As filed with the Securities and Exchange Commission on May 15, 2002.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-15279
GENERAL COMMUNICATION, INC.
(Exact name of registrant as specified in its charter)
STATE OF ALASKA 92-0072737
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2550 Denali Street
Suite 1000
Anchorage, Alaska 99503
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (907) 265-5600
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (l) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
The number of shares outstanding of the registrant's classes of common stock
as of April 26, 2002 was:
51,454,395 shares of Class A common stock; and
3,881,538 shares of Class B common stock.
1
INDEX
GENERAL COMMUNICATION, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2002
Page No.
--------
Cautionary Statement Regarding Forward-Looking Statements.................................................3
PART I. FINANCIAL INFORMATION
Item l. Consolidated Balance Sheets as of March 31, 2002
(unaudited) and December 31, 2001..................................................5
Consolidated Statements of Operations for the
Three months ended March 31, 2002
(unaudited) and 2001 (unaudited)...................................................7
Consolidated Statements of Stockholders' Equity
for the three months ended March 31, 2002
(unaudited) and 2001 (unaudited)...................................................8
Consolidated Statements of Cash Flows for the three
months ended March 31, 2002 (unaudited)
and 2001 (unaudited)...............................................................9
Notes to Interim Condensed Consolidated Financial
Statements.........................................................................10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................................20
Item 3. Quantitative and Qualitative Disclosures About
Market Risk...........................................................................33
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.....................................................................34
Item 6. Exhibits and Reports on Form 8-K......................................................34
Other items are omitted, as they are not applicable.
SIGNATURES................................................................................................35
2
Cautionary Statement Regarding Forward-Looking Statements
You should carefully review the information contained in this Quarterly Report,
but should particularly consider any risk factors that we set forth in this
Quarterly Report and in other reports or documents that we file from time to
time with the Securities and Exchange Commission ("SEC"). In this Quarterly
Report, in addition to historical information, we state our future strategies,
plans, objectives or goals and our beliefs of future events and of our future
operating results, financial position and cash flows. In some cases, you can
identify those so-called "forward-looking statements" by words such as "may,"
"will," "should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," "project," or "continue" or the negative of those words
and other comparable words. All forward-looking statements involve known and
unknown risks, uncertainties and other important factors that may cause our
actual results, performance, achievements, plans and objectives to differ
materially from any future results, performance, achievements, plans and
objectives expressed or implied by these forward-looking statements. In
evaluating those statements, you should specifically consider various factors,
including those outlined below. Those factors may cause our actual results to
differ materially from any of our forward-looking statements. For these
statements, we claim the protection of the safe harbor for forward-looking
statements provided by the Securities Reform Act. Such risks, uncertainties and
other factors include but are not limited to those identified below.
- - Material adverse changes in the economic conditions in the markets we serve
and in general economic conditions;
- - The efficacy of the rules and regulations to be adopted by the Federal
Communications Commission ("FCC") and state public regulatory agencies to
implement the provisions of the 1996 Telecom Act; the outcome of litigation
relative thereto; and the impact of regulatory changes relating to access
reform;
- - Our responses to competitive products, services and pricing, including
pricing pressures, technological developments, alternative routing
developments, and the ability to offer combined service packages that include
local, cable and Internet services;
- - The extent and pace at which different competitive environments develop for
each segment of our business;
- - The extent and duration for which competitors from each segment of the
telecommunication industries are able to offer combined or full service
packages prior to our being able to do so;
- - The degree to which we experience material competitive impacts to our
traditional service offerings prior to achieving adequate local service
entry;
- - Competitor responses to our products and services and overall market
acceptance of such products and services;
- - The outcome of our negotiations with incumbent local exchange carriers
("ILECs") and state regulatory arbitrations and approvals with respect to
interconnection agreements;
- - Our ability to purchase network elements or wholesale services from ILECs at
a price sufficient to permit the profitable offering of local telephone
service at competitive rates;
- - Success and market acceptance for new initiatives, many of which are
untested;
- - The level and timing of the growth and profitability of new initiatives,
particularly local telephone services expansion, Internet (consumer and
business) services expansion and wireless services;
- - Start-up costs associated with entering new markets, including advertising
and promotional efforts;
- - Risks relating to the operations of new systems and technologies and
applications to support new initiatives;
- - Local conditions and obstacles;
- - The impact of oversupply of capacity resulting from excessive deployment of
network capacity;
- - Uncertainties inherent in new business strategies, new product launches and
development plans, including local telephone services, Internet services,
wireless services, digital video services, cable modem services, digital
subscriber line services, and transmission services and the offering of these
services in geographic areas with which we are unfamiliar;
3
- - The risks associated with technological requirements, technology substitution
and changes and other technological developments;
- - Development and financing of telecommunication, local telephone, wireless,
Internet and cable networks and services;
- - Future financial performance, including the availability, terms and
deployment of capital; the impact of regulatory and competitive developments
on capital outlays, and the ability to achieve cost savings and realize
productivity improvements and the consequences of increased leverage;
- - Availability of qualified personnel;
- - Changes in, or failure, or inability, to comply with, government regulations,
including, without limitation, regulations of the FCC, the Regulatory
Commission of Alaska, and adverse outcomes from regulatory proceedings;
- - Uncertainties in federal military spending levels and military base closures
in markets in which we operate;
- - The ongoing global and domestic trend towards consolidation in the
telecommunications industry, which trend may be the effect of making the
competitors larger and better financed and afford these competitors with
extensive resources and greater geographic reach, allowing them to compete
more effectively; and
- - Other risks detailed from time to time in our periodic reports filed with the
SEC.
You should not place undue reliance on any such forward-looking statements.
Further, any forward-looking statement, and such risks, uncertainties and other
factors speak, only as of the date on which they were originally made and we
expressly disclaim any obligation or undertaking to disseminate any updates or
revisions to any forward-looking statement to reflect any change in our
expectations with regard to those statements or any other change in events,
conditions or circumstances on which any such statement is based, except as
required by law. New factors emerge from time to time, and it is not possible
for us to predict what factors will arise or when. In addition, we cannot assess
the impact of each factor on our business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements.
4
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
ASSETS 2002 2001
- --------------------------------------------------------------------------- ---------------- ---------------
(Amounts in thousands)
Current assets:
Cash and cash equivalents $ 13,368 11,097
--------------- ----------------
Receivables:
Trade 59,145 58,895
Employee and other 996 1,587
--------------- ----------------
60,141 60,482
Less allowance for doubtful receivables 4,280 4,166
--------------- ----------------
Net receivables 55,861 56,316
--------------- ----------------
Deferred income taxes, net 5,386 4,690
Inventories 4,021 3,462
Prepaid and other current assets 2,578 3,061
Property held for sale 517 481
Notes receivable with related parties 146 182
--------------- ----------------
Total current assets 81,877 79,289
--------------- ----------------
Property and equipment in service, net of depreciation 391,981 395,887
Construction in progress 14,211 8,121
--------------- ----------------
Net property and equipment 406,192 404,008
--------------- ----------------
Cable certificates, net of amortization of $26,884,000 at March 31,
2002 and December 31, 2001 191,132 191,132
Goodwill, net of amortization of $7,200,000 at March 31, 2002 and December
31, 2001 41,205 40,940
Other intangible assets, net of amortization of $1,431,000 and $1,252,000
at March 31, 2002 and December 31, 2001, respectively 3,182 3,387
Deferred loan and senior notes costs, net of amortization of $6,325,000
and $5,568,000 at March 31, 2002 and December 31, 2001, respectively 6,654 7,630
Notes receivable with related parties 5,388 3,246
Other assets, at cost, net of amortization of $72,000 and $70,000 at March
31, 2002 and December 31, 2001, respectively 5,567 5,047
--------------- ----------------
Total other assets 253,128 251,382
--------------- ----------------
Total assets $ 741,197 734,679
=============== ================
See accompanying notes to interim condensed consolidated financial statements.
5 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
(Unaudited)
March 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2002 2001
- -------------------------------------------------------------------------- ---------------- ----------------
(Amounts in thousands)
Current liabilities:
Current maturities of obligations under long-term debt and capital
leases $ 17,391 7,346
Accounts payable 35,275 36,464
Deferred revenue 11,396 11,129
Accrued payroll and payroll related obligations 10,587 15,289
Accrued interest 4,433 8,049
Accrued liabilities 6,019 4,938
Subscriber deposits 1,407 1,121
---------------- ----------------
Total current liabilities 86,508 84,336
Long-term debt, excluding current maturities 345,000 346,000
Obligations under capital leases, excluding current maturities 44,913 45,016
Obligations under capital leases due to related party, excluding
current maturities 593 620
Deferred income taxes, net of deferred income tax benefit 27,521 25,069
Other liabilities 5,360 4,339
---------------- ----------------
Total liabilities 509,895 505,380
---------------- ----------------
Redeemable preferred stocks 26,907 26,907
---------------- ----------------
Stockholders' equity:
Common stock (no par):
Class A. Authorized 100,000,000 shares; issued 51,446,647 and
50,967,196 shares at March 31, 2002 and December 31, 2001,
respectively 198,632 195,647
Class B. Authorized 10,000,000 shares; issued 3,882,843 shares at
March 31, 2002 and December 31, 2001; convertible on a
share-per-share basis into Class A common stock 3,281 3,281
Less cost of 316,554 and 296,554 Class A common shares held in
treasury at March 31, 2002 and December 31, 2001, respectively (1,836) (1,659)
Paid-in capital 10,832 10,474
Notes receivable with related parties issued upon stock option exercise (5,559) (2,588)
Retained deficit (1,068) (2,771)
Accumulated other comprehensive income 113 8
---------------- ----------------
Total stockholders' equity 204,395 202,392
Commitments and contingencies
---------------- ----------------
Total liabilities and stockholders' equity $ 741,197 734,679
================ ================
See accompanying notes to interim condensed consolidated financial statements.
6
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
2002 2001
-------------- ----------------
(Amounts in thousands, except
per share amounts)
Revenues $ 88,210 96,917
Cost of sales and services 31,237 42,086
Selling, general and administrative expenses 31,882 27,850
Depreciation and amortization expense 14,715 13,939
-------------- ----------------
Operating income 10,376 13,042
-------------- ----------------
Interest expense 6,591 8,883
Interest income 73 163
-------------- ----------------
Interest expense, net 6,518 8,720
-------------- ----------------
Net income before income taxes 3,858 4,322
Income tax expense 1,646 1,899
-------------- ----------------
Net income $ 2,212 2,423
============== ================
Basic and diluted net income per common share $ 0.03 0.04
============== ================
See accompanying notes to interim condensed consolidated financial
statements.
7
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2002 AND 2001
Notes
Class A Receivable Accumulated
Class A Class B Shares Issued to Other
(Unaudited) Common Common Held in Paid-in Related Retained Comprehensive
(Amounts in thousands) Stock Stock Treasury Capital Parties Deficit Income Total
------------------------------------------------------------------------------------------
Balances at December 31, 2000 $182,706 3,299 (1,659) 7,368 (2,976) (5,258) --- 183,480
Net income --- --- --- --- --- 2,423 --- 2,423
Tax effect of excess stock compensation
expense for tax purposes over amounts
recognized for financial reporting
purposes --- --- --- 309 --- --- --- 309
Class B shares converted to Class A 3 (3) --- --- --- --- --- ---
Shares issued under stock option plan 511 --- --- --- --- --- --- 511
Amortization of the excess of GCI stock
market value over stock option
exercise cost on date of stock option
grant --- --- --- 171 --- --- --- 171
Shares issued to Employee Stock
Purchase Plan 688 --- --- --- --- --- --- 688
Acquisition of G.C. Cablevision, Inc.
net assets and customer base 2,388 --- --- --- --- --- --- 2,388
Preferred stock dividends --- --- --- --- --- (475) --- (475)
------------------------------------------------------------------------------------------
Balances at March 31, 2001 $186,296 3,296 (1,659) 7,848 (2,976) (3,310) --- 189,495
==========================================================================================
Balances at December 31, 2001 $195,647 3,281 (1,659) 10,474 (2,588) (2,771) 8 202,392
Components of comprehensive income:
Net income --- --- --- --- --- 2,212 --- 2,212
Fair value of cash flow hedge, net of
income tax benefit of $72 --- --- --- --- --- --- 105 105
-------
Comprehensive income 2,317
Tax effect of excess stock compensation
expense for tax purposes over amounts
recognized for financial reporting
purposes --- --- --- 255 --- --- --- 255
Shares issued under stock option plan 2,985 --- --- --- (2,971) --- --- 14
Amortization of the excess of GCI stock
market value over stock option
exercise cost on date of stock option
grant --- --- --- 103 --- --- --- 103
Purchase of treasury stock --- --- (177) --- --- --- --- (177)
Preferred stock dividends --- --- --- --- --- (509) --- (509)
------------------------------------------------------------------------------------------
Balances at March 31, 2002 $198,632 3,281 (1,836) 10,832 (5,559) (1,068) 113 204,395
==========================================================================================
See accompanying notes to interim condensed consolidated financial statements.
8
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
2002 2001
-------------- --------------
(Amounts in thousands)
Operating activities:
Net income $ 2,212 2,423
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 14,715 13,939
Amortization charged to selling, general and administrative --- 9
Non-cash cost of sale --- 10,877
Deferred income tax expense 1,646 1,899
Bad debt expense, net of write-offs 124 544
Deferred compensation and compensatory stock options 251 242
Other noncash income and expense items 110 (84)
Change in operating assets and liabilities (6,809) 1,393
-------------- --------------
Net cash provided by operating activities 12,249 31,242
-------------- --------------
Investing activities:
Purchases of property and equipment (16,069) (13,522)
Advances and billings to Kanas Telecom, Inc. --- (2,716)
Payment of deposit --- (1,200)
Notes receivable issued to related parties (5,669) (121)
Payments received on notes receivable with related parties 3,587 146
Purchases of other assets (428) (796)
-------------- --------------
Net cash used by investing activities (18,579) (18,209)
-------------- --------------
Financing activities:
Repayments of long-term borrowings and capital lease obligations (86) (12,140)
Long-term borrowings - bank debt 9,000 ---
Purchase of treasury stock (177) ---
Payment of preferred stock dividend (150) ---
Proceeds from common stock issuance 14 511
-------------- --------------
Net cash provided (used) by financing activities 8,601 (11,629)
-------------- --------------
Net increase in cash and cash equivalents 2,271 1,404
Cash and cash equivalents at beginning of period 11,097 5,962
-------------- --------------
Cash and cash equivalents at end of period $ 13,368 7,366
============== ==============
See accompanying notes to interim condensed consolidated financial
statements.
9
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
(1) General
In the following discussion, General Communication, Inc. and its direct
and indirect subsidiaries are referred to as "we," "us" and "our".
(a) Business
General Communication, Inc. ("GCI"), an Alaska corporation, was
incorporated in 1979. We offer the following services:
- Long-distance telephone service between Anchorage, Fairbanks,
Juneau, and other communities in Alaska and the remaining United
States and foreign countries
- Cable television services throughout Alaska
- Facilities-based competitive local access services in Anchorage,
Fairbanks and Juneau, Alaska
- Internet access services
- Termination of traffic in Alaska for certain common carriers
- Private line and private network services
- Managed services to certain commercial customers
- Broadband services, including our SchoolAccess(TM) offering to
rural school districts and a similar offering to rural hospitals
and health clinics
- Sales and service of dedicated communications systems and
related equipment
- Lease and sales of capacity on two undersea fiber optic cables
used in the transmission of interstate and intrastate private
line, switched message long-distance and Internet services
between Alaska and the remaining United States and foreign
countries
(b) Principles of Consolidation
The interim condensed consolidated financial statements include the
accounts of GCI, GCI's wholly-owned subsidiary GCI, Inc., GCI,
Inc.'s wholly-owned subsidiary GCI Holdings, Inc., GCI Holdings,
Inc.'s wholly-owned subsidiaries GCI Communication Corp., GCI
Cable, Inc., and GCI Transport Co., Inc., GCI Holdings, Inc.'s 85%
controlling interest in GCI Fiber Communication Co., Inc., GCI
Communication Corp.'s wholly-owned subsidiary Potter View
Development Co., Inc., GCI Cable, Inc.'s wholly-owned subsidiary
GCI American Cablesystems, Inc., GCI American Cablesystems, Inc.'s
wholly-owned subsidiary GCI Cablesystems of Alaska, Inc., GCI
Transport Co., Inc.'s wholly-owned subsidiaries GCI Satellite Co.,
Inc., GCI Fiber Co., Inc. and Fiber Hold Co., Inc. and GCI Fiber
Co., Inc.'s and Fiber Hold Co., Inc.'s wholly-owned partnership
Alaska United Fiber System Partnership ("Alaska United").
10 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
(c) Net Income Per Common Share
Net income per common share ("EPS") and common shares used to
calculate basic and diluted EPS consist of the following (amounts
in thousands):
Three Months Ended March 31,
2002 2001
------------------------------ -------------------------------
Income Shares Income Shares
(Num- (Denom- Per-share (Num- (Denom- Per-share
erator) inator) Amounts erator) inator) Amounts
-------- ---------- ---------- --------- ---------- ----------
Net income $ 2,212 $ 2,423
Less Preferred Stock dividends:
Series B 361 475
Series C 148 ---
-------- ---------
Basic EPS:
Income available to common
stockholders 1,703 54,828 $ 0.03 1,948 52,223 $ 0.04
Effect of Dilutive Securities:
Unexercised stock options --- 928 --- --- 894 ---
-------- ---------- ---------- --------- ---------- ----------
Diluted EPS:
Income available to common
stockholders $ 1,703 55,756 $ 0.03 $ 1,948 53,117 $ 0.04
======== ========== ========== ========= ========== ==========
Common equivalent shares outstanding which are anti-dilutive for
purposes of calculating EPS for the three months ended March 31,
2002 and 2001, are not included in the diluted EPS calculations,
and consist of the following (shares, in thousands):
Three Months Ended
March 31,
2002 2001
------------ ------------
Series B redeemable preferred stock 3,062 4,083
Series C redeemable preferred stock 833 ---
------------ ------------
Anti-dilutive common equivalent shares
outstanding 3,895 4,083
============ ============
Weighted average shares associated with outstanding stock options
for the three months ended March 31, 2002 and 2001 which have been
excluded from the diluted EPS calculations because the options'
exercise price was greater than the average market price of the
common shares consist of the following (shares, in thousands):
Three Months Ended
March 31,
2002 2001
------------ ------------
Weighted average shares associated with
outstanding stock options 239 159
============ ============
Effective March 31, 2001 we acquired the assets and customer base
of G.C. Cablevision, Inc. The seller received 238,199 unregistered
shares of GCI Class A common stock with a future payment in
additional shares contingent upon the market price of our common
stock on a future
11 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
date. At March 31, 2002 the market price condition was not met and
approximately 70,800 shares of GCI Class A common stock would be
issuable if this date was the end of the contingency period.
(d) Common Stock
Following is the statement of common stock at March 31, 2002 and
2001 (shares, in thousands):
Class A Class B
----------------- ----------------
Balances at December 31, 2000 48,643 3,904
Class B shares converted to Class A 4 (4)
Shares issued under stock option plan 172 ---
Shares issued upon acquisition of G.C.
Cablevision, Inc. net assets and customer
base 238 ---
----------------- ----------------
Balances at March 31, 2001 49,057 3,900
================= ================
Balances at December 31, 2001 50,967 3,883
Shares issued under stock option plan 480 ---
----------------- ----------------
Balances at March 31, 2002 51,447 3,883
================= ================
(e) Redeemable Preferred Stocks
Redeemable preferred stocks consist of (amounts in thousands):
March 31, December 31,
2002 2001
----------------- ----------------
Series B $ 16,907 16,907
Series C 10,000 10,000
----------------- ----------------
$ 26,907 26,907
================= ================
We have 1,000,000 shares of preferred stock authorized with the
following shares issued at March 31, 2002 and 2001 (shares, in
thousands):
Series B Series C
------------- --------------
Balances at December 31, 2000 and
March 31, 2001 20 ---
============= ==============
Balances at December 31, 2001 and
March 31, 2002 17 10
============= ==============
The combined aggregate amount of preferred stock mandatory
redemption requirements follow (amounts in thousands):
Years ending March 31:
2003 $ ---
2004 ---
2005 10,150
2006 ---
2007 ---
--------
$ 10,150
========
12 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Series B
The redemption amount of our convertible redeemable accreting
Series B preferred stock at March 31, 2002 and December 31, 2001 is
$17,509,000 and $17,148,000, respectively. The difference between
the carrying and redemption amounts is due to accrued dividends
which are included in Accrued Liabilities until either paid in cash
or through the issuance of additional Series B preferred stock.
Series C
The redemption amount of our convertible redeemable accreting
Series C preferred stock on March 31, 2002 and December 31, 2001
was $10,000,000.
(f) Sale of Fiber Optic Cable System Capacity
During the first quarter of 2001 we completed a $19.5 million sale
of long-haul capacity in the Alaska United undersea fiber optic
cable system ("fiber capacity sale") in a cash transaction. The
sale included both capacity within Alaska, and between Alaska and
the 48 contiguous states south of or below Alaska ("Lower 48"). We
used the proceeds from the fiber capacity sale to repay $11.7
million of the Fiber Facility debt and to fund capital expenditures
and working capital.
The fiber capacity sale contract gave the purchaser an indefeasible
right to use a certain amount of fiber system capacity and expires
on February 4, 2024. The term may be extended if the actual useful
life of the fiber system capacity extends beyond the estimated
useful life of twenty-five years. The fiber system capacity sold is
integral equipment because it is attached to real estate. Because
all of the benefits and risks of ownership have been transferred to
the purchaser upon full receipt of the purchase price and other
terms of the contract meet the requirements of Statement of
Financial Accounting Standard ("SFAS") No. 66, "Accounting for
Sales of Real Estate" we accounted for the fiber capacity sale as a
sales-type lease. We recognized $19.5 million in revenue from the
fiber capacity sale. We recognized $10.9 million as cost of sales
during the three months ended March 31, 2001.
The accounting for the sale of fiber system capacity is currently
evolving and accounting guidance may become available in the future
which could require us to change our policy. If we are required to
change our policy, it is likely the effect would be to recognize
the gain from future sales of fiber capacity, if any, over the term
the capacity is provided.
(g) New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 141, "Business Combinations." SFAS No. 141 requires
that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. Use of the
pooling-of-interests method will be prohibited on a prospective
basis only. Adoption of SFAS No. 141 has not had a significant
impact on our results of operations, financial position or cash
flows.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 provides accounting and reporting
standards for intangible assets acquired individually, with a group
of other assets, or as part of a business combination. This
statement addresses how acquired goodwill and other intangible
assets are recorded upon their acquisition as well as how they are
to be accounted for after they have been initially recognized in
the financial statements. Under this statement, goodwill and other
intangibles with indefinite useful lives, on a prospective basis,
will no longer be amortized, however will be tested for impairment
at least annually, based on a fair value comparison. Intangibles
that have finite useful lives will continue to be amortized
13 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
over their respective useful lives. This statement also requires
expanded disclosure for goodwill and other intangible assets.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 replaces
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of. However it retains the
fundamental provisions of SFAS No. 121 for recognition and
measurement of the impairment of long-lived assets to be held and
used and for measurement of long-lived assets to be disposed of by
sale. This statement applies to all long-lived assets, including
discontinued operations, and replaces the provisions of APB Opinion
No. 30, Reporting Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, for the disposal of segments
of a business. This statement requires that those long-lived assets
be measured at the lower of carrying amount or fair value less cost
to sell, whether reported in continuing operations or in
discontinued operations. Adoption of SFAS No. 144 has not had a
significant impact on our results of operations, financial position
or cash flows.
(h) Reclassifications
Reclassifications have been made to the 2001 financial statements
to make them comparable with the 2002 presentation.
(i) Other
The accompanying unaudited interim condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with
the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. The interim condensed consolidated
financial statements include the consolidated accounts of GCI and
its wholly owned subsidiaries with all significant intercompany
transactions eliminated. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating
results for the three-month period ended March 31, 2002 are not
necessarily indicative of the results that may be expected for the
year ended December 31, 2002. For further information, refer to the
financial statements and footnotes thereto included in our annual
report on Form 10-K for the year ended December 31, 2001.
14 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
(2) Consolidated Statements of Cash Flows Supplemental Disclosures
Changes in operating assets and liabilities consist of (amounts in thousands):
Three month periods ended March 31, 2002 2001
------------- ------------
Decrease in accounts receivables $ 519 3,100
Increase in inventories (559) (193)
Decrease in prepaid and other current assets 588 96
Increase (decrease) in accounts payable (1,189) 672
Increase in deferred revenues 267 490
Increase (decrease) in accrued payroll and payroll related obligations (4,702) 657
Decrease in accrued interest (3,616) (4,191)
Increase in accrued liabilities 1,081 824
Increase (decrease) in subscriber deposits 286 (55)
Increase (decrease) in components of other long-term liabilities 516 (7)
------------- ------------
$ (6,809) 1,393
============= ============
We paid interest totalling approximately $10,207,000 and $13,074,000
during the three-month periods ended March 31, 2002 and 2001,
respectively.
(3) Intangible Assets
Effective with the adoption of SFAS No. 142, "Goodwill and Other
Intangible Assets" on January 1, 2002, goodwill and cable certificates
(certificates of convenience and public necessity) are no longer
amortized. The following pro forma financial information reflects net
income and basic and diluted EPS as if goodwill and cable certificates
were not subject to amortization for the three months ended March 31,
2001 (amounts in thousands, except per share amounts):
Basic and
Net Income Diluted EPS
------------- --------------
Net income, as reported $ 2,423 0.04
Add cable certificate amortization, net of
income taxes 724 0.01
Add goodwill amortization, net of income taxes 177 ---
------------- --------------
Adjusted net income $ 3,324 0.05
============= ==============
Cable certificates are allocated to our cable services reportable
segment. Goodwill is not allocated to a reportable segment, but is
included in the All Other category in note 5.
15 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Amortization expense for amortizable intangible assets for the three
months ended March 31, 2002 and 2001 was approximately $965,000 and
$2,094,000 (inclusive of goodwill and cable certificate amortization
expense), respectively. Amortization expense for amortizable intangible
assets for each of the five succeeding fiscal years is estimated to be
(amounts in thousands):
Years ending
December 31,
2002 $ 760
2003 374
2004 229
2005 123
2006 119
No intangible assets have been impaired based upon impairment testing
performed as of January 1, 2002.
(4) Long-term Debt
We expect to refinance the Senior Holdings Loan and the Fiber Facility in
the second or third quarter of 2002. Upon completion of the refinancing
we expect to recognize $2.7 million to $2.9 million as an extraordinary
loss before income tax effect.
(5) Industry Segments Data
Our reportable segments are business units that offer different products.
The reportable segments are each managed separately and offer distinct
products with different production and delivery processes.
We have four reportable segments as follows:
Long-distance services. We offer a full range of common-carrier
long-distance services to commercial, government, other
telecommunications companies and residential customers, through our
networks of fiber optic cables, digital microwave, and fixed and
transportable satellite earth stations and our SchoolAccess(TM)
offering to rural school districts and a similar offering to rural
hospitals and health clinics.
Cable services. We provide cable television services to residential,
commercial and government users in the State of Alaska. Our cable
systems serve 33 communities and areas in Alaska, including the state's
three largest urban areas, Anchorage, Fairbanks and Juneau. We offer
digital cable television services in Anchorage, Fairbanks, Juneau and
Kenai and retail cable modem service (through our Internet services
segment) in Anchorage, Fairbanks, Juneau and several other communities
in Alaska. We plan to expand our product offerings as plant upgrades
are completed in other communities in Alaska.
Local access services. We offer facilities based competitive local
exchange services in Anchorage, Fairbanks and Juneau and plan to
provide similar competitive local exchange services in other locations
pending regulatory approval.
Internet services. We offer wholesale and retail Internet services. We
offer cable modem service in Anchorage, Fairbanks, Juneau and several
other communities in Alaska and plan to provide cable modem service in
other areas in 2002. Our undersea fiber optic cable allows us to offer
enhanced services with high-bandwidth requirements.
16 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Included in the "All Other" category in the tables that follow are our
managed services, product sales, cellular telephone services, and, during
the three months ended March 31, 2001, management services for Kanas, a
related party. None of these business units has ever met the quantitative
thresholds for determining reportable segments. Also included in the All
Other category are corporate related expenses including management
information systems, accounting, legal and regulatory, human resources
and other general and administrative expenses. In 2001, the All Other
category includes revenues and costs associated with the sale of undersea
fiber optic cable system capacity (see note 1(f)).
We evaluate performance and allocate resources based on (1) earnings or
loss from operations before depreciation, amortization, net interest
expense and income taxes, and (2) operating income or loss. The
accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies in note 1.
Intersegment sales are recorded at cost plus an agreed upon intercompany
profit.
We earn all revenues through sales of services and products within the
United States of America. All of our long-lived assets are located within
the United States of America.
Summarized financial information for our reportable segments and for the
All Other category for the three months ended March 31, 2002 and 2001
follows (amounts in thousands):
Reportable Segments
--------------------------------------------------------
Long- Local Total
Distance Cable Access Internet Reportable All
Services Services Services Services Segments Other Total
------------------------------------------------------------------------------
2002
Revenues:
Intersegment $ 5,329 496 2,673 2,143 10,641 186 10,827
External 50,068 21,346 7,308 3,573 82,295 5,915 88,210
------------------------------------------------------------------------------
Total revenues $ 55,397 21,842 9,981 5,716 92,936 6,101 99,037
==============================================================================
Earnings (loss) from
operations before
depreciation,
amortization, net interest
expense and income taxes $ 24,548 9,884 844 (2,935) 32,341 (7,026) 25,315
==============================================================================
Operating income (loss) $ 17,850 5,713 34 (3,825) 19,772 (9,172) 10,600
==============================================================================
17 (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
------------------------------------------------------------------------------
2001
Revenues:
Intersegment $ 4,835 377 1,635 1,210 8,057 203 8,260
External 46,236 18,046 5,958 2,619 72,859 24,058 96,917
------------------------------------------------------------------------------
Total revenues $ 51,071 18,423 7,593 3,829 80,916 24,261 105,177
==============================================================================
Earnings (loss) from
operations before
depreciation,
amortization, net interest
expense and income taxes $ 18,755 8,425 1,146 (2,967) 25,359 1,854 27,213
==============================================================================
Operating income (loss) $ 12,759 3,415 339 (3,580) 12,933 341 13,274
==============================================================================
A reconciliation of reportable segment revenues to consolidated revenues
follows (amounts in thousands):
Three months ended March 31, 2002 2001
------------- --------------
Reportable segment revenues $ 92,936 80,916
Plus All Other revenues 6,101 24,261
Less intersegment revenues eliminated in consolidation (10,827) (8,260)
------------- --------------
Consolidated revenues $ 88,210 96,917
============= ==============
A reconciliation of reportable segment earnings from operations before
depreciation, amortization, net interest expense and income taxes to
consolidated net income before income taxes follows (amounts in
thousands):
Three months ended March 31, 2002 2001
-------------- --------------
Reportable segment earnings from operations before
depreciation, amortization, net interest expense and
income taxes $ 32,341 25,359
Plus (less) All Other loss from operations before
depreciation, amortization, net interest expense and
income taxes (7,026) 1,854
Less intersegment contribution eliminated in consolidation (224) (232)
-------------- --------------
Consolidated earnings from operations before
depreciation, amortization, net interest expense
and income taxes 25,091 26,981
Less depreciation and amortization expense 14,715 13,939
-------------- --------------
Consolidated operating income 10,376 13,042
Less interest expense, net 6,518 8,720
-------------- --------------
Consolidated net income before income taxes $ 3,858 4,322
============== ==============
18 (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 follows (amounts in thousands):
Three months ended March 31, 2002 2001
-------------- -------------
Reportable segment operating income $ 19,772 12,933
Plus (less) All Other operating loss (9,172) 341
Less intersegment contribution eliminated in consolidation (224) (232)
-------------- -------------
Consolidated operating income 10,376 13,042
Less interest expense, net 6,518 8,720
-------------- -------------
Consolidated net income before income taxes $ 3,858 4,322
============== =============
(6) Commitments and Contingencies
Bid to Purchase Fiber Optic Cable System Assets
The assets of WCI Cable, Inc. and its subsidiaries ("WCIC"), a competing
fiber optic cable system connecting Alaska to the Lower 48 states, were
offered for sale following its bankruptcy filing and reorganization. We
were not the successful bidder and we expect to continue to pursue other
opportunities to secure facilities to supplement our existing backup
facilities.
Litigation and Disputes
We are routinely involved in various lawsuits, billing disputes, legal
proceedings and regulatory matters that have arisen in the normal course
of business. While the ultimate results of these items cannot be
predicted with certainty, we do not expect at this time the resolution of
them to have a material adverse effect on our financial position, results
of operations or our liquidity.
Internal Revenue Service Examination
Our U.S. income tax return for 1999 was selected for examination by the
Internal Revenue Service during 2001. The examination commenced during
the third quarter of 2001. We believe this examination will not have a
material adverse effect on our financial position, results of operations
or our liquidity.
19
PART I.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
In the following discussion, General Communication, Inc. and its direct and
indirect subsidiaries are referred to as "we," "us" and "our."
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. On an on-going basis, we evaluate our estimates and
judgments, including those related to unbilled revenues, allowance for doubtful
accounts, depreciation and amortization periods, intangible assets, income
taxes, and contingencies and litigation. We base our estimates and judgments on
historical experience and on various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. See also our Cautionary
Statement Regarding Forward-Looking Statements.
General Overview
We have experienced significant growth in recent years through strategic
acquisitions, deploying new business lines and expansion of our existing
businesses. We have historically met our cash needs for operations, regular
capital expenditures and maintenance capital expenditures through our cash flows
from operating activities. Cash requirements for significant acquisitions and
major capital expenditures have been provided largely through our financing
activities.
Long-Distance Services Overview
During the first quarter of 2002 long-distance services revenue represented
56.8% of consolidated revenues. Our provision of interstate and intrastate
long-distance services to residential, commercial and governmental customers and
to other common carriers (principally WorldCom, Inc. ("WorldCom"), a related
party, and Sprint), provision of private line and leased dedicated capacity
services and broadband services accounted for 96.1% of our total long-distance
services revenues during the first quarter of 2002.
Factors that have the greatest impact on year-to-year changes in long-distance
services revenues include the rate per minute charged to customers, usage
volumes expressed as minutes of use, and the number of private line, leased
dedicated service and broadband products in use.
Long-distance services face significant competition from AT&T Alascom, Inc.,
long-distance resellers, and from local telephone companies that have entered
the long-distance market. We believe our approach to developing, pricing, and
providing long-distance services and bundling different business segment
services will continue to allow us to be competitive in providing those
services.
Our contract to provide interstate and intrastate long-distance services to
Sprint was amended in March 2002 extending its term to March 2007 with two
one-year automatic extensions to March 2009. The amendment reduced the rate to
be charged by us for certain Sprint traffic over the extended term of the
contract.
20
Other common carrier traffic routed to us for termination in Alaska is largely
dependent on traffic routed to WorldCom and Sprint by their customers. Pricing
pressures, new program offerings and market consolidation continue to evolve in
the markets served by WorldCom and Sprint. If, as a result, their traffic is
reduced, or if their competitors' costs to terminate or originate traffic in
Alaska are reduced, our traffic will also likely be reduced, and our pricing may
be reduced to respond to competitive pressures. We are unable to predict the
effect on us of such changes, however given the materiality of other common
carrier revenues to us, a significant reduction in traffic or pricing could have
a material adverse effect on our financial position, results of operations and
liquidity.
Cable Services Overview
During the first quarter of 2002, cable television revenues represented 24.2% of
consolidated revenues. The cable systems serve 33 communities and areas in
Alaska, including the state's three largest population centers, Anchorage,
Fairbanks and Juneau.
We generate cable services revenues from four primary sources: (1) digital and
analog programming services, including monthly basic or premium subscriptions
and pay-per-view movies or other one-time events, such as sporting events; (2)
equipment rentals or installation; (3) advertising sales; and (4) cable modem
services (shared with our Internet services segment). During the first quarter
of 2002 programming services generated 78.0% of total cable services revenues,
equipment rental and installation fees accounted for 9.8% of such revenues,
cable modem services accounted for 7.8% of such revenues, advertising sales
accounted for 3.6% of such revenues, and other services accounted for the
remaining 0.8% of total cable services revenues.
The primary factors that contribute to year-to-year changes in cable services
revenues are average monthly subscription and pay-per-view rates, the mix among
basic, premium and pay-per-view services and digital and analog services, the
average number of cable television and cable modem subscribers during a given
reporting period, and revenues generated from new product offerings.
Cable services face competition from alternative methods of receiving and
distributing television signals and from other sources of news, information and
entertainment. We believe our cable television services will continue to be
competitive by providing, at reasonable prices, a greater variety of programming
and other communication services than are available off-air or through other
alternative delivery sources and upon superior technical performance and
responsive local customer service.
Local Access Services Overview
We generate local access services revenues from three primary sources: (1)
business and residential basic dial tone services; (2) business private line and
special access services; and (3) business and residential features and other
charges, including voice mail, caller ID, distinctive ring, inside wiring and
subscriber line charges. Local exchange services revenues totaled $7.3 million
in the first quarter of 2002 representing 8.3% of consolidated revenues.
The primary factors that contribute to year-to-year changes in local access
services revenues are the average number of business and residential subscribers
to our services during a given reporting period, the average monthly rates
charged for non-traffic sensitive services and the number and type of additional
premium features selected.
Our local access services segment faces significant competition in Anchorage,
Fairbanks, and Juneau from the ILEC Alaska Communications Systems, Inc. ("ACS")
and AT&T Alascom, Inc. We began marketing efforts in the Juneau market in the
fourth quarter of 2001 and began provisioning service 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.
21
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) cable modem services (a
portion of cable modem revenue is also recognized by our cable services
segment). Internet services segment revenues totaled $3.6 million representing
4.0% of total revenues in the first quarter of 2002.
The primary factors that contribute to year-to-year changes in Internet services
revenues are the average number of subscribers to our services during a given
reporting period, the average monthly subscription rates, and the number and
type of additional premium features selected.
Marketing campaigns continue to be deployed targeting residential and commercial
customers featuring bundled Internet products. Our Internet offerings are
coupled with our long-distance and local access services offerings and provide
free basic Internet services or discounted premium Internet services if certain
long-distance or local access services plans are selected. Value-added premium
Internet features are available for additional charges.
We compete with a number of Internet service providers in our markets. We
believe our approach to developing, pricing, and providing Internet services
allows us to be competitive in providing those services.
All Other Services Overview
Revenues reported in the All Other category as described in note 5 in the
accompanying Notes to Interim Condensed Consolidated Financial Statements
include our managed services, product sales, cellular telephone services, and,
during the first quarter of 2001, management services for Kanas, a related
party. During the first quarter of 2001, the All Other category also includes
revenues of $19.5 million associated with the sale of undersea fiber optic cable
system capacity.
Revenues included in the All Other category represented 6.7% of total revenues
in the first quarter of 2002 and include managed services revenues totaling $4.8
million and product sales and cellular telephone services revenues totaling $1.1
million.
22
RESULTS OF OPERATIONS
The following table sets forth selected Statement of Operations data as a
percentage of total revenues for the periods indicated (underlying data rounded
to the nearest thousands):
Percentage
Three Months Ended Change(1)
March 31, 2002 vs.
(Unaudited) 2002 2001 2001
---- ---- ----
Statement of Operations Data:
Revenues
Long-distance services 56.8% 47.7% 8.3%
Cable services 24.2% 18.6% 18.3%
Local access services 8.3% 6.1% 22.7%
Internet services 4.0% 2.7% 36.4%
All Other services 6.7% 24.9% (75.4%)
--------------------------------------
Total revenues 100.0% 100.0% (9.0%)
Cost of sales and services 35.4% 43.4% (25.8%)
Selling, general and administrative expenses 36.1% 28.7% 14.5%
Depreciation and amortization 16.7% 14.4% 5.6%
--------------------------------------
Operating income 11.8% 13.5% (20.4%)
Net income before income taxes 4.4% 4.5% (10.7%)
Net income 2.5% 2.5% (8.7%)
Other Operating Data:
Long-distance services operating income (2) 35.6% 27.5% 40.0%
Cable services operating income (3) 26.8% 18.9% 67.3%
Local access services operating income (4) 0.5% 5.7% (90.0%)
Internet services operating loss (5) (107.1%) (136.7%) (6.8%)
<FN>
- --------------------------
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.
- --------------------------
</FN>
Three Months Ended March 31, 2002 ("2002") Compared To Three Months Ended March
31, 2001 ("2001").
Revenues
Total revenues decreased 9.0% from $96.9 million in 2001 to $88.2 million in
2002. Excluding the fiber optic cable capacity sale of $19.5 million in 2001 as
described in note 1(f) in the accompanying Notes to Interim Condensed
Consolidated Financial Statements, total revenues increased 14.0%.
23
Long-distance services revenues from residential, commercial, governmental, and
other common carrier customers increased 8.3% to $50.1 million in 2002. The
increase was largely due to the following:
- An increase of 17.4% in private line and private network transmission
services revenues to $8.8 million in 2002 due to an increased number of
leased circuits in service,
- An increase of 15.6% in message telephone service revenues from other
common carriers (principally WorldCom and Sprint) to $20.8 million in
2002,
- An increase of 68.3% to $4.4 million in 2002 revenues from our packaged
telecommunications offering to rural hospitals and health clinics and
our SchoolAccess(TM) offering to rural school districts. The increase
is primarily due to an increase in circuits and services sold to rural
hospitals and health clinics and the provision of SchoolAccess(TM)
services to an additional nine school districts located in Arizona and
New Mexico beginning in July 2001, and
- An increase of 10.3% in total minutes of use to 268.3 million minutes
primarily due to a 17.9% increase in wholesale minutes carried for
other common carriers.
Long-distance services revenue increases described above were partially offset
by the following:
- A 1.9% decrease in the average rate per minute on minutes carried for
other common carriers due to a reduced rate charged by us for certain
WorldCom traffic due to a contract amendment commencing March 2001, and
- A 2.5% decrease in our total average rate per minute to $0.115 per
minute in 2002 attributed to our promotion of and customers' enrollment
in calling plans offering a certain number of minutes for a flat
monthly fee.
Cable services revenues increased 18.3% to $21.3 million in 2001. Programming
services revenues increased 13.7% to $16.6 million in 2002 and average gross
revenue per average basic subscriber per month increased $0.19 or 0.3% in 2002
resulting from the following:
- Basic subscribers served increased approximately 11,600 to
approximately 132,600 at March 31, 2002 as compared to March 31, 2001
(the 2002 increase includes approximately 1,000 basic subscribers
acquired from G.C. Cablevision, Inc. on March 31, 2001 and
approximately 7,000 basic subscribers acquired from Rogers American
Cablesystems, Inc. ("Rogers") on November 19, 2001),
- New facility construction efforts in 2002 and the acquisition of GC
Cablevision, Inc. and Rogers subscribers resulted in approximately
15,400 additional homes passed, a 8.7% increase from 2001, and
- Digital subscriber counts increased 50.3% to approximately 26,000 at
March 31, 2002 as compared to March 31, 2001.
The cable services segment's share of cable modem revenue (offered through our
Internet services segment) increased $696,000 to $1.7 million in 2002.
Local access services revenues increased 22.7% in 2002 to $7.3 million primarily
due to growth in the average number of customers served. At March 31, 2002
approximately 89,800 lines were in service as compared to approximately 65,000
lines in service at March 31, 2001.
Internet services revenues increased 36.4% to $3.6 million in 2002 primarily due
to growth in the average number of customers served and the number of cable
modems deployed. We had approximately 71,400 active residential, commercial and
small business retail dial-up Internet subscribers at March 31, 2002 as compared
to approximately 65,000 at March 31, 2001. We had approximately 30,200 active
residential, commercial and small business retail cable modem subscribers at
March 31, 2002 as compared to
24
approximately 18,500 at March 31, 2001. Approximately 850 cable modem
subscribers were acquired from Rogers on November 19, 2001.
The 75.4% decrease in All Other revenues to $5.9 million in 2002 is primarily
due to the $19.5 million fiber capacity sale in 2001 as previously described
off-set by increased revenues from managed services in 2002.
Cost of Sales and Service
Total cost of sales and services decreased 25.8% to $31.2 million in 2002. As a
percentage of total revenues, total cost of sales and services decreased from
43.4% in 2001 to 35.4% in 2002. Excluding the fiber capacity sale in 2001, total
cost of sales and services as a percentage of total revenues decreased from
40.3% in 2001 to 35.4% in 2002.
Long-distance services cost of sales and services decreased 10.9% to $16.2
million in 2001. Long-distance services cost of sales as a percentage of
long-distance services revenues decreased from 39.4% in 2001 to 32.4% in 2002
primarily due to the following:
- Reductions in access costs due to distribution and termination of our
traffic on our own local services network instead of paying other
carriers to distribute and terminate our traffic. The reduced access
cost per minute is estimated to be from $0.037 to $0.063 for interstate
traffic and from $0.087 to $0.142 for intrastate traffic. We expect
cost savings to continue to occur as long-distance traffic originated,
carried, and terminated on our own facilities grows, and
- The FCC Multi-Association Group order reform reducing the access rates
paid by interexchange carriers to LECs.
Offsetting the 2002 decrease in long-distance services cost of sales as a
percentage of long-distance services revenues described above is a decrease in
the average rate per minute billed to customers without a comparable decrease in
access charges paid by us.
Cable services cost of sales and services increased 20.7% to $6.0 million in
2002. Cable services cost of sales and services as a percentage of cable
revenues, which is less as a percentage of revenues than are long-distance,
local access and Internet services cost of sales and services, increased from
27.4% in 2001 to 27.9% in 2002. Cable services rate increases did not keep pace
with increases in programming costs in 2002. Programming costs increased for
most of our cable services offerings, and we incurred additional costs on new
programming introduced in 2001 and 2002.
Local access services cost of sales and services increased 50.1% to $4.7 million
in 2002. Local access services cost of sales and services as a percentage of
local access services revenues increased from 52.7% in 2001 to 64.4% in 2002,
primarily due to the following:
- Decreased network access services revenues from other carriers as the
number of customers purchasing both long-distance and local access
services from us increases,
- An increase in the Anchorage loop lease rates paid to ACS,
- The effect of offering new local access services customers acquired in
2002 one to two months of free service while continuing to incur cost
of sales for such new customers, and
- The lease of wholesale circuits from the ILEC in Fairbanks and Juneau
pending completion of our facilities enabling service transition to
unbundled network elements ("UNE") facilities and pricing.
The increases in local access services cost of sales as a percentage of local
access services revenues described above are off-set by economies of scale and
more efficient network utilization as local access services revenues increase.
25
ACS requested and received permission for a 7.7% increase in the UNE loop rate
to $14.92 and a 24% increase in their retail residential loop lease rates
effective in November 2001. The wholesale loop lease rate paid by us is tied to
the retail residential loop lease rate and increased approximately $2.25 per
line. Additionally, the cost of residential features increased 24% to
approximately $1.35 per line. We expect the increased rates will result in a
3.0% to 4.0% increase in our local access services cost of sales as a percentage
of local access services revenue for the year ended December 31, 2002.
Internet services cost of sales and services increased 2.7% to $1.2 million in
2002, and as a percentage of Internet services revenues, totaled 33.4% and 44.4%
in 2002 and 2001, respectively. The decrease as a percentage of Internet
services revenues is primarily due to a $1.3 million increase in Internet's
portion of cable modem revenue that generally has higher margins than do other
Internet 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 Internet services revenues.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 14.5% to $31.9 million in
2002 and, as a percentage of total revenues, increased to 36.1% in 2002 from
28.7% in 2001. Excluding the fiber capacity sale in 2001, selling, general and
administrative expenses, as a percentage of total revenues, increased from 34.3%
in 2001 to 36.1% in 2002. The increase in selling, general and administrative
expenses in 2002 is primarily due to increased labor and health insurance costs,
incremental new costs to operate GCI Fiber Communication Co., Inc. and Rogers,
and costs incurred for our unsuccessful bid to purchase certain of the assets of
WCIC, off-set by a decrease in company-wide success sharing bonus costs.
Marketing and advertising expenses as a percentage of total revenues increased
from 3.4% in 2001 to 4.1% in 2002. Excluding the fiber capacity sale in 2001,
marketing and advertising expenses as a percentage of total revenues were 4.3%
in 2001.
Depreciation and Amortization
Depreciation and amortization expense increased 5.6% to $14.7 million in 2002.
The increase is primarily attributable to an increase in depreciation expense
due to our $68.0 million investment in equipment and facilities placed into
service during 2001 for which a full year of depreciation will be recorded
during the year ended December 31, 2002, and the $10.0 million investment in
equipment and facilities placed into service during the first quarter of 2002
for which a partial year of depreciation will be recorded during 2002.
Partially off-setting the increases in depreciation and amortization expense
described above is the discontinuation of amortization of Cable Certificates and
Goodwill upon the adoption of SFAS 142, "Goodwill and Other Intangible Assets"
resulting in a decrease in amortization expense in the first quarter of 2002 of
approximately $1.6 million as compared to the first quarter of 2001.
Interest Expense, Net
Interest expense, net of interest income, decreased 25.2% to $6.5 million in
2002. This decrease resulted primarily from decreased interest rates in 2002 on
our variable rate debt and a $431,000 net interest benefit earned in 2002 from
our two interest rate swap agreements. Partially offsetting these decreases was
an increase in average outstanding indebtedness in 2002.
Income Tax Expense
Income tax expense was $1.6 million in 2002 and $1.9 million in 2001. The change
was due to reduced net income before income taxes in 2002 as compared to 2001,
primarily due to the effect of the fiber capacity sale in 2001. Our effective
income tax rate decreased from 43.9% in 2001 to 42.7% in 2002 due to the effect
of items that are nondeductible for income tax purposes.
26
At March 31, 2002, we have (1) tax net operating loss carryforwards of
approximately $158.6 million that will begin expiring in 2007 if not utilized,
and (2) alternative minimum tax credit carryforwards of approximately $1.9
million available to offset regular income taxes payable in future years. Our
utilization of remaining net operating loss carryforwards is subject to certain
limitations pursuant to Internal Revenue Code section 382.
Tax benefits associated with recorded deferred tax assets are considered to be
more likely than not realizable through future reversals of existing taxable
temporary differences and future taxable income exclusive of reversing temporary
differences and carryforwards. The amount of deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced. We estimate that our
effective income tax rate for financial statement purposes will be 40% to 45% in
2002.
The Job Creation and Worker Assistance Act of 2002 was signed into law on March
9, 2002 and contains several provisions that are effective for tax years ending
in 2001, one of which relates to net operating losses. The Act amends Internal
Revenue Code ("IRC") Section 172(b)(1) to provide, generally, that a net
operating loss for a tax year ending in 2001 or 2002 can be carried back five
years, rather than the two-year carryback generally allowed by section
172(b)(1)(A). The Act also amends IRC Section 56(d)(1) to allow alternative
minimum tax net operating losses carried forward into tax years ending in 2001
or 2002 to be used without regard to the 90 percent alternative minimum taxable
income limitation that generally applies. In addition, alternative minimum tax
net operating losses generated in 2001 or 2002 and carried back to an earlier
year under IRC Section 172 are not subject to the 90 percent alternative minimum
taxable income limitation. SFAS No. 109 states that a change in tax law or rates
that affects deferred income taxes is recorded in the statement of operations in
the year of enactment. Accordingly the deferred income tax effect of $188,000
was recorded as a reduction of our recorded deferred tax assets in our
consolidated balance sheet at March 31, 2002.
Our U.S. income tax return for 1999 was selected for examination by the Internal
Revenue Service during 2001. The examination commenced during the third quarter
of 2001. We believe this examination will not have a material adverse effect on
our financial position, results of operations or our liquidity.
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
The following chart provides selected unaudited statement of operations data
from our quarterly results of operations during 2002 and 2001:
(Amounts in thousands, except per share amounts)
-------------------------------------------------------------
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
-------------------------------------------------------------
2002
----
Revenues:
Long-distance services $ 50,068 50,068
Cable services $ 21,346 21,346
Local access services $ 7,308 7,308
Internet services $ 3,573 3,573
All Other services $ 5,915 5,915
-------------------------------------------------------------
Total revenues $ 88,210 88,210
Operating income $ 10,376 10,376
Net income before income taxes $ 3,858 3,858
Net income $ 2,212 2,212
Basic and diluted net income per common
share $ 0.03 0.03
27
(Amounts in thousands, except per share amounts)
-------------------------------------------------------------
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
-------------------------------------------------------------
2001
----
Revenues:
Long-distance services $ 46,236 49,851 53,892 50,715 200,694
Cable services $ 18,046 18,873 19,113 20,522 76,554
Local access services $ 5,958 6,183 6,397 6,691 25,229
Internet services $ 2,619 3,134 3,019 3,224 11,996
All Other services(1) $ 24,058 7,494 5,598 5,635 42,785
-------------------------------------------------------------
Total revenues $ 96,917 85,535 88,019 86,787 357,258
Operating income(1) $ 13,042 8,411 10,192 7,928 39,573
Net income before income taxes $ 4,322 436 2,717 1,184 8,659
Net income $ 2,423 166 1,527 473 4,589
Basic net income (loss) per common share $ 0.04 (0.01) 0.02 0.00 0.05
Diluted net income (loss) per common
share(2) $ 0.03 (0.01) 0.02 0.00 0.05
<FN>
--------------
1 The first quarter of 2001 includes $19.5 million of revenue and $8.7
million of operating income from the sale of long-haul capacity in the
Alaska United undersea fiber optic cable system.
2 Due to rounding, the sum of quarterly net income (loss) per common share
amounts does not agree to total year net income per common share
amounts.
--------------
</FN>
Revenues
Total revenues for the quarter ended March 31, 2002 ("first quarter") were $88.2
million, representing a 1.6% increase from $86.8 million for the quarter ended
December 31, 2001 ("fourth quarter"). The first quarter increase resulted
primarily from a 4.0% increase in cable services revenues to $21.3 million
resulting from the following:
- We recognized a full quarter of revenue from the 7,000 basic
subscribers we acquired from Rogers on November 19, 2001 and total
basic subscribers served increased approximately 600 to approximately
132,600 at March 31, 2002 as compared to December 31, 2001,
- Digital subscriber counts increased 5.7% to approximately 26,000 at
March 31, 2002 as compared to December 31, 2001, and
- The cable services segment's share of cable modem revenue (offered
through our Internet services segment) increased 14.8% to $1.7 million
in first quarter.
The increase in total revenues described above was partially offset by a 1.3%
decrease in long-distance services revenue to $50.1 million primarily due to the
following:
- A decrease in the long-distance services average rate per minute from
$0.118 in the fourth quarter to $0.115 in the first quarter, and
- A 3.5% decrease in long-distance minutes of traffic carried for
customers other than other common carriers to 80.7 million minutes
primarily due to seasonality.
The decrease in long-distance services revenue described above is partially
offset by the following:
- Revenues from other common carriers increased 1.7% to $20.8 million,
primarily due to a 4.0% increase in minutes carried to 187.6 million
minutes partially offset by a 2.2% decrease in the average rate per
minute on minutes carried for other common carriers, and
- An increase of 8.9% in private line and private network transmission
services revenues to $8.8 million in first quarter due to an increased
number of leased circuits in service.
28
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. 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.
Cost of Sales and Services
Cost of sales and services increased from $31.1 million in the fourth quarter to
$31.2 million in the first quarter. As a percentage of revenues, fourth and
first quarter cost of sales and services totaled 35.9% and 35.4%, respectively.
The first quarter decrease as a percentage of revenues primarily results from
reductions in access costs due to distribution and termination of traffic on our
own long-distance and local services networks instead of paying other carriers
to distribute and terminate our traffic. We expect cost savings to continue as
traffic carried on our own facilities grows.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased 1.6% to $31.9 million in
the first quarter as compared to the fourth quarter. As a percentage of
revenues, first quarter selling, general and administrative expenses were 36.1%
as compared to 37.4% for the fourth quarter. The decrease in selling, general
and administrative expenses in the first quarter as a percentage of revenues as
compared to the fourth quarter is primarily due to increased revenues without a
comparable increase in costs and decreased accrual of the company-wide success
sharing bonus.
Net Income
We reported net income of $2.2 million for the first quarter as compared to a
$473,000 for the fourth quarter. The increase is due to increased operating
income and decreased net interest expense partially offset by increased income
tax expense.
Liquidity and Capital Resources
Cash flows from operating activities totaled $12.2 million in the three month
period ended March 31, 2002 ("2002") as compared to $31.2 million in the three
month period ended March 31, 2001 ("2001"), net of changes in the components of
working capital. The decrease in 2002 is primarily due to the fiber capacity
sale in 2001 offset by increased cash flow from substantially all service
offerings. Uses of cash during 2002 include expenditures for property and
equipment, including construction in progress, totalling $16.1 million and
payment of $5.7 million in notes receivable issued to related parties. Other
sources of cash in 2002 include $9.0 million in long-term borrowings and receipt
of $3.6 million in repayments of notes receivable issued to related parties.
Working capital deficit improved $0.4 million to ($4.6) million at March 31,
2002 as compared to ($5.0) million as of December 31, 2001.
We were not the successful bidder for certain of the assets of WCIC, as
described in note 6 to the Interim Condensed Consolidated Financial Statements,
therefore the December 17, 2001 amendment to the Senior Holdings Loan will not
become effective.
We were in compliance with all loan covenants at March 31, 2002.
We borrowed an additional $9.0 million on our Senior Holdings Loan credit
facilities in 2002. We are scheduled to make $5.7 million and $10.0 million
principal payments on our Senior Holdings Loan credit
29
facilities in the fourth quarter of 2002 and first quarter of 2003,
respectively, though we expect to refinance the Senior Holdings Loan credit
facilities in the second or third quarter of 2002.
Our expenditures for property and equipment, including construction in progress,
totaled $16.1 million and $13.5 million during 2002 and 2001, respectively. We
expect our expenditures for property and equipment, including construction in
progress, for our core operations to total $65 million - $70 million during the
year ended December 31, 2002. Planned capital expenditures over the next five
years include those necessary for continued expansion of our long-distance,
local exchange and Internet facilities, supplementation of our existing backup
facilities, continuing development of our Personal Communication Services, or
PCS, network, cable telephony, and upgrades to our cable television plant.
The long-distance, local access, cable, Internet and wireless services
industries are experiencing increasing competition and rapid technological
changes. Our future results of operations will be affected by our ability to
react to changes in the competitive environment and by our ability to fund and
implement new technologies. We are unable to determine how competition and
technological changes will affect our ability to obtain financing.
We believe that we will be able to meet our current and long-term liquidity and
capital requirements, fixed charges and preferred stock dividends through our
cash flows from operating activities, existing cash, cash equivalents,
short-term investments, credit facilities, and other external financing and
equity sources. Should cash flows be insufficient to support additional
borrowings and principal payments scheduled under our existing credit
facilities, capital expenditures will likely be reduced.
New Accounting Standards
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". SFAS No. 143 provides accounting and reporting standards for costs
associated with the retirement of long-lived assets. This statement requires
entities to record the fair value of a liability for an asset retirement
obligation in the period in which it is incurred. When the liability is
initially recorded, the entity capitalizes a cost by increasing the carrying
amount of the related long-lived asset. Over time, the liability is accreted to
its present value each period, and the capitalized cost is depreciated over the
useful life of the related asset. Upon settlement of the liability, an entity
either settles the obligation for its recorded amount or incurs a gain or loss
upon settlement. We will be required to adopt this statement no later than
January 1, 2003 and do not expect this statement to have a material effect on
our results of operations, financial position and cash flows.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
The following summarizes the effects of SFAS No. 145:
- SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt",
which required all gains and losses from extinguishment of debt to be
aggregated and, if material, classified as an extraordinary item, net
of related income tax effect is rescinded. Upon adoption of SFAS No.
145, companies will be required to apply the criteria in Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" ("Opinion No. 30"), in determining the classification of
gains and losses resulting from the extinguishment of debt,
- SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements", amended SFAS No. 4 and is no longer necessary since SFAS
No. 4 has been rescinded,
- SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers", was
issued to establish accounting requirements for the effects of the
transition to the provisions of the Motor Carrier Act of 1980. Those
transitions are completed and, therefore, SFAS No. 44 is no longer
needed, and
30
- SFAS No. 13, "Accounting for Leases", is amended to require that
certain lease modifications that have economic effects similar to
sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions.
SFAS No. 145 will be effective for fiscal years beginning after May 15, 2002,
with early adoption of the provisions related to the rescission of Statement No.
4 encouraged. Upon adoption, enterprises must reclassify prior period items that
do not meet the extraordinary item classification criteria in Opinion No. 30. We
are currently assessing the impact of this statement on our results of
operations, financial position and cash flows.
Critical Accounting Policies
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our interim
condensed consolidated financial statements.
- We recognize unbilled revenues based upon minutes of use processed and
established rates, net of credits and adjustments.
- We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required
payments. We base our estimates on the aging of our accounts receivable
balances and our historical write-off experience, net of recoveries. If
the financial condition of our customers were to deteriorate, resulting
in an impairment of their ability to make payments, additional
allowances may be required.
- When recording depreciation expense associated with our telephony and
cable television distribution systems, we use estimated useful lives.
Because of changes in technology and industry conditions, we
periodically evaluate the useful lives of our telephony and cable
television distribution systems. These evaluations could result in a
change in useful lives in future periods.
- When recording amortization expense on intangible assets, we use
estimated useful lives. We periodically evaluate the useful lives of
our intangible assets. These evaluations could result in a change in
useful lives in future periods. Additionally, we periodically review
the valuation of our intangible assets. These reviews could result in
write-down of the value of intangible assets.
- We record a valuation allowance to reduce our deferred tax assets to
the amount that we believe is more likely than not to be realized.
While we have considered future taxable income and ongoing prudent and
feasible tax planning strategies in assessing the need for the
valuation allowance, in the event we were to determine that we would
not be able to realize all or part of our net deferred tax assets in
the future, an adjustment to the deferred tax assets would be charged
to income in the period such determination was made.
- We have recorded revenues in the first quarter of 2001 associated with
a cash sale of indefeasible rights to use certain amounts of our fiber
system capacity. The fiber system capacity sold was treated as integral
equipment because it is attached to real estate. Because all of the
benefits and risks of ownership were transferred to the purchaser upon
full receipt of the purchase price and other terms of the contract meet
the requirements of SFAS No. 66, "Accounting for Sales of Real Estate,"
we accounted for the fiber capacity sale as a sales-type lease. The
accounting for the sale of fiber system capacity is currently evolving
and accounting guidance may become available in the future which could
require us to change our policy. If we are required to change our
policy, it is likely the effect would be to recognize the gain from
future sales of fiber capacity, if any, over the term the capacity is
provided.
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
31
military spending. Any deterioration in these markets could have an adverse
impact on us. In fiscal 2001 Alaska's oil revenues and federal funding supplied
61% and 33%, respectively, of the state's total revenues. Investment losses
negatively affected the state's total revenues in fiscal 2001 due to the recent
decline in its stock market investments. Investment losses of approximately
$615.2 million reduced the state's total revenues to approximately $3.8 billion.
All of the federal funding is dedicated for specific purposes, leaving oil
revenues as the primary funding source of general operating expenditures. In
fiscal 2002 state economists forecast that Alaska's federal funding, oil
revenues, and investment earnings will supply 42%, 33% and 10%, respectively, of
the state's total projected revenues.
The volume of oil transported by the TransAlaska Oil Pipeline System over the
past 20 years has been as high as 2.0 million barrels per day in fiscal 1988.
Production has been declining over the last several years with an average of
0.991 million barrels produced per day in fiscal 2001. The state forecasts the
production of 1.011 million barrels per day in fiscal 2002. The state forecasts
a production rate slightly above 1.0 million barrels per day through fiscal 2009
due to future development of recent discoveries in the National Petroleum
Reserve Alaska, further development of heavy oil in both the Kuparuk and Prudhoe
Bay fields, and additional satellite field development.
Market prices for North Slope oil averaged $27.85 in fiscal 2001 and are
forecasted to average $21.50 in fiscal 2002. State economists forecast the
average price of North Slope oil to decline to $20.50 in fiscal 2003. The
closing price per barrel was $21.06 on May 6, 2002. The production policy of the
Organization of Petroleum Exporting Countries and its ability to continue to act
in concert represents a key uncertainty in the state's revenue forecast.
The State of Alaska maintains the Constitutional Budget Reserve Fund that is
intended to fund budgetary shortfalls. If the state's current projections are
realized, the Constitutional Budget Reserve Fund will be depleted in 2004. If
the fund is depleted, aggressive state action will be necessary to increase
revenues and reduce spending in order to balance the budget. The governor of the
State of Alaska and the Alaska legislature continue to pursue cost cutting and
revenue enhancing measures. In May 2002 the Alaska House of Representatives
passed an income tax and an excise tax on alcohol and allowed for the use of
Alaska Permanent Fund earnings to pay for education and the funding of
municipalities in addition to the annual payments to Alaska residents. The House
bills have moved to the Alaska Senate for consideration.
Tourism, air cargo, and service sectors have helped offset the prevailing
pattern of oil industry downsizing that has occurred during much of the last
several years. Funds from federal sources totaling $2.1 billion are expected to
be distributed to the State of Alaska for highways and other federally supported
projects in fiscal 2002.
Should new oil discoveries or developments not materialize or the price of oil
become depressed, the long term trend of continued decline in oil production
from the Prudhoe Bay field area is inevitable with a corresponding adverse
impact on the economy of the state, in general, and on demand for
telecommunications and cable television services, and, therefore, on us, in
particular. In the past year, there has been a renewed effort to allow
exploration and development in the Arctic National Wildlife Refuge ("ANWR"). The
U.S. Department of Energy estimates it could take seven to twelve years after
approval of ANWR exploration for the first production.
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 Phillips Petroleum, Alaska's large natural gas
owners, believe either natural gas pipeline makes financial sense based upon
their
32
preliminary analysis, though Phillips Petroleum says it will move forward with
permitting of the project if certain federal income tax incentives are included.
The governor of the State of Alaska and certain natural gas transportation
companies continue to support a natural gas pipeline from Alaska's North Slope
by trying to reduce the project's costs and by advocating for federal tax
incentives to further reduce the project's costs. In April 2002 the U.S. Senate
passed an energy bill mandating the following:
- A North Slope natural gas pipeline will follow the Alaska Highway
route,
- Gas producers will be allowed to take a credit on their federal income
taxes if prices fall,
- Alaskans along the pipeline route will have access to the gas, and
- Future gas discoveries will be allowed to move through the pipeline.
We have, since our entry into the telecommunication marketplace, aggressively
marketed our services to seek a larger share of the available market. The
customer base in Alaska is limited, however, with a population of approximately
627,000 people. The State of Alaska's population is distributed as follows:
- 42% are located in the Municipality of Anchorage,
- 13% are located in the Fairbanks North Star Borough, and
- 5% are located in the City and Borough of Juneau.
The remaining population is spread out over the vast reaches of Alaska. No
assurance can be given that the driving forces in the Alaska economy, and in
particular, oil production, will continue at appropriate levels to provide an
environment for expanded economic activity.
No assurance can be given that oil companies doing business in Alaska will be
successful in discovering new fields or further developing existing fields which
are economic to develop and produce oil with access to the pipeline or other
means of transport to market, even with a reduced level of royalties. We are not
able to predict the effect of changes in the price and production volumes of
North Slope oil on Alaska's economy or on us.
Seasonality
Long-distance revenues have historically been highest in the summer months
because of temporary population increases attributable to tourism and increased
seasonal economic activity such as construction, commercial fishing, and oil and
gas activities. Cable television revenues, on the other hand, are higher in the
winter months because consumers spend more time at home and tend to watch more
television during these months. Local access and Internet services are not
expected to exhibit significant seasonality. Our ability to implement
construction projects is also hampered during the winter months because of cold
temperatures, snow and short daylight hours.
PART I.
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
We are exposed to various types of market risk in the normal course of business,
including the impact of interest rate changes. We do not hold derivatives for
trading purposes.
Our Senior Holdings Loan agreement carries interest rate risk. Amounts borrowed
under this agreement bear interest at either Libor plus 1.0% to 2.5%, depending
on the leverage ratio of Holdings and certain of its subsidiaries, or at the
greater of the prime rate or the federal funds effective rate (as defined) plus
0.05%, in each case plus an additional 0.0% to 1.375%, depending on the leverage
ratio of Holdings and certain of its subsidiaries. Should the Libor rate, the
lenders' base rate or the leverage ratios change, our interest expense will
increase or decrease accordingly. As of March 31, 2002, we have borrowed $120.7
million subject to
33
interest rate risk. On this amount, a 1% increase in the interest rate would
cost us $1,207,000 in additional gross interest cost on an annualized basis.
On January 3, 2001 we entered into an interest rate swap agreement to convert
$50 million in 9.75% fixed rate debt to a variable interest rate equal to the 90
day Libor rate plus 334 basis points. The swap agreement carries interest rate
risk. Should the Libor rate change, our interest expense will increase or
decrease accordingly. A 1% change in the variable interest rate will change the
annualized benefit of the swap by $500,000. As of March 31, 2002, the interest
rate spread between the fixed and swapped variable rate is 4.55%, an annualized
reduction in interest expense of approximately $2,275,000.
On September 21, 2001, we entered into an interest rate swap agreement to
convert $25 million of variable interest rate debt to 3.98% fixed rate debt plus
applicable margin. The swap agreement carries interest rate risk. Should the
Libor rate change, our interest expense will increase or decrease accordingly. A
1% change in the variable interest rate will change the annualized benefit of
the swap by $250,000.
Our Fiber Facility carries interest rate risk. Amounts borrowed under this
Agreement bear interest at either Libor plus 2.5%-2.75%, or at our choice, the
lender's prime rate plus 1.25%-1.5%. Should the Libor rate, the lenders' base
rate or the leverage ratios change, our interest expense will increase or
decrease accordingly. As of March 31, 2002, we have borrowed $60.0 million
subject to interest rate risk. On this amount, a 1% increase in the interest
rate would cost us $600,000 in additional gross interest cost on an annualized
basis.
Our Satellite Transponder Capital Lease carries interest rate risk. Amounts
borrowed under this Agreement bear interest at Libor plus 3.25%. Should the
Libor rate change, our interest expense will increase or decrease accordingly.
As of March 31, 2002, we have borrowed $46.2 million subject to interest rate
risk. On this amount, a 1% increase in the interest rate would cost us $462,000
in additional gross interest cost on an annualized basis.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information regarding pending legal proceedings to which we are a party is
included in note 6 to the Interim Condensed Consolidated Financial Statements
and is incorporated herein by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - None
(b) Reports on Form 8-K filed during the quarter ended
March 31, 2002 - None
34
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/ President and Director May 10, 2002
- -------------------------------------- (Principal Executive Officer) -----------------------
Ronald A. Duncan
/s/ Senior Vice President, Chief Financial May 10, 2002
- -------------------------------------- Officer, Secretary and Treasurer -----------------------
John M. Lowber (Principal Financial Officer)
/s/ Vice President, Chief Accounting May 10, 2002
- -------------------------------------- Officer -----------------------
Alfred J. Walker (Principal Accounting Officer)
35