other Operating Data:
Long-distance services operating income (2) 41.3% 46.6% (5.3%)
Cable services operating income (3) 25.5% 24.8% 9.1%
Local access services operating income (4) (3.2%) (20.5%) 78.0%
Internet services operating income (loss) (5) 14.3% (18.8%) 205.8%
- --------------------------
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, 2004 ("2004") Compared To Three Months Ended
March 31, 2003 ("2003")
Overview of Revenues and Cost of Sales and Services
Total revenues increased 17.4% from $92.8 million in 2003 to $108.9 million in
2004. All of our segments and All Other Services contributed to the increase in
total revenues. See the discussion below for more information by segment.
Total cost of sales and services increased 28.1% from $30.2 million in 2003 to
$38.7 million in 2004. As a percentage of total revenues, total cost of sales
and services increased from 32.6% in 2003 to 35.6% in 2003. All of our segments
and All Other Services contributed to the increase in total cost of sales and
services. See the discussion below for more information by segment.
Long-Distance Services Overview
Long-distance services revenue in 2004 represented 47.7% of consolidated
revenues. Our provision of interstate and intrastate long-distance services,
Private Line and leased dedicated capacity services, and broadband services
accounted for 94.0% of our total long-distance services revenues during 2004.
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.
Due in large part to the favorable synergistic effects of our bundling strategy,
the long-distance services segment continues to be a significant contributor to
our overall performance, although the migration of traffic from voice to data
and from fixed to mobile wireless continues.
29
Our long-distance services segment faces significant competition from AT&T
Alascom, 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. Contractual rate reductions occur
annually through the end of the initial term of the contract.
On July 21, 2002 MCI and substantially all of its active United States
subsidiaries filed voluntary petitions for reorganization under Chapter 11 of
the United States Bankruptcy Code in the United States Bankruptcy Court. On July
22, 2003, the United States Bankruptcy Court approved a settlement agreement for
pre-petition amounts owed to us by MCI and affirmed all of our existing
contracts with MCI. The remaining pre-petition accounts receivable balance owed
by MCI to us after this settlement was $11.1 million ("MCI credit") which we
have used and will continue to use as a credit against amounts payable for
services purchased from MCI.
After settlement, we began reducing the MCI credit as we utilized it for
services otherwise payable to MCI. The use of the credit is recorded as a
reduction of bad debt expense. During the three months ended March 31, 2004 and
2003 we realized approximately $1.2 million and $0, respectively, of the MCI
credit against amounts payable for services received from MCI.
The remaining unused MCI credit totaled $6.7 million and $7.9 million at March
31, 2004 and December 31, 2003, respectively. The credit balance is not recorded
on the Consolidated Balance Sheet as we are recognizing recovery of bad debt
expense as the credit is realized.
MCI emerged from bankruptcy protection on April 20, 2004. We have accounted for
our use of the MCI credit as a gain contingency, and, accordingly, will
recognize a reduction of bad debt expense as services are provided by MCI and
the credit is realized.
Other common carrier traffic routed to us for termination in Alaska is largely
dependent on traffic routed to MCI and Sprint by their customers. Pricing
pressures, general economic deterioration, new program offerings, business
failures, and market and business consolidations continue to evolve in the
markets served by MCI and Sprint. If, as a result, their traffic is reduced, or
if their competitors' costs to terminate or originate traffic in Alaska are
reduced, our traffic will also likely be reduced, and our pricing may be reduced
to respond to competitive pressures. Additionally, a protracted economic malaise
in the 48 contiguous states south of or below Alaska ("Lower 48 States") or a
further disruption in the economy resulting from terrorist attacks and other
attacks or acts of war could affect our carrier customers. 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.
30
Long-distance Services Segment Revenues
Total long-distance services segment revenues increased 7.0% to $51.9 million in
2004. The components of long-distance services segment revenues are as follows
(amounts in thousands):
2004 2003 Percentage Change
-------------- ------------- -----------------
Common carrier message telephone services $ 21,171 21,062 0.5%
Residential, commercial and governmental message telephone
services 9,893 10,211 (3.1%)
Private line and private network services 10,366 8,838 17.3%
Broadband services 7,369 5,747 28.2%
Lease of fiber optic cable system capacity 3,097 2,628 17.8%
-------------- ------------- ----------------
Total long-distance services segment revenue $ 51,896 48,486 7.0%
============== ============= ================
Common Carrier Message Telephone Services Revenue
The 2004 increase in message telephone service revenues from other common
carriers (principally MCI and Sprint) resulted from a 20.5% increase in
wholesale minutes carried to 225.5 million minutes. The increase in message
telephone service revenues from other common carriers in 2004 was partially
off-set by the following:
o A 11.4% decrease in the average rate per minute on minutes carried for
other common carriers primarily due to the decreased average rate per
minute as agreed to in the July 2003 extension of our contract to
provide interstate and intrastate long-distance services to MCI, and
o A discount given to a certain other common carrier customer starting in
the third quarter of 2003.
Residential, Commercial and Governmental Message Telephone Services Revenue
Selected key performance indicators for our offering of message telephone
service to residential, commercial and governmental customers follow:
2004 2003 Percentage Change
------------------ ------------------ -----------------
Retail minutes carried 76.2 million 71.9 million 6.0%
Average rate per minute $0.130 $0.139 (6.5%)
Number of active residential,
commercial and governmental
customers (1) 86,100 87,300 (1.4%)
------------------------------------
1 All current subscribers who have had calling activity during March 2004
and 2003, respectively.
The decrease in message telephone service revenues from residential, commercial,
and governmental customers in 2004 is primarily due to the following:
o A decrease in the average rate per minute primarily due to our
promotion of and customers' enrollment in calling plans offering a
certain number of minutes for a flat monthly fee, and
31
o A decrease in the number of active residential, commercial, and
governmental customers billed primarily due to the effect of customers
substituting cellular phone, prepaid calling card, and email usage for
direct dial minutes.
The decrease in message telephone service to residential, commercial and
governmental customers in 2004 is partially off-set by an increase in minutes
carried for these customers. The increase in minutes is primarily a result of
our contract to provide services to the State of Alaska starting in the first
quarter of 2004.
Broadband Services Revenue
The increase in revenues from our packaged telecommunications offering to rural
hospitals and health clinics and our SchoolAccess(TM) offering to rural school
districts in 2004 is primarily due to the following:
o An increased number of circuits leased to rural hospitals and health
clinics in Alaska to both existing and new customers resulting in
increased revenue of $607,000, and
o A $617,000 increase in special project revenue for services sold to the
federal government.
Long-distance Services Segment Cost of Sales and Services
Long-distance services segment cost of sales and services increased 18.6% to
$14.3 million in 2004. Long-distance services segment cost of sales and services
as a percentage of long-distance services segment revenues increased from 24.9%
in 2003 to 27.6% in 2004 primarily due to the following:
o A $2.3 million 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 and did not recur in 2004,
o The decreased average rate per minute on minutes carried for other
common carriers as agreed to in the July 24, 2003 extension of our
contract to provide interstate and intrastate long-distance services to
MCI, and
o A discount given to a certain other common carrier customer in 2004
without a corresponding decrease in the cost of sales and services.
The increase 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
the following:
o A $400,000 refund in 2004 from an intrastate access cost pool that
previously overcharged us for access services, and
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 $.011 and $.061 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.
Cable Services Overview
Cable television revenues in 2004 represented 22.8% of consolidated revenues.
Our cable systems serve 35 communities and areas in Alaska, including the
state's four largest population centers, Anchorage, Fairbanks, the
Matanuska-Susitna Valley and Juneau.
32
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 2004 programming
services generated 73.5% of total cable services revenues, cable services'
allocable share of cable modem services accounted for 13.3% of such revenues,
equipment rental and installation fees accounted for 9.4% of such revenues,
advertising sales accounted for 3.0% of such revenues, and other services
accounted for the remaining 0.8% of total cable services revenues.
Effective February 2003, we increased rates charged for certain cable services
and premium packages in six communities, including three of the state's four
largest population centers, Anchorage, Fairbanks and Juneau. Rates increased
approximately 4% for those customers who experienced an adjustment.
The primary factors that contribute to year-to-year changes in cable services
revenues include average monthly subscription and pay-per-view rates, the mix
among basic, premium and pay-per-view services and digital and analog services,
the average number of cable television and cable modem subscribers during a
given reporting period, and revenues generated from new product offerings.
In 2002 we signed seven-year retransmission agreements with the five local
Anchorage broadcasters and began up-linking and distributing the local Anchorage
programming to all of our cable systems. This local programming provides
additional value to our cable subscribers that not all our Direct Broadcast
Satellite ("DBS") competitors can provide. In the third quarter of 2003 DBS
service provider Dish Network (EchoStar Communications Corporation) began
providing, for an additional fee, Anchorage based broadcaster programming in
Anchorage and in other Alaska communities where there is not a similar local
broadcast affiliate.
Cable Services Segment Revenues and Cost of Sales and Services
Selected key performance indicators for our cable services segment follow:
Percentage
2004 2003 Change
------------- ------------- ----------------
Basic subscribers 134,000 136,300 (1.7%)
Digital special interest subscribers 34,000 30,200 12.6%
Cable modem subscribers 51,700 38,600 33.9%
Homes passed 203,400 198,400 2.5%
Total cable services segment revenues increased 6.0% to $24.9 million and
average gross revenue per average basic subscriber per month increased $2.87 or
4.8% in 2004.
The increase in cable services segment revenues is primarily due to a 32.8%
increase in its share of cable modem revenue (offered through our Internet
services segment) to $3.3 million in 2004 due to an increased number of cable
modems deployed. Approximately 99% of our cable homes passed are able to
subscribe to our cable modem service. In the second quarter of 2003 we completed
our upgrade of the Ketchikan cable system. Customers in this system are now able
to subscribe to cable modem service.
We now offer digital programming service in Anchorage, the Matanuska-Susitna
Valley, Fairbanks, Juneau, Ketchikan, Kenai, and Soldotna, representing
approximately 88% of our total homes passed at
33
March 31, 2004. We launched digital programming services in the
Matanuska-Susitna Valley cable system during the first and second quarters of
2003 and launched such services in the Ketchikan cable system in the third
quarter of 2003.
Cable services cost of sales and services increased 9.4% to $7.1 million in 2004
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 increased from 27.6% in 2003 to 28.4% in 2004 primarily due to
rate increases in 2004 by programming vendors exceeding our rate adjustments.
Cost of sales increases are partially off-set by increasing amounts of cable
modem services sold that generally have higher margins than do cable programming
services.
Multiple System Operator ("MSO") Operating Statistics
Our operating statistics include capital expenditures and customer information
from our cable services segment and the components of our local access services
and Internet services segments which offer services utilizing our cable
services' facilities.
Our capital expenditures by standard reporting category for the three month
periods ending March 31, 2004 and 2003 follows (amounts in thousands):
2004 2003
----------- ----------
Customer premise equipment $ 3,438 1,276
Commercial 47 68
Scalable infrastructure 1,755 135
Line extensions 44 88
Upgrade/rebuild 1,770 72
Support capital 181 77
---------- ----------
Sub-total 7,235 1,716
Remaining reportable segments and
All Other capital expenditures 17,966 4,758
---------- ----------
$ 25,201 6,474
========== ==========
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, 2004 and 2003 we had 122,100 and 124,000 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, 2004 and 2003 we had 185,800 and
173,300 revenue generating units, respectively.
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 2004 local access services revenues represented
10.8% of consolidated revenues.
34
The primary factors that contribute to year-to-year changes in local access
services revenues include the average number of business and residential
subscribers to our services during a given reporting period, the average monthly
rates charged for non-traffic sensitive services, the number and type of
additional premium features selected, and the traffic sensitive access rates
charged to carriers and the Universal Service Program.
Our local access services segment faces significant competition in Anchorage,
Fairbanks, and Juneau from ACS , which is the largest ILEC in Alaska, and from
AT&T Alascom, Inc. 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.
At March 31, 2004, 108,600 lines were in service as compared to approximately
98,900 lines in service at March 31, 2003. At March 31, 2004 approximately 1,200
additional lines were awaiting connection. We estimate that our 2004 lines in
service represents a statewide market share of approximately 23%.
Our access line mix at March 31, 2004 follows:
o Residential lines represent approximately 59% of our lines,
o Business customers represent approximately 35% of our lines, and
o Internet access customers represent approximately 6% of our lines.
Approximately 85% of our lines are provided on our own facilities and leased
local loops. Approximately 5% of our lines are provided using UNE platform.
In December 2003 we distributed our new phone directory and began recognizing
revenue and costs of sales and service in the local access services segment. We
recognized one month of revenue and cost of sales and service in the fourth
quarter of 2003 and are recognizing the remaining eleven months in 2004.
In April 2004 we successfully launched our DLPS deployment utilizing our
Anchorage coaxial cable facilities. This service delivery method allows us to
utilize our own cable facilities to provide local access to our customers and
avoid paying local loop charges to the ILEC. To ensure the necessary equipment
is available to us we have committed to purchase a certain number of outdoor,
network powered multi-media adapters.
Local Access Services Segment Revenues and Cost of Sales and Services
Local access services segment revenues increased 39.9% in 2004 to $11.8 million
primarily due to the following:
o Growth in the average number of lines in service, and
o $1.3 million increase in support from the Universal Service Program.
35
Local access services segment cost of sales and services increased 15.9% to $6.5
million in 2004. Local access services segment cost of sales and services as a
percentage of local access services segment revenues decreased from 67.0% in
2003 to 55.5% in 2004, primarily due to the following:
o $1.3 million increase in support from the Universal Service Program
with no corresponding increase in cost of sales and services, and
o $218,000 increase in the end user common line rate in the third quarter
of 2003.
The local access services segment operating results are negatively affected 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 results would have improved by
approximately $1.7 million and the long distance services segment operating
results would have been reduced by an equal amount in 2004. Avoided access
charges totaled approximately $1.8 million in 2003.
The local access services segment operating results were affected by our
evaluation and testing of DLPS technology. We successfully launched our DLPS
deployment in April 2004.
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 revenue (a portion of cable modem revenue is also
recognized by our cable services segment). During 2004 Internet services segment
revenues represented 5.9% of consolidated revenues.
The primary factors that contribute to year-to-year changes in Internet services
revenues include the average number of subscribers to our services during a
given reporting period, the average monthly subscription rates, the amount of
bandwidth purchased by large commercial customers, and the number and type of
additional premium features selected.
Marketing campaigns continue to be deployed targeting residential and commercial
customers featuring bundled products. Our Internet offerings are bundled with
various combinations of our long-distance, cable, and local access services
offerings and provide free or discounted basic or premium Internet services.
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.
Internet Services Segment Revenues and Cost of Sales and Services
Selected key performance indicators for our Internet services segment follow:
Percentage
2004 2003 Change
------------ ------------ ---------------
Total Internet subscribers 100,600 91,800 9.6%
Cable modem subscribers 51,700 38,600 33.9%
Dial-up subscribers 48,900 53,500 (8.6%)
36
Total Internet services segment revenues increased 39.6% to $6.4 million in 2004
primarily due to the 34.3% increase in its allocable share of cable modem
revenues to $2.7 million in 2004 as compared to 2003. The increase in cable
modem revenues is primarily due to growth in cable modem subscribers.
Additionally, cable modem revenue growth is affected by the level of service our
subscribers select. In 2004 and 2003, 7.4% and 6.7%, respectively, of our
subscribers selected our highest level of cable modem service resulting in a
29.7% or approximately $1.3 million increase in revenue in 2004 as compared to
2003.
We previously reported a total of 71,600 Internet subscribers at March 31, 2003.
This subscriber count was based upon the total number of active dial-up
subscribers at March 31, 2003. Not all cable modem subscribers paying for a
dial-up plan had activated their dial-up service. When we first started selling
cable modem service it was packaged in a way that almost all cable modem
subscribers were also dial up subscribers. As we introduced new packages and
plans and started promoting our cable modem LiteSpeed service the number of
cable modem subscribers without a dial up plan increased substantially. An
internal review during the second quarter of 2003 revealed that these subscriber
counts had risen substantially enough that they are now being reported
separately.
Internet services cost of sales and services increased 25.3% to $1.8 million in
2004, and as a percentage of Internet services revenues, totaled 27.5% and 30.6%
in 2004 and 2003, respectively. The 2004 decrease as a percentage of Internet
services revenues is primarily due to the increase in Internet's portion of
cable modem revenue which 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.
All Other Services Overview
Revenues reported in the All Other category as described in note 6 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 12.8% of total revenues
in 2004.
All Other Revenues and Costs of Sales and Services
All Other revenues increased 78.3% to $14.0 million in 2004. The increase in
revenues is primarily due to the following:
o $6.1 million in special project revenue earned from our GCI Fiber
system in 2004, and
o Increased monthly revenue earned from our GCI Fiber system that
transits the Trans Alaska oil pipeline corridor.
The increase described above is partially off-set by a $840,000 decrease in
product sales revenue to $786,000 in 2004. The decrease is due to sales of
product to two customers in 2003 that were not repeated in 2004.
All Other costs of sales and services increased 94.3% to $9.1 million in 2004,
and as a percentage of All Other revenues, totaled 64.8% and 59.5% in 2004 and
2003, respectively. The increase in All Other costs of sales and services as a
percentage of All Other revenues is primarily due to the recognition of $5.5
million in costs associated with special project revenue earned from our GCI
Fiber system in 2004.
37
The cost of sales and services as a percentage of revenue was 89.7% for this
project, which is a higher percentage than we realize for the regular monthly
revenue in All Other revenues.
The increase in the cost of sales and services as a percentage of revenue is
partially off-set by increased monthly revenue earned from our recurring service
contracts in 2004 which exceeds the corresponding increase in costs of sales or
services.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 7.3% to $35.4 million in
2004 primarily due to a $1.5 million increase in labor and health insurance
costs. As a percentage of total revenues, selling, general and administrative
expenses decreased to 32.5% in 2004 from 35.6% in 2003, primarily due to an
increase in revenues without a corresponding increase in selling, general and
administrative expenses.
Marketing and advertising expenses as a percentage of total revenues increased
from 2.7% in 2003 to 2.8% in 2004.
Bad Debt Expense (Recovery)
Bad debt expense (recovery) decreased 166.5% to ($397,000) in 2004. The 2004
decrease is primarily due to realization of approximately $1.2 million of the
MCI credit through a reduction to bad debt expense in 2004, as further discussed
in the "Long Distance Service Overview" above.
Depreciation, Amortization and Accretion Expense
Depreciation, amortization and accretion expense increased 16.7% to $15.8
million in 2004. The increase is primarily attributed to our $45.8 million
investment in equipment and facilities placed into service during 2003 for which
a full year of depreciation will be recorded in 2004, and the $7.0 million
investment in equipment and facilities placed into service during 2004 for which
a partial year of depreciation will be recorded in 2004.
Other Expense, Net
Other expense, net of other income, increased 60.7% to $16.2 million in 2004.
The increase is primarily due to the following:
o In 2004 we paid bond call premiums totaling $6.1 million to redeem our
old Senior Notes, and
o As a result of redeeming our old Senior Notes in 2004 we recognized
$2.3 million in unamortized old Senior Notes fee expense.
Partially offsetting the increases described above was a $2.3 million decrease
in interest expense in 2004 on our new Senior Credit Facility due to a decrease
in the average outstanding balance owed and a decreased interest rate as
compared to 2003.
Income Tax Expense
Income tax expense was $1.3 million in 2004 and $2.3 million in 2003. The change
was due to decreased net income before income taxes and cumulative effect of a
change in accounting principle in 2004 as compared to 2003. Our effective income
tax rate decreased from 42.4% in 2003 to 40.5% in 2004 due to the decreasing
proportion of items that are nondeductible for income tax purposes in 2004.
38
At March 31, 2004, we have (1) tax net operating loss carryforwards of
approximately $188.6 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 annual income tax
rate for financial statement purposes will be 38% to 41% in 2004.
Cumulative Effect of a Change in Accounting Principle
On January 1, 2003 we adopted SFAS No. 143, "Accounting for Asset Retirement
Obligations," and 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.
Liquidity and Capital Resources
Cash flows from operating activities totaled $13.8 million in 2004 as compared
to $14.4 million in 2003. The 2004 decrease is primarily due to a $4.3 million
payment of our company-wide success sharing bonus in 2004 and a $2.3 million
refund in 2003 from a local exchange carrier in respect of its earnings that
exceeded regulatory requirements, partially off-set by increased cash flow from
all of our reportable segments and All Other Services.
Other sources of cash during 2004 include $245.7 million from the issuance of
our new Senior Notes and a $10.0 million draw under the revolving credit portion
of our new Senior Credit Facility. Uses of cash during 2004 included
expenditures of $25.2 million for property and equipment, including construction
in progress, the $180.0 million repayment of our old Senior Notes, the $53.8
million repayment of the term and revolving credit portions of our new Senior
Credit Facility, payment of $6.4 million in fees associated with the new Senior
Notes and new Senior Credit Facility, and payment of bond call premiums totaling
$6.1 million to redeem our old Senior Notes.
Net receivables decreased $6.2 million from December 31, 2003 to March 31, 2004
primarily due to the February 2004 receipt of $5.6 million on a trade receivable
for broadband services provided to hospitals and health clinics.
Working capital totaled $20.0 million at March 31, 2004, a $11.9 million
increase as compared to $8.1 million at December 31, 2003. The increase is
primarily due to the January 2004 draw on our new Senior Credit Facility which
we used to fund our old Senior Notes interest payment in February 2004.
In February 2004 GCI's wholly owned subsidiary GCI, Inc. sold $250 million in
aggregate principal amount of senior debt securities due in 2014. The new Senior
Notes are an unsecured senior obligation. We pay interest of 7.25% on the new
Senior Notes. The new Senior Notes were sold at a discount of $4.3 million. The
Senior Notes are carried on our Consolidated Balance Sheet net of the
39
unamortized portion of the discount, which is being amortized to Interest
Expense over the life of the new Senior Notes.
The net proceeds of the offering were primarily used to repay our existing
$180.0 million 9.75% Senior Notes and to repay approximately $43.8 million of
the term portion and $10.0 million of the revolving portion of our new Senior
Credit Facility. Semi-annual interest payments of approximately $9.1 million
will be due beginning August 15, 2004. In connection with the issuance, we paid
fees and other expenses of approximately $6.3 million which are being amortized
over the life of the new Senior Notes.
The new Senior Notes were offered only to qualified institutional buyers
pursuant to exemptions from registration under the Securities Act. The new
Senior Notes have not been registered under the Securities Act and, unless so
registered, may not be offered or sold except pursuant to an exemption from, or
in a transaction not subject to, the registration requirements of the Securities
Act and applicable state securities laws. We plan to register our new Senior
Notes during the second quarter of 2004.
The new Senior Notes are not redeemable prior to February 15, 2009. At any time
on or after February 15, 2009, the new Senior Notes are redeemable at our
option, in whole or in part, on not less than thirty days nor more than sixty
days notice, at the following redemption prices, plus accrued and unpaid
interest (if any) to the date of redemption:
If redeemed during the twelve month period
commencing February 1 of the year indicated: Redemption Price
---------------------------------------------------- -----------------
2009 103.625%
2010 102.417%
2011 101.208%
2012 and thereafter 100.000%
We may, on or prior to February 17, 2007, at our option, use the net cash
proceeds of one or more underwritten public offerings of our qualified stock to
redeem up to a maximum of 35% of the initially outstanding aggregate principal
amount of our new Senior Notes at a redemption price equal to 107.25% of the
principal amount of the new Senior Notes, together with accrued and unpaid
interest, if any, thereon to the date of redemption, provided that not less than
65% of the principal amount of the new Senior Notes originally issued remain
outstanding following such a redemption.
The new Senior Notes restrict GCI, Inc. and certain of its subsidiaries from
incurring debt in most circumstances unless the result of incurring debt does
not cause our leverage ratio to exceed 6.0 to one. The new Senior Notes do not
allow debt under the new Senior Credit Facility to exceed the greater of (and
reduced by certain stated items):
o $250 million, reduced by the amount of any prepayments, or
o 3.0 times earnings before interest, taxes, depreciation and
amortization for the last four full fiscal quarters of GCI, Inc. and
certain of its subsidiaries.
The new Senior Notes limit our ability to make cash dividend payments.
40
We conducted a Consent Solicitation and Tender Offer for the old Senior Notes.
Through February 13, 2004 we accepted for payment $114.6 million principal
amount of notes which were validly tendered. Such notes accepted for payment
received additional consideration as follows:
o $4.0 million based upon a payment of $1,035 per $1,000 principal
amount, consisting of the purchase price of $1,025 per $1,000 principal
amount and the consent payment of $10 per $1,000 principal amount, and
o $497,000 in accrued and unpaid interest through February 16, 2004.
The remaining principal amount of $65.4 million was redeemed on March 18, 2004
for additional consideration as follows:
o $2.1 million based upon a payment of $1,032.50 per $1,000 principal
amount, and
o $833,000 in accrued and unpaid interest through March 18, 2004.
The total redemption cost was $186.1 million. The premium to redeem our old
Senior Notes was $6.1 million (excluding interest cost of $1.3 million) and was
recognized as a loss on early extinguishment of debt, a component of Other
Income (Expense), during the three months ended March 31, 2004.
Compliance with the redemption notice requirements in the Indenture resulted in
a delay before final payment of some of the old Senior Notes. As a result of
such delay, our total debt increased during the overlap period between the
redemption of the old Senior Notes and the issuance of the new Senior Notes
making us out of compliance with Section 6.11 of our Credit, Guaranty, Security
and Pledge Agreement, dated as of October 30, 2003. We received a waiver from
compliance with Section 6.11 until April 30, 2004. After the final redemption
payment on March 18, 2004 we were in compliance with Section 6.11.
In January 2004 we drew $10.0 million under the revolving portion of our new
Senior Credit facility. Our ability to draw down on the revolver portion of our
new Senior Credit Facility could be diminished if we are not in compliance with
all new Senior Credit Facility covenants or have a material adverse change at
the date of the request for the draw. In February 2004 we used a portion of the
proceeds from the issuance of our new Senior Notes to repay approximately $43.8
million of the term portion and $10.0 million of the revolving portion of our
new Senior Credit Facility.
We were in compliance with all loan covenants at March 31, 2004.
Our expenditures for property and equipment, including construction in progress,
totaled $25.2 million and $6.5 million during 2004 and 2003, respectively. Our
capital expenditures requirements in excess of approximately $25 million per
year, excluding the new fiber optic cable system construction costs, are largely
success driven and are a result of the progress we are making in the
marketplace. We expect our 2004 expenditures for property and equipment for our
core operations, including construction in progress and excluding the new fiber
optic cable system construction costs and other special projects described
below, to total $45 million to $55 million, depending on available opportunities
and the amount of cash flow we generate during 2004.
We are constructing a fiber optic cable system connecting Seward, Alaska and
Warrenton, Oregon, with leased backhaul facilities to connect it to our
switching and distribution centers in Anchorage, Alaska and Seattle, Washington.
The 1,544-statute mile cable system has a total design capacity of 960
41
Gigabits per second access speed and is planned to be operational in May 2004.
The cable will complement our existing fiber optic cable system between
Whittier, Alaska and Seattle, Washington. The two cables will provide physically
diverse backup to each other in the event of an outage. We expect to fund
construction costs that are expected to total approximately $50 million through
our operating cash flows and, to the extent necessary, with draws on our new
Senior Credit Facility. During 2004 our capital expenditures for this project
have totaled approximately $10.3 million and from inception have totaled $28.4
million, most of which have been funded through our operating cash flows.
Planned capital expenditures over the next five years include those necessary
for continued expansion of our long-distance, local exchange and Internet
facilities, supplementing our existing network backup facilities, continuing
development of our PCS network to meet the requirements of our license,
continuing deployment of DLPS, upgrades to our cable television plant, and
potential development of a wireless network.
In April 2004 we successfully launched our DLPS service delivery method. To
ensure the necessary equipment is available to us we have entered into an
agreement to purchase a certain number of outdoor, network powered multi-media
adapters. The agreement has a remaining outstanding commitment at March 31, 2004
of $17.4 million.
A migration of MCI's or Sprint'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 in cash at the
semi-annual payment dates of April 30 and October 31 of each year. In January
2004, 3,108 shares of our Series B preferred stock were converted to 560,000
shares of our Class A common stock at the stated conversion price of $5.55 per
share. The conversion will reduce our future semi-annual cash dividends.
Dividends accrued on our Series C preferred stock are payable quarterly in cash.
In March 2004 we paid a Series C preferred stock dividend of approximately
$150,000.
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 competition,
economic conditions, and regulatory and technological changes will affect our
ability to obtain financing under acceptable terms and conditions.
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.
Critical Accounting Policies
Our accounting and reporting policies comply with accounting principles
generally accepted in the United States of America. The preparation of financial
statements in conformity with generally accepted
42
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
accounting principles generally accepted in the United States of America. 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, 2004 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 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 No. 141, "Business Combinations." 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 the applicability of
quoted market prices in active markets and, if quoted market prices are
not available and/or are not applicable, how the acquired asset will
perform in the future using a discounted cash flow analysis. 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 goodwill and other intangibles, we may
consider other information to validate the
43
reasonableness of our valuations including 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
position, results of operations or liquidity. 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 services segment cost of sales and
services 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 $78.6 million associated with income tax net operating
losses that were generated from 1990 to 2004, 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 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, 2004 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 position, results of operations or
liquidity.
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.
44
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 fair value of stock options as
compensation expense, are among topics currently under reexamination by
accounting standards setters and regulators. With the exception of accounting
for the cost of stock options, no specific conclusions reached by these standard
setters appear likely to cause a material change in our accounting policies,
although 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, 2003 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. All of the federal funding and the majority of
investment revenues are dedicated for specific purposes, leaving oil revenues as
the primary source of general operating revenues. In fiscal 2003 the State's
actual results indicate that Alaska's oil revenues, federal funding and
investment revenues supplied 36%, 30% and 21%, respectively, of the state's
total revenues. In fiscal 2004 state economists forecast that Alaska's oil
revenues, federal funding and investment revenues will supply 23%, 25% 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
0.991 million barrels produced per day in fiscal 2003. The state forecasts the
production rate to decline from 0.985 million barrels produced per day in fiscal
2004 to 0.843 million barrels produced per day in fiscal 2015.
Market prices for North Slope oil averaged $28.15 in fiscal 2003 and are
forecasted to average $31.13 in fiscal 2004. The closing price per barrel was
$36.12 on April 19, 2004. To the extent that actual oil prices vary materially
from the state's projected prices the state's projected revenues and deficits
will change. When the price of oil is greater than $23.00 per barrel, every $1
change in the price per barrel of oil is forecasted to result in a $40.0 to
$70.0 million change in the state's fiscal 2004 revenue. The production policy
of the Organization of Petroleum Exporting Countries and its ability to continue
to act in concert represents a key uncertainty in the state's revenue forecast.
The State of Alaska maintains the Constitutional Budget Reserve Fund that is
intended to fund budgetary shortfalls. If the state's current projections are
realized, the Constitutional Budget Reserve Fund will be depleted in 2008. 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.
45
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. Periodically
there are renewed efforts to allow exploration and development in the Arctic
National Wildlife Refuge ("ANWR"). The United States 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. In January 2004, two competing
groups submitted applications to the State of Alaska to negotiate tax and other
financial terms for the construction of a natural gas pipeline. One of the
groups has since abandoned their plan to build a natural gas pipeline. In April
2004, the State of Alaska and TransCanada Corporation signed a memorandum of
understanding which could lead to the construction of a natural gas pipeline.
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 deployment of a system with up to 100 ground-based
interceptor silos and battle management command and control facilities at Fort
Greely, Alaska.
The United States 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, though it may be operational
in the summer of 2004.
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.
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,
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.
46
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 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 do not 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.
Schedule of Certain Known Contractual Obligations
The following table details future projected payments associated with our
certain known contractual obligations as of December 31, 2003, the date of our
most recent fiscal year-end balance sheet. Our schedule of certain known
contractual obligations has been updated to reflect our issuance of new Senior
Notes, redemption of our old Senior Notes, and conversion of shares of Series B
preferred stock to shares of GCI Class A common stock in January 2004.
Payments Due by Period
---------------------------------------------------------------
More
Less than 1 1 to 3 4 to 5 Than 5
Total Year Years Years Years
------------- ----------- ---------- ------------ -------------
(Amounts in thousands)
Long-term debt $ 366,914 --- 32,168 89,002 245,744
Interest on long-term debt 190,026 17,838 36,250 36,250 99,688
Capital lease obligations, including
interest 61,902 8,448 19,201 15,775 18,478
Operating lease commitments 69,473 12,357 20,787 13,230 23,099
Redeemable preferred stock 22,659 --- 10,000 --- 12,659
Purchase obligations 71,038 45,024 20,303 5,711 ---
------------- ----------- ---------- ------------ -------------
Total contractual obligations $ 782,012 83,667 138,709 159,968 399,668
============= =========== ========== ============ =============
For long-term debt included in the above table, we have included principal
payments on our new Senior Credit Facility and on our new Senior Notes. Interest
on amounts outstanding under our new Senior Credit Facility is based on variable
rates and therefore the amount is not determinable. Our old Senior Notes
required semi-annual interest payments of approximately $8.8 million through
February 2004, after which they were repaid using funds from the issuance of our
new Senior Notes. Our new Senior
47
Notes require semi-annual interest payments of approximately $9.1 million
through February 2014. For a discussion of our long-term debt, including the
redemption of our old Senior Notes, issuance of new Senior Notes and the use of
proceeds from the issuance of new Senior Notes to pay down our new Senior Credit
Facility, see note 5 to the accompanying "Notes to Interim Condensed
Consolidated Financial Statements."
For a discussion of our capital and operating leases, see note 16 to the "Notes
to Consolidated Financial Statements" included in Part II of our December 31,
2003 Form 10-K.
We have included only the maturity redemption amounts 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. Dividends are
payable in cash semi-annually at the rate of 8.5%, plus accrued but unpaid
dividends. Mandatory redemption is required 12 years from the date of closing.
In January 2004, a Series B preferred stockholder converted 3,108 shares of
Series B preferred stock to GCI Class A common stock. 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 notes 1(e)
and 17 to the "Notes to Consolidated Financial Statements" included in Part II
of our December 31, 2003 Form 10-K.
Purchase obligations at December 31, 2003 are further described in note 16 to
the "Notes to Consolidated Financial Statements" included in Part II of our
December 31, 2003 Form 10-K and include the following:
o The remaining construction commitment for our fiber optic cable system
of $17.6 million,
o The remaining DLPS equipment purchase commitment of $17.4 million, and
o The remaining $16.0 million commitment for our Alaska Airlines
agreement.
The contracts associated with these commitments are non-cancelable. Purchase
obligations also include other commitments for goods and services for capital
projects and normal operations which are not included in our Consolidated
Balance Sheets at December 31, 2003, because the goods had not been received or
the services had not been performed at December 31, 2003.
PART I.
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
We are exposed to various types of market risk in the normal course of business,
including the impact of interest rate changes. We do not hold derivatives for
trading purposes.
Our new Senior Credit Facility 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. 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, 2004, we have borrowed $121.2 million of which $96.2
million is subject to interest rate
48
risk. On this amount, a 1% increase in the interest rate would result in
$962,000 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, 2004, we have borrowed $43.2 million subject to interest rate
risk. On this amount, a 1% increase in the interest rate would result in
$432,000 in additional gross interest cost on an annualized basis.
PART I.
ITEM 4.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by 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.
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 7 to the accompanying "Notes to Interim Condensed Consolidated
Financial Statements" and is incorporated herein by reference.
49
PART II.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
Exhibit No. Description
--------------------------------------------------------------------------------------------------------
3.2 Amended and Restated Bylaws of the Company dated April 23, 2004
10.116 Audit Committee Charter (filed as Appendix I to the Company's Proxy Statement dated
April 30, 2004)
10.117 Nominating and Corporate Governance Committee Charter
10.118 Code Of Business Conduct and Ethics
31 Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32 Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K filed during the quarter ended March 31,
2004:
o On February 2, 2004, we filed a report on Form 8-K dated
February 2, 2004 under Items 5 and 7 which included a
copy of our press release dated that same day announcing
that GCI, Inc., a wholly owned subsidiary of GCI, was
commencing a cash tender offer and consent solicitation
for any and all of its $180.0 million outstanding
principal amount of 9.75% Senior Notes due 2007.
o On February 11, 2004, we filed a report on Form 8-K dated
February 10, 2004 under Items 5 and 7 which included a
copy of our press release dated that same day announcing
that GCI, Inc., a wholly owned subsidiary of GCI, had
agreed to sell $230.0 million in aggregate principal
amount of senior debt securities due in 2014.
o On February 19, 2004, we filed a report on Form 8-K dated
February 17, 2004 under Items 5 and 7 which included a
copy of our press release dated that same day announcing
that GCI, Inc., a wholly owned subsidiary of GCI, had
closed the private offering of $250.0 million principal
amount of 7.25% Senior Notes due February 15, 2014.
o On February 19, 2004, we filed a report on Form 8-K dated
February 18, 2004, and furnished under Items 7 and 12 a
copy of our press release dated that same day reporting
2003 financial results.
50
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 3, 2004
- -------------------------------------- (Principal Executive Officer) -----------------------
Ronald A. Duncan
/s/ John M. Lowber Senior Vice President, Chief Financial May 3, 2004
- -------------------------------------- Officer, Secretary and Treasurer -----------------------
John M. Lowber (Principal Financial Officer)
/s/ Alfred J. Walker Vice President, Chief Accounting Officer May 3, 2004
- -------------------------------------- (Principal Accounting Officer) -----------------------
Alfred J. Walker
51