As filed with the Securities and Exchange Commission on November 11, 2003
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-15279
GENERAL COMMUNICATION, INC.
(Exact name of registrant as specified in its charter)
STATE OF ALASKA 92-0072737
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2550 Denali Street
Suite 1000
Anchorage, Alaska 99503
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (907) 868-5600
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (l) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes X No .
The number of shares outstanding of the registrant's classes of common stock as
of October 31, 2003 was:
52,465,802 shares of Class A common stock; and
3,868,580 shares of Class B common stock.
1
GENERAL COMMUNICATION, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2003
TABLE OF CONTENTS
Page No.
--------
Cautionary Statement Regarding Forward-Looking Statements.................................................3
PART I. FINANCIAL INFORMATION
Item l. Consolidated Balance Sheets as of September 30, 2003
(unaudited) and December 31, 2002..................................................5
Consolidated Statements of Operations for the
three and nine months ended September 30, 2003
(unaudited) and 2002 (unaudited)...................................................7
Consolidated Statements of Stockholders' Equity
for the nine months ended September 30, 2003
(unaudited) and 2002 (unaudited)...................................................8
Consolidated Statements of Cash Flows for the nine
months ended September 30, 2003 (unaudited)
and 2002 (unaudited)...............................................................9
Notes to Interim Condensed Consolidated Financial
Statements.........................................................................10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................................28
Item 3. Quantitative and Qualitative Disclosures About
Market Risk...........................................................................62
Item 4. Controls and Procedures...............................................................63
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.....................................................................63
Item 6. Exhibits and Reports on Form 8-K......................................................64
Other items are omitted, as they are not applicable.
SIGNATURES................................................................................................65
2
Cautionary Statement Regarding Forward-Looking Statements
You should carefully review the information contained in this Quarterly Report,
but should particularly consider any risk factors that we set forth in this
Quarterly Report and in other reports or documents that we file from time to
time with the Securities and Exchange Commission ("SEC"). In this Quarterly
Report, in addition to historical information, we state our future strategies,
plans, objectives or goals and our beliefs of future events and of our future
operating results, financial position and cash flows. In some cases, you can
identify those so-called "forward-looking statements" by words such as "may,"
"will," "should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," "project," or "continue" or the negative of those words
and other comparable words. All forward-looking statements involve known and
unknown risks, uncertainties and other important factors that may cause our
actual results, performance, achievements, plans and objectives to differ
materially from any future results, performance, achievements, plans and
objectives expressed or implied by these forward-looking statements. In
evaluating those statements, you should specifically consider various factors,
including those outlined below. Those factors may cause our actual results to
differ materially from any of our forward-looking statements. For these
statements, we claim the protection of the safe harbor for forward-looking
statements provided by the Securities Reform Act. Such risks, uncertainties and
other factors include but are not limited to those identified below and those
further described in Part I, Item 1. Factors That May Affect Our Business and
Future Results of our December 31, 2002 Form 10-K.
o Material adverse changes in the economic conditions in the markets we
serve and in general economic conditions, including the continuing
impact of the current depressed telecommunications industry due to high
levels of competition in the long-distance market resulting in
pressures to reduce prices, an oversupply of long-haul capacity,
excessive debt loads; several high-profile company failures and
potentially fraudulent accounting practices by some companies;
o The efficacy of laws enacted by Congress and the state of Alaska
legislature; rules and regulations to be adopted by the Federal
Communications Commission ("FCC") and state public regulatory agencies
to implement the provisions of the 1996 Telecom Act; the outcome of
litigation relative thereto; and the impact of regulatory changes
relating to access reform;
o Our responses to competitive products, services and pricing, including
pricing pressures, technological developments, alternative routing
developments, and the ability to offer combined service packages that
include long-distance, local, cable and Internet services;
o The extent and pace at which different competitive environments develop
for each segment of our business;
o The extent and duration for which competitors from each segment of the
telecommunication industries are able to offer combined or full service
packages prior to our being able to do so;
o The degree to which we experience material competitive impacts to our
traditional service offerings prior to achieving adequate local service
entry;
o Competitor responses to our products and services and overall market
acceptance of such products and services;
o The outcome of our negotiations with Incumbent Local Exchange Carriers
("ILECs") and state regulatory arbitrations and approvals with respect
to interconnection agreements;
o Our ability to purchase network elements or wholesale services from
ILECs at a price sufficient to permit the profitable offering of local
telephone service at competitive rates;
o Success and market acceptance for new initiatives, many of which are
untested;
o The level and timing of the growth and profitability of existing and
new initiatives, particularly yellow page directories, local telephone
services expansion including deploying digital local telephone service,
Internet services expansion and wireless services;
o Start-up costs associated with entering new markets, including
advertising and promotional efforts;
3
o Risks relating to the operations of new systems and technologies and
applications to support new initiatives;
o Local conditions and obstacles;
o The impact on our industry and indirectly on us of oversupply of
capacity resulting from excessive deployment of network capacity in
certain markets we do not serve;
o Uncertainties inherent in new business strategies, new product launches
and development plans, including local telephone services, Internet
services, wireless services, digital video services, cable modem
services, digital subscriber line services, transmission services, and
yellow page directories, and the offering of these services in
geographic areas with which we are unfamiliar;
o The risks associated with technological requirements, technology
substitution and changes and other technological developments;
o Prolonged service interruptions which could affect our business;
o Development and financing of telecommunication, local telephone,
wireless, Internet and cable networks and services;
o Future financial performance, including the availability, terms and
deployment of capital; the impact of regulatory and competitive
developments on capital outlays, and the ability to achieve cost
savings and realize productivity improvements and the consequences of
increased leverage;
o Availability of qualified personnel;
o Changes in, or failure, or inability, to comply with, government
regulations, including, without limitation, regulations of the FCC, the
Regulatory Commission of Alaska ("RCA"), and adverse outcomes from
regulatory proceedings;
o Changes in regulations governing unbundled network elements ("UNE");
o Uncertainties in federal military spending levels and military base
closures in markets in which we operate;
o The ongoing global and domestic trend towards consolidation in the
telecommunications industry, which may make the competitors larger and
better financed and afford these competitors with extensive resources
and greater geographic reach, allowing them to compete more
effectively;
o The financial, credit and economic impacts of the MCI (previously
"WorldCom, Inc.") bankruptcy filing on the industry in general and on
us in particular;
o A significant delay in MCI's emergence from bankruptcy or a migration
of MCI's traffic off our network without it being replaced by other
common carriers that interconnect with our network;
o The effect on us of pricing pressures, new program offerings and market
consolidation in the markets served by our major customers, MCI and
Sprint;
o The effect on us of industry consolidation and the acquisition of one
or more of our large wholesale customers;
o Under Statement of Financial Accounting Standard ("SFAS") 142, we must
test our intangibles for impairment at least annually, which may result
in a material, non-cash write-down of goodwill and could have a
material adverse impact on our results of operations and shareholders'
equity; and
o Other risks detailed from time to time in our periodic reports filed
with the SEC.
You should not place undue reliance on any such forward-looking statements.
Further, any forward-looking statement, and such risks, uncertainties and other
factors speak, only as of the date on which they were originally made and we
expressly disclaim any obligation or undertaking to disseminate any updates or
revisions to any forward-looking statement to reflect any change in our
expectations with regard to those statements or any other change in events,
conditions or circumstances on which any such statement is based, except as
required by law. New factors emerge from time to time, and it is not possible
for us to predict what factors will arise or when. In addition, we cannot assess
the impact of each factor on our business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements.
4
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands) (Unaudited)
September 30, December 31,
ASSETS 2003 2002
- --------------------------------------------------------------------------- ---------------- ---------------
Current assets:
Cash and cash equivalents $ 10,780 11,940
--------------- ----------------
Receivables:
Trade 60,107 63,111
Employee 292 391
Other 2,602 3,093
--------------- ----------------
63,001 66,595
Less allowance for doubtful receivables 2,359 14,010
--------------- ----------------
Net receivables 60,642 52,585
--------------- ----------------
Prepaid and other current assets 11,605 9,171
Deferred income taxes, net 8,644 8,509
Notes receivable with related parties 1,053 697
Property held for sale 1,037 1,037
Inventories 537 400
--------------- ----------------
Total current assets 94,298 84,339
--------------- ----------------
Property and equipment in service, net of depreciation 371,564 381,394
Construction in progress 22,981 16,958
--------------- ----------------
Net property and equipment 394,545 398,352
--------------- ----------------
Cable certificates, net of amortization of $26,775 and $26,884 at
September 30, 2003 and December 31, 2002, respectively 191,241 191,132
Goodwill, net of amortization of $7,200 at September 30, 2003 and December
31, 2002 41,972 41,972
Other intangible assets, net of amortization of $1,522 and $1,848 at
September 30, 2003 and December 31, 2002, respectively 3,304 3,460
Deferred loan and senior notes costs, net of amortization of $6,630 and
$4,110 at September 30, 2003 and December 31, 2002, respectively 10,237 9,961
Notes receivable with related parties 5,246 5,142
Other assets, at cost, net of amortization of $52 and $24 at September 30,
2003 and December 31, 2002, respectively 8,229 4,424
--------------- ----------------
Total other assets 260,229 256,091
--------------- ----------------
Total assets $ 749,072 738,782
=============== ================
See accompanying notes to interim condensed consolidated financial statements.
5 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
(Amounts in thousands) (Unaudited)
September 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2003 2002
- -------------------------------------------------------------------------- ---------------- ----------------
Current liabilities:
Current maturities of obligations under long-term debt and capital
leases $ 24,017 1,857
Accounts payable 28,865 33,605
Deferred revenue 20,501 18,290
Accrued payroll and payroll related obligations 15,566 11,821
Accrued liabilities 6,605 5,763
Accrued interest 2,961 7,938
Subscriber deposits 691 889
---------------- ----------------
Total current liabilities 99,206 80,163
Long-term debt, excluding current maturities 330,000 357,700
Obligations under capital leases, excluding current maturities 40,529 44,072
Obligations under capital leases due to related party, excluding
current maturities 685 703
Deferred income taxes, net of deferred income tax benefit 25,380 16,061
Other liabilities 6,092 4,956
---------------- ----------------
Total liabilities 501,892 503,655
---------------- ----------------
Redeemable preferred stocks 26,907 26,907
---------------- ----------------
Stockholders' equity:
Common stock (no par):
Class A. Authorized 100,000 shares; issued 52,238 and 51,795 shares
at September 30, 2003 and December 31, 2002, respectively 200,950 199,903
Class B. Authorized 10,000 shares; issued 3,871 and 3,875 shares at
September 30, 2003 and December 31, 2002, respectively;
convertible on a share-per-share basis into Class A common stock 3,271 3,274
Less cost of 338 and 317 Class A common shares held in treasury at
September 30, 2003 and December 31, 2002, respectively (1,917) (1,836)
Paid-in capital 11,837 11,222
Notes receivable with related parties issued upon stock option exercise (5,650) (5,650)
Retained earnings 12,204 1,847
Accumulated other comprehensive loss (422) (540)
---------------- ----------------
Total stockholders' equity 220,273 208,220
Commitments and contingencies
---------------- ----------------
Total liabilities and stockholders' equity $ 749,072 738,782
================ ================
See accompanying notes to interim condensed consolidated financial statements.
6
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
-------------- -------------- --------------- --------------
(Amounts in thousands, except per share amounts)
Revenues $ 98,327 94,550 287,043 275,500
Cost of sales and services 31,870 30,375 92,189 92,473
Selling, general and administrative expenses 35,262 32,209 102,549 96,095
Bad debt expense 533 1,677 1,932 12,874
Depreciation, amortization and accretion expense 13,067 13,936 39,368 41,806
-------------- -------------- --------------- --------------
Operating income 17,595 16,353 51,005 32,252
-------------- -------------- --------------- --------------
Other income (expense):
Interest expense (8,845) (7,477) (27,137) (20,304)
Amortization of loan and senior notes fees (631) (321) (2,329) (1,449)
Interest income 162 107 493 335
-------------- -------------- --------------- --------------
Other expense, net (9,314) (7,691) (28,973) (21,418)
-------------- -------------- --------------- --------------
Net income before income taxes and
cumulative effect of a change in
accounting principle 8,281 8,662 22,032 10,834
Income tax expense 3,752 3,599 9,598 4,662
-------------- -------------- --------------- --------------
Net income before cumulative effect of a
change in accounting principle 4,529 5,063 12,434 6,172
Cumulative effect of a change in accounting
principle, net of income tax benefit of $367 --- --- (544) ---
-------------- -------------- --------------- --------------
Net income $ 4,529 5,063 11,890 6,172
============== ============== =============== ==============
Basic net income per common share:
Net income before cumulative effect of a
change in accounting principle $ 0.07 0.08 0.20 0.08
Cumulative effect of a change in accounting
principle, net of income tax benefit of
$367 --- --- (0.01) ---
-------------- -------------- --------------- --------------
Net income $ 0.07 0.08 0.19 0.08
============== ============== =============== ==============
Diluted net income per common share:
Net income before cumulative effect of a
change in accounting principle $ 0.07 0.08 0.19 0.08
Cumulative effect of a change in accounting
principle, net of income tax benefit of
$367 --- --- (0.01) ---
-------------- -------------- --------------- --------------
Net income $ 0.07 0.08 0.18 0.08
============== ============== =============== ==============
See accompanying notes to interim condensed consolidated financial statements.
7
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(Unaudited)
Notes Accumulated
Class A Receivable Other
Class A Class B Shares Issued to Retained Comprehensive
Common Common Held in Paid-in Related Earnings Income
(Amounts in thousands) Stock Stock Treasury Capital Parties (Deficit) (Loss) Total
----------------------------------------------------------------------------------------
Balances at December 31, 2001 $195,647 3,281 (1,659) 10,474 (2,588) (2,771) 8 202,392
Components of comprehensive income:
Net income --- --- --- --- --- 6,172 --- 6,172
Change in fair value of cash flow
hedge, net of change in income tax
liability of $390 --- --- --- --- --- --- (587) (587)
-----------
Comprehensive income 5,585
Tax effect of excess stock compensation
expense for tax purposes over amounts
recognized for financial reporting
purposes --- --- --- 307 --- --- --- 307
Class B shares converted to Class A 5 (5) --- --- --- --- --- ---
Shares issued under stock option plan 3,219 --- --- --- (3,062) --- --- 157
Amortization of the excess of GCI stock
market value over stock option exercise
cost on date of stock option grant --- --- --- 336 --- --- --- 336
Shares issued to Employee Stock Purchase
Plan 497 --- --- --- --- --- --- 497
Shares issued to acquire minority
shareholders' interest in GFCC 68 --- --- --- --- --- --- 68
Purchase of treasury stock --- --- (177) --- --- --- --- (177)
Preferred stock dividends --- --- --- --- --- (1,532) --- (1,532)
----------------------------------------------------------------------------------------
Balances at September 30, 2002 $199,436 3,276 (1,836) 11,117 (5,650) 1,869 (579) 207,633
========================================================================================
Balances at December 31, 2002 $199,903 3,274 (1,836) 11,222 (5,650) 1,847 (540) 208,220
Components of comprehensive income:
Net income --- --- --- --- --- 11,890 --- 11,890
Change in fair value of cash flow
hedge, net of change in income tax
benefit of $175 --- --- --- --- --- --- 118 118
-----------
Comprehensive income 12,008
Tax effect of excess stock compensation
expense for tax purposes over amounts
recognized for financial reporting
purposes --- --- --- 222 --- --- --- 222
Class B shares converted to Class A 3 (3) --- --- --- --- --- ---
Shares issued under stock option plan 1,044 --- --- --- --- --- --- 1,044
Amortization of the excess of GCI stock
market value over stock option exercise
cost on date of stock option grant --- --- --- 393 --- --- --- 393
Purchase of treasury stock --- --- (81) --- --- --- --- (81)
Preferred stock dividends --- --- --- --- --- (1,533) --- (1,533)
----------------------------------------------------------------------------------------
Balances at September 30, 2003 $200,950 3,271 (1,917) 11,837 (5,650) 12,204 (422) 220,273
========================================================================================
See accompanying notes to interim condensed consolidated financial statements.
8
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
2003 2002
-------------- --------------
(Amounts in thousands)
Operating activities:
Net income $ 11,890 6,172
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, amortization and accretion expense 39,368 41,806
Deferred income tax expense 9,598 4,757
Amortization of loan and senior notes fees 2,329 1,449
Cumulative effect of a change in accounting principle, net 544 ---
Bad debt expense, net of write-offs (679) 10,587
Deferred compensation 331 533
Compensatory stock options 393 337
Employee Stock Purchase Plan expense funded with issuance of
General Communication, Inc. Class A common stock --- 497
Other noncash income and expense items (383) 36
Change in operating assets and liabilities (13,990) (18,567)
-------------- --------------
Net cash provided by operating activities 49,401 47,607
-------------- --------------
Investing activities:
Purchases of property and equipment (34,393) (51,989)
Payment of deposits (3,221) ---
Notes receivable issued to related parties (99) (3,055)
Payments received on notes receivable with related parties 22 946
Purchases of other assets (955) (1,563)
-------------- --------------
Net cash used by investing activities (38,646) (55,661)
-------------- --------------
Financing activities:
Repayments of long-term borrowings and capital lease obligations (9,102) (6,802)
Long-term borrowings - bank debt --- 14,000
Payment of preferred stock dividend (1,171) (1,018)
Payment of debt issuance costs (2,605) (382)
Purchase of treasury stock (81) (177)
Proceeds from common stock issuance 1,044 157
-------------- --------------
Net cash provided (used) by financing activities (11,915) 5,778
-------------- --------------
Net decrease in cash and cash equivalents (1,160) (2,276)
Cash and cash equivalents at beginning of period 11,940 11,097
-------------- --------------
Cash and cash equivalents at end of period $ 10,780 8,821
============== ==============
See accompanying notes to interim condensed consolidated financial statements.
9
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
The accompanying unaudited interim condensed consolidated financial statements
include the accounts of General Communication, Inc. ("GCI") and its subsidiaries
and have been prepared in accordance with generally accepted accounting
principles for interim financial information. Accordingly, they do not include
all of the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements. They
should be read in conjunction with our audited consolidated financial statements
for the year ended December 31, 2002, filed as part of our annual report on Form
10-K. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. The results of operations for interim periods are not necessarily
indicative of the results that may be expected for an entire year or any other
period.
(l) Business and Summary of Significant Accounting Principles
In the following discussion GCI and its direct and indirect subsidiaries
are referred to as "we," "us" and "our".
(a) Business
GCI, an Alaska corporation, was incorporated in 1979. We offer the
following services:
o Long-distance telephone service between Alaska and the
remaining United States and foreign countries
o Cable television services throughout Alaska
o Facilities-based competitive local access services in
Anchorage, Fairbanks and Juneau, Alaska
o Internet access services
o Termination of traffic in Alaska for certain common carriers
o Private line and private network services
o Managed services to certain commercial customers
o Broadband services, including our SchoolAccess(TM) offering to
rural school districts and a similar offering to rural
hospitals and health clinics
o Sales and service of dedicated communications systems and
related equipment
o Lease and sales of capacity on two undersea fiber optic cables
used in the transmission of interstate and intrastate private
line, switched message long-distance and Internet services
between Alaska and the remaining United States and foreign
countries
(b) Principles of Consolidation
The consolidated financial statements include the accounts of GCI,
GCI's subsidiary GCI, Inc., GCI, Inc.'s subsidiary GCI Holdings,
Inc., GCI Holdings, Inc.'s subsidiaries GCI Communication Corp.,
GCI Cable, Inc., GCI Transport Co., Inc., GCI Fiber Communication
Co., Inc., GCI Fiber Co., Inc. and Fiber Hold Co., Inc. and GCI
Fiber Co., Inc.'s and Fiber Hold Co., Inc.'s partnership Alaska
United Fiber System Partnership, GCI Communication Corp.'s
subsidiaries Potter View Development Co., Inc., Wok 1, Inc. and Wok
2, Inc. and GCI Transport Co., Inc.'s subsidiary GCI Satellite Co.,
Inc. All subsidiaries are wholly-owned at September 30, 2003.
The consolidated financial statements include the consolidated
accounts of GCI and its wholly owned subsidiaries with all
significant intercompany transactions eliminated.
10 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
(c) Earnings per Common Share
Earnings per common share ("EPS") and common shares used to
calculate basic and diluted EPS consist of the following (amounts
in thousands, except per share amounts):
Three Months Ended September 30,
2003 2002
------------------------------ -------------------------------
Income Shares Income Shares
(Num- (Denom- Per-share Num- (Denom- Per-share
erator) inator) Amounts erator) inator) Amounts
---------- -------- ---------- ---------- --------- ----------
Net income $ 4,529 $ 5,063
Less preferred stock dividends:
Series B 361 361
Series C 151 151
---------- ----------
Basic EPS:
Net income available to common
stockholders 4,017 55,707 $ 0.07 4,551 55,142 $ 0.08
Effect of Dilutive Securities:
Unexercised stock options --- 1,163 --- --- 717 ---
---------- -------- ---------- ---------- --------- ----------
Diluted EPS:
Net income available to common
stockholders $ 4,017 56,870 $ 0.07 $ 4,551 55,859 $ 0.08
========== ======== ========== ========== ========= ==========
11 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Nine Months Ended September 30,
2003 2002
------------------------------ -------------------------------
Income Shares Income Shares
(Num- (Denom- Per-share (Num- (Denom- Per-share
erator) inator) Amounts erator) inator) Amounts
---------- -------- ---------- ---------- --------- ----------
Net income before cumulative
effect of a change in accounting
principle, net of deferred tax
benefit of $367 $ 12,434 $ 6,172
Less preferred stock dividends:
Series B 1,083 1,083
Series C 449 449
---------- ----------
Basic EPS:
Net income before cumulative
effect of a change in accounting
principle, net of deferred tax
benefit of $367, available to
common stockholders 10,902 55,563 $ 0.20 4,640 54,995 $ 0.08
Effect of Dilutive Securities:
Unexercised stock options --- 531 --- --- 1,176 ---
---------- -------- ---------- ---------- --------- ----------
Diluted EPS:
Net income before cumulative
effect of a change in accounting
principle, net of deferred tax
benefit of $367, available to
common stockholders $ 10,902 56,094 $ 0.19 $ 4,640 56,171 $ 0.08
========== ======== ========== ========== ========= ==========
Common equivalent shares outstanding which are anti-dilutive for
purposes of calculating EPS for the three and nine months ended
September 30, 2003 and 2002 are not included in the diluted EPS
calculations and consist of the following (shares, in thousands):
Series B redeemable preferred stock 3,062
Series C redeemable preferred stock 833
--------
Anti-dilutive common equivalent shares
outstanding 3,895
========
12 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Weighted average shares associated with outstanding stock options
for the three and nine months ended September 30, 2003 and 2002
which have been excluded from the diluted EPS calculations because
the options' exercise price was greater than the average market
price of the common shares consist of the following (shares, in
thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
----------- ----------- ---------- ----------
Weighted average shares associated with
outstanding stock options 155 4,573 2,045 756
=========== =========== ========== ==========
(d) Common Stock
Following is the statement of common stock at September 30, 2003
and 2002 (shares, in thousands):
Class A Class B
------------- --------------
Balances at December 31, 2001 50,967 3,883
Class B shares converted to Class A 6 (6)
Shares issued under stock option plan 533 ---
Shares issued to the GCI Employee Stock
Purchase Plan 200 ---
Shares issued to acquire minority
shareholders' interest in GFCC 15 ---
------------- --------------
Balances at September 30, 2002 51,721 3,877
============= ==============
Balances at December 31, 2002 51,795 3,875
Class B shares converted to Class A 4 (4)
Shares issued under stock option plan 216 ---
Shares issued per G.C. Cablevision, Inc.
acquisition agreement 223 ---
------------- --------------
Balances at September 30, 2003 52,238 3,871
============= ==============
(e) Redeemable Preferred Stocks
Redeemable preferred stocks consist of the following (amounts in
thousands):
September 30, December 31,
2003 2002
--------------- ----------------
Series B $ 16,907 16,907
Series C 10,000 10,000
--------------- ----------------
$ 26,907 26,907
=============== ================
We have 1,000,000 shares of preferred stock authorized with the
following shares issued (in thousands):
Series B Series C
------------- --------------
Shares at December 31, 2001 and 2002 and
September 30, 2002 and 2003 17 10
============= ==============
13 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
As of September 30, 2003, the combined aggregate amount of
preferred stock mandatory redemption requirements follow (amounts
in thousands):
Years ending
September 30:
-------------
2004 $ ---
2005 10,150
2006 ---
2007 ---
2008 ---
--------
$ 10,150
========
Series B
The redemption amount of our Series B preferred stock at September
30, 2003 and December 31, 2002 was $17,509,000 and $17,148,000,
respectively. The difference between the carrying and redemption
amounts is due to accrued dividends which are included in Accrued
Liabilities.
Series C
The redemption amount of our convertible redeemable accreting
Series C preferred stock on September 30, 2003 and December 31,
2002 was $10,000,000.
(f) Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity
On July 1, 2003 we adopted SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity". SFAS No. 150 establishes standards for how an issuer
classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an
issuer classify a financial instrument that is within its scope as
a liability (or an asset in some circumstances). Many of those
instruments were previously classified as equity. Adoption of SFAS
No. 150 did not have a material effect on our results of
operations, financial position and cash flows.
(g) Asset Retirement Obligations
On January 1, 2003 we adopted SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 provides accounting and
reporting standards for costs associated with the retirement of
long-lived assets. This statement requires entities to record the
fair value of a liability for an asset retirement obligation in the
period in which it is incurred. When the liability is initially
recorded, the entity capitalizes a cost by increasing the carrying
amount of the related long-lived asset. Over time, the liability is
accreted to its present value each period, and the capitalized cost
is depreciated over the useful life of the related asset. Upon
settlement of the liability, an entity either settles the
obligation for its recorded amount or incurs a gain or loss upon
settlement. Upon adoption, we recorded the cumulative effect of
accretion and depreciation expense as a cumulative effect of a
change in accounting principle of approximately $544,000, net of
income tax benefit of $367,000.
14 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Following is a reconciliation of the beginning and ending aggregate
carrying amount of our asset retirement obligations at September
30, 2003 (amounts in thousands):
Balance at December 31, 2002 $ ---
Liability recognized upon adoption of SFAS
No. 143 1,565
Accretion expense for the nine months ended
September 30, 2003 96
----------
Balance at September 30, 2003 $ 1,661
==========
Following is the amount of the liability for asset retirement
obligations as if SFAS No. 143 had been applied at December 31,
2001 (amounts in thousands):
Balance at December 31, 2001 $ 1,350
==========
Balance at September 30, 2002 $ 1,511
==========
At the date of adoption we recorded net additional capitalized
costs of $654,000 in Property and Equipment in Service, Net of
Depreciation.
(h) Payments Received from Suppliers
On March 20, 2003 the Financial Accounting Standards Board issued
Emerging Issues Task Force ("EITF") Issue No. 02-16, "Accounting by
a Reseller for Cash Consideration Received from a Vendor" ("EITF
No. 02-16"). We have applied EITF No. 02-16 prospectively for
arrangements entered into or modified after December 31, 2002. Our
cable services segment occasionally receives reimbursements for
costs to promote suppliers' services, called cooperative
advertising arrangements. The supplier payment is classified as a
reduction of selling, general and administrative expenses if it
reimburses specific, incremental and identifiable costs incurred to
resell the suppliers' services. Excess consideration, if any, is
classified as a reduction of cost of sales and services.
Occasionally our cable services segment enters into a binding
arrangement with a supplier in which we receive a rebate dependent
upon us meeting a specified goal. We recognize the rebate as a
reduction of cost of sales and services systematically as we make
progress toward the specified goal, provided the amounts are
probable and reasonably estimable. If earning the rebate is not
probable and reasonably estimable, it is recognized only when the
goal is met.
(i) Costs Associated with Exit or Disposal Activities
On January 1, 2003 we adopted SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". Upon adoption of SFAS
No. 146, enterprises may only record exit or disposal costs when
they are incurred and can be measured at fair value. The recorded
liability will be subsequently adjusted for changes in estimated
cash flows. SFAS 146 revises accounting for specified employee and
contract terminations that are part of restructuring activities.
Adoption of SFAS No. 146 did not have a material effect on our
results of operations, financial position and cash flows.
(j) Stock Option Plan
At September 30, 2003, we had one stock-based employee compensation
plan. We account for this plan under the recognition and
measurement principles of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. We use the intrinsic-value method and
compensation expense is recorded on the
15 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
date of grant only if the current market price of the underlying
stock exceeds the exercise price. We have adopted SFAS No. 123,
"Accounting for Stock-Based Compensation," which permits entities
to recognize as expense over the vesting period the fair value of
all stock-based awards on the date of grant. Alternatively, SFAS
No. 123 also allows entities to continue to apply the provisions of
APB Opinion No. 25.
We have adopted SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure". This Statement amends SFAS
No. 123 to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, this Statement
amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results.
We have elected to continue to apply the provisions of APB Opinion
No. 25 and provide the pro forma disclosure as required by SFAS No.
148.
16 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Stock-based employee compensation cost is reflected over the
options' vesting period of generally five years and compensation
cost for options granted prior to January 1, 1996 is not
considered. The following table illustrates the effect on net
income and EPS for the three and nine months ended September 30,
2003 and 2002, if we had applied the fair-value recognition
provisions of SFAS No. 123 to stock-based employee compensation
(amounts in thousands, except per share amounts):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- ------------------------
2003 2002 2003 2002
----------- ---------- --------- -----------
Net income, as reported $ 4,529 5,063 11,890 6,172
Total stock-based employee
compensation expense included in
reported net income, net of related
tax effects 66 59 225 202
Total stock-based employee
compensation expense under the
fair-value based method for all
awards, net of related tax effects (653) (856) (1,641) (1,918)
----------- ---------- --------- -----------
Pro forma net income $ 3,942 4,266 10,474 4,456
=========== ========== ========= ===========
Basic net income per common share
after cumulative effect of a
change in accounting principle, as
reported $ 0.07 0.08 0.19 0.08
=========== ========== ========= ===========
Diluted net income per common share
after cumulative effect of a
change in accounting principle, as
reported $ 0.07 0.08 0.18 0.08
=========== ========== ========= ===========
Basic and diluted net income per
common share after cumulative
effect of a change in accounting
principle, pro forma $ 0.06 0.07 0.16 0.05
=========== ========== ========= ===========
The calculation of total stock-based employee compensation expense
under the fair-value based method includes weighted-average
assumptions of a risk-free interest rate, volatility and an
expected life.
17 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
(k) Concentrations of Credit Risk
Financial instruments that potentially subject us to concentrations
of credit risk are primarily cash and cash equivalents and accounts
receivable. Excess cash is invested in high quality short-term
liquid money instruments issued by highly rated financial
institutions. At September 30, 2003 and December 31, 2002,
substantially all of our cash and cash equivalents were invested in
short-term liquid money instruments at one highly rated financial
institution.
We have two major customers, MCI and Sprint Corporation. There is
increased risk associated with these customers' accounts receivable
balances. Our remaining customers are located primarily throughout
Alaska. Because of this geographic concentration, our growth and
operations depend upon economic conditions in Alaska. The economy
of Alaska is dependent upon the natural resources industries, and
in particular oil production, as well as tourism, government, and
United States military spending. Though limited to one geographical
area and except for MCI and Sprint, the concentration of credit
risk with respect to our receivables is minimized due to the large
number of customers, individually small balances, and short payment
terms.
(l) Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others
On January 1, 2003 we adopted FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others". This
Interpretation elaborates on the disclosures to be made by a
guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also
clarifies that a guarantor is required to recognize, at the
inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. This Interpretation
does not prescribe a specific approach for subsequently measuring
the guarantor's recognized liability over the term of the related
guarantee. This Interpretation also incorporates, without change,
the guidance in FIN No. 34, "Disclosure of Indirect Guarantees of
Indebtedness of Others", which is being superseded. Adoption of FIN
No. 45 did not have a material effect on our results of operations,
financial position and cash flows.
(m) Derivative Instruments and Hedging Activities
On July 1, 2003 we adopted SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities". SFAS No. 149
amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities".
Adoption of SFAS No. 149 did not have a material effect on our
results of operations, financial position and cash flows.
(n) Consolidation of Variable Interest Entities
On July 1, 2003 we adopted FIN No. 46, "Consolidation of Variable
Interest Entities". This Interpretation of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements", addresses
consolidation by business enterprises of variable interest
entities, which have one or both of the following characteristics:
1. The equity investment at risk is not sufficient to permit the
entity to finance its activities without additional subordinated
financial support from other parties, which is provided through
other interests that will absorb some or all of the expected
losses of the entity.
18 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
2. The equity investors lack one or more of the following essential
characteristics of a controlling financial interest:
a. The direct or indirect ability to make decisions about the
entity's activities through voting rights or similar rights.
b. The obligation to absorb the expected losses of the entity if
they occur, which makes it possible for the entity to finance
its activities.
c. The right to receive the expected residual returns of the
entity if they occur, which is the compensation for the risk
of absorbing the expected losses.
Adoption of FIN No. 46 did not have a material effect on our
results of operations, financial position and cash flows.
(o) Reclassifications
Reclassifications have been made to the 2002 financial statements
to make them comparable with the 2003 presentation.
(2) Consolidated Statements of Cash Flows Supplemental Disclosures
Changes in operating assets and liabilities consist of (amounts in
thousands):
Nine month periods ended September 30, 2003 2002
------------ ------------
Increase in accounts receivable $ (9,315) (14,678)
Increase in inventories (137) (1,242)
(Increase) decrease in prepaid and other current assets (2,434) 1,018
Increase (decrease) in accounts payable (2,802) 453
Increase in deferred revenues 2,211 3,911
Increase (decrease) in accrued payroll and payroll
related obligations 3,745 (4,544)
Decrease in accrued interest (4,977) (4,793)
Increase in accrued liabilities 136 1,239
Decrease in subscriber deposits (198) (187)
Increase (decrease) in components of other long-term
liabilities (219) 256
------------ ------------
$ (13,990) (18,567)
============ ============
We paid interest totaling approximately $32,242,000 and $25,097,000
during the nine months ended September 30, 2003 and 2002, respectively.
Effective March 31, 2001 we acquired the assets and customer base of G.C.
Cablevision, Inc. Upon acquisition the seller received shares of GCI
Class A common stock with a future payment in additional shares
contingent upon the market price of our common stock on March 31, 2003.
At March 31, 2003 the market price condition was not met and
approximately 222,600 shares of GCI Class A common stock were issued.
(3) Intangible Assets
Cable certificates are allocated to our cable services segment. Goodwill
is primarily allocated to the cable services segment and the remaining
amount is not allocated to a reportable segment, but is included in the
All Other category as described in note 6.
19 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Amortization expense for amortizable intangible assets was as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
-------------- ----------- ------------- -----------
Amortization expense $ 195 180 527 567
============== =========== ============= ===========
Amortization expense for amortizable intangible assets for each of the
five succeeding fiscal years is estimated to be (amounts in thousands):
Years ending
December 31,
---------------
2003 $ 605
2004 487
2005 355
2006 350
2007 289
No intangible assets have been impaired based upon impairment testing
performed as of December 31, 2002 and no indicators of impairment have
occurred since the impairment testing was performed.
(4) MCI Settlement and Release Agreement
On July 21, 2002 MCI and substantially all of its active U.S.
subsidiaries filed voluntary petitions for reorganization under Chapter
11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court.
Chapter 11 allows a company to continue operating in the ordinary course
of business in order to maximize recovery for the company's creditors and
shareholders.
At the time of the petition for bankruptcy, we had approximately $12.9
million in receivables outstanding from MCI. At December 31, 2002 the bad
debt reserve for uncollected amounts due from MCI ("MCI reserve") totaled
$11.6 million and consisted of all billings for services rendered prior
to July 21, 2002 that were not paid or deemed recoverable as of December
31, 2002.
On July 22, 2003, the United States Bankruptcy Court approved the
settlement of pre-petition amounts owed to us by MCI and affirmed all of
our existing contracts with MCI. The settlement settles unpaid balances
due from MCI for services rendered prior to their bankruptcy filing date,
settles billing disputes between us, and establishes a right to set-off
certain of our pre-petition accounts payable to MCI. Under the terms of
the settlement, we reduced the pre-petition amounts receivable from MCI
by $1.8 million and off-set our pre-petition accounts payable by $1.0
million. The majority of the difference reduced the MCI reserve with the
remainder recorded as bad debt expense.
The remaining pre-petition accounts receivable balance owed by MCI to us
after this settlement was $11.1 million ("MCI credit") which we have and
will use as a credit against amounts payable for future services
purchased from MCI. At settlement, all of the remaining pre-petition
amounts receivable due from MCI, which was fully reserved, was removed
from accounts receivable in our Consolidated Balance Sheet.
After settlement, we began reducing the MCI credit as we utilize it for
services otherwise payable to MCI during the same period. The use of the
credit was and is expected to be recorded as a reduction of bad debt
expense. During the three months ended September 30, 2003 we utilized
approximately $1.0 million of the MCI credit against amounts payable for
services received from MCI during the same
20 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
period. The settlement discussed above and use of the MCI credit resulted
in net recovery of bad debt expense of approximately $647,000 during the
three months ended September 30, 2003.
The remaining unused MCI credit totaled $10.0 million at September 30,
2003. The credit balance is not recorded on the Consolidated Balance
Sheet as we are recognizing utilization of the credit as we incur charges
for services received from MCI.
On July 24, 2003, our contract to provide interstate and intrastate
long-distance services to MCI was extended for a minimum of five years to
July 2008. The agreement sets the terms and conditions under which we
originate and terminate certain types of long distance and data services
in Alaska on MCI's behalf. In exchange for extending the term of this
exclusive contract, MCI will receive a series of rate reductions
implemented in phases over the life of the contract.
On October 31, 2003, MCI's reorganization plan was approved by the U.S.
Bankruptcy Court. We expect to evaluate the likelihood that we will
receive full credit offset for our remaining credit balance when MCI
exits bankruptcy proceedings and may change our recognition method at
that time.
(5) Long-term Debt
On April 22, 2003 we amended our $225.0 million Senior Facility. On
October 30, 2003 we closed a $220.0 million bank facility ("new Senior
Facility") to replace the amended Senior Facility as further described in
note 8.
(6) Industry Segments Data
Our reportable segments are business units that offer different products.
The reportable segments are each managed separately and offer distinct
products with different production and delivery processes.
We have four reportable segments as follows:
Long-distance services. We offer a full range of common carrier
long-distance services to commercial, government, other
telecommunications companies and residential customers, through our
networks of fiber optic cables, digital microwave, and fixed and
transportable satellite earth stations and our SchoolAccess(TM)
offering to rural school districts and a similar offering to rural
hospitals and health clinics.
Cable services. We provide cable television services to residential,
commercial and government users in the State of Alaska. Our cable
systems serve 33 communities and areas in Alaska, including the state's
four largest urban areas, Anchorage, Fairbanks, the Matanuska-Susitna
Valley, and Juneau. We offer digital cable television services in
Anchorage, the Matanuska-Susitna Valley, Fairbanks, Juneau, Ketchikan,
Kenai and Soldotna and retail cable modem service (through our Internet
services segment) in all of our locations in Alaska except Kotzebue.
Local access services. We offer facilities based competitive local
exchange services in Anchorage, Fairbanks and Juneau and plan to
provide similar competitive local exchange services in other locations
pending regulatory approval and subject to availability of capital.
Operating expenses to prepare our new phone directory are included in
the local access services segment. Revenue and costs of sales and
service for our new phone directory will be included in the local
access services segment upon their recognition.
Internet services. We offer wholesale and retail Internet services to
both consumer and commercial customers. We offer cable modem service as
further described in Cable services above. Our
21 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
undersea fiber optic cable systems allow us to offer enhanced services
with high-bandwidth requirements.
Included in the "All Other" category in the tables that follow are our
managed services, product sales and cellular telephone services. None of
these business units has ever met the quantitative thresholds for
determining reportable segments. Also included in the All Other category
are corporate related expenses including information technology,
accounting, legal and regulatory, human resources and other general and
administrative expenses.
We evaluate performance and allocate resources based on (1) earnings or
loss from operations before depreciation, amortization and accretion
expense, net other expense and income taxes, and (2) operating income or
loss. The accounting policies of the reportable segments are the same as
those described in the summary of significant accounting policies in note
1. Intersegment sales are recorded at cost plus an agreed upon
intercompany profit.
We earn all revenues through sales of services and products within the
United States of America. All of our long-lived assets are located within
the United States of America, except approximately 72% of our undersea
fiber optic cable systems which transit international waters.
Summarized financial information for our reportable segments for the nine
months ended September 30, 2003 and 2002 follows (amounts in thousands):
Reportable Segments
--------------------------------------------------------
Long- Local Total
Distance Cable Access Internet Reportable All
Services Services Services Services Segments Other Total
------------------------------------------------------------------------------
2003
----
Revenues:
Intersegment $ 10,946 1,900 7,277 1,792 21,915 558 22,473
External 153,248 71,009 27,211 14,302 265,770 21,273 287,043
------------------------------------------------------------------------------
Total revenues $ 164,194 72,909 34,488 16,094 287,685 21,831 309,516
==============================================================================
Earnings (loss) from
operations before
depreciation,
amortization, net interest
expense and income taxes $ 81,108 33,153 2,501 2,149 118,911 (26,709) 92,202
==============================================================================
Operating income (loss) $ 66,525 19,712 (111) (380) 85,746 (32,912) 52,834
==============================================================================
22 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Reportable Segments
--------------------------------------------------------
Long- Local Total
Distance Cable Access Internet Reportable All
Services Services Services Services Segments Other Total
------------------------------------------------------------------------------
2002
----
Revenues:
Intersegment $ 16,578 1,543 7,498 1,447 27,066 558 27,624
External 156,221 65,322 23,510 11,412 256,465 19,035 275,500
------------------------------------------------------------------------------
Total revenues $ 172,799 66,865 31,008 12,859 283,531 19,593 303,124
==============================================================================
Earnings (loss) from
operations before
depreciation,
amortization, net interest
expense and income taxes $ 73,440 30,528 2,178 (8,444) 97,702 (22,937) 74,765
==============================================================================
Operating income (loss) $ 54,583 18,472 (369) (11,111) 61,575 (28,615) 32,960
==============================================================================
A reconciliation of reportable segment revenues to consolidated revenues
follows (amounts in thousands):
Nine months ended September 30, 2003 2002
--------------- ---------------
Reportable segment revenues $ 287,685 283,531
Plus All Other revenues 21,831 19,593
Less intersegment revenues eliminated in consolidation 22,473 27,624
--------------- ---------------
Consolidated revenues $ 287,043 275,500
=============== ===============
A reconciliation of reportable segment earnings from operations before
depreciation, amortization and accretion expense, net other expense and
income taxes to consolidated net income before income taxes and
cumulative effect of a change in accounting principle follows (amounts in
thousands):
Nine months ended September 30, 2003 2002
-------------- ----------------
Reportable segment earnings from operations before
depreciation, amortization and accretion expense, net other
expense and income taxes $ 118,911 97,702
Less All Other loss from operations before depreciation,
amortization and accretion expense, net other expense and
income taxes 26,709 22,937
Less intersegment contribution eliminated in consolidation 1,829 707
-------------- ----------------
Consolidated earnings from operations before
depreciation, amortization and accretion expense, net
other expense and income taxes 90,373 74,058
Less depreciation, amortization and accretion expense 39,368 41,806
-------------- ----------------
Consolidated operating income 51,005 32,252
Less other expense, net 28,973 21,418
-------------- ----------------
Consolidated net income before income taxes and cumulative
effect of a change in accounting principle $ 22,032 10,834
============== ================
23 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
A reconciliation of reportable segment operating income to consolidated
net income before income taxes and cumulative effect of a change in
accounting principle follows (amounts in thousands):
Nine months ended September 30, 2003 2002
--------------- ---------------
Reportable segment operating income $ 85,746 61,575
Less All Other operating loss 32,912 28,616
Less intersegment contribution eliminated in consolidation 1,829 707
--------------- ---------------
Consolidated operating income 51,005 32,252
Less other expense, net 28,973 21,418
--------------- ---------------
Consolidated net income before income taxes and cumulative
effect of a change in accounting principle $ 22,032 10,834
=============== ===============
(7) Commitments and Contingencies
Litigation and Disputes
We are routinely involved in various lawsuits, billing disputes, legal
proceedings and regulatory matters that have arisen in the normal course
of business.
On July 1, 1999, the Alaska Public Utilities Commission ("APUC") ruled
that the rural exemptions from local competition for the ILECs operating
in Juneau, Fairbanks and North Pole would not be continued, which allowed
us to negotiate for unbundled elements for the provision of competitive
local service. Alaska Communications Systems, Inc. ("ACS") requested
reconsideration of this decision and on October 11, 1999, the RCA issued
an order terminating rural exemptions for the ILECs operating in the
Fairbanks and Juneau markets. ACS has appealed these decisions. The
appeal presently is before the Alaska Supreme Court. On February 11,
2003, the Alaska Supreme Court heard oral argument. One of the principal
issues in dispute concerns the assignment of the burden of proof. In
accordance with instructions from the Alaska Superior Court, the APUC
assigned the burden to ACS at the remand proceeding. At the oral
argument, several Justices expressed concern with the assignment of the
burden. At this time, we cannot reasonably predict what the outcome of
the case will be or even what relief the Court might order if it were to
find that the burden of proof was improperly assigned to ACS. An adverse
decision from the Court, however, has the potential to disrupt our
ability to provide service to our Fairbanks and Juneau customers over our
facilities. We are unable to predict when the Court will issue their
decision.
While the ultimate results of these items cannot be predicted with
certainty, we do not expect at this time the resolution of them, except
for the rural exemption proceedings described above, to have a material
adverse effect on our financial position, results of operations or
liquidity.
Fiber Optic Cable System Construction Commitment
In June 2003 we began work on the construction of a fiber optic cable
system connecting Seward, Alaska and Warrenton, Oregon, with leased
backhaul facilities to connect it to our switching and distribution
centers in Anchorage, Alaska and Seattle, Washington. A consortium of
companies has been selected to design, engineer, manufacture and install
the undersea fiber optic cable system and a contract has been signed at a
total cost to us of $35.2 million. We expect to fund construction of the
fiber optic cable system through our operating cash flows and, to the
extent necessary, with draws on our new Senior Facility. During the nine
month period ended September 30, 2003 our capital
24 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
expenditures for this project have totaled approximately $4.8 million,
all of which has been funded through our operating cash flows.
Alaska Airline Miles Agreement
In August 2003 we entered into an agreement with Alaska Airlines, Inc.
("Alaska Airlines") to offer our residential and business customers who
make qualifying purchases from us the opportunity to accrue mileage
awards in the Alaska Airlines Mileage Plan. The agreement requires the
purchase of Alaska Airlines miles during the year ended December 31, 2003
and in future years.
Internal Revenue Service Examination
Our U.S. income tax return for 2000 was selected for examination by the
Internal Revenue Service during 2003. The examination is scheduled to
begin during the fourth quarter of 2003. We believe this examination will
not have a material adverse effect on our financial position, results of
operations or our liquidity.
(8) Subsequent Event
On October 30, 2003 we closed a $220.0 million new Senior Facility to
replace the April 22, 2003 amended Senior Facility. The new Senior
Facility reduces the interest rate from LIBOR plus 6.50% to LIBOR plus
3.25%. The new Senior Facility includes a term loan of $170.0 million and
a revolving credit facility of $50.0 million.
The repayment schedule for the term loan in the new Senior Facility is
unchanged from that in the April 22, 2003 amended Senior Facility. The
repayment schedule is as follows (amounts in thousands):
Date Amount
------------------------------------------ -----------
Quarterly from December 31, 2003 to
December 31, 2004 $ 5,000
Quarterly from March 31, 2005 to December
31, 2005 $ 6,000
Quarterly from March 31, 2006 to December
31, 2006 $ 8,000
Quarterly from March 31, 2007 to September
30, 2007 $ 10,000
The remaining balance of the new Senior Facility will be payable in full
on October 31, 2007.
We are required to pay a commitment fee on the unused portion of the
commitment as follows:
Commitment fee if the outstanding Commitment fee if the outstanding
revolving credit facility is > 50% revolving credit facility is
of the average revolving credit < 50% of the average revolving
Total Leverage facility commitments by the credit facility commitments by the
Ratio (as defined) lenders during such during such period lenders during such period
--------------------- ---------------------------------------- ----------------------------------------
> 3.75 1.00% 1.25%
-
> 3.25 but <3.75 0.75% 1.00%
-
> 2.75 but <3.25 0.50% 0.75%
-
< 2.75 0.50% 0.75%
25 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
We may not permit the Total Leverage Ratio (as defined) to exceed:
Period Total Leverage Ratio
-------------------------------------------------------- ------------------------
October 30, 2003 through December 30, 2003 4.25:1
December 31, 2003 through December 30, 2004 4.00:1
December 31, 2004 through December 30, 2005 3.75:1
December 31, 2005 through June 29, 2006 3.50:1
June 30, 2006 through June 29, 2007 3.25:1
June 30, 2007 through September 29, 2007 3.00:1
September 30, 2007 through October 31, 2007 2.75:1
We may not permit the Senior Secured Leverage Ratio (as defined) to
exceed:
Senior Secured
Period Leverage Ratio
-------------------------------------------------------- ------------------------
October 30, 2003 through December 30, 2004 2.00:1
December 31, 2004 through September 29, 2006 1.75:1
September 30, 2006 through June 29, 2007 1.50:1
June 30, 2007 through September 29, 2007 1.25:1
September 30, 2007 through October 31, 2007 1.00:1
The Interest Coverage Ratio (as defined) may not be less than 2.50:1 at
any time.
Capital expenditures, excluding up to $58.0 million incurred to build or
acquire additional fiber optic cable system capacity between Alaska and
the lower forty-eight states, in any of the years ended December 31,
2003, 2004, 2005 and 2006, may not exceed:
o $25.0 million, plus
o 100% of any Excess Cash Flow (as defined) during the applicable
period less certain permitted investments of up to $5.0 million
during the applicable period.
If the revolving credit facility exceeds $25.0 million, we may not incur
capital expenditures, other than those incurred to build or acquire
additional fiber optic cable system capacity, in excess of $25.0 million.
Under the new Senior Facility we must either have repaid in full or
successfully refinanced our Senior Notes by February 1, 2007.
$3.5 million of the new Senior Facility has been used to provide a letter
of credit to secure payment for our contract for the design, engineering,
manufacture and installation of the undersea fiber optic cable system
discussed in note 7. The letter of credit will be reduced to $1.8 million
after a contract payment estimated to be made in March 2004. The letter
of credit will be cancelled after the final contract payment date
estimated to be in April 2004.
Because a portion of the new Senior Facility is a substantial
modification of the April 22, 2003 amended Senior Facility we will
recognize approximately $5.0 million in Amortization of Loan and Senior
Notes Fees during the three months ended December 31, 2003. The remaining
$2.2 million in Deferred Loan Costs, Net will continue to be amortized
over the life of the new Senior Facility.
26 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
In connection with the new Senior Facility, we paid bank fees and other
expenses of $850,000 in October 2003 which will be amortized over the
life of the new agreement.
27
PART I.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
In the following discussion, General Communication, Inc. and its direct and
indirect subsidiaries are referred to as "we," "us" and "our."
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. On an on-going basis, we evaluate our estimates and
judgments, including those related to unbilled revenues, cost of sales and
services accruals, allowance for doubtful accounts, depreciation, amortization
and accretion periods, intangible assets, income taxes, and contingencies and
litigation. We base our estimates and judgments on historical experience and on
various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. See also our Cautionary Statement Regarding
Forward-Looking Statements.
General Overview
We have experienced significant growth in recent years through strategic
acquisitions, deploying new business lines and expansion of our existing
businesses. We have historically met our cash needs for operations, regular
capital expenditures and maintenance capital expenditures through our cash flows
from operating activities. Historically, cash requirements for significant
acquisitions and major capital expenditures have been provided largely through
our financing activities. We expect to fund the construction of a new fiber
optic cable system through our operating cash flows and, to the extent
necessary, with draws on our new Senior Facility, as further discussed in
Liquidity and Capital Resources included in Part I, Item 2 of this report.
Consolidated revenues increased by $3.8 million during the third quarter of 2003
("2003") as compared to the third quarter in 2002 ("2002"). Operating income
increased by $1.2 million in 2003. Net income before income tax decreased
approximately $400,000 and net income decreased approximately $500,000. Three of
our reportable business segments experienced growth in external revenues from
2002 to 2003 as we continued to strengthen our position in the markets we serve.
The long-distance services segment experienced a decrease in revenue in 2003 as
compared to 2002. The local access services had operating income in 2003 and an
operating loss in 2002. The Internet services segment improved its operating
loss in 2003 as compared to 2002. The operating income for the long-distance
services and cable services segments decreased in 2003 as compared to 2002.
Basic and diluted earnings per share decreased $0.01 per share in 2003 as
compared to 2002.
Long-Distance Services Overview
Third quarter 2003 long-distance services revenue represented 54.1% of
consolidated revenues. Our provision of interstate and intrastate long-distance
services, private line and leased dedicated capacity services, and broadband
services accounted for 94.6% of our total long-distance services revenues during
the third quarter of 2003.
28
Factors that have the greatest impact on year-to-year changes in long-distance
services revenues may include the rate per minute charged to customers, usage
volumes expressed as minutes of use, and the number of private line, leased
dedicated service and broadband products in use.
Our long-distance services segment faces significant competition from AT&T
Alascom, Inc., long-distance resellers, and local telephone companies that have
entered the long-distance market. We believe our approach to developing,
pricing, and providing long-distance services and bundling different business
segment services will continue to allow us to be competitive in providing those
services.
Our contract to provide interstate and intrastate long-distance services to
Sprint was replaced in March 2002 extending its term to March 2007 with two
one-year automatic extensions to March 2009. Beginning in April 2002 the new
contract reduced the rate to be charged by us for certain Sprint traffic over
the extended term of the contract. Additional contractual rate reductions occur
annually through the end of the initial term of the contract.
On July 21, 2002 MCI and substantially all of its active U.S. subsidiaries filed
voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy
Code in the United States Bankruptcy Court. Chapter 11 allows a company to
continue operating in the ordinary course of business in order to maximize
recovery for the company's creditors and shareholders.
At the time of the petition for bankruptcy, we had approximately $12.9 million
in receivables outstanding from MCI. At December 31, 2002 the bad debt reserve
for uncollected amounts due from MCI ("MCI reserve") totaled $11.6 million and
consisted of all billings for services rendered prior to July 21, 2002 that were
not paid or deemed recoverable as of December 31, 2002.
On July 22, 2003, the United States Bankruptcy Court approved the settlement of
pre-petition amounts owed to us by MCI and affirmed all of our existing
contracts with MCI. The settlement settles unpaid balances due from MCI for
services rendered prior to their bankruptcy filing date, settles billing
disputes between us, and establishes a right to set-off certain of our
pre-petition accounts payable to MCI. Under the terms of the settlement, we
reduced the pre-petition amounts receivable from MCI by $1.8 million and off-set
our pre-petition accounts payable by $1.0 million. The majority of the
difference reduced the MCI reserve with the remainder recorded as bad debt
expense.
The remaining pre-petition accounts receivable balance owed by MCI to us after
this settlement was $11.1 million ("MCI credit") which we have and will use as a
credit against amounts payable for future services purchased from MCI. At
settlement, all of the remaining pre-petition amounts receivable due from MCI,
which was fully reserved, was removed from accounts receivable in our
Consolidated Balance Sheet.
After settlement, we began reducing the MCI credit as we utilize it for services
otherwise payable to MCI during the same period. The use of the credit was and
is expected to be recorded as a reduction of bad debt expense. During the three
months ended September 30, 2003 we utilized approximately $1.0 million of the
MCI credit against amounts payable for services received from MCI during the
same period. The settlement discussed above and use of the MCI credit resulted
in net recovery of bad debt expense of approximately $647,000 during the three
months ended September 30, 2003.
The remaining unused MCI credit totaled $10.0 million at September 30, 2003. The
credit balance is not recorded on the Consolidated Balance Sheet as we are
recognizing utilization of the credit as we incur charges for services received
from MCI.
On July 24, 2003, our contract to provide interstate and intrastate
long-distance services to MCI was extended for a minimum of five years to July
2008. The agreement sets the terms and conditions under
29
which we originate and terminate certain types of long distance and data
services in Alaska on MCI's behalf. In exchange for extending the term of this
exclusive contract, MCI will receive a series of rate reductions implemented in
phases over the life of the contract.
On October 31, 2003, MCI's reorganization plan was approved by the U.S.
Bankruptcy Court. MCI has indicated that the company may emerge from bankruptcy
protection soon after the start of 2004. We expect to evaluate the likelihood
that we will receive full credit offset for our remaining credit balance when
MCI exits bankruptcy proceedings and may change our recognition method at that
time. We cannot predict what effect the bankruptcy and reorganization process or
the economy may have on their traffic levels and ultimately, their requirements
for service to and from Alaska.
Recent hearings, media coverage and a U.S. Attorney's office inquiry reflect a
political movement that may be attempting to deny MCI from continuing to provide
services to government agencies. We estimate that 25% to 27% of our MCI revenues
are attributed to their provision of service to government agencies. Our MCI
revenues could be significantly reduced if MCI's government contract traffic
moves from their network to other carriers' networks for which we do not provide
service.
Other common carrier traffic routed to us for termination in Alaska is largely
dependent on traffic routed to MCI and Sprint by their customers. Pricing
pressures, general economic deterioration, new program offerings, business
failures, and market and business consolidations continue to evolve in the
markets served by MCI and Sprint. If, as a result, their traffic is reduced, or
if their competitors' costs to terminate or originate traffic in Alaska are
reduced, our traffic will also likely be reduced, and our pricing may be reduced
to respond to competitive pressures. We are unable to predict the effect on us
of such changes, however given the materiality of other common carrier revenues
to us, a significant reduction in traffic or pricing could have a material
adverse effect on our financial position, results of operations and liquidity.
Due in large part to the favorable synergistic effects of our integrated
approach, the long-distance services segment continues to be a significant
contributor to our overall performance, although the migration of traffic from
voice to data continues.
Cable Services Overview
Third quarter 2003 cable television revenues represented 24.1% of consolidated
revenues. Our cable systems serve 33 communities and areas in Alaska, including
the state's four largest population centers, Anchorage, Fairbanks, the
Matanuska-Susitna Valley and Juneau.
We generate cable services revenues from four primary sources: (1) digital and
analog programming services, including monthly basic and premium subscriptions,
pay-per-view movies and other one-time events, such as sporting events; (2)
equipment rentals and installation; (3) cable modem services (shared with our
Internet services segment); and (4) advertising sales. During the third quarter
of 2003 programming services generated 75.4% of total cable services revenues,
cable services' allocable share of cable modem services accounted for 11.6% of
such revenues, equipment rental and installation fees accounted for 8.9% of such
revenues, advertising sales accounted for 3.3% of such revenues, and other
services accounted for the remaining 0.8% of total cable services revenues.
Effective February 2003, we increased rates charged for certain cable services
and premium packages in six communities, including three of the state's four
largest population centers, Anchorage, Fairbanks and Juneau. Rates increased
approximately 4% for those customers who experienced an adjustment.
The primary factors that contribute to year-to-year changes in cable services
revenues may include average monthly subscription and pay-per-view rates, the
mix among basic, premium and pay-per-view services and
30
digital and analog services, the average number of cable television and cable
modem subscribers during a given reporting period, and revenues generated from
new product offerings.
Our cable services segment faces competition from alternative methods of
receiving and distributing television signals, including but not limited to
direct broadcast satellite ("DBS") and, expected to begin in the fourth quarter
of 2003 or in 2004, digital video service over telephone lines, and from other
sources of news, information and entertainment. Several ILECs in the 48
contiguous states south of or below Alaska ("Lower 48 States") and the largest
ILEC in Alaska have announced marketing arrangements to provide DBS services
along with local telephone and other services. Similar arrangements could be
extended to other ILECs in the markets we serve in Alaska. DBS service provider
Dish Network (EchoStar Communications Corporation) recently announced that local
network programming is available in their Anchorage, Alaska market for an
additional fee. We believe we will continue to be competitive by providing, at
reasonable prices, a greater variety of communication services than are
available off-air or through other alternative delivery sources. Additionally,
we believe we offer superior technical performance and responsive
community-based customer service.
Local Access Services Overview
We generate local access services revenues from three primary sources: (1)
business and residential basic dial tone services; (2) business private line and
special access services; and (3) business and residential features and other
charges, including voice mail, caller ID, distinctive ring, inside wiring and
subscriber line charges. During the third quarter of 2003 local access services
revenues represented 9.7% of consolidated revenues.
The primary factors that contribute to year-to-year changes in local access
services revenues may 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.
Our local access services segment faces significant competition in Anchorage,
Fairbanks, and Juneau from the ILEC ACS and from AT&T Alascom, Inc. We began
providing service in the Juneau market in the first quarter of 2002. We believe
our approach to developing, pricing, and providing local access services and
bundling different business segment services will allow us to be competitive in
providing those services.
Operating expenses to prepare our new phone directory are included in the local
access services segment. Revenue and costs of sales and service for our new
phone directory will be included in the local access services segment upon their
recognition.
Internet Services Overview
We generate Internet services revenues from three primary sources: (1) access
product services, including commercial, Internet service provider, and retail
dial-up access; (2) network management services; and (3) Internet services'
allocable share of cable modem services (a portion of cable modem revenue is
also recognized by our cable services segment). During the third quarter of 2003
Internet services segment revenues represented 5.0% of consolidated revenues.
The primary factors that contribute to year-to-year changes in Internet services
revenues may 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 Internet products. Our Internet offerings are
coupled with our long-distance and local access
31
services offerings and provide free basic Internet services or discounted
premium Internet services if certain long-distance or local access services
plans are selected. Value-added premium Internet features are available for
additional charges.
We compete with a number of Internet service providers in our markets. We
believe our approach to developing, pricing, and providing Internet services
allows us to be competitive in providing those services.
All Other Services Overview
Revenues reported in the All Other category as described in note 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 7.1% of total revenues
in the third quarter of 2003 and include managed services revenues totaling $5.6
million, cellular telephone services revenues totaling $903,000 and product
sales revenues totaling $453,000.
32
RESULTS OF OPERATIONS
The following table sets forth selected Statement of Operations data as a
percentage of total revenues for the periods indicated (unaudited, underlying
data rounded to the nearest thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
Percent- Percent-
age age
Change (1) Change (1)
2003 vs. 2003 vs.
2003 2002 2002 2003 2002 2002
---- ---- ---- ---- ---- ----
Statement of Operations Data:
Revenues
Long-distance services 54.1% 56.9% (1.1%) 53.4% 56.7% (1.9%)
Cable services 24.1% 23.3% 7.4% 24.7% 23.7% 8.7%
Local access services 9.7% 8.6% 17.8% 9.5% 8.5% 15.7%
Internet services 5.0% 4.1% 25.3% 5.0% 4.2% 25.3%
All Other services 7.1% 7.1% 4.2% 7.4% 6.9% 11.8%
-----------------------------------------------------------------------
Total revenues 100.0% 100.0% 4.0% 100.0% 100.0% 4.2%
Cost of sales and services 32.4% 32.1% 4.9% 32.1% 33.6% (0.3%)
Selling, general and administrative
expenses 35.9% 34.1% 9.5% 35.7% 34.9% 6.7%
Bad debt expense 0.5% 1.8% (68.2%) 0.7% 4.6% (85.0%)
Depreciation, amortization and accretion
expense 13.3% 14.7% (6.2%) 13.7% 15.2% (5.8%)
-----------------------------------------------------------------------
Operating income 17.9% 17.3% 7.6% 17.8% 11.7% 58.1%
Net income before income taxes and
cumulative effect of a change in
accounting principle 8.4% 9.2% 4.4% 7.7% 3.9% 103.4%
Net income before cumulative
effect of a change in accounting
principle 4.6% 5.4% 10.5% 4.3% 2.2% 101.5%
Net income 4.6% 5.4% 10.5% 4.1% 2.2% 92.6%
Other Operating Data:
Long-distance services operating income (2) 43.3% 43.9% (2.5%) 43.4% 34.9% 21.9%
Cable services operating income (3) 25.2% 29.0% (6.6%) 27.8% 28.3% 6.7%
Local access services operating income
(loss) (4) 0.2% (10.2%) 102.1% (0.4%) (1.6%) 69.9%
Internet services operating loss (5) (0.4%) (93.7%) 99.5% (2.7%) (97.4%) 96.6%
- --------------------------
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.
- --------------------------
33
Three Months Ended September 30, 2003 ("2003") Compared To Three Months Ended
September 30, 2002 ("2002").
Overview of Revenues and Cost of Sales and Services
Total revenues increased 4.0% from $94.6 million in 2002 to $98.3 million in
2003. The cable services, local access services and Internet services segments
and All Other Services contributed to the increase in total revenues, partially
off-set by a decrease in revenues in the long-distance services segment. See the
discussion below for more information by segment.
Total cost of sales and services increased 4.9% to $31.9 million in 2003. As a
percentage of total revenues, total cost of sales and services increased from
32.1% in 2002 to 32.4% in 2003. The cable services, local access services and
Internet services segments contributed to the increase in total cost of sales
and services, partially off-set by decreases in cost of sales and services in
the long-distance services segment and All Other Services. See the discussion
below for more information by segment.
Long-distance Services Segment Revenues
Total long-distance services segment revenues decreased 1.1% to $53.2 million in
2003.
Message Telephone Service Revenue from Common Carrier Customers
Message telephone service revenues from other common carriers (principally MCI
and Sprint) decreased 7.5% to $24.6 million in 2003 resulting from the
following:
o A 9.5% 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 24, 2003 extension of our contract to
provide interstate and intrastate long-distance services to MCI,
o A discount given to a certain other common carrier customer starting in
2003, and
o Revenue earned due to a 2002 increase in the rate per minute of certain
other common carrier minutes retroactive to April 2002 which did not
recur in 2003.
The decrease in message telephone service revenues from other common carriers in
2003 was off-set by a 8.5% increase in wholesale minutes carried to 243.6
million minutes.
The economic stagnation in the Lower 48 States appears to have dampened demand
for services provided by our large common carrier customers. To the extent that
these customers experience reduced demand for traffic destined for and
originating in Alaska, it could adversely affect our common carrier traffic. A
protracted economic malaise in the Lower 48 States or a further disruption in
the economy resulting from renewed terrorist activity could affect our carrier
customers which, in turn, could affect our revenues and cash flows.
Message Telephone Service Revenue from Residential, Commercial and Governmental
Customers
Message telephone service revenues from residential, commercial, and
governmental customers decreased 11.5% to $10.1 million in 2003 primarily due to
the following:
o A 6.5% decrease in minutes carried for these customers to 70.8 million
minutes. The decrease is primarily due to the effect of customers
substituting cellular phone, prepaid calling card and email usage for
direct dial minutes,
o A 8.2% decrease in the average rate per minute to $0.112 per minute
paid by these customers due to our promotion of and customers'
enrollment in calling plans offering a certain number of minutes for a
flat monthly fee, and
o A 2.2% decrease in the number of active residential, commercial, and
governmental customers billed to 86,200 at September 30, 2003 as
compared to December 31, 2002.
34
Revenue from Private Line and Private Network Customers
Private line and private network transmission services revenues increased 2.0%
to $9.2 million in 2003.
Revenue from Broadband Customers
Revenues from our packaged telecommunications offering to rural hospital and
health clinic service and our SchoolAccess(TM) offering to rural school
districts increased 46.5% to $6.4 million in 2003. The increase is primarily due
to the following:
o Our new SchoolAccess(TM) offering called Distance Learning Service that
started in late 2002. Distance Learning Service is a video-conference
based service which enables school districts to provide educational
opportunities for students within the district and is used by six
school districts in Alaska, and
o An increased number of circuits sold to rural hospitals and health
clinics.
Long-distance Services Segment Cost of Sales and Services
Long-distance services segment cost of sales and services decreased 0.1% to
$14.4 million in 2003. Long-distance services segment cost of sales and services
as a percentage of long-distance services segment revenues increased from 26.8%
in 2002 to 27.0% in 2003 primarily due to the following:
o In the course of business we estimate unbilled long-distance services
cost of sales and services based upon minutes of use processed through
our network and established rates. Such estimates are revised when
subsequent billings are received, payments are made, billing matters
are researched and resolved, tariffed billing periods lapse, or when
disputed charges are resolved. In 2003 and 2002, we had favorable
adjustments of $624,000 and $1.5 million, respectively,
o A discount given to a certain other common carrier customer starting in
2003 without a corresponding decrease in the cost of sales and
services,
o Increased costs associated with additional transponder and network
back-up capacity in 2003 as compared to 2002, and
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.
The increase in 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 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 $.059 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, and
o A $400,000 refund in 2003 from an intrastate access cost pool that
previously overcharged us for access services.
Cable Services Segment Revenues and Cost of Sales and Services
Total cable services segment revenues increased 7.4% to $23.7 million and
average gross revenue per average basic subscriber per month increased $3.71 or
6.7% in 2003. Programming services revenues increased 5.4% to $17.9 million in
2003 resulting from the following:
o Basic subscribers served increased approximately 700 to approximately
135,300 at September 30, 2003 as compared to September 30, 2002,
35
o Digital subscriber counts increased 22.1% to approximately 34,800 at
September 30, 2003 as compared to September 30, 2002, and
o 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 cable services segment's share of cable modem revenue (offered through our
Internet services segment) increased $630,000 to $2.7 million in 2003 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 89% of our total homes passed at September 30, 2003. We launched
digital programming service in the Matanuska-Susitna Valley and Ketchikan cable
system in 2003.
New facility construction efforts in late 2002 and 2003 resulted in
approximately 5,200 additional homes passed, a 2.7% increase at September 30,
2003 as compared to September 30, 2002. New facility construction efforts in
2003 resulted in approximately 3,300 additional homes passed and a review of
homes passed in the system acquired from Rogers American Cablesystems, Inc.
resulted in approximately 1,900 additional homes passed.
In the second quarter of 2002 we signed new seven-year retransmission agreements
with the five local Anchorage broadcasters and began up-linking and distributing
the local Anchorage programming to all of our cable systems. This local
programming provides additional value to our cable subscribers that not all our
DBS competitors can provide.
Cable services cost of sales and services increased 14.7% to $6.6 million in
2003 due to programming cost increases for most of our cable programming
services offerings. Cable services cost of sales and services as a percentage of
cable services revenues increased from 26.1% in 2002 to 27.9% in 2003 primarily
due to increased discounts given as subscribers enroll in certain cable service
packages.
The increase in cable services cost of sales and services as a percentage of
cable services revenues described above is partially off-set by increasing
amounts of cable modem services sold that generally have higher margins than do
cable programming services.
Local Access Services Segment Revenues and Cost of Sales and Services
Local access services segment revenues increased 17.8% in 2003 to $9.5 million
primarily due to growth in the average number of customers served. At September
30, 2003 an estimated 103,400 lines were in service as compared to approximately
95,000 to 100,000 lines in service at September 30, 2002. We estimate that our
2003 lines in service total represents a statewide market share of approximately
21%. At September 30, 2003 approximately 1,150 additional lines were awaiting
connection. The increase in local access services segment revenues is also
caused by a change in how we provision local access lines in Fairbanks and
Juneau. In 2002 we primarily resold service purchased from ACS. In 2003 we are
benefiting from our facilities build-out with an increased number of access
lines provisioned on our own facilities, UNE loop and UNE platform which allows
us to collect interstate and intrastate access revenues.
36
Local access services segment cost of sales and services increased 11.3% to $5.9
million in 2003. Local access services segment cost of sales and services as a
percentage of local access services segment revenues decreased from 65.9% in
2002 to 62.2% in 2003, primarily due to reductions in access costs attributed to
changes in how we provision local access lines. The decrease previously
described is partially off-set by decreased network access services revenues
from other carriers as the number of customers purchasing both long-distance and
local access services from us increases.
Our access line mix at September 30, 2003 follows:
o Residential lines represent approximately 58% of our lines,
o Business customers represent approximately 35% of our lines, and
o Internet access customers represent approximately 7% of our lines.
Approximately 87% of our lines are provided on our own facilities and leased
local loops. Approximately 5% of our lines are provided using UNE platform.
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 $1.6 million and the long distance services segment operating
results would have been reduced by an equal amount in the third quarter of 2003.
Avoided access charges totaled approximately $1.3 million in the same period of
2002. The local access services segment operating results are affected by our
continued evaluation and testing of digital local phone service and Internet
protocol-based technology to deliver phone service through our cable facilities.
Internet Services Segment Revenues and Cost of Sales and Services
Total Internet services segment revenues increased 25.3% to $4.9 million in 2003
primarily due to a 34.2% increase in its allocable share of cable modem revenues
to $2.3 million in 2003 as compared to 2002. The increase in cable modem
revenues is primarily due to growth in the number of cable modems deployed.
Cable modem subscribers increased from approximately 33,000 at September 30,
2002 to approximately 42,800 at September 30, 2003.
At September 30, 2003 we had 93,900 total Internet subscribers, which includes
51,100 dial-up subscribers and 42,800 cable modem subscribers. Our total dial-up
subscribers decreased 1,700 to 51,100 subscribers at September 30, 2003 as
compared to September 30, 2002 as more customers continue to migrate to cable
modems.
We reported a total of 71,400 dial-up Internet subscribers at September 30,
2002. This subscriber count was based upon the total number of active dial-up
subscribers at September 30, 2002. Not all cable modem subscribers paying for a
dial-up plan have 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 new 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.
The Internet services segment does not share in plan fee revenues associated
with our bundled Internet and long-distance service package. Estimated plan fees
related to this service offering are approximately $1.0 million per quarter and
those revenues are included in the long-distance services segment.
37
Internet services cost of sales and services increased 23.2% to $1.5 million in
2003, and as a percentage of Internet services revenues, totaled 30.7% and 31.3%
in 2003 and 2002, respectively. The 2003 decrease as a percentage of Internet
services revenues is primarily due to a $582,000 increase in Internet's portion
of cable modem revenue to $2.3 million that generally has higher margins than do
other Internet services products. As Internet services revenues increase,
economies of scale and more efficient network utilization continue to result in
reduced Internet cost of sales and services as a percentage of revenues.
We enhanced the value of our Internet offerings throughout 2002 through the
addition of electronic billing and presentment capabilities and the rollout of a
product called eMail Guard, which filters out e-mail spam and viruses. We
upgraded the download speeds of all of our cable modem Internet service
offerings. These new services and enhancements have proven to be popular with
our customers which we believe is helping to further solidify our customer
relationships.
All Other Revenues and Costs of Sales and Services
All Other revenues increased 4.2% to $7.0 million in 2003 primarily due to
increased monthly revenue earned from a managed services contract with a certain
customer and $400,000 in special project revenue with a certain customer in
2003. The increase in All Other revenues is partially off-set by a decrease in
special project revenue with a certain customer in 2003 as compared to 2002.
Revenues from our GCI Fiber system that runs along the oil pipeline corridor are
continuing to increase and we expect the annual recurring revenue run rate to
increase by an additional two to three million dollars per year by the end of
2003. Additionally, we expect to recognize approximately $6.5 million dollars in
special project revenue in the fourth quarter of 2003.
All Other costs of sales and services decreased 6.1% to $3.4 million in 2003,
and as a percentage of All Other revenues, totaled 49.3% and 54.8% in 2003 and
2002, respectively. The decrease in All Other costs of sales and services as a
percentage of All Other revenues is primarily due to the following:
o Increased monthly revenue earned from managed services in 2003 which
exceeds the corresponding increase in costs of sales or services, and
o The recognition of $400,000 in special project revenue in 2003 which
exceeds the corresponding increase in costs of sales or services.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 9.5% to $35.3 million in
2003 and, as a percentage of total revenues, increased to 35.9% in 2003 from
34.1% in 2002. The 2003 increase in selling, general and administrative expenses
is primarily due to an increased accrual for company-wide success sharing bonus
costs, increased labor costs, costs associated with Alaska regulatory affairs
and the purchase of Alaska Airline miles due to the implementation of our Alaska
Airlines miles program in 2003.
Marketing and advertising expenses as a percentage of total revenues decreased
from 3.2% in 2002 to 2.6% in 2003.
Bad Debt Expense
Bad debt expense decreased 68.2% to $533,000 in 2003 and, as a percentage of
total revenues, decreased to 0.5% in 2003 from 1.8% in 2002. The 2003 decrease
is primarily due to the following:
o Recognition of approximately $647,000 of the MCI credit as a reduction
to bad debt expense in 2003, as further discussed in the Long Distance
Service Overview included in Part I, Item 2 of this report, and
38
o Provision in 2002 of an additional $1.2 million bad debt reserve for
uncollected amounts due from MCI resulting from substantially all of
its active U.S. subsidiaries filing voluntary petitions for
reorganization under Chapter 11 of the U.S. Bankruptcy Code in the
United States Bankruptcy Court for the Southern District of New York on
July 21, 2002.
The decrease in bad debt expense described above is partially off-set by the
recognition of a $550,000 bad debt reserve for uncollected amounts due from a
certain customer in 2003.
Depreciation, Amortization and Accretion Expense
Depreciation, amortization and accretion expense decreased 6.2% to $13.1 million
in 2003. The decrease is primarily attributed to a reduction in the depreciable
value of Property and Equipment due to an adjustment of $18.5 million which was
recorded in 2002 associated with the Kanas Telecom, Inc. acquisition.
The decrease in depreciation, amortization and accretion expense described above
was partially off-set by an increase in depreciation expense due to our $59.2
million investment in equipment and facilities placed into service during 2002
for which a full year of depreciation will be recorded in 2003, and the $28.4
million investment in equipment and facilities placed into service during 2003
for which a partial year of depreciation will be recorded in 2003.
Other Expense, Net
Other expense, net of other income, increased 21.1% to $9.3 million in 2003. The
increase is primarily due to the following:
o Increased interest expense due to the increased interest rate paid on
our April 22, 2003 amended Senior Facility,
o Increased deferred loan fee amortization expense due to increased
deferred loan fees associated with the amended Senior Facility, and
o A $269,000 interest benefit earned in 2002 from an interest rate swap
agreement which was called at no cost by the counterparty and
terminated on August 1, 2002.
Partially offsetting these increases were a decrease in the average outstanding
indebtedness in 2003 and the capitalization of $128,000 of interest costs due to
the construction of a fiber optic cable system connecting Seward, Alaska and
Warrenton, Oregon.
Income Tax Expense
Income tax expense was $3.8 million in 2003 and $3.6 million in 2002. Our
effective income tax rate changed from 41.5% in 2002 to 45.3% in 2003 due to the
effect of items that are nondeductible for income tax purposes.
At September 30, 2003, we have (1) tax net operating loss carryforwards of
approximately $196.2 million that will begin expiring in 2005 if not utilized,
and (2) alternative minimum tax credit carryforwards of approximately $1.9
million available to offset regular income taxes payable in future years. Our
utilization of certain net operating loss carryforwards is subject to
limitations pursuant to Internal Revenue Code section 382.
Tax benefits associated with recorded deferred tax assets are considered to be
more likely than not realizable through future reversals of existing taxable
temporary differences and future taxable income exclusive of reversing temporary
differences and carryforwards. The amount of deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced which would result in
additional income tax expense. We estimate that our effective income tax rate
for financial statement purposes will be 43% to 47% in 2003.
39
Nine Months Ended September 30, 2003 ("2003") Compared To Nine Months Ended
September 30, 2002 ("2002").
Overview of Revenues and Cost of Sales and Services
Total revenues increased 4.2% from $275.5 million in 2002 to $287.0 million in
2003. The cable services, local access services and Internet services segments
and All Other Services contributed to the increase in total revenues, partially
off-set by a decrease in revenues in the long-distance services segment. See the
discussion below for more information by segment.
Total cost of sales and services decreased 0.3% to $92.2 million in 2003. As a
percentage of total revenues, total cost of sales and services decreased from
33.6% in 2002 to 32.1% in 2003. The long-distance services segment contributed
to the decrease in total cost of sales and services, partially off-set by
increases in costs of sales and services in the cable services, local access
services and Internet services segments and All Other Services. See the
discussion below for more information by segment.
Long-distance Services Segment Revenues
Total long-distance services segment revenues decreased 1.9% to $153.2 million
in 2003.
Message Telephone Service Revenue from Common Carrier Customers
Message telephone service revenues from other common carriers (principally MCI
and Sprint) decreased 8.2% to $68.7 million in 2003 resulting from the
following:
o A 9.5% 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 24, 2003 extension of our contract to
provide interstate and intrastate long-distance services to MCI,
o A discount given to a certain other common carrier customer starting in
the third quarter of 2003, and
o Revenue earned due to a 2002 increase in the rate per minute of certain
other common carrier minutes retroactive to April 2002 which did not
recur in 2003.
The decrease in message telephone service revenues from other common carriers in
2003 was partially off-set by a 1.5% increase in wholesale minutes carried to
639.4 million minutes.
The economic stagnation in the Lower 48 States appears to have dampened demand
for services provided by our large common carrier customers. To the extent that
these customers experience reduced demand for traffic destined for and
originating in Alaska, it could adversely affect our common carrier traffic. A
protracted economic malaise in the Lower 48 States or a further disruption in
the economy resulting from renewed terrorist activity could affect our carrier
customers which, in turn, could affect our revenues and cash flows.
Message Telephone Service Revenue from Residential, Commercial and Governmental
Customers
Message telephone service revenues from residential, commercial, and
governmental customers decreased 13.9% to $30.5 million in 2003 primarily due to
the following:
o A 8.5% decrease in minutes carried for these customers to 215.3 million
minutes. The decrease is primarily due to the loss of approximately 4.0
million to 4.5 million minutes earned from a certain retail customer in
2002 but not earned in 2003 and the effect of customers substituting
cellular phone, prepaid calling card and email usage for direct dial
minutes,
o A 11.8% decrease in the average rate per minute to $0.112 per minute
paid by these customers due to our promotion of and customers'
enrollment in calling plans offering a certain number of minutes for a
flat monthly fee, and
40
o A 2.2% decrease in the number of active residential, commercial, and
governmental customers billed to 86,200 at September 30, 2003 as
compared to December 31, 2002.
Revenue from Private Line and Private Network Customers
Private line and private network transmission services revenues increased 1.5%
to $27.4 million in 2003.
Revenue from Broadband Customers
Revenues from our packaged telecommunications offering to rural hospital and
health clinic service and our SchoolAccess(TM) offering to rural school
districts increased 37.8% to $18.4 million in 2003. The increase is primarily
due to the following:
o Our new SchoolAccess(TM) offering called Distance Learning Service that
started in late 2002. Distance Learning Service is a video-conference
based service which enables school districts to provide educational
opportunities for students within the district and is used by six
school districts in Alaska,
o An increased number of circuits sold to rural hospitals and health
clinics, and
o Equipment sales to one customer.
Long-distance Services Segment Cost of Sales and Services
Long-distance services segment cost of sales and services decreased 13.6% to
$39.5 million in 2003. Long-distance services segment cost of sales and services
as a percentage of long-distance services segment revenues decreased from 29.3%
in 2002 to 25.8% in 2003 primarily due to the following:
o Reductions in access costs due to distribution and termination of our
traffic on our own local access services network instead of paying
other carriers to distribute and terminate our traffic. The statewide
average cost savings is approximately $.011 and $.059 per minute for
interstate and intrastate traffic, respectively. We expect cost savings
to continue to occur as long-distance traffic originated, carried, and
terminated on our own facilities grows,
o The FCC MAG reform order reducing the interstate access rates paid by
interexchange carriers to LECs beginning July 2002,
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
o A $1.3 million refund in 2003 from an intrastate access cost pool that
previously overcharged us for access services.
The decrease in the long-distance services segment cost of sales and services as
a percentage of long-distance services segment revenues is partially off-set by
the following:
o Increased costs associated with additional transponder and network
back-up capacity in 2003 as compared to 2002,
o A discount given to a certain other common carrier customer starting in
the third quarter of 2003 without a corresponding decrease in the cost
of sales and services,
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 decrease in a favorable adjustment from $4.0 million in 2002 to $1.4
million in 2003. In the course of business we estimate unbilled
long-distance services cost of sales and services based upon minutes of
use processed through our network and established rates. Such estimates
are revised when subsequent billings are received, payments are made,
billing matters are researched and resolved, tariffed billing periods
lapse, or when disputed charges are resolved.
41
Cable Services Segment Revenues and Cost of Sales and Services
Total cable services segment revenues increased 8.7% to $71.0 million and
average gross revenue per average basic subscriber per month increased $4.08 or
7.4% in 2003. Programming services revenues increased 8.2% to $54.6 million in
2003 resulting from the following:
o Basic subscribers served increased approximately 700 to approximately
135,300 at September 30, 2003 as compared to September 30, 2002,
o Digital subscriber counts increased 22.1% to approximately 34,800 at
September 30, 2003 as compared to September 30, 2002, and
o 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 cable services segment's share of cable modem revenue (offered through our
Internet services segment) increased 38.8% to $8.0 million in 2003 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 89% of our total homes passed at September 30, 2003. We launched
digital programming service in the Matanuska-Susitna Valley and Ketchikan cable
system in 2003.
New facility construction efforts in late 2002 and 2003 resulted in
approximately 5,200 additional homes passed, a 2.7% increase at September 30,
2003 as compared to September 30, 2002. New facility construction efforts in
2003 resulted in approximately 3,300 additional homes passed and a review of
homes passed in the system acquired from Rogers American Cablesystems, Inc.
resulted in approximately 1,900 additional homes passed.
In the second quarter of 2002 we signed new seven-year retransmission agreements
with the five local Anchorage broadcasters and began up-linking and distributing
the local Anchorage programming to all of our cable systems. This local
programming provides additional value to our cable subscribers that not all our
DBS competitors can provide.
Cable services cost of sales and services increased 9.6% to $19.4 million in
2003 due to programming cost increases for most of our cable programming
services offerings. Cable services cost of sales and services as a percentage of
cable services revenues increased from 27.2% in 2002 to 27.4% in 2003 primarily
due to rate increases by programming vendors exceeding our rate adjustments. The
increase described above is partially off-set by a $182,000 favorable adjustment
to cable services cost of sales and services in 2003 after completion of audits
by certain cable programming service vendors and increasing amounts of cable
modem services sold that generally have higher margins than do cable programming
services.
In October 2002 we, along with the other largest publicly traded multiple system
operators ("MSOs") signed a pledge to support and adhere to new voluntary
reporting guidelines on common operating statistics to provide investors and
others with a better understanding of our operations. Our operating statistics
include capital expenditures and customer information from our cable services
segment and the components of our local access services and Internet services
segments which offer services utilizing our cable services' facilities.
42
Our capital expenditures by standard reporting category for the nine months
ending September 30, 2003 and 2002 follows (amounts in thousands):
2003 2002
--------- ---------
Customer premise equipment ("CPE") $ 6,880 5,763
Commercial 395 443
Scalable infrastructure 1,000 2,757
Line extensions 645 620
Upgrade/rebuild 1,816 3,846
Support capital 313 5,398
--------- ---------
Sub-total 11,049 18,827
Remaining reportable segments and All Other
capital expenditures 23,344 33,162
--------- ---------
$ 34,393 51,989
========= =========
During the nine months ending September 30, 2003 we decreased our capital
expenditures for all of our reportable segments as compared to the same period
in 2002. The decrease was due, in part, to capital expenditure limitations
required by our Senior Facility, which we closed on November 1, 2002. On April
22, 2003 we amended our Senior Facility agreement and on October 30, 2003 we
closed a new Senior Facility. The April 22, 2003 amendment and the new Senior
Facility among other items, increase the amount we may incur for capital
expenditures. For a discussion of the Senior Facility amendment, see Liquidity
and Capital Resources included in Part I, Item 2 of this report.
The standardized definition of a customer relationship is the number of
customers that receive at least one level of service, encompassing voice, video,
and data services, without regard to which services customers purchase. At
September 30, 2003 and 2002 we had 122,379 and 120,133 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 September 30, 2003 and 2002 we had 178,168
and 167,606 revenue generating units, respectively.
Local Access Services Segment Revenues and Cost of Sales and Services
Local access services segment revenues increased 15.7% in 2003 to $27.2 million
primarily due to growth in the average number of customers served. At September
30, 2003, 103,400 lines were in service as compared to approximately 95,000 to
100,000 lines in service at September 30, 2002. We estimate that our 2003 lines
in service total represents a statewide market share of approximately 21%. At
September 30, 2003 approximately 1,150 additional lines were awaiting
connection. The increase in local access services segment revenues is also
caused by a change in how we provision local access lines in Fairbanks and
Juneau. In 2002 we primarily resold service purchased from ACS. In 2003 we are
benefiting from our facilities build-out with an increased number of access
lines provisioned on our own facilities, UNE loop and UNE platform which allows
us to collect interstate and intrastate access revenues.
The increase in local access services revenues described above was partially
off-set by the following:
o The FCC MAG reform order reducing the interstate access rates paid by
interexchange carriers to LECs beginning July 2002, and
o A reduction in July 2002 in interstate access rates charged by us to
interexchange carriers in response to an FCC order forcing a competitor
to reduce their interstate access rates.
43
Local access services segment cost of sales and services increased 16.6% to
$17.4 million in 2003. Local access services segment cost of sales and services
as a percentage of local access services segment revenues increased from 63.7%
in 2002 to 64.1% in 2003, primarily due to the following:
o Decreased network access services revenues from other carriers as the
number of customers purchasing both long-distance and local access
services from us increases, and
o The effect of the revenue decreases from interstate access rates
described above with no corresponding decrease in the cost of sales and
services.
Partially offsetting the items described above are reductions in access costs
attributed to our conversion of service provided on a wholesale basis to service
provided through our own facilities.
Our access line mix at September 30, 2003 follows:
o Residential lines represent approximately 58% of our lines,
o Business customers represent approximately 35% of our lines, and
o Internet access customers represent approximately 7% of our lines.
Approximately 87% of our lines are provided on our own facilities and leased
local loops. Approximately 5% of our lines are provided using UNE platform.
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 $5.1 million and the long distance services segment operating
results would have been reduced by an equal amount in 2003. Avoided access
charges totaled approximately $5.5 million in 2002. The decrease in the avoided
access charge in 2003 is due to the FCC MAG reform order reducing the interstate
access rates paid by interexchange carriers to LECs beginning July 2002 and a
reduction in July 2002 in interstate access rates charged by us to interexchange
carriers in response to an FCC order forcing a competitor to reduce their
interstate access rates. The local access services segment operating results are
affected by our continued evaluation and testing of digital local phone service
and Internet protocol-based technology to deliver phone service through our
cable facilities.
Internet Services Segment Revenues and Cost of Sales and Services
Total Internet services segment revenues increased 25.3% to $14.3 million in
2003 primarily due to the $1.8 million increase in its allocable share of cable
modem revenues to $6.5 million in 2003 as compared to 2002. The increase in
cable modem revenues is primarily due to growth in the number of cable modems
deployed. Cable modem subscribers increased from approximately 33,000 at
September 30, 2002 to approximately 42,800 at September 30, 2003.
At September 30, 2003 we had 93,900 total Internet subscribers, which includes
51,100 dial-up subscribers and 42,800 cable modem subscribers. Our total dial-up
subscribers decreased 1,700 to 51,100 subscribers at September 30, 2003 as
compared to September 30, 2002 as more customers continue to migrate to cable
modems.
We reported a total of 71,400 dial-up Internet subscribers at September 30,
2002. This subscriber count was based upon the total number of active dial-up
subscribers at September 30, 2002. Not all cable modem subscribers paying for a
dial-up plan have 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 new cable modem
44
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.
The Internet services segment does not share in plan fee revenues associated
with our bundled Internet and long-distance service package. Estimated plan fees
related to this service offering are approximately $1.0 million per quarter and
those revenues are included in the long-distance services segment.
Internet services cost of sales and services increased 21.4% to $4.3 million in
2003, and as a percentage of Internet services revenues, totaled 30.3% and 31.3%
in 2003 and 2002, respectively. The 2003 decrease as a percentage of Internet
services revenues is primarily due to a $1.8 million increase in Internet's
portion of cable modem revenue that generally has higher margins than do other
Internet services products. As Internet services revenues increase, economies of
scale and more efficient network utilization continue to result in reduced
Internet cost of sales and services as a percentage of revenues.
We enhanced the value of our Internet offerings throughout 2002 through the
addition of electronic billing and presentment capabilities and the rollout of a
product called eMail Guard, which filters out e-mail spam and viruses. We
upgraded the download speeds of all of our cable modem Internet service
offerings. These new services and enhancements have proven to be popular with
our customers which we believe is helping to further solidify our customer
relationships.
All Other Revenues and Costs of Sales and Services
All Other revenues increased 11.8% to $21.3 million in 2003. The increase in
revenues is primarily due to the following:
o A $1.4 million increase in product sales to $2.3 million due to sales
of product to two customers in 2003,
o A payment of $327,000 from a customer to acknowledge our ability to
maintain certain costs below a stated budget,
o Increased monthly revenue earned from a managed services contract with
a certain customer, and
o $400,000 in special project revenue in 2003.
The increase in All Other revenues is partially off-set by a $1.1 million
decrease in special project revenue from a certain customer in 2003 as compared
to 2002.
Revenues from our GCI Fiber system that runs along the oil pipeline corridor are
continuing to increase and we expect the annual recurring revenue run rate to
increase by an additional two to three million dollars per year by the end of
2003. Additionally, we expect to recognize approximately $6.5 million dollars in
special project revenue in the fourth quarter of 2003.
All Other costs of sales and services increased 9.6% to $11.5 million in 2003,
and as a percentage of All Other revenues, totaled 54.0% and 55.1% in 2003 and
2002, respectively. The decrease in All Other costs of sales and services as a
percentage of All Other revenues is primarily due to the following:
o Increased monthly revenue earned from managed services in 2003 which
exceeds the corresponding increase in costs of sales or services,
o The recognition of $400,000 in special project revenue in 2003 which
exceeds the corresponding increase in costs of sales or services,
o A payment of $327,000 from a customer in 2003 to acknowledge our
ability to maintain certain costs below a stated budget with no
corresponding increase in costs of sales or services, and
45
o A $140,000 favorable adjustment in 2003 due to a revision of an
estimate of a previously unbilled cost of sales and service upon
receipt of the invoice.
The decrease in All Other costs of sales and services as a percentage of All
Other revenues is partially off-set by the sales of product to two customers in
2003 which have a higher cost of sales as a percentage of revenues than do
managed services.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 6.7% to $102.5 million in
2003 and, as a percentage of total revenues, increased to 35.7% in 2003 from
34.9% in 2002. The 2003 increase in selling, general and administrative expenses
is primarily due to an increased accrual for company-wide success sharing bonus
costs, increased labor and health insurance costs, costs associated with Alaska
regulatory affairs, and the purchase of Alaska Airline miles due to the
implementation of our Alaska Airlines miles program in 2003. The 2003 increase
is off-set by costs incurred in 2002 for our unsuccessful bid to purchase
certain assets of WCI Cable, Inc. and its subsidiaries.
Marketing and advertising expenses as a percentage of total revenues decreased
from 3.3% in 2002 to 2.6% in 2003.
Bad Debt Expense
Bad debt expense decreased 85.0% to $1.9 million in 2003 and, as a percentage of
total revenues, decreased to 0.7% in 2003 from 4.6% in 2002. The 2003 decrease
is primarily due to the following:
o Recognition of approximately $647,000 of the MCI credit as a reduction
to bad debt expense in 2003, as further discussed in the Long Distance
Service Overview included in Part I, Item 2 of this report, and
o Provision in 2002 of a $11.0 million bad debt reserve for uncollected
amounts due from MCI resulting from substantially all of its active
U.S. subsidiaries filing voluntary petitions for reorganization under
Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy
Court for the Southern District of New York on July 21, 2002.
The decrease in bad debt expense described above is partially off-set by
recognition of a $550,000 bad debt reserve for uncollected amounts due from a
certain customer in 2003.
Depreciation, Amortization and Accretion Expense
Depreciation, amortization and accretion expense decreased 5.8% to $39.4 million
in 2003. The decrease is primarily attributed to a reduction in the depreciable
value of Property and Equipment due to an adjustment of $18.5 million which was
recorded in 2002 associated with the Kanas Telecom, Inc. acquisition.
The decrease in depreciation, amortization and accretion expense described above
was partially off-set by an increase in depreciation expense due to our $59.2
million investment in equipment and facilities placed into service during 2002
for which a full year of depreciation will be recorded in 2003, and the $28.4
million investment in equipment and facilities placed into service during 2003
for which a partial year of depreciation will be recorded in 2003.
Other Expense, Net
Other expense, net of other income, increased 35.3% to $29.0 million in 2003.
The increase is primarily due to the following:
o Increased interest expense due to the increased interest rate paid on
our amended Senior Facility,
46
o Increased deferred loan fee expense due to the increased deferred loan
fees associated with the amended Senior Facility, and
o A $1.2 million interest benefit earned in 2002 from an interest rate
swap agreement which was called at no cost by the counter party and
terminated on August 1, 2002.
Partially offsetting these increases was a decrease in the average outstanding
indebtedness in 2003 and the capitalization of $128,000 of interest costs due to
the commencement of construction of a fiber optic cable system connecting
Seward, Alaska and Warrenton, Oregon.
Income Tax Expense
Income tax expense was $9.6 million in 2003 and $4.7 million in 2002. The change
was due to increased net income before income taxes and cumulative effect of a
change in accounting principle in 2003 as compared to 2002. Our effective income
tax rate increased from 43.0% in 2002 to 43.6% in 2003 due to the effect of
items that are nondeductible for income tax purposes.
47
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
The following chart provides selected unaudited statement of operations data
from our quarterly results of operations during 2003 and 2002:
(Amounts in thousands, except per share amounts)
-------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
-------------------------------------------------------------
2003
----
Revenues:
Long-distance services $ 48,486 51,570 53,191 153,247
Cable services $ 23,438 23,872 23,699 71,009
Local access services $ 8,426 9,245 9,540 27,211
Internet services $ 4,590 4,790 4,922 14,302
All Other services $ 7,837 6,462 6,975 21,274
------------------------------------ -------------
Total revenues $ 92,777 95,939 98,327 287,043
Operating income $ 15,438 17,972 17,595 51,005
Net income before income taxes and
cumulative effect of a change in
accounting principle $ 5,377 8,374 8,281 22,032
Net income before cumulative effect of a
change in accounting principle $ 3,095 4,810 4,529 12,434
Net income $ 2,551 4,810 4,529 11,890
==================================== =============
Basic net income per common share:
Net income before cumulative effect of a
change in accounting principle $ 0.05 0.08 0.07 0.20
Cumulative effect of a change in accounting
principle $ (0.01) --- --- (0.01)
------------------------------------ -------------
Net income $ 0.04 0.08 0.07 0.19
==================================== =============
Diluted net income per common share:
Net income before cumulative effect of a
change in accounting principle (1) $ 0.05 0.08 0.07 0.19
Cumulative effect of a change in accounting
principle $ (0.01) --- --- (0.01)
------------------------------------ -------------
Net income (1) $ 0.04 0.08 0.07 0.18
==================================== =============
48
(Amounts in thousands, except per share amounts)
-------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
-------------------------------------------------------------
2002
----
Revenues:
Long-distance services $ 50,068 52,375 53,778 48,711 204,932
Cable services $ 21,346 21,919 22,057 23,366 88,688
Local access services $ 7,308 8,106 8,096 8,561 32,071
Internet services $ 3,573 3,912 3,927 4,172 15,584
All Other services $ 5,915 6,428 6,692 7,532 26,567
-------------------------------------------------------------
Total revenues $ 88,210 92,740 94,550 92,342 367,842
Operating income (2) $ 11,133 4,766 16,353 13,473 45,725
Net income (loss) before income taxes (2) $ 3,858 (1,686) 8,662 1,488 12,322
Net income (loss) (2) $ 2,212 (1,103) 5,063 491 6,663
=============================================================
Basic and diluted net income (loss) per
common share (2) $ 0.03 (0.03) 0.08 0.00 0.08
=============================================================
----------------------
1 Due to rounding, the sum of quarterly net income per common share
amounts does not agree to total net income per common share amounts.
2 The second and third quarters of 2002 include the provision of $9.7
million and $1.2 million, respectively, of bad debt expense for
estimated uncollectible accounts due from MCI.
----------------------
Overview of Revenues and Cost of Sales and Services
Total revenues for the quarter ended September 30, 2003 ("third quarter") were
$98.3 million, representing a 2.5% increase from $95.9 million for the quarter
ended June 30, 2003 ("second quarter"). The long-distance services, local
services and Internet services segments and All Other Services contributed to
the increase in total revenues, partially off-set by a decrease in revenues from
the cable services segment.
Cost of sales and services increased from $30.1 million in the second quarter to
$31.9 million in the third quarter. As a percentage of revenues, second and
third quarter cost of sales and services totaled 31.3% and 32.4%, respectively.
All of our reportable segments and All Other Services contributed to the
increase in total cost of sales and services.
Long-distance Services Segment Revenues and Cost of Sales and Services
Third quarter long-distance services segment revenues increased 3.1% to $53.2
million as compared to the second quarter. The increase resulted primarily from
increased revenues from other common carrier customers and increased broadband
revenue, off-set by a decrease in revenues from residential, commercial, and
governmental customers and decreased private line revenue.
Revenues from other common carrier customers increased 7.3% to $24.6 million in
the third quarter as compared to the second quarter. Minutes carried for other
common carriers increased 16.7% to 243.6 million minutes. The increased revenues
from other common carrier customers was partially off-set by the following:
o A 4.1% decrease in the average rate per minute on minutes carried for
other common carriers in the third quarter as compared to the second
quarter primarily due to 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 starting in
the third quarter.
49
Revenues from residential, commercial, and governmental customers decreased 0.5%
to $10.1 million in the third quarter primarily due to the following:
o A 2.4% decrease in retail minutes carried for residential, commercial
and governmental customers to 70.8 million minutes, and
o A 2.3% decrease in the number of active residential, commercial, and
governmental customers billed to 86,200 at September 30, 2003 as
compared to June 30, 2003.
The average rate per minute on minutes carried for residential, commercial and
governmental customers remained steady in the second and third quarters at
$0.112 per minute.
Private line and private network transmission services revenues decreased
$212,000 to $9.2 million in the third quarter as compared to the second quarter
primarily due to various individually immaterial credits given to customers.
Long-distance revenues have historically been highest in the summer months
because of temporary population increases attributable to tourism and increased
seasonal economic activity such as construction, commercial fishing, and oil and
gas activities.
Revenues from our packaged telecommunications offering to rural hospital and
health clinic service and our SchoolAccess(TM) offering to rural school
districts increased $95,000 to $6.4 million in the third quarter.
The increase in revenues from our packaged telecommunications offering to rural
hospital and health clinic service and our SchoolAccess(TM) offering to rural
school districts described above was partially off-set by an equipment sale to
one customer in the second quarter which did not recur in the third quarter.
Long-distance services cost of sales and services increased 10.4% to $14.4
million in the third quarter. Long-distance services cost of sales and services
as a percentage of long-distance services revenues increased from 25.3% in the
second quarter to 27.0% in the third quarter primarily due to the following:
o A decrease in a refund from an intrastate access cost pool that
previously overcharged us for access services from $861,000 refund in
the second quarter to $400,000 in the third quarter,
o A decrease in a favorable adjustment from $749,000 in the second
quarter to $624,000 in the third quarter. In the course of business we
estimate unbilled long-distance services cost of sales and services
based upon minutes of use processed through our network and established
rates. Such estimates are revised when subsequent billings are
received, payments are made, billing matters are researched and
resolved, tariffed billing periods lapse, or when disputed charges are
resolved,
o A discount given to a certain other common carrier customer starting in
the third quarter, and
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.
Cable Services Segment Revenues and Cost of Sales and Services
Cable services segment revenues decreased 0.7% to $23.7 million. The decrease in
cable services segment revenues is primarily due to a 3.6% decrease in
programming services revenues to $17.9 million in the third quarter resulting
from a decrease in basic subscribers served from 137,200 at June 30, 2003 to
135,300 at September 30, 2003 due in part, to seasonality.
50
The decrease in programming services revenues described above is partially
off-set by the following:
o Digital subscriber counts increased 13.4% to approximately 34,800 at
September 30, 2003 as compared to June 30, 2003. Digital subscriber
counts have increased without a corresponding increase in programming
services revenues due to our promotional offerings in the third quarter
of discounted cable service packages to increase customer retention,
and
o Average gross revenue per average basic subscriber per month increased
$0.39 or 0.6% in the third quarter as compared to the second quarter.
The decrease in cable services segment revenue is partially off-set by an
increase in equipment rental revenues due to the increase in digital subscriber
counts discussed above and migration to digital signal delivery.
Homes passed increased approximately 700 to 201,100 at September 30, 2003 as
compared to June 30, 2003 primarily due to system buildouts in areas that were
not previously served and a continuing review of homes passed in the system
acquired from Rogers American Cablesystems, Inc.
Cable programming services revenues have historically been highest in the winter
months because consumers spend more time at home and tend to watch more
television during these months.
The cable services segment's share of cable modem revenue (offered through our
Internet services segment) increased 1.3% to $2.7 million in third quarter due
to an increased number of cable modems deployed. The decreased rate of growth in
the cable services segment's share of cable modem revenue in spite of the growth
in cable modem subscribers in the third quarter (as discussed in the Internet
Services Segment Revenues and Cost of Sales and Services section below) is due
to our promotional offer of one to two months of free cable modem service.
Cable services cost of sales and services increased 3.6% to $6.6 million in the
third quarter as compared to the second quarter. Cable services cost of sales
and services as a percentage of cable services segment revenues increased from
26.7% in the second quarter to 27.9% in the third quarter. The increase is due
in part to a $182,000 favorable adjustment to cable services cost of sales and
services after completion of audits by certain cable programming service vendors
in the second quarter.
Local Access Services Segment Revenues and Cost of Sales and Services
Local access services segment revenues increased 3.2% in the third quarter to
$9.5 million primarily due to increased lines in service in the third quarter
and a reimbursement from Universal Service Fund ("USF") in the third quarter
related to a prior period. At September 30, 2003 an estimated 103,400 lines were
in service as compared to approximately 101,900 lines in service at June 30,
2003.
Local access services segment cost of sales and services increased $70,000 to
$5.9 million in the third quarter. Local access services segment cost of sales
and services as a percentage of local access services segment revenues decreased
from 63.4% in the second quarter to 62.2% in the third quarter. The decrease in
cost of sales and services as a percentage of local access services segment
revenues is primarily due to a reimbursement from USF in the third quarter
related to a prior period. The decrease is partially off-set by decreased
network access services revenues from other carriers as the number of customers
purchasing both long-distance and local access services from us increases.
The local access services segment operating results are negatively effected 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 $1.6 million and the long distance
51
services segment operating results would have been reduced by an equal amount in
the third quarter. Avoided access charges totaled approximately $1.7 million in
the second quarter.
Internet Services Segment Revenues and Cost of Sales and Services
Total Internet services segment revenues increased $132,000 to $4.9 million in
the third quarter primarily due to the $70,000 increase in Internet services
segment's allocable share of cable modem revenues to $2.3 million in the third
quarter as compared to the second quarter. The increase in cable modem revenues
is primarily due to growth in the number of cable modems deployed. Cable modem
subscribers increased from approximately 40,500 at June 30, 2003 to
approximately 42,800 at September 30, 2003. The growth in cable modem
subscribers in third quarter without proportional growth in cable modem revenue
is primarily due to our promotional offer of one to two months of free service.
At September 30, 2003 we had 93,900 total Internet subscribers, which includes
51,100 dial-up subscribers and 42,800 cable modem subscribers. At June 30, 2003
we had 92,200 total Internet subscribers, which included 51,700 dial-up
subscribers and 40,500 cable modem subscribers. Our total dial-up subscribers
decreased 600 to 51,100 subscribers at September 30, 2003 as compared to June
30, 2003 as more customers continue to migrate to cable modems.
Internet services cost of sales and services increased $89,000 in the third
quarter to $1.5 million, and as a percentage of Internet services revenues,
totaled 30.7% and 29.7% in the third and second quarters, respectively.
All Other Revenues and Costs of Sales and Services
All Other revenues increased $512,000 to $7.0 million in the third quarter
primarily due to the recognition of $400,000 in special project revenue from a
certain customer in the third quarter.
All Other costs of sales increased $51,000 to $3.4 million in the third quarter,
and as a percentage of All Other revenues, totaled 49.3% and 52.5% in the third
and second quarters, respectively. The decrease in All Other costs of sales and
services as a percentage of All Other revenues is primarily due to the
recognition of $400,000 in special project revenue in the third quarter without
a corresponding increase in costs of sales or services. The decrease in All
Other costs of sales and services as a percentage of All Other revenues is
partially off-set by a $140,000 favorable adjustment in the second quarter due
to a revision of an estimate of a previously unbilled cost of sales and service
upon receipt of the invoice.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 2.8% to $35.3 million in
the third quarter as compared to the second quarter. As a percentage of
revenues, selling, general and administrative expenses were 35.9% and 35.8% in
the third and second quarters, respectively. The increase in selling, general
and administrative expenses is primarily due to costs associated with Alaska
regulatory affairs and the purchase of Alaska Airline miles due to the
implementation of our Alaska Airlines miles program in 2003. The increase in
selling, general and administrative expenses is partially off-set by decreased
health insurance costs.
Bad Debt Expense
Bad debt expense decreased $269,000 to $533,000 in the third quarter as compared
to the second quarter. As a percentage of total revenues, third and second
quarter bad expense was 0.5% and 0.8%, respectively. The decrease in the third
quarter is primarily due to the recognition of approximately $647,000 of the MCI
credit as a reduction to bad debt expense in third quarter, as further discussed
in the Long Distance Service Overview included in Part I, Item 2 of this report.
The decrease in bad debt expense described above is partially off-set by
recognition of a $550,000 bad debt reserve for uncollected amounts due from a
certain customer in the third quarter.
52
Depreciation, Amortization and Accretion Expense
Depreciation, amortization and accretion expense increased 2.1% to $13.1 million
in third quarter as compared to second quarter due to several individually
insignificant increases in depreciation and amortization expense.
Other Expense, Net
Other expense, net of other income, decreased $284,000 in the third quarter to
$9.3 million due primarily to the capitalization of $128,000 in interest cost
associated with the commencement of construction of a fiber optic cable system
connecting Seward, Alaska and Warrenton, Oregon.
Net Income
We reported net income of $4.5 million for the third quarter as compared to net
income of $4.8 million for the second quarter. The decrease is primarily due to
increased costs of sales and services due to a decreased refund in the long
distance services segment and decreased favorable cost of sales and services
adjustments in the long distance and cable services segments and All Other
Services in the third quarter, as previously described.
Liquidity and Capital Resources
Cash flows from operating activities totaled $49.4 million in the nine months
ended September 30, 2003 ("2003") as compared to $47.6 million in the nine
months ended September 30, 2002 ("2002"). The increase in 2003 is primarily due
to increased cash flow in 2003 from all of our reportable segments, a $2.3
million refund from a local exchange carrier in respect of its earnings that
exceeded regulatory requirements, and a $1.3 million refund from an intrastate
access cost pool that previously overcharged us for access services. Uses of
cash during 2003 included $34.4 million of expenditures for property and
equipment, including construction in progress, principal payments on long-term
debt and capital lease obligations of $9.1 million, payment of $3.2 million in
deposits, payment of $2.6 million in fees associated with the original and
amended Senior Facility, and payment of preferred stock dividends of $1.2
million.
Net receivables increased $8.1 million from December 31, 2002 to September 30,
2003 primarily due to an increase in:
o Trade receivables for broadband services provided to hospitals and
health clinics, and
o Trade receivables for telecommunication services provided to a certain
customer. The accounts receivable for this customer was subsequently
paid in October 2003.
Working capital deficit totaled ($4.9) million at September 30, 2003, a $9.1
million decrease as compared to working capital of $4.2 million at December 31,
2002. The decrease is primarily attributed to classification of $20.0 million of
our Senior Facility as current maturities of long-term debt as of September 30,
2003, following the April 22, 2003 amendment.
The decrease in working capital was partially off-set by:
o A $8.1 million increase in net receivables at September 30, 2003 as
compared to December 31, 2002 as previously described, and
o A $5.0 million decrease in accrued interest at September 30, 2003 as
compared to December 31, 2002 due to the semi-annual $8.8 million
Senior Notes interest payment in August 2003.
On October 30, 2003 we closed a $220.0 million new Senior Facility to replace
the April 22, 2003 amended Senior Facility. The new Senior Facility reduces the
interest rate from LIBOR plus 6.50% to LIBOR plus
53
3.25%. The new Senior Facility includes a term loan of $170.0 million and a
revolving credit facility of $50.0 million.
The repayment schedule for the term loan portion of the new Senior Facility is
unchanged from that in the April 22, 2003 amended Senior Facility, as follows
(amounts in thousands):
Date Amount
------------------------------------------ -----------
Quarterly from December 31, 2003 to
December 31, 2004 $ 5,000
Quarterly from March 31, 2005 to December
31, 2005 $ 6,000
Quarterly from March 31, 2006 to December
31, 2006 $ 8,000
Quarterly from March 31, 2007 to September
30, 2007 $ 10,000
The remaining balance of the Senior Facility will be payable in full on October
31, 2007.
We are required to pay a commitment fee on the unused portion of the
commitment as follows:
Commitment fee if the outstanding Commitment fee if the outstanding
revolving credit facility is > 50% revolving credit facility is
of the average revolving credit < 50% of the average revolving
Total Leverage facility commitments by the credit facility commitments by the
Ratio (as defined) lenders during such during such period lenders during such period
--------------------- ---------------------------------------- ----------------------------------------
> 3.75 1.00% 1.25%
-
> 3.25 but <3.75 0.75% 1.00%
-
> 2.75 but <3.25 0.50% 0.75%
-
< 2.75 0.50% 0.75%
We may not permit the Total Leverage Ratio (as defined) to exceed:
Period Total Leverage Ratio
-------------------------------------------------------- ------------------------
October 30, 2003 through December 30, 2003 4.25:1
December 31, 2003 through December 30, 2004 4.00:1
December 31, 2004 through December 30, 2005 3.75:1
December 31, 2005 through June 29, 2006 3.50:1
June 30, 2006 through June 29, 2007 3.25:1
June 30, 2007 through September 29, 2007 3.00:1
September 30, 2007 through October 31, 2007 2.75:1
54
We may not permit the Senior Secured Leverage Ratio (as defined) to
exceed:
Senior Secured
Period Leverage Ratio
-------------------------------------------------------- ------------------------
October 30, 2003 through December 30, 2004 2.00:1
December 31, 2004 through September 29, 2006 1.75:1
September 30, 2006 through June 29, 2007 1.50:1
June 30, 2007 through September 29, 2007 1.25:1
September 30, 2007 through October 31, 2007 1.00:1
The Interest Coverage Ratio (as defined) may not be less than 2.50:1 at any
time.
Capital expenditures, excluding up to $58.0 million incurred to build or acquire
additional fiber optic cable system capacity between Alaska and the lower
forty-eight states, in any of the years ended December 31, 2003, 2004, 2005 and
2006 may not exceed:
o $25.0 million, plus
o 100% of any Excess Cash Flow (as defined) during the applicable period
less certain permitted investments during the applicable period.
If the revolving credit facility exceeds $25.0 million, we may not incur capital
expenditures, other than those incurred to build or acquire additional fiber
optic cable system capacity, in excess of $25.0 million.
Under the new Senior Facility we must either have repaid in full or successfully
refinanced our Senior Notes by February 1, 2007.
$3.5 million of the new Senior Facility has been used to provide a letter of
credit to secure payment for our contract for the design, engineering,
manufacture and installation of the undersea fiber optic cable system. The
letter of credit will be reduced to $1.8 million after a contract payment
estimated to be made in March 2004. The letter of credit will be cancelled after
the final contract payment date estimated to be in April 2004.
In connection with the April 22, 2003 amended Senior Facility, we paid bank fees
and other expenses of approximately $2.6 million during the nine months ended
September 30, 2003. Deferred Loan Costs, Net for the Senior Facility which
closed on November 1, 2002 and the April 22, 2003 amended Senior Facility
totaled $7.2 million at October 30, 2003, the date we closed the new Senior
Facility.
Because a portion of the new Senior Facility is a substantial modification of
the April 22, 2003 amended Senior Facility we will recognize approximately $5.0
million in Amortization of Loan and Senior Notes Fees during the three months
ended December 31, 2003. The remaining $2.2 million in Deferred Loan Costs, Net
will continue to be amortized over the life of the new Senior Facility.
In connection with the new Senior Facility, we paid bank fees and other expenses
of $850,000 in October 2003 which will be amortized over the life of the new
agreement.
The term loan is fully drawn and we have letters of credit totaling $6.5
million, which leaves $43.5 million available at September 30, 2003 to draw
under the revolving credit facility if needed. In April 2003, we made a $2.7
million principal payment on the revolving credit facility.
We were in compliance with all loan covenants at September 30, 2003.
55
Our semi-annual Senior Notes interest payment of $8.8 million was paid in
February and again in August 2003 out of existing cash balances. Our next Senior
Notes interest payment of $8.8 million is due February 1, 2004.
Our expenditures for property and equipment, including construction in progress,
totaled $34.4 million and $52.0 million during the nine months ended September
30, 2003 and 2002, respectively. Our capital expenditures requirements are
largely success driven and are a result of the progress we are making in the
marketplace. We expect our 2003 expenditures for property and equipment for our
core operations, including construction in progress and excluding the new fiber
system construction costs described below, to total $40 million to $50 million,
depending on available opportunities and the amount of cash flow we generate
during 2003.
We have begun 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. The 1,544-statute mile cable has a total design capacity of 960
Gigabits per second access speed and is planned to be operational by May 2004.
The cable will complement our existing fiber optic cable 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 $50 million through our operating cash flows
and, to the extent necessary, with draws on our new Senior Facility. During the
nine month period ended September 30, 2003 our capital expenditures for this
project have totaled approximately $4.8 million, all of which has 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 Personal Communication Services, or PCS, network, digital
local phone service, and upgrades to our cable television plant.
The financial, credit and economic impacts of MCI's July 2002 bankruptcy filing
on the industry in general and on us in particular are not yet fully understood
and are not predictable. See Long Distance Overview for a discussion of the
settlement of the uncollected amounts due from MCI.
We believe that payment for services provided to MCI subsequent to their
bankruptcy filing date will continue to be made timely, consistent with our
status in MCI's filing as a key service provider or utility to MCI.
A migration of MCI's traffic off our network without it being replaced by other
common carriers that interconnect with our network could have a materially
adverse impact on our financial position, results of operations and liquidity.
Dividends accrued on our Series B preferred stock are payable at the semi-annual
payment dates of April 30 and October 31 of each year. We paid the $722,000
dividend due on April 30, 2003 in cash. Our next Series B preferred stock
dividend is due October 31, 2003 and will be paid in cash as required by the
Series B preferred stock agreement.
Dividends accrued on our Series C preferred stock are payable in cash quarterly.
Our next Series C preferred stock dividend of approximately $150,000 is due
December 31, 2003.
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
56
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.
The telecommunications industry in general is depressed due to high levels of
competition in the long-distance market resulting in pressures to reduce prices,
an oversupply of long-haul capacity, excessive debt loads, several high-profile
company failures and potentially fraudulent accounting practices by some
companies. Our ability to obtain new debt under acceptable terms and conditions
in the future may be diminished as a result.
We believe that we will be able to meet our current and long-term liquidity and
capital requirements, fixed charges and preferred stock dividends through our
cash flows from operating activities, existing cash, cash equivalents,
short-term investments, credit facilities, and other external financing and
equity sources. Should cash flows be insufficient to support additional
borrowings and principal payments scheduled under our existing credit
facilities, capital expenditures will likely be reduced.
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 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 and
nine months ended September 30, 2003 are described below.
o We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required
payments. We base our estimates on the aging of our accounts receivable
balances, financial health of specific customers, and our historical
write-off experience, net of recoveries. If the financial condition of
our customers were to deteriorate or if they are unable to emerge from
reorganization proceedings, resulting in an impairment of their ability
to make payments, additional allowances may be required. If their
financial condition improves or they emerge successfully from
reorganization proceedings, allowances may be reduced. Such allowance
changes could have a material effect on our consolidated financial
condition and results of operations.
o We record all assets and liabilities acquired in purchase acquisitions,
including goodwill and other intangibles, at fair value as required by
SFAS 141. Goodwill and indefinite-lived assets such as our cable
segment franchise agreements are no longer amortized but are subject,
at a minimum, to annual tests for impairment. Other intangible assets
are amortized over their estimated useful lives using the
57
straight-line method, and are subject to impairment if events or
circumstances indicate a possible inability to realize the carrying
amount. The initial goodwill and other intangibles recorded and
subsequent impairment analysis requires management to make subjective
judgments concerning estimates of how the acquired asset will perform
in the future using a discounted cash flow analysis. Additionally,
estimated cash flows may extend beyond ten years and, by their nature,
are difficult to determine over an extended timeframe. Events and
factors that may significantly affect the estimates include, among
others, competitive forces, customer behaviors and attrition, changes
in revenue growth trends, cost structures and technology, and changes
in discount rates, performance compared to peers, material and ongoing
negative economic trends, and specific industry or market sector
conditions. In determining the reasonableness of cash flow estimates,
we review historical performance of the underlying asset or similar
assets in an effort to improve assumptions utilized in our estimates.
In assessing the fair value of reportable operating segments, we may
consider other information to validate the reasonableness of our
valuations including public market comparables, multiples of recent
mergers and acquisitions of similar businesses and third-party
assessments. These evaluations could result in a change in useful lives
in future periods and could result in write-down of the value of
intangible assets. Because of the significance of the identified
intangible assets and goodwill to our consolidated balance sheet, the
annual impairment analysis will be critical. Any changes in key
assumptions about the business and its prospects, or changes in market
conditions or other externalities, could result in an impairment charge
and such a charge could have a material adverse effect on our
consolidated financial condition and results of operations. Refer to
Note 3 in the accompanying Notes to Interim Condensed Consolidated
Financial Statements for additional information regarding intangible
assets.
o We estimate unbilled long-distance segment cost of sales based upon
minutes of use carried through our network and established rates. We
estimate unbilled costs for new circuits and services, and when network
changes occur that result in traffic routing changes or a change in
carriers. Carriers that provide service to us regularly change their
networks which can lead to new, revised or corrected billings. Such
estimates are revised or removed when subsequent billings are received,
payments are made, billing matters are researched and resolved,
tariffed billing periods lapse, or when disputed charges are resolved.
Revisions to previous estimates could either increase or decrease costs
in the year in which the estimate is revised which could have a
material effect on our consolidated financial condition and results of
operations.
o Our income tax policy provides for deferred income taxes to show the
effect of temporary differences between the recognition of revenue and
expenses for financial and income tax reporting purposes and between
the tax basis of assets and liabilities and their reported amounts in
the financial statements in accordance with SFAS No. 109, "Accounting
for Income Taxes." We have recorded deferred tax assets of
approximately $80.7 million associated with income tax net operating
losses that were generated from 1990 to 2003, and that expire from 2005
to 2022. 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 September 30, 2003 based on
management's belief that future reversals of existing taxable temporary
differences and estimated future taxable income exclusive of reversing
temporary
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differences and carryforwards, will, more likely than not, be
sufficient to realize the benefit of these assets over time. In the
event that actual results differ from these estimates or if our
historical trends change, we may be required to record a valuation
allowance on deferred tax assets, which could have a material adverse
effect on our consolidated financial condition and results of
operations.
Other significant accounting policies, not involving the same level of
measurement uncertainties as those discussed above, are nevertheless important
to an understanding of the financial statements. Polices related to revenue
recognition and financial instruments require difficult judgments on complex
matters that are often subject to multiple sources of authoritative guidance.
Certain of these matters, including but not limited to the requirement to
account for the market value of stock options as compensation expense, are among
topics currently under reexamination by accounting standards setters and
regulators. Although no specific conclusions reached by these standard setters
appear likely to cause a material change in our accounting policies, outcomes
cannot be predicted with confidence. A complete discussion of our significant
accounting policies can be found in Note 1 in the Notes to Consolidated
Financial Statements included in our December 31, 2002 Form 10-K. A condensed
discussion of our significant accounting policies can be found in Note 1 in the
accompanying Notes to Interim Condensed Consolidated Financial Statements.
Geographic Concentration and the Alaska Economy
We offer voice and data telecommunication and video services to customers
primarily throughout Alaska. Because of this geographic concentration, growth of
our business and of our operations depends upon economic conditions in Alaska.
The economy of Alaska is dependent upon the natural resource industries, and in
particular oil production, as well as investment earnings, tourism, government,
and United States military spending. Any deterioration in these markets could
have an adverse impact on us. All of the federal funding is 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 general operating revenues and federal funding supplied 37% and 45%,
respectively, of the state's total revenues. In fiscal 2004 state economists
forecast that Alaska's general operating revenues and federal funding will
supply 33% and 45%, 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
0.990 million barrels produced per day in fiscal 2003. The state forecasts a
production rate slightly above 1.0 million barrels per day starting in fiscal
2009. The state attributes the production rate increase to future development of
recent discoveries in the National Petroleum Reserve Alaska and other new
fields.
Market prices for North Slope oil averaged $28.15 in fiscal 2003 and are
forecasted to average $25.28 in fiscal 2004. The closing price per barrel was
$28.38 on October 21, 2003. To the extent that actual oil prices vary materially
from the state's projected prices the state's projected revenues and deficits
will change. Every $1 change in the price of oil results in a $50.0 to $60.0
million change in the state's revenue. The production policy of the Organization
of Petroleum Exporting Countries and its ability to continue to act in concert
represents a key uncertainty in the state's revenue forecast.
The State of Alaska maintains the Constitutional Budget Reserve Fund that is
intended to fund budgetary shortfalls. If the state's current projections are
realized, the Constitutional Budget Reserve Fund will be depleted in 2006. The
date the Constitutional Budget Reserve Fund is depleted is highly influenced by
the price of oil. If the fund is depleted, aggressive state action will be
necessary to increase revenues and reduce spending in order to balance the
budget. The governor of the State of Alaska and the Alaska legislature continue
to pursue cost cutting and revenue enhancing measures. Through a combination of
revenue enhancements and reductions in spending the governor of the State of
Alaska and the State legislature
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approved a fiscal 2004 budget which is projected to spend approximately $479
million of the Constitutional Budget Reserve Fund.
In 2003 the Alaska Legislature passed and the Governor signed legislation that
extended the life of the RCA until 2007.
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.
Should new oil discoveries or developments not materialize or the price of oil
become depressed, the long term trend of continued decline in oil production
from the Prudhoe Bay area is inevitable with a corresponding adverse impact on
the economy of the state, in general, and on demand for telecommunications and
cable television services, and, therefore, on us, in particular. In the past
year, there has been a renewed effort to allow exploration and development in
the Arctic National Wildlife Refuge ("ANWR"). The U.S. Energy Information Agency
estimates it could take nine years to begin oil field drilling after approval of
ANWR exploration.
Deployment of a natural gas pipeline from the State of Alaska's North Slope to
the Lower 48 States has been proposed to supplement natural gas supplies. A
competing natural gas pipeline through Canada has also been proposed. The
economic viability of a natural gas pipeline depends upon the price of and
demand for natural gas. Either project could have a positive impact on the State
of Alaska's revenues and the Alaska economy. According to their public comments,
neither Exxon Mobil, BP nor Conoco Phillips, Alaska's large natural gas owners,
believe either natural gas pipeline makes financial sense based upon their
preliminary analysis, though BP and Conoco Phillips have proposed certain
federal income tax incentives that would take effect if the price for Alaska
natural gas goes below a certain level. The governor of the State of Alaska and
certain natural gas transportation companies continue to support a natural gas
pipeline from Alaska's North Slope by trying to reduce the project's costs and
by advocating for federal tax incentives to further reduce the project's costs.
Federal income tax incentives may be included in energy legislation which is
being debated by the U.S. House and Senate.
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 U.S. Army Corps of Engineers awarded a construction contract in 2002 for
test bed facilities. The contract is reported to contain basic requirements and
various options that could amount to $250 million in construction, or possibly
more, if all items are executed. Site preparation has been underway at Fort
Greely since August of 2001 and construction began on the Fort Greely test bed
shortly after the June 15, 2002 groundbreaking. The test bed is due to be
operational by September 30, 2004.
We have, since our entry into the telecommunication marketplace, aggressively
marketed our services to seek a larger share of the available market. The
customer base in Alaska is limited, however, with a population of approximately
644,000 people. The State of Alaska's population is distributed as follows:
o 42% are located in the Municipality of Anchorage,
o 13% are located in the Fairbanks North Star Borough,
o 10% are located in the Matanuska-Susitna Borough,
o 5% are located in the City and Borough of Juneau, and
60
o The remaining 30% are located in other communities across the State of
Alaska.
No assurance can be given that the driving forces in the Alaska economy, and in
particular, oil production, will continue at appropriate levels to provide an
environment for expanded economic activity.
No assurance can be given that oil companies doing business in Alaska will be
successful in discovering new fields or further developing existing fields which
are economic to develop and produce oil with access to the pipeline or other
means of transport to market, even with a reduced level of royalties. We are not
able to predict the effect of changes in the price and production volumes of
North Slope oil on Alaska's economy or on us.
Seasonality
Long-distance revenues (primarily those derived from our other common carrier
customers) have historically been highest in the summer months because of
temporary population increases attributable to tourism and increased seasonal
economic activity such as construction, commercial fishing, and oil and gas
activities. Cable television revenues, on the other hand, are higher in the
winter months because consumers spend more time at home and tend to watch more
television during these months. Local access and Internet services are not
expected to exhibit significant seasonality. Our ability to implement
construction projects is also hampered during the winter months because of cold
temperatures, snow and short daylight hours.
Inflation
We do not believe that inflation has a significant effect on our operations.
Schedule of Certain Known Contractual Obligations
The following table details future projected payments associated with our
certain known contractual obligations as of December 31, 2002, the date of our
most recent fiscal year-end balance sheet. Our schedule of certain known
contractual obligations has been updated to reflect our new Senior Facility,
conversion of shares of Series B preferred stock to shares of GCI Class A common
stock in October 2003, and to include certain purchase obligations.
Payments Due by Period
Less than 1 1 to 3 4 to 5 More Than 5
Total Year Years Years Years
------------------------------------------------------------
(Amounts in thousands)
Long-term debt $ 357,700 15,000 47,000 295,700 ---
Interest on long-term debt 87,750 17,550 35,100 35,100 ---
Capital lease obligations, including
interest 68,943 5,115 19,845 18,536 25,447
Operating lease commitments 67,673 11,780 18,607 12,878 24,408
Redeemable preferred stocks 25,657 --- 10,000 --- 15,657
Purchase obligations 53,574 22,704 23,170 5,775 1,925
------------ ----------- ---------- ----------- ------------
Total contractual obligations $ 661,297 72,149 153,722 367,989 67,437
============ =========== ========== =========== ============
Purchase obligations include our fiber optic cable system construction
commitment of $35.4 million as further described in note 7 to the Notes to
Interim Condensed Consolidated Financial Statements included in Part I, Item 1
of this report. The contract associated with this commitment is non-cancelable.
For long-term debt included in the above table, we have included principal
payments on our new Senior Facility and on our Senior Notes. Interest on amounts
outstanding under our new Senior Facility is based on variable rates and
therefore the amount is not determinable. Our Senior Notes require semi-annual
interest
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payments of approximately $8.78 million through 2007. For a discussion of our
long-term debt, see notes 5 and 8 to the Notes to Consolidated Financial
Statements included in Part II of our December 31, 2002 Form 10-K.
For a discussion of our capital and operating leases, see note 12 to the Notes
to Consolidated Financial Statements included in Part II of our December 31,
2002 Form 10-K.
We have included only the maturity redemption amount on our Series B and C
preferred stock (cash dividends are excluded). Our Series B preferred stock is
convertible at $5.55 per share into GCI Class A common stock. Through April 30,
2003, dividends are payable semi-annually at the rate of 8.5%, plus accrued but
unpaid dividends, at our option, in cash or in additional fully-paid shares of
Series B preferred stock. The dividend due on April 30, 2003 was paid in cash.
Dividends earned after April 30, 2003, are payable semi-annually in cash only.
Mandatory redemption is required 12 years from the date of closing. Our Series C
preferred stock is convertible at $12 per share into GCI Class A common stock,
is non-voting, and pays a 6% per annum quarterly cash dividend. We may redeem
the Series C preferred stock at any time in whole but not in part. Mandatory
redemption is required at any time after the fourth anniversary date at the
option of holders of 80% of the outstanding shares of the Series C preferred
stock. For more information about our redeemable preferred stock, see notes 1(e)
and 1(f) to the Notes to Consolidated Financial Statements included in Part II
of our December 31, 2002 Form 10-K.
Audit Committee
The Audit Committee, composed entirely of independent directors, meets
periodically with our independent auditors and management to review the
Company's financial statements and the results of audit activities. The Audit
Committee, in turn, reports to the Board of Directors on the results of its
review and recommends the selection of independent auditors.
The Audit Committee has approved the independent auditor to provide the
following services:
o Audit (audit of financial statements filed with the SEC, quarterly
reviews, comfort letters, consents, review of registration statements,
accounting consultations); and
o Audit-related (employee benefit plan audits and accounting consultation
on proposed transactions).
PART I.
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
We are exposed to various types of market risk in the normal course of business,
including the impact of interest rate changes. We do not hold derivatives for
trading purposes.
Our new Senior 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 September 30, 2003, we have borrowed $170.0 million of which $145.0 million
is subject to interest rate risk. On this amount, a 1% increase in the interest
rate would result in $1,450,000 in additional gross interest cost on an
annualized basis.
Our Satellite Transponder Capital Lease carries interest rate risk. Amounts
borrowed under this Agreement bear interest at Libor plus 3.25%. Should the
Libor rate change, our interest expense will increase or decrease accordingly.
As of September 30, 2003, we have borrowed $43.8 million subject to interest
rate
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risk. On this amount, a 1% increase in the interest rate would result in
$438,000 in additional gross interest cost on an annualized basis.
PART I.
ITEM 4.
Controls and Procedures
Evaluation of disclosure controls and procedures
Within the 90 days prior to the date of this report, we carried out an
evaluation of the effectiveness of the design and operation of our "disclosure
controls and procedures" (as defined in the Securities Exchange Act of 1934
("Exchange Act") Rules 13a-14(c) and 15d-14(c)) under the supervision and with
the participation of our management, including our Chief Executive Officer and
our Chief Financial Officer. Based upon that evaluation, our Chief Executive
Officer and our Chief Financial Officer concluded that our disclosure controls
and procedures are effective.
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in our reports
filed or submitted under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed in our
reports filed under the Exchange Act is accumulated and communicated to
management to allow timely decisions regarding required disclosure.
Changes in Internal Controls
There were no significant changes in our internal controls or, to our knowledge,
in other factors that could significantly affect our disclosure controls and
procedures subsequent to the date we carried out this evaluation.
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 Interim Condensed Consolidated Financial Statements
and is incorporated herein by reference.
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PART II.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
Exhibit No. Description
--------------------------------------------------------------------------------------------------------
10.111 Credit, Guaranty, Security and Pledge Agreement between GCI Holdings, Inc. and
Credit Lyonnais New York Branch as Administrative Agent, Issuing Bank,
Co-Bookrunner and Co-Arranger, General Electric Capital Corporation as
Documentation Agent, Co-Arranger and Co-Bookrunner and CIT Lending Services
Corporation as Syndication Agent, dated as of October 30, 2003
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
September 30, 2003:
o On July 23, 2003, we filed a report on Form 8-K dated
July 22, 2003 under Item 7 and 9 which included a copy
of our press release dated that same day reporting a
summary description of our results of operations for the
three and six month periods ended June 30, 2003.
o On July 25, 2003, we filed a report on Form 8-K dated
July 24, 2003 under Item 5 and 7 furnished pursuant to
Item 12 which included a copy of our press release dated
that same day reporting the extension of our Alaska
supply contract with MCI.
o On July 31, 2003, we filed a report on Form 8-K dated
July 30, 2003 under Item 7 and 12 which included a copy
of our press release dated that same day reporting a
detailed description of our results of operations for
the three and six month periods ended June 30, 2003.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENERAL COMMUNICATION, INC.
Signature Title Date
- -------------------------------------- -------------------------------------------- -----------------------
/s/ Ronald A. Duncan President and Director November 7, 2003
- -------------------------------------- (Principal Executive Officer) -----------------------
Ronald A. Duncan
/s/ John M. Lowber Senior Vice President, Chief Financial November 7, 2003
- -------------------------------------- Officer, Secretary and Treasurer -----------------------
John M. Lowber (Principal Financial Officer)
/s/ Alfred J. Walker Vice President, Chief Accounting November 7, 2003
- -------------------------------------- Officer -----------------------
Alfred J. Walker (Principal Accounting Officer)
65