As filed with the Securities and Exchange Commission on August 9, 2005
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 June 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-15279
GENERAL COMMUNICATION, INC.
(Exact name of registrant as specified in its charter)
STATE OF ALASKA 92-0072737
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2550 Denali Street
Suite 1000
Anchorage, Alaska 99503
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (907) 868-5600
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (l) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No .
The number of shares outstanding of the registrant's classes of common
stock as of July 28, 2005 was:
51,148,641 shares of Class A common stock; and
3,846,824 shares of Class B common stock.
1
GENERAL COMMUNICATION, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2005
TABLE OF CONTENTS
Page No.
--------
Cautionary Statement Regarding Forward-Looking Statements.................................................3
PART I. FINANCIAL INFORMATION
Item l. Consolidated Balance Sheets as of June 30, 2005
(unaudited) and December 31, 2004..................................................6
Consolidated Statements of Income for the
three and six months ended June 30, 2005 (unaudited)
and 2004 (unaudited)...............................................................8
Consolidated Statements of Stockholders' Equity
for the six months ended June 30, 2005
(unaudited) and 2004 (unaudited)...................................................9
Consolidated Statements of Cash Flows for the six
months ended June 30, 2005 (unaudited)
and 2004 (unaudited)...............................................................11
Notes to Interim Condensed Consolidated Financial
Statements (unaudited).............................................................12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................................26
Item 3. Quantitative and Qualitative Disclosures About
Market Risk...........................................................................57
Item 4. Controls and Procedures...............................................................57
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.....................................................................58
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds...........................59
Item 4. Submission of Matters to a Vote of Security Holders...................................60
Item 5. Other Information.....................................................................60
Item 6. Exhibits..............................................................................61
Other items are omitted, as they are not applicable.
SIGNATURES................................................................................................62
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.
o Local and general market conditions and obstacles, including possible
material adverse changes in the economic conditions in the markets we
serve and in general economic conditions; the continuing impact of the
current stagnant communications industry due to high levels of
competition in the long-distance market resulting in continuing
pressures to reduce prices; and an oversupply of long-haul capacity and
high debt loads;
o The efficacy of laws enacted by Congress and the State of Alaska
legislature; rules and regulations to be adopted by the Federal
Communications Commission ("FCC") and state public regulatory agencies
to implement the provisions of the 1996 Telecom Act; the outcome of
litigation relative thereto; and the impact of regulatory changes
relating to access reform;
o The outcome of our negotiations with Incumbent Local Exchange Carriers
("ILECs") and state regulatory arbitrations and approvals with respect
to interconnection agreements;
o Changes in, or failure, or inability, to comply with, government
regulations, including, without limitation, regulations of the FCC, the
Regulatory Commission of Alaska ("RCA"), and adverse outcomes from
regulatory proceedings;
o Changes in regulations governing Unbundled Network Elements ("UNEs");
o Changes in the treatment or classification of services using a
particular technology, including Internet protocol;
o Our responses to competitive products, services and pricing, including
pricing pressures, technological developments, alternative routing
developments, and the ability to offer combined service packages that
include long-distance, local, cable, Internet, and cellular telephone
services;
o The extent and pace at which different competitive environments develop
for each segment of our business;
3
o The extent and duration for which competitors from each segment of the
communications industries are able to offer combined or full service
packages prior to our being able to do so;
o Competitor responses to our products and services and overall market
acceptance of such products and services;
o Our ability to purchase network elements or wholesale services from
ILECs at a price sufficient to permit the profitable offering of local
telephone service at competitive rates;
o Success and market acceptance for new initiatives, some of which are
untested;
o The level and timing of the growth and profitability of existing and new
initiatives, particularly local telephone services expansion including
deploying digital local telephone service and wireless services;
o Start-up costs associated with entering new markets, including
advertising and promotional efforts;
o Risks relating to the operations of new systems and technologies and
applications to support new initiatives;
o The risks associated with technological requirements, technology
substitution and changes and other technological developments;
o Prolonged service interruptions which could affect our business;
o Development and financing of communications, local telephone, wireless,
Internet and cable networks and services;
o Future financial performance, including the availability, terms and
deployment of capital; the impact of regulatory and competitive
developments on capital outlays, and the ability to achieve cost savings
and realize productivity improvements and the consequences of increased
leverage;
o Availability of qualified personnel;
o Uncertainties in federal military spending levels in markets in which we
operate;
o Uncertainties surrounding the 2005 base realignment and closure program
and proposed military base closures in markets in which we operate;
o The effect on us of industry consolidation including the potential
acquisition of one or more of our large wholesale customers by a company
with commercial relationships with other providers and the ongoing
global and domestic trend towards consolidation in the communications
industry, which may result in our competitors being larger and better
financed with extensive resources and greater geographic reach, allowing
them to compete more effectively;
o The effect on us of pricing pressures, new program offerings and
continuing market consolidation in the markets served by our major
customer, MCI, Inc. ("MCI") and our other common carrier customers; and
o Other risks detailed from time to time in our periodic reports filed
with the SEC.
You should not place undue reliance on any such forward-looking statements.
Further, any forward-looking statement, and such risks, uncertainties and other
factors speak only as of the date on which they were originally made and we
expressly disclaim any obligation or undertaking to disseminate any updates or
revisions to any forward-looking statement to reflect any change in our
expectations with regard to those statements or any other change in events,
conditions or circumstances on which any such statement is based, except as
required by law. New factors emerge from time to time, and it is not possible
for us to predict what factors will arise or when. In addition, we cannot assess
the impact of each factor on our business or the extent to which
4
any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements.
5
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands) (Unaudited)
June 30, December 31,
ASSETS 2005 2004
- -------------------------------------------------------------------------------------------- ----------------- ----------------
Current assets:
Cash and cash equivalents $ 17,625 31,452
----------------- ----------------
Receivables 75,723 74,429
Less allowance for doubtful receivables 2,489 2,317
----------------- ----------------
Net receivables 73,234 72,112
Deferred income taxes, net 14,279 13,893
Prepaid expenses 7,211 7,907
Property held for sale 3,414 2,282
Inventories 1,499 1,215
Notes receivable from related parties 399 475
Other current assets 1,297 2,429
----------------- ----------------
Total current assets 118,958 131,765
----------------- ----------------
Property and equipment in service, net of depreciation 428,425 432,249
Construction in progress 36,972 22,505
----------------- ----------------
Net property and equipment 465,397 454,754
----------------- ----------------
Cable certificates 191,241 191,241
Goodwill 41,972 41,972
Other intangible assets, net of amortization of $2,230 and $1,625 at June 30, 2005 and
December 31, 2004, respectively 6,496 6,265
Deferred loan and senior notes costs, net of amortization of $3,532 and $2,602 at June 30,
2005 and December 31, 2004, respectively 9,497 10,341
Notes receivable from related parties 3,395 3,345
Other assets 12,010 9,508
----------------- ----------------
Total other assets 264,611 262,672
----------------- ----------------
Total assets $ 848,966 849,191
================= ================
See accompanying notes to interim condensed consolidated financial statements.
6 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
(Amounts in thousands) (Unaudited)
LIABILITIES, REDEEMABLE PREFERRED STOCK, AND June 30, December 31,
STOCKHOLDERS' EQUITY 2005 2004
- -------------------------------------------------------------------------------------------- ----------------- ----------------
Current liabilities:
Current maturities of obligations under long-term debt and capital leases $ 22,467 6,407
Accounts payable 28,305 28,742
Accrued payroll and payroll related obligations 15,896 15,350
Deferred revenue 15,147 16,253
Accrued interest 8,724 8,747
Accrued liabilities 5,787 6,849
Subscriber deposits 389 437
----------------- ----------------
Total current liabilities 96,715 82,785
Long-term debt 421,352 436,969
Obligations under capital leases, excluding current maturities 29,664 32,750
Obligation under capital lease due to related party, excluding current maturity 652 672
Deferred income taxes, net of deferred income tax benefit 56,906 49,111
Other liabilities 9,541 8,385
----------------- ----------------
Total liabilities 614,830 610,672
----------------- ----------------
Redeemable preferred stock --- 4,249
----------------- ----------------
Stockholders' equity:
Common stock (no par):
Class A. Authorized 100,000 shares; issued 51,028 and 51,825 shares at June 30, 2005
and December 31, 2004, respectively 178,814 186,883
Class B. Authorized 10,000 shares; issued 3,850 and 3,862 shares at June 30,
2005 and December 31, 2004, respectively; convertible on a share-per-share
basis into Class A common stock 3,248 3,248
Less cost of 295 and 288 Class A common shares held in treasury at June 30,
2005 and December 31, 2004, respectively (1,732) (1,702)
Paid-in capital 15,157 14,957
Notes receivable with related parties issued upon stock option exercise (2,978) (3,016)
Retained earnings 41,627 33,900
----------------- ----------------
Total stockholders' equity 234,136 234,270
----------------- ----------------
Commitments and contingencies
Total liabilities, redeemable preferred stock, and stockholders' equity $ 848,966 849,191
================= ================
See accompanying notes to interim condensed consolidated financial statements.
7
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
(Amounts in thousands, except per share amounts) 2005 2004 2005 2004
----------- ------------ ----------- ------------
Revenues $ 110,665 103,786 217,175 212,702
Cost of goods sold (exclusive of depreciation, amortization and
accretion shown separately below) 36,045 33,257 71,245 72,002
Selling, general and administrative expenses 38,019 36,102 75,199 71,506
Bad debt expense (recovery) 194 (487) (159) (884)
Depreciation, amortization and accretion expense 18,397 15,704 36,151 31,462
----------- ------------ ----------- ------------
Operating income 18,010 19,210 34,739 38,616
----------- ------------ ----------- ------------
Other income (expense):
Interest expense (8,354) (6,036) (16,636) (13,553)
Loss on early extinguishment of debt --- --- --- (6,136)
Amortization and write-off of loan and senior notes fees (448) (387) (931) (3,014)
Interest income 112 79 291 187
----------- ------------ ----------- ------------
Other expense, net (8,690) (6,344) (17,276) (22,516)
----------- ------------ ----------- ------------
Net income before income taxes 9,320 12,866 17,463 16,100
Income tax expense 4,036 5,141 7,516 6,450
----------- ------------ ----------- ------------
Net income 5,284 7,725 9,947 9,650
Preferred stock dividends 55 363 148 847
----------- ------------ ----------- ------------
Net income available to common shareholders $ 5,229 7,362 9,799 8,803
=========== ============ =========== ============
Basic net income per common share $ 0.10 0.13 0.18 0.15
=========== ============ =========== ============
Diluted net income per common share $ 0.09 0.13 0.18 0.15
=========== ============ =========== ============
See accompanying notes to interim condensed consolidated financial statements.
8
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(Unaudited)
Notes
Class A Receivable Accumulated
Class A Class B Shares Issued to Other
Common Common Held in Paid-in Related Retained Comprehensive
(Amounts in thousands) Stock Stock Treasury Capital Parties Earnings Loss Total
----------------------------------------------------------------------------------------
Balances at December 31, 2003 $ 202,362 3,269 (1,917) 12,836 (4,971) 15,371 (308) 226,642
Components of comprehensive income:
Net income --- --- --- --- --- 9,650 --- 9,650
Change in fair value of cash flow
hedge, net of change in income tax
liability of $83 --- --- --- --- --- --- 214 214
-------
Comprehensive income 9,864
Tax effect of excess stock compensation
expense for tax purposes over amounts
recognized for financial reporting
purposes --- --- --- 471 --- --- --- 471
Shares issued under stock option plan 1,794 --- --- --- --- --- --- 1,794
Amortization of the excess of GCI stock
market value over stock option exercise
cost on date of stock option grant --- --- --- 152 --- --- --- 152
Class B shares converted to Class A 2 (2) --- --- --- --- --- ---
Conversion of Series B preferred stock to
Class A common stock 3,092 --- --- --- --- --- --- 3,092
Payments received on notes receivable
issued to related parties upon stock
option exercise --- --- --- --- 620 --- --- 620
Purchase of treasury stock --- --- (20) --- --- --- --- (20)
Preferred stock dividends --- --- --- --- --- (847) --- (847)
----------------------------------------------------------------------------------------
Balances at June 30, 2004 $ 207,250 3,267 (1,937) 13,459 (4,351) 24,174 (94) 241,768
========================================================================================
See accompanying notes to interim condensed consolidated financial statements.
9 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(Unaudited)
(Continued)
Notes
Class A Receivable
Class A Class B Shares Issued to
Common Common Held in Paid-in Related Retained
(Amounts in thousands) Stock Stock Treasury Capital Parties Earnings Total
---------------------------------------------------------------------------
Balances at December 31, 2004 $ 186,883 3,248 (1,702) 14,957 (3,016) 33,900 234,270
Components of comprehensive income:
Net income --- --- --- --- --- 9,947 9,947
Tax effect of excess stock compensation
expense for tax purposes over amounts
recognized for financial reporting
purposes --- --- --- 104 --- --- 104
Common stock repurchases --- --- --- --- --- (8,252) (8,252)
Common stock retirements (8,538) --- --- --- --- 8,538 ---
Shares issued under stock option plan 469 --- --- --- --- --- 469
Redemption of Series B redeemable
preferred stock --- --- --- --- --- (2,358) (2,358)
Amortization of the excess of GCI stock
market value over stock option exercise
cost on date of stock option grant --- --- --- 96 --- --- 96
Purchase of treasury stock --- --- (30) --- --- --- (30)
Payment received on note receivable
issued to related party upon stock
option exercise --- --- --- --- 38 --- 38
Preferred stock dividends --- --- --- --- --- (148) (148)
---------------------------------------------------------------------------
Balances at June 30, 2005 $ 178,814 3,248 (1,732) 15,157 (2,978) 41,627 234,136
===========================================================================
See accompanying notes to interim condensed consolidated financial statements.
10
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(Unaudited)
(Amounts in thousands) 2005 2004
-------------- -------------
Cash flows from operating activities:
Net income $ 9,947 9,650
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation, amortization and accretion expense 36,151 31,462
Deferred income tax expense 7,516 6,420
Amortization and write-off of loan and senior notes fees 931 3,014
Loss on disposal of property and equipment 459 180
Deferred compensation 449 332
Bad debt expense, net of write-offs 172 80
Compensatory stock options 96 152
Loss on early extinguishment of debt --- 6,136
Other noncash income and expense items 499 158
Change in operating assets and liabilities (2,867) (14,639)
-------------- -------------
Net cash provided by operating activities 53,353 42,945
-------------- -------------
Cash flows from investing activities:
Purchases of property and equipment, including construction period interest (47,690) (64,147)
Purchases of other assets and intangible assets (2,021) (1,032)
Proceeds from sales of assets 445 859
Additions to property held for sale (191) (158)
Notes receivable issued to related parties (13) (27)
Refund of deposit --- 699
Payments received on notes receivable from related parties --- 786
-------------- -------------
Net cash used in investing activities (49,470) (63,020)
-------------- -------------
Cash flows from financing activities:
Purchase of common stock to be retired (8,048) ---
Redemption of Series B redeemable preferred stock (6,607) ---
Repayments of capital lease obligations (3,171) (1,967)
Proceeds from common stock issuance 469 1,794
Payment of preferred stock dividends (237) (891)
Payment of debt issuance costs (86) (6,607)
Purchase of treasury stock (30) (20)
Issuance of new Senior Notes --- 245,720
Repayment of old Senior Notes --- (180,000)
Repayment of Senior Credit Facility --- (53,832)
Borrowing on Senior Credit Facility --- 15,000
Payment of bond call premiums --- (6,136)
Payment received on note receivable from related parties issued upon stock
option exercise --- 620
-------------- -------------
Net cash provided by (used in) financing activities (17,710) 13,681
-------------- -------------
Net decrease in cash and cash equivalents (13,827) (6,394)
Cash and cash equivalents at beginning of period 31,452 10,435
-------------- -------------
Cash and cash equivalents at end of period $ 17,625 4,041
============== =============
See accompanying notes to interim condensed consolidated financial statements.
11
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
The accompanying unaudited interim condensed consolidated financial statements
include the accounts of General Communication, Inc. ("GCI") and its subsidiaries
and have been prepared in accordance with generally accepted accounting
principles for interim financial information. Accordingly, they do not include
all of the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements. They
should be read in conjunction with our audited consolidated financial statements
for the year ended December 31, 2004, filed as part of our annual report on Form
10-K. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. The results of operations for interim periods are not necessarily
indicative of the results that may be expected for an entire year or any other
period.
(l) Business and Summary of Significant Accounting Principles
In the following discussion, GCI and its direct and indirect subsidiaries
are referred to as "we," "us" and "our."
(a) Business
GCI, an Alaska corporation, was incorporated in 1979. We offer the
following services:
o Long-distance telephone service between Alaska and the
remaining United States and foreign countries,
o Cable television services throughout Alaska,
o Facilities-based competitive local access services in
Anchorage, Fairbanks, and Juneau, Alaska,
o Internet access services,
o Origination and termination of traffic in Alaska for certain
common carriers,
o Private line and private network services,
o Managed services to certain commercial customers,
o Broadband services, including our SchoolAccess(TM) offering to
rural school districts and a similar offering to rural
hospitals and health clinics,
o Sales and service of dedicated communications systems and
related equipment,
o Lease and sales of capacity on our undersea fiber optic cable
systems 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,
o Distribution of white and yellow pages directories to
residential and business customers in certain markets we serve
and on-line directory products, and
o Resale of cellular telephone services.
(b) Principles of Consolidation
The consolidated financial statements include the consolidated
accounts of GCI and its wholly owned subsidiaries with all
significant intercompany transactions eliminated.
12 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
(c) Earnings per Common Share
Earnings per common share ("EPS") and common shares used to
calculate basic and diluted EPS consist of the following (amounts
in thousands, except per share amounts):
Three Months Ended June 30,
2005 2004
---------------------------------- ----------------------------------
Income Shares Income Shares
(Num- (Denom- Per-share (Num- (Denom- Per-share
erator) inator) Amounts erator) inator) Amounts
---------- ----------- ----------- ---------- ----------- -----------
Net income $ 5,284 $ 7,725
---------- ----------
Less preferred stock dividends:
Series B 55 213
Series C --- 150
---------- ----------
55 363
---------- ----------
Basic EPS:
Net income 5,229 54,637 $ 0.10 7,362 56,994 $ 0.13
Effect of Dilutive Securities:
Unexercised stock options --- 975 --- --- 1,109 ---
Series B redeemable preferred stock --- --- --- 213 2,277 ---
---------- ----------- ----------- ---------- ----------- -----------
Diluted EPS:
Net income $ 5,229 55,612 $ 0.09 $ 7,575 60,380 $ 0.13
========== =========== =========== ========== =========== ===========
Six Months Ended June 30,
2005 2004
---------------------------------- ----------------------------------
Income Shares Income Shares
(Num- (Denom- Per-share (Num- (Denom- Per-share
erator) inator) Amounts erator) inator) Amounts
---------- ----------- ----------- ---------- ----------- -----------
Net income $ 9,947 $ 9,650
---------- ----------
Less preferred stock dividends:
Series B 148 548
Series C --- 299
---------- ----------
148 847
---------- ----------
Basic EPS:
Net income 9,799 54,815 $ 0.18 8,803 56,873 $ 0.15
Effect of Dilutive Securities:
Unexercised stock options --- 1,104 --- --- 1,199 ---
---------- ----------- ----------- ---------- ----------- -----------
Diluted EPS:
Net income $ 9,799 55,919 $ 0.18 $ 8,803 58,072 $ 0.15
========== =========== =========== ========== =========== ===========
13 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Common equivalent shares outstanding which are anti-dilutive for
purposes of calculating EPS for the three and six months ended June
30, 2005 and 2004 are not included in the diluted EPS calculations
and consist of the following (shares, in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Series B redeemable preferred stock 470 --- 623 2,277
Series C redeemable preferred stock --- 833 --- 833
------------ ------------ ------------ ------------
Anti-dilutive common equivalent shares outstanding 470 833 623 3,110
============ ============ ============ ============
Weighted average shares associated with outstanding stock options
for the three and six months ended June 30, 2005 and 2004 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 Six Months Ended
June 30, June 30,
2005 2004 2005 2004
----------- ------------ ------------ ------------
Weighted average shares associated with outstanding
stock options 582 352 401 271
=========== ============ ============ ============
(d) Common Stock
Following are the changes in common stock for the six months ended
June 30, 2005 and 2004 (shares, in thousands):
Class A Class B
------------- ------------
Balances at December 31, 2003 52,589 3,868
Class B shares converted to Class A 2 (2)
Shares issued under stock option plan 335 ---
Conversion of Series B preferred stock to Class A
common stock 560 ---
------------- ------------
Balances at June 30, 2004 53,486 3,866
============= ============
Balances at December 31, 2004 51,825 3,862
Class B shares converted to Class A 12 (12)
Shares issued under stock option plan 83 ---
Shares retired (892) ---
------------- ------------
Balances at June 30, 2005 51,028 3,850
============= ============
14 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
At June 30, 2005 and December 31, 2004 we held 109,000 shares and
138,000 shares, respectively, of Class A common stock in treasury
with the intent to retire. We held no Class A common stock in
treasury with the intent to retire at June 30, 2004 and December
31, 2003. The cost of the repurchased Class A common stock is
included in Retained Earnings on our Consolidated Balance Sheets at
June 30, 2005 and December 31, 2004.
(e) Redeemable Preferred Stock
In May 2005 we repurchased the remaining 4,314 shares of our Series
B redeemable preferred stock for a total purchase price of $6.6
million from Toronto Dominion Investments, Inc. At June 30, 2005 we
have no issued preferred stock. At December 31, 2004 we had $4.2
million of redeemable Series B preferred stock. We have 1,000,000
shares of preferred stock authorized and had 4,314 shares of Series
B issued at December 31, 2004.
The redemption amount of our Series B preferred stock at December
31, 2004 was $4.3 million. The difference of $89,000 between the
carrying and redemption amounts was due to accrued dividends that
were included in Accrued Liabilities.
(f) Asset Retirement Obligations
Following is a reconciliation of the beginning and ending aggregate
carrying amount of our asset retirement obligations at June 30,
2005 and 2004 (amounts in thousands):
Balance at December 31, 2003 $ 2,005
Accretion expense for the six months ended June
30, 2004 97
Other (43)
-------
Balance at June 30, 2004 $ 2,059
=======
Balance at December 31, 2004 $ 2,971
Accretion expense for the six months ended June
30, 2005 99
-------
Balance at June 30, 2005 $ 3,070
=======
(g) Stock Option Plan
At June 30, 2005, we had one stock-based employee compensation
plan. We account for this plan under the recognition and
measurement principles of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. We use the intrinsic-value method and
compensation expense is recorded on the date of grant only if the
current market price of the underlying stock exceeds the exercise
price. We have adopted Statement of Financial Accounting Standard
("SFAS") No. 123, "Accounting for Stock-Based Compensation," which
permits entities to recognize as expense over the vesting period
the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to
apply the provisions of APB Opinion No. 25.
15 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
We have adopted SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure." This Statement amends SFAS
No. 123 to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, this Statement
amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results.
We have elected to continue to apply the provisions of APB Opinion
No. 25 and provide the pro forma disclosure as required by SFAS No.
148.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based
Payment," requiring all companies to measure compensation cost for
all share-based payments (including employee stock options) at fair
value. After consideration of the SEC's April 2005 amendment of the
SFAS No. 123R compliance dates, SFAS No. 123R is effective for
annual periods beginning after June 15, 2005, or December 15, 2005
for small business issuers. As of January 1, 2006, we will apply
SFAS No. 123R using a modified version of prospective application.
Under that transition method, compensation cost is recognized on or
after January 1, 2006 for the portion of outstanding awards for
which the requisite service has not yet been rendered, based on the
grant-date fair value of those awards calculated under SFAS No. 123
for either recognition or pro forma disclosures. In March 2005 the
SEC issued SAB No. 107 expressing the SEC staff's view regarding
the interaction between SFAS No. 123R and certain SEC rules and
regulations and providing the staff's views regarding the valuation
of share-based payment arrangements for public companies. We
estimate the application of SFAS No. 123R will result in an
increase in our compensation cost for all share-based payments of
approximately $2.3 million during the year ended December 31, 2006.
16 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Stock-based employee compensation cost is reflected over the
options' vesting period of generally five years and compensation
cost for options granted prior to January 1, 1996 is not
considered. The following table illustrates the effect on net
income and EPS for the three and six months ended June 30, 2005 and
2004, if we had applied the fair-value recognition provisions of
SFAS No. 123 to stock-based employee compensation (amounts in
thousands, except per share amounts):
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- ------------------------
2005 2004 2005 2004
----------- ---------- ---------- ----------
Net income, as reported $ 5,284 7,725 9,947 9,650
Total stock-based employee
compensation expense included in
reported net income, net of related
tax effects 48 44 96 89
Total stock-based employee
compensation expense under the
fair-value based method for all
awards, net of related tax effects (401) (484) (911) (1,040)
----------- ---------- ---------- ----------
Pro forma net income $ 4,931 7,285 9,132 8,699
=========== ========== ========== ==========
Basic net income per common share,
as reported $ 0.10 0.13 0.18 0.15
=========== ========== ========== ==========
Diluted net income per common share,
as reported $ 0.09 0.13 0.18 0.15
=========== ========== ========== ==========
Basic and diluted net income per
common share, pro forma $ 0.09 0.12 0.16 0.14
=========== ========== ========== ==========
The calculation of total stock-based employee compensation expense
under the fair-value based method includes weighted-average
assumptions of a risk-free interest rate, volatility and an
expected life.
17 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
(2) Consolidated Statements of Cash Flows Supplemental Disclosures
Changes in operating assets and liabilities consist of (amounts in
thousands):
Six month periods ended June 30, 2005 2004
------------ ------------
Increase in accounts receivable $ (3,130) (3,172)
Decrease in prepaid expenses 696 6,632
Increase in inventories (284) (82)
Decrease in other current assets 137 629
Decrease in accounts payable (437) (6,766)
Increase (decrease) in accrued payroll and payroll
related obligations 546 (3,229)
Decrease in deferred revenues (1,106) (6,531)
Decrease in accrued interest (23) (1,802)
Increase (decrease) in accrued liabilities 338 (26)
Decrease in subscriber deposits (48) (133)
Increase (decrease) in components of other long-term
liabilities 444 (159)
------------ ------------
$ (2,867) (14,639)
============ ============
We paid interest totaling approximately $16.7 million and $16.4 million
during the six months ended June 30, 2005 and 2004, respectively. We
capitalized interest of approximately $0 and $1.1 million during the six
months ended June 30, 2005 and 2004, respectively. Capitalized interest
is recorded as an addition to Property and Equipment.
Income tax refunds received totaled $202,000 and $0 during the six months
ended June 30, 2005 and 2004, respectively. We paid income taxes of
$100,000 and $0 during the six months ended June 30, 2005 and 2004,
respectively.
We recorded $104,000 and $471,000 during the six months ended June 30,
2005 and 2004, respectively, in paid-in capital in recognition of the
income tax effect of excess stock compensation expense for tax purposes
over amounts recognized for financial reporting purposes.
In January 2004, 3,108 shares of our Series B preferred stock were
converted to 560,000 shares of our Class A common stock at the stated
conversion price of $5.55 per share.
(3) Intangible Assets
There have been no events or circumstances that indicate the
recoverability of the carrying amounts of indefinite-lived and
definite-lived intangible assets has changed as of June 30, 2005. The
remaining useful lives of our cable certificates and goodwill were
evaluated as of June 30, 2005 and events and circumstances continue to
support an indefinite useful life. We reviewed the useful lives assigned
to our definite-lived intangible assets and believe the lives continue to
be appropriate as of June 30, 2005.
On September 29, 2004, the SEC issued SEC Staff Announcement Topic "Use
of the Residual Method to Value Acquired Assets Other than Goodwill,"
("SEC Staff Announcement") requiring us to apply no later than January 1,
2005 a direct value method to determine the fair value of our
18 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
intangible assets with indefinite lives other than goodwill for purposes
of impairment testing. We adopted the SEC Staff Announcement on December
31, 2004. Our cable certificate assets were originally valued and
recorded using the residual method. Impairment testing of our cable
certificate assets as of December 31, 2004 used a direct value method
pursuant to the SEC Staff Announcement and did not result in impairment.
Cable certificates are allocated to our cable services segment. Goodwill
of approximately $41.0 million is allocated to the cable services segment
and approximately $675,000 is allocated to the long-distance services
segment.
Amortization expense for amortizable intangible assets was as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
-------------- ----------- ------------- -----------
Amortization expense $ 313 191 605 351
============== =========== ============= ===========
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,
--------------
2005 $ 1,242
2006 1,268
2007 1,198
2008 946
2009 626
(4) MCI Settlement and Release Agreement
On July 21, 2002 MCI and substantially all of its active United States
subsidiaries filed voluntary petitions for reorganization under Chapter
11 of the United States Bankruptcy Code in the United States Bankruptcy
Court. On July 22, 2003, the United States Bankruptcy Court approved a
settlement agreement for pre-petition amounts owed to us by MCI and
affirmed all of our existing contracts with MCI. MCI emerged from
bankruptcy protection on April 20, 2004. The remaining pre-petition
accounts receivable balance owed by MCI to us after this settlement was
$11.1 million ("MCI credit") which we have used and will continue to use
as a credit against amounts payable for services purchased from MCI.
19 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
After settlement, we began reducing the MCI credit as we utilized it for
services otherwise payable to MCI. Uncertainties exist with respect to
the potential realization and the timing of our utilization of the MCI
credit. We have accounted for our use of the MCI credit as a gain
contingency and, accordingly, will recognize a reduction of bad debt
expense as services are provided by MCI and the credit is realized. The
use of the credit is recorded as a reduction of bad debt expense. We have
realized the following amounts of the MCI credit against amounts payable
for services received from MCI (amounts in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
-------------- ----------- ------------- -----------
MCI credit realized $ 996 1,109 1,889 2,296
============== =========== ============= ===========
The remaining unused MCI credit totaled $1.8 million and $3.7 million at
June 30, 2005 and December 31, 2004, respectively. The credit balance is
not recorded on the Consolidated Balance Sheet as we are recognizing
recovery of bad debt expense as the credit is realized.
(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.
As of January 1, 2005 financial information for our SchoolAccess(TM)
offering to rural school districts and a similar offering to rural
hospitals and health clinics ("Broadband services") is not included in
the long-distance services segment but is included in the "All Other"
category. Additionally, Property and Equipment originally included in the
Internet services segment were determined to be Broadband services
Property and Equipment and were reclassified to the "All Other" category.
Segment and All Other category data for the six months ended June 30,
2004 have been restated to reflect the changes.
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.
Cable services. We provide cable television services to residential,
commercial and government users in the state of Alaska. Our cable
systems serve 36 communities and areas in Alaska, including the
state's four largest urban areas, Anchorage, Fairbanks, the
Matanuska-Susitna Valley, and Juneau. We offer digital cable
television services in Anchorage, Cordova, Fairbanks, Homer, Juneau,
Kenai, Ketchikan, Kodiak, the Matanuska-Susitna Valley, Nome, Seward,
Soldotna, and Valdez and retail cable modem service (through our
Internet services segment) in all of our locations in Alaska except
Barrow and Kotzebue.
20 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Local access services. We offer facilities based competitive local
exchange services in Anchorage, Fairbanks and Juneau and plan to
provide similar competitive local exchange services in other locations
pending regulatory approval and subject to availability of capital.
Revenue, cost of goods sold and operating expenses for our phone
directories are included in the local access services segment.
Internet services. We offer wholesale and retail Internet services to
both consumer and commercial customers. We offer cable modem service
as further described in Cable services above. Our undersea fiber optic
cable systems allow us to offer enhanced services with high-bandwidth
requirements.
Included in the "All Other" category in the tables that follow are our
Broadband services, managed services, product sales and cellular
telephone services. None of these business units has ever met the
quantitative thresholds for determining reportable segments. Also
included in the All Other category are corporate related expenses
including information technology, accounting, legal and regulatory, human
resources, and other general and administrative expenses.
We evaluate performance and allocate resources based on (1) earnings or
loss from operations before depreciation, amortization and accretion
expense, net other expense and income taxes, and (2) operating income or
loss. The accounting policies of the reportable segments are the same as
those described in the summary of significant accounting policies in note
1 in the "Notes to Consolidated Financial Statements" included in Part II
of our December 31, 2004 annual report on Form 10-K. Intersegment sales
are recorded at cost plus an agreed upon intercompany profit.
We earn all revenues through sales of services and products within the
United States. All of our long-lived assets are located within the United
States of America, except approximately 82% of our undersea fiber optic
cable systems which transit international waters.
21 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Summarized financial information for our reportable segments for the six
months ended June 30, 2005 and 2004 follows (amounts in thousands):
Reportable Segments
---------------------------------------------------------
Long- Local Total
Distance Cable Access Internet Reportable All
Services Services Services Services Segments Other Total
-------------------------------------------------------------------------------
2005
----
Revenues:
Intersegment $ 8,186 1,805 4,302 531 14,824 672 15,496
External 92,289 52,243 25,996 14,720 185,248 31,927 217,175
-------------------------------------------------------------------------------
Total revenues $ 100,475 54,048 30,298 15,251 200,072 32,599 232,671
===============================================================================
Earnings (loss) from
operations before
depreciation,
amortization, accretion,
net interest expense and
income taxes $ 52,377 22,597 1,496 6,025 82,495 (11,605) 70,890
===============================================================================
Operating income (loss) $ 39,446 12,375 (1,785) 4,206 54,242 (19,503) 34,739
===============================================================================
2004
----
Revenues:
Intersegment $ 6,888 1,232 4,550 1,696 14,366 372 14,738
External 89,720 50,033 23,010 12,923 175,686 37,016 212,702
-------------------------------------------------------------------------------
Total revenues $ 96,608 51,265 27,560 14,619 190,052 37,388 227,440
===============================================================================
Earnings (loss) from
operations before
depreciation,
amortization, accretion,
net interest expense and
income taxes $ 50,518 22,551 641 4,057 77,767 (7,689) 70,078
===============================================================================
Operating income (loss) $ 38,502 13,181 (1,322) 2,520 52,881 (14,265) 38,616
===============================================================================
A reconciliation of reportable segment revenues to consolidated revenues
follows (amounts in thousands):
Six months ended June 30, 2005 2004
--------------- ---------------
Reportable segment revenues $ 200,072 190,052
Plus All Other revenues 32,599 37,388
Less intersegment revenues eliminated in consolidation 15,496 14,738
--------------- ---------------
Consolidated revenues $ 217,175 212,702
=============== ===============
22 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
A reconciliation of reportable segment earnings from operations before
depreciation, amortization and accretion expense, net other expense and
income taxes to consolidated net income before income taxes follows
(amounts in thousands):
Six months ended June 30, 2005 2004
-------------- ----------------
Reportable segment earnings from operations before
depreciation, amortization and accretion expense, net other
expense and income taxes $ 82,495 77,767
Less All Other loss from operations before depreciation,
amortization and accretion expense, net other expense and
income taxes 11,605 7,689
-------------- ----------------
Consolidated earnings from operations before
depreciation, amortization and accretion expense, net
other expense and income taxes 70,890 70,078
Less depreciation, amortization and accretion expense 36,151 31,462
-------------- ----------------
Consolidated operating income 34,739 38,616
Less other expense, net 17,276 22,516
-------------- ----------------
Consolidated net income before income taxes $ 17,463 16,100
============== ================
A reconciliation of reportable segment operating income to consolidated
net income before income taxes follows (amounts in thousands):
Six months ended June 30, 2005 2004
--------------- ---------------
Reportable segment operating income $ 54,242 52,881
Less All Other operating loss 19,503 14,265
--------------- ---------------
Consolidated operating income 34,739 38,616
Less other expense, net 17,276 22,516
--------------- ---------------
Consolidated net income before income taxes $ 17,463 16,100
=============== ===============
(6) Commitments and Contingencies
Litigation, Disputes, and Regulatory Matters
We filed a lawsuit on July 27, 2004 in federal district court against
AT&T Corp. ("AT&T") claiming that AT&T has discriminated and continues to
discriminate against us by refusing to provide wholesale transport
services to us on the same terms and conditions that AT&T makes available
to other carriers. On November 30, 2004, AT&T filed a motion for referral
of this matter to the Commission under the doctrine of primary
jurisdiction. On February 24, 2005, the Court granted AT&T's motion and
dismissed our complaint without prejudice. We filed an Amended Formal
Complaint against AT&T and its subsidiary AT&T Alascom with the FCC on
July 6, 2005, seeking both injunctive relief and damages to remedy the
discrimination. We are unable to predict the outcome of our lawsuit with
certainty at this time.
23 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
On June 25, 2004 the RCA issued an order in our arbitration with Alaska
Communications Systems Group, Inc. ("ACS") to revise the rates, terms,
and conditions that govern access to UNEs in the Anchorage market. The
RCA's ruling set rates for numerous elements of ACS' network, the most
significant being the lease rate for local loops. The order initially
increased the loop rate from $14.92 to $19.15 per loop per month. We
immediately filed a petition for reconsideration with the RCA to correct
computational errors and raise other issues. On August 20, 2004, the RCA
ruled on the petition and retroactively lowered the loop rate to $18.64
per month. The Commission issued a final order approving an
interconnection agreement on December 7, 2004. In January 2005 we
appealed the RCA ruling to the Federal District Court in Anchorage,
Alaska arguing that the pricing and methodology used by ACS and approved
by the RCA was flawed and in violation of federal law. We are unable to
predict the outcome of our lawsuit with certainty at this time.
On May 15, 2003, AT&T filed a petition with the FCC requesting a
declaratory ruling that intrastate access charges do not apply to certain
of its calling card offerings. When AT&T Alascom, a subsidiary of AT&T,
characterized calling card calls that originate and terminate in Alaska
as interstate, they shifted certain intrastate access charges payable to
Alaska local exchange carriers to us. In a proceeding before the RCA, the
RCA had already declared this AT&T Alascom practice to be improper. After
AT&T petitioned the FCC, the RCA stayed AT&T Alascom's obligations to
make back payments for the period prior to April 2004, but ordered AT&T
Alascom to pay on an ongoing basis from April 1, 2004. On February 23,
2005, the FCC also ruled against AT&T, consistent with the RCA's prior
findings. By orders dated April 22, 2005 and June 8, 2005, the RCA ruled
that AT&T Alascom is required to make back payments of all
jurisdictionally shifted access minutes. The RCA accepted a stipulation
between the parties to attempt to mediate the amount of access payments
owed. If mediation fails, the RCA will establish a schedule for formal
proceedings to determine the amount owed by AT&T Alascom. We have not
completed our calculations of the amounts due to us and cannot predict at
this time with certainty the ultimate amount to be refunded pursuant to
this gain contingency, however it could be material to our results of
operations, financial position and cash flows.
We are involved in various other lawsuits, billing disputes, legal
proceedings, and regulatory matters that have arisen from time to time 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 liquidity.
Telecommunication Services Agreements
We lease a portion of our 800-mile fiber optic system capacity that
extends from Prudhoe Bay to Valdez via Fairbanks, and provide management
and maintenance services for this capacity to a significant customer. The
telecommunications service agreement is for fifteen years and may be
extended for up to two successive three-year periods and, upon expiration
of the extensions, one additional year. The agreement may be canceled by
either party with 180 days written notice. On March 24, 2005, the lessee
announced that they had signed a contract with a competitor to build a
microwave system to run parallel with our fiber optic cable system. The
lessee also announced their intention to utilize the microwave system in
addition to our fiber optic cable system. The lessee has not notified us
in writing of their intent to change or cancel our agreement. We are
24 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
unable to predict the financial impact of this event on our results of
operations, financial position and cash flows.
A summary of minimum future service revenues from this agreement, follows
(amounts in thousands):
Years ending December 31,
2005 $ 13,200
2006 13,200
2007 13,200
2008 13,200
2009 13,200
2010 and thereafter 85,276
-----------
Total minimum future service revenues $ 151,276
===========
25
PART I.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
In the following discussion, General Communication, Inc. and its direct and
indirect subsidiaries are referred to as "we," "us" and "our."
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and assumptions that affect the reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. On an on-going basis, we evaluate our
estimates and judgments, including those related to unbilled revenues, Cost of
Goods Sold (exclusive of depreciation, amortization and accretion shown
separately) ("Cost of Goods Sold") accruals, allowance for doubtful accounts,
depreciation, amortization and accretion periods, intangible assets, income
taxes, and contingencies and litigation. We base our estimates and judgments on
historical experience and on various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. See also our "Cautionary
Statement Regarding Forward-Looking Statements."
General Overview
Through our focus on long-term results, acquisitions, and strategic capital
investments, we strive to consistently grow our revenues and expand our margins.
We have historically met our cash needs for operations, regular capital
expenditures and maintenance capital expenditures through our cash flows from
operating activities. Historically, cash requirements for significant
acquisitions and major capital expenditures have been provided largely through
our financing activities.
As of January 1, 2005 financial information for Broadband services is not
included in the long-distance services segment but is included in the "All
Other" category. Segment and All Other category data for the three and six
months ended June 30, 2004 have been restated to reflect the change.
26
Results of Operations
The following table sets forth selected Statements of Income data as a
percentage of total revenues for the periods indicated (underlying data rounded
to the nearest thousands):
Percentage Percentage
Change (1) Change (1)
Three Months Ended 2005 Six Months Ended 2005
June 30, vs. June 30, vs.
(Unaudited) 2005 2004 2004 2005 2004 2004
---- ---- ---- ---- ---- ----
Statements of Income Data:
Revenues:
Long-distance services segment 43.0% 43.5% 5.2% 42.5% 42.2% 2.9%
Cable services segment 23.8% 24.3% 4.6% 24.0% 23.5% 4.4%
Local access services segment 11.5% 10.8% 13.2% 12.0% 10.8% 13.0%
Internet services segment 6.7% 6.3% 13.7% 6.8% 6.1% 13.9%
All other 15.0% 15.1% 6.3% 14.7% 17.4% (13.7%)
-------------------------------------------------------------------------------
Total revenues 100.0% 100.0% 6.6% 100.0% 100.0% 2.1%
Selling, general and administrative
expenses 34.4% 34.8% 5.3% 34.6% 33.6% 5.2%
Bad debt expense (recovery) 0.2% (0.5%) 139.8% (0.1%) (0.4%) (82.0%)
Depreciation, amortization and
accretion expense 16.6% 15.1% 17.2% 16.6% 14.8% 14.9%
Operating income 16.3% 18.5% (6.2%) 16.0% 18.2% (10.0%)
Net income before income taxes 8.4% 12.4% (27.6%) 8.0% 7.6% 8.5%
Net income 4.8% 7.4% (31.6%) 4.6% 4.5% 3.1%
27
Percentage Percentage
Change (1) Change (1)
Three Months Ended 2005 Six Months Ended 2005
June 30, vs. June 30, vs.
(Unaudited) 2005 2004 2004 2005 2004 2004
---- ---- ---- ---- ---- ----
Other Operating Data:
Long-distance services segment
operating income (2) 45.1% 43.7% 8.5% 42.7% 42.9% 2.5%
Cable services segment operating
income (3) 22.3% 27.1% (14.0%) 23.7% 26.3% (6.1%)
Local access services segment
operating loss (4) (10.1%) (8.4%) (35.7%) (6.9%) (5.7%) (35.0%)
Internet services segment operating
income (5) 29.3% 22.1% 50.7% 28.6% 19.5% 67.0%
<FN>
--------------------------
1 Percentage change in underlying data.
2 Computed by dividing total external long-distance services segment
operating income by total external long-distance services segment revenues.
3 Computed by dividing total external cable services segment operating income
by total external cable services segment revenues.
4 Computed by dividing total external local access services segment operating
loss by total external local access services segment revenues.
5 Computed by dividing total external Internet services segment operating
income by total external Internet services segment revenues.
--------------------------
</FN>
Three Months Ended June 30, 2005 ("2005") Compared To Three Months Ended June
30, 2004 ("2004")
Overview of Revenues and Cost of Goods Sold
Total revenues increased 6.6% from $103.8 million in 2004 to $110.7 million in
2005. Revenue increased in each of our segments and All Other Services. See the
discussion below for more information by segment and for All Other Services.
Total Cost of Goods Sold increased 8.4% from $33.3 million in 2004 to $36.0
million in 2005. Increases in cable services, local access services and Internet
services segments and All Other Services Cost of Goods Sold were partially
off-set by decreased long-distance services segment Cost of Goods Sold. See the
discussion below for more information by segment and for All Other Services.
Long-Distance Services Segment Overview
Long-distance services segment revenue in 2005 represented 43.0% of consolidated
revenues. Our provision of interstate and intrastate long-distance services, and
private line and leased dedicated capacity services accounted for 90.5% of our
total long-distance services segment revenues during 2005.
28
Factors that have the greatest impact on year-to-year changes in long-distance
services segment revenues include the rate per minute charged to customers,
usage volumes expressed as minutes of use, and the number of private lines and
private networks in use.
Due in large part to the favorable synergistic effects of our bundling strategy,
the long-distance services segment continues to be a significant contributor to
our overall performance, although the migration of traffic from voice to data
and from fixed to mobile wireless continues.
Our long-distance services segment faces significant competition from AT&T
Alascom, long-distance resellers, and local telephone companies that have
entered the long-distance market. We believe our approach to developing,
pricing, and providing long-distance services and bundling different business
segment services will continue to allow us to be competitive in providing those
services.
On July 21, 2002 MCI and substantially all of its active United States
subsidiaries, on a combined basis a major customer, filed voluntary petitions
for reorganization under Chapter 11 of the United States Bankruptcy Code in the
United States Bankruptcy Court. On July 22, 2003, the United States Bankruptcy
Court approved a settlement agreement for pre-petition amounts owed to us by MCI
and affirmed all of our existing contracts with MCI. MCI emerged from bankruptcy
protection on April 20, 2004. The remaining pre-petition accounts receivable
balance owed by MCI to us after this settlement was $11.1 million which we have
used and will continue to use as a credit against amounts payable for services
purchased from MCI.
After settlement, we began reducing the MCI credit as we utilized it for
services otherwise payable to MCI. We have accounted for our use of the MCI
credit as a gain contingency, and, accordingly, are recognizing a reduction of
bad debt expense as services are provided by MCI and the credit is realized.
During 2005 and 2004 we realized approximately $996,000 and $1.1 million,
respectively, of the MCI credit against amounts payable for services received
from MCI.
The remaining unused MCI credit totaled $1.8 million at June 30, 2005. The
credit balance is not recorded on the Consolidated Balance Sheet as we are
recognizing recovery of bad debt expense as the credit is realized.
In 2005 we renewed our agreement to provide interstate and intrastate
long-distance services to MCI through December 2009 with five one-year automatic
extensions to December 2014. The amendment includes new rates mandated by the
Consolidated Appropriations Act for Fiscal Year 2005 signed into law December 8,
2004 and effective January 22, 2005 which will result in rate decreases of 3%
per year ("Tariff 11 Rates").
In May 2005 Verizon Communications, Inc. agreed to acquire MCI. Any such
acquisition is expected to require approval of shareholders and anti-trust
regulators, as well as state utility commissions that license phone service. We
are unable to predict the impact that a merger with or an acquisition of MCI
will have upon us, however given the materiality of MCI's 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.
The initial term of our contract to provide interstate and intrastate
long-distance services and private line and private network services to Sprint
Corporation ("Sprint"), one of our significant customers, ends
29
in March 2007 with two one-year automatic extensions to March 2009. In 2005 we
amended the original agreement to include Tariff 11 Rates.
In December 2004 Sprint and Nextel Communications, Inc. announced a merger. The
agreement requires approval of shareholders and anti-trust regulators, as well
as state utility commissions that license phone service. We are unable to
predict the outcome this merger will have upon us.
Common carrier traffic routed to us for termination in Alaska is largely
dependent on traffic routed to our common carrier customers by their customers.
Pricing pressures, new program offerings, business failures, and market and
business consolidations continue to evolve in the markets served by our other
common carrier customers. 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, consistent with federal law. Additionally, disruption
in the economy resulting from terrorist attacks and other attacks or acts of war
could affect our carrier customers. We are unable to predict the effect on us of
such changes, however given the materiality of other common carrier revenues to
us, a significant reduction in traffic or pricing could have a material adverse
effect on our financial position, results of operations and liquidity.
Long-distance Services Segment Revenues
Total long-distance services segment revenues increased 5.2% to $47.5 million in
2005. The components of long-distance services segment revenues are as follows
(amounts in thousands):
2005 2004 Percentage Change
-------------- ------------- -----------------
Common carrier message telephone services $ 22,612 21,318 6.1%
Residential, commercial and governmental message telephone
services 9,551 9,713 (1.7%)
Private line and private network services 10,865 10,669 1.8%
Lease of fiber optic cable system capacity 4,519 3,493 29.4%
-------------- ------------- -----------------
Total long-distance services segment revenue $ 47,547 45,193 5.2%
============== ============= =================
Common Carrier Message Telephone Services Revenue
The increase in message telephone service revenues from our other common carrier
customers in 2005 resulted from a 25.2% increase in wholesale minutes carried to
271.2 million minutes.
The 2005 increase in message telephone service revenues from other common
carriers was partially off-set by a 13.4% decrease in the average rate per
minute on minutes carried for other common carriers primarily due to a change in
the composition of traffic resulting from one of our common carrier customer
contracts.
30
Residential, Commercial, and Governmental Message Telephone Services Revenue
Selected key performance indicators for our offering of message telephone
service to residential, commercial, and governmental customers follow:
2005 2004 Percentage Change
------------------ ------------------ -----------------
Retail minutes carried 76.4 million 77.1 million (0.9%)
Average rate per minute (1) $0.132 $0.133 (0.8%)
Number of active residential,
commercial and governmental
customers (2) 91,300 90,700 0.7%
<FN>
------------------------------------
1 Residential, commercial, and governmental message telephone services
revenues excluding plan fees associated with the carriage of data services
divided by the retail minutes carried.
2 All current subscribers who have had calling activity during June 2005 and
2004, respectively.
</FN>
The decrease in message telephone service revenues from residential, commercial,
and governmental customers in 2005 is primarily due to a decrease in the minutes
carried for these customers and in the average rate per minute and is partially
off-set by an increase in the number of active residential, commercial, and
governmental customers billed. The increase in the number of customers billed is
primarily due to our promotion of and our customers' enrollment in bundled
offerings to our residential customers, partially off-set by the effect of
customers substituting cellular phone, prepaid calling card, and email usage for
direct dial minutes.
Fiber Optic Cable System Capacity Lease Revenue
The increase in fiber optic cable system capacity lease revenues is primarily
due to a lease of capacity on the AULP East fiber optic cable system resulting
in increased monthly revenue of approximately $430,000 starting in July 2004.
Long-distance Services Segment Cost of Goods Sold
Long-distance services segment Cost of Goods Sold decreased 2.6% to $12.0
million in 2005 primarily due to reduced access costs resulting from the
distribution and termination of our traffic on our own local access services
network instead of paying other carriers to distribute and terminate our
traffic. The statewide average cost savings is approximately $.010 and $.051 per
minute for interstate and intrastate traffic, respectively. We expect cost
savings to continue to occur as long-distance traffic originated, carried, and
terminated on our own facilities grows. Additionally, we performed an analysis
of circuit costs directly contributing to long-distance services segment and
Broadband services revenues and, as a result, decreased long-distance services
segment Cost of Goods Sold by $535,000 in 2005. Broadband services segment Cost
of Goods Sold was increased an equal amount in 2005.
The decrease in the long-distance services segment Cost of Goods Sold in 2005 is
partially off-set by the receipt of a $400,000 refund in 2004 from an intrastate
access cost pool that previously overcharged us for access services.
31
Long-distance Services Segment Operating Income
Long-distance services segment operating income increased 8.5% to $21.4 million
from 2004 to 2005 primarily due to the following:
o A 5.2% increase in long-distance services segment revenue to $47.5
million in 2005, as discussed above,
o A 2.6% decrease in long-distance services segment costs of goods
sold to $12.0 million in 2005, as discussed above,
o A 3.5% decrease in long-distance services segment selling, general
and administrative expenses to $7.9 million in 2005, and
o A 16.0% increase in long-distance services segment depreciation,
amortization and accretion expense to $6.7 million in 2005 as
compared to $5.8 million in 2004 primarily due to our investment in
long-distance services segment equipment and facilities placed into
service during the year ended December 31, 2004 for which a full
year of depreciation will be recorded in the year ended December
31, 2005, and our investment in long-distance services segment
equipment and facilities placed into service during the six months
ended June 30, 2005 for which a partial year of depreciation will
be recorded in the year ended December 31, 2005.
Cable Services Segment Overview
Cable services segment revenues in 2005 represented 23.8% of consolidated
revenues. Our cable systems serve 36 communities and areas in Alaska, including
the state's four largest population centers, Anchorage, Fairbanks, the
Matanuska-Susitna Valley and Juneau. On February 1, 2005 we acquired all of the
assets of Barrow Cable TV, Inc. ("BCTV") for approximately $1.6 million. The
BCTV asset purchase resulted in approximately 950 additional subscribers and
approximately 1,100 additional homes passed.
We generate cable services segment revenues from four primary sources: (1)
digital and analog programming services, including monthly basic and premium
subscriptions, pay-per-view movies and other one-time events, such as sporting
events; (2) equipment rentals and installation; (3) cable modem services (shared
with our Internet services segment); and (4) advertising sales.
The primary factors that contribute to period-to-period changes in cable
services segment revenues include average monthly subscription rates and
pay-per-view buys, the mix among basic, premium and digital tier services, the
average number of cable television and cable modem subscribers during a given
reporting period, set-top box utilization and related rates, revenues generated
from new product offerings, and sales of cable advertising services.
Cable Services Segment Revenues and Cost of Goods Sold
Selected key performance indicators for our cable services segment follow:
June 30, Percentage
2005 2004 Change
------------- ------------- ----------------
Basic subscribers 137,400 135,200 1.6%
Digital programming tier subscribers 48,700 38,800 25.5%
Cable modem subscribers 70,200 56,800 23.6%
Homes passed 211,000 204,500 3.2%
32
A basic cable subscriber is defined as one basic tier of service delivered to an
address or separate subunits thereof regardless of the number of outlets
purchased. A digital programming tier subscriber is defined as one digital
programming tier of service delivered to an address or separate subunits thereof
regardless of the number of outlets or digital programming tiers purchased. A
cable modem subscriber is defined by the purchase of cable modem service
regardless of the level of service purchased. If one entity purchases multiple
cable modem service access points, each access point is counted as a subscriber.
The components of cable services segment revenues are as follows (amounts in
thousands):
2005 2004 Percentage Change
-------------- ------------- -----------------
Programming services $ 18,869 18,289 3.2%
Cable modem services (cable services segment's allocable
share) 3,313 3,420 (3.1%)
Equipment rental and installation fees 2,809 2,375 18.3%
Advertising sales 1,071 869 23.2%
Other 282 228 23.7%
-------------- ------------- -----------------
Total cable services segment revenue $ 26,344 25,181 4.6%
============== ============= =================
Average gross revenue per average basic subscriber per month increased $3.09 or
4.9% in 2005.
The increase in programming services revenue is primarily due to an increase in
basic subscribers in 2005. The increase in equipment rental and installation
fees revenue is primarily caused by the increased use of digital distribution
technology.
Cable services segment Cost of Goods Sold increased 19.3% to $7.6 million in
2005 primarily due to a refund received in 2004 from a supplier retroactive to
August 2003, an arrangement with a supplier in which we earned a rebate in 2004
upon meeting a specified goal, and programming cost increases in 2005 for most
of our cable programming service offerings.
Cable Services Segment Operating Income
Cable services segment operating income decreased 14.0% to $5.9 million from
2004 to 2005 primarily due to the following:
o The 19.3% increase in Cost of Goods Sold to $7.6 million in 2005
described above,
o A $475,000 increase in cable services segment selling, general and
administrative expenses to $7.6 million in 2005 primarily due to an
increase in labor costs, and
o A 9.2% increase in cable services segment depreciation,
amortization and accretion expense to $5.1 million in 2005 as
compared to 2004 primarily due to our investment in cable services
segment equipment and facilities placed into service during the
year ended December 31, 2004 for which a full year of depreciation
will be recorded in the year ended December 31, 2005, and our
investment in cable services segment equipment and facilities
placed into service during the six months ended June 30, 2005 for
which a partial year of depreciation will be recorded in the year
ended December 31, 2005.
33
The decrease in Cable services segment operating income was partially off-set by
the 4.6% increase in cable services segment revenues to $26.3 million in 2005
described above.
Local Access Services Segment Overview
During 2005 local access services segment revenues represented 11.5% of
consolidated revenues. We generate local access services segment 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.
The primary factors that contribute to year-to-year changes in local access
services segment revenues include the average number of business and residential
subscribers to our services during a given reporting period, the average monthly
rates charged for non-traffic sensitive services, the number and type of
additional premium features selected, the traffic sensitive access rates charged
to carriers and the Universal Service Program.
Our local access services segment faces significant competition in Anchorage,
Fairbanks, and Juneau from ACS, which is the largest ILEC in Alaska, and from
AT&T Alascom, Inc. in Anchorage for residential services. AT&T Alascom, Inc. has
applied to the RCA to extend its certificate to include Fairbanks and Juneau. 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.
In April 2004 we successfully launched our DLPS deployment utilizing our
Anchorage coaxial cable facilities. This service delivery method allows us to
utilize our own cable facilities to provide local access service to our
customers and avoid paying local loop charges to the ILEC. To ensure the
necessary equipment is available to us, we have committed to purchase a certain
number of outdoor, network powered multi-media adapters. We plan to continue to
deploy additional DLPS lines during the year ended December 31, 2005.
In January 2005 we applied to the RCA to expand our existing certification for
the provision of competitive local service. We applied to provide service in
competition with the existing service provider in five service areas which
include the communities of Ketchikan, Cordova, Chitina, Glenallen, McCarthy,
Mentasta, Tatitlek, Valdez, Delta Junction, Homer, Kenai, Kodiak, Soldotna,
Nenana, North Pole, and the area from Eagle River to Healy. In addition, we have
requested approval to offer local service in six areas covered by our cable
facilities only which include the communities of Wrangell, Petersburg, Sitka,
Seward, Bethel, and Nome.
We plan to offer service in these new areas using a combination of methods. To a
large extent, we plan to use our existing cable network to deliver local
services. Where we do not have cable plant, we may use wireless technologies and
resale of other carrier's services. We may lease portions of an existing
carrier's network or seek wholesale discounts, but our application is not
dependent upon access to either unbundled network elements of the ILEC's network
or wholesale discount rates for resale of ILEC services. The comment period has
closed and we expect the RCA to decide this application no later than September
30, 2005.
On June 25, 2004 the RCA issued an order in our arbitration with ACS to revise
the rates, terms, and conditions that govern access to UNEs in the Anchorage
market. The RCA's ruling set rates for
34
numerous elements of ACS' network, the most significant being the lease rate for
local loops. The order initially increased the loop rate payable to ACS from
$14.92 to $19.15 per loop per month. We immediately filed a petition for
reconsideration with the RCA to correct computational errors and raise other
issues. On August 20, 2004, the RCA ruled on the petition and retroactively
lowered the loop rate to $18.64 per month. The Commission issued a final order
approving an interconnection agreement on December 7, 2004. In January 2005 we
appealed the RCA ruling to the Federal District Court in Anchorage, Alaska
arguing that the pricing and methodology used by ACS and approved by the RCA was
flawed and in violation of federal law. We cannot predict at this time the
outcome of the lawsuit.
On February 22, 2005, in a complaint proceeding brought by us, the RCA released
a ruling that Matanuska Telephone Association's ("MTA's") rural exemption for
the areas served by MTA Vision, Inc. had been lifted by virtue of its offering
of video programming services and that we may negotiate and arbitrate with MTA.
We tendered a renewed interconnection request to MTA on February 25, 2005. We
filed a petition for arbitration with the RCA on July 15, 2005 and expect
arbitration to be concluded within the 135 day statutory deadline. Negotiations
are continuing while the petition for arbitration is pending.
On May 2, 2005 we tendered an interconnection request to the City of Ketchikan
d/b/a Ketchikan Public Utilities ("KPU"), which had been authorized by the RCA
to provide video programming services through its KPU CommVision division on
April 26, 2005. Under the terms of Section 251(f)(1)(C) of the
Telecommunications Act of 1996 KPU's current rural exemption from negotiation
will be forfeited if, and when, KPU commences offering video programming. On
June 3, 2005, we entered into a stipulation with KPU recognizing that KPU will
forfeit its rural exemption and negotiations for interconnection will commence
when KPU commences offering video programming.
Local Access Services Segment Revenues and Cost of Goods Sold
Selected key performance indicators for our local services segment follow:
June 30, Percentage
2005 2004 Change
------------- ------------- ----------------
Total lines in service 111,900 110,600 1.2%
DLPS lines in service 12,800 840 1,423.8%
A line in service is defined as a revenue generating circuit or channel
connecting a customer to the public switched telephone network. We estimate that
our 2005 and 2004 total lines in service represent a statewide market share of
approximately 24% and 23%, respectively.
Our access line mix at June 30, 2005 follows:
June 30,
2005 2004
---------- ---------
Residential customers 61% 60%
Business customers 36% 34%
Internet access customers 3% 6%
In 2005 and 2004 approximately 85% and 84%, respectively, of our lines are
provided on our own facilities and leased local loops. In 2005 and 2004
approximately 6% and 5%, respectively, of our lines are provided using the UNE
platform delivery method.
35
Local access services segment revenues increased 13.2% in 2005 to $12.7 million
primarily due to the following:
o Growth in the average number of lines in service, and
o $546,000 increase in support from the Universal Service Program.
Local access services segment Cost of Goods Sold increased 5.6% to $7.2 million
in 2005 primarily due to the growth in the average number of lines in service
and the increased costs resulting from the RCA's Anchorage UNE arbitration
settlement order in June 2004 which increased the UNE lease rate payable to ACS
from $14.92 to $18.64 per line per month beginning on June 25, 2004.
Additionally, the UNE lease rates payable to ACS in Fairbanks and Juneau
increased from $19.19 to $23.00 and $16.71 to $18.00, respectively, as of
January 1, 2005.
Local Access Services Segment Operating Loss
Local access services segment operating loss increased 35.7% to $1.3 million
from 2004 to 2005 primarily due to the following:
o The 5.6% increase in Cost of Goods Sold to $7.2 million discussed
above,
o A $716,000 increase in local access services segment selling,
general and administrative expenses to $4.9 million in 2005
primarily due to an increase in labor costs, and
o An 56.3% increase in local access services segment depreciation,
amortization and accretion expense to $1.7 million in 2005 as
compared to 2004 primarily due to our investment in local access
services segment equipment and facilities placed into service
during the year ended December 31, 2004 for which a full year of
depreciation will be recorded in the year ended December 31, 2005,
and our investment in local access services segment equipment and
facilities placed into service during the six months ended June 30,
2005 for which a partial year of depreciation will be recorded in
2005.
The operating loss increase was partially off-set by the 13.2% revenue increase
to $12.7 million in 2005 discussed above.
The local access services segment operating results are negatively affected by
the allocation of all of the benefit of access cost savings to the long-distance
services segment. If the local access services segment received credit for the
access charge reductions recorded by the long-distance services segment, the
local access services segment operating loss would have improved by
approximately $1.6 million and the long-distance services segment operating
income would have been reduced by an equal amount in 2005 and 2004.
Internet Services Segment Overview
During 2005 Internet services segment revenues represented 6.7% of consolidated
revenues. We generate Internet services segment revenues from three primary
sources: (1) access product services, including commercial, Internet service
provider, and retail dial-up access; (2) network management services; and (3)
Internet services segment's allocable share of cable modem revenue (a portion of
cable modem revenue is also recognized by our cable services segment).
36
The primary factors that contribute to year-to-year changes in Internet services
segment revenues include the average number of subscribers to our services
during a given reporting period, the average monthly subscription rates, the
amount of bandwidth purchased by large commercial customers, and the number and
type of additional premium features selected.
Marketing campaigns continue to be deployed targeting residential and commercial
customers featuring bundled products. Our Internet offerings are bundled with
various combinations of our long-distance, cable, and local access services
segments' offerings and provide free or discounted basic or premium Internet
services. Value-added premium Internet features are available for additional
charges.
We compete with a number of Internet service providers in our markets. We
believe our approach to developing, pricing, and providing Internet services
allows us to be competitive in providing those services.
Internet Services Segment Revenues and Cost of Goods Sold
Selected key performance indicators for our Internet services segment follow:
June 30, Percentage
2005 2004 Change
------------ ------------ ---------------
Cable modem subscribers 70,200 56,800 23.6%
Dial-up subscribers 27,700 43,500 (36.3%)
------------ ------------ ---------------
Total Internet subscribers 97,900 100,300 (2.4%)
============ ============ ===============
Total Internet subscribers are defined by the purchase of Internet access
service regardless of the level of service purchased. If one entity purchases
multiple Internet access service points, that entity is included in our total
Internet subscriber count at a rate equal to the number of access points
purchased. A subscriber with both cable modem and dial-up service is included
once as a cable modem subscriber. A dial-up subscriber is defined by the
purchase of dial-up Internet service regardless of the level of service
purchased. If one entity purchases multiple dial-up service access points, each
access point is counted as a subscriber.
The decrease in total Internet subscribers is primarily due to non-revenue
affecting adjustments to our customer database to prepare for the implementation
of a new customer service information system. We expect further such adjustments
during the three-month period ending September 30, 2005.
Total Internet services segment revenues increased 13.7% to $7.4 million in 2005
primarily due to the 12.9% increase in its allocable share of cable modem
revenues to $3.2 million in 2005 as compared to 2004. The increase in cable
modem revenues is primarily due to growth in cable modem subscribers.
Additionally, in 2004 the Internet services segment sold services to Broadband
services (included in the All Other category) and all of the revenue was
eliminated from the Internet services segment. In 2005 Broadband services and
Internet services are operating under a revenue-share agreement that has
resulted in an allocation of revenue between the Internet services segment and
the All Other category. Internet services segment revenue would have been $7.0
million and $6.5 million in 2005 and 2004, respectively, if the change in the
external revenue distribution had not occurred.
Internet services Cost of Goods Sold increased 3.8% to $1.9 million in 2005
associated with increased Internet services segment revenues.
37
Internet Services Segment Operating Income
Internet services segment operating income increased 50.7% to $2.2 million from
2004 to 2005 primarily due to the 13.7% increase in Internet services segment
revenues to $7.4 million in 2005 as described above and a $82,000 decrease in
selling, general and administrative expenses to $2.4 million.
The operating income increase is partially off-set by the 3.8% increase in Cost
of Goods Sold to $1.9 million as described above and a 14.3% increase in
Internet services segment depreciation, amortization and accretion expense to
$887,000 in 2005 as compared to 2004 primarily due to our investment in Internet
services segment equipment and facilities placed into service during the year
ended December 31, 2004 for which a full year of depreciation will be recorded
in the year ended December 31, 2005, and our investment in Internet services
segment equipment and facilities placed into service during the six months ended
June 30, 2005 for which a partial year of depreciation will be recorded in 2005.
All Other 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 Broadband services, managed services, product sales, and cellular
telephone services.
Revenues included in the All Other category represented 15.0% of total revenues
in 2005.
We lease a portion of our 800-mile fiber optic system capacity that extends from
Prudhoe Bay to Valdez via Fairbanks, and provide management and maintenance
services for this capacity to a significant customer. The telecommunications
service agreement is for fifteen years and may be extended for up to two
successive three-year periods and, upon expiration of the extensions, one
additional year. The agreement may be canceled by either party with 180 days
written notice. On March 24, 2005, the lessee announced that they had signed a
contract with a competitor to build a microwave system to run parallel with our
fiber optic cable system. The lessee also announced their intention to utilize
the microwave system in addition to our fiber optic cable system. The lessee has
not notified us in writing of their intent to change or cancel our agreement.
Revenue associated with this agreement totals approximately $13.2 million per
year. We are unable to predict the financial impact of this event on our results
of operations, financial position and cash flows, however we believe that
operating income from sales or leases of capacity and provision of other
services on this fiber optic cable system to other customers will partially
offset operating income reductions that may result if our contract is cancelled.
All Other Revenues and Cost of Goods Sold
All Other revenues increased 6.3% to $16.7 million in 2005 primarily due to a
49.7% increase in revenues from our cellular telephone services to $1.6 million
resulting from increased promotion of our digital cellular telephone service.
All Other revenues would have increased 9.2% to $17.1 million in 2005 if we had
not changed the allocation of external revenue between our Internet services
segment and Broadband services. In 2004 all of a certain revenue stream was
retained by Broadband services and the associated internal Cost of Goods Sold
purchased from the Internet services segment was eliminated from the All Other
category. In 2005 Broadband services and Internet services operate under a
revenue-share agreement that has
38
resulted in an allocation of the revenue between the Internet services segment
and the All Other category.
All Other Cost of Goods Sold increased 23.9% to $7.4 million in 2005 primarily
associated with increased cellular telephone services revenues. Additionally, we
performed an analysis of circuit costs directly contributing to long-distance
services segment and Broadband services revenues and, as a result, increased
Broadband services Cost of Goods Sold by $535,000 in 2005. Long-distance
services segment Cost of Goods Sold was decreased an equal amount in 2005.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 5.3% to $38.0 million in
2005 primarily due to a $991,000 increase in labor and health insurance costs
resulting from an increased number of employees and a $464,000 increase in
contract labor and contract services expenses associated with special projects.
As a percentage of total revenues, selling, general and administrative expenses
decreased to 34.4% in 2005 from 34.8% in 2004, primarily due to an increase in
revenues without a proportional increase in selling, general and administrative
expenses.
Bad Debt Expense (Recovery)
Bad debt expense (recovery) increased approximately $681,000 to a net expense of
$194,000 in 2005. The increase is primarily due to allowances established for
two Broadband services customers. The bad debt expense is partially off-set by
realization of approximately $996,000 of the MCI credit through a reduction to
bad debt expense in 2005, as further discussed above in "Long Distance Services
Segment Overview." We realized approximately $1.1 million of the MCI credit
through a reduction to bad debt expense in 2004.
Depreciation, Amortization and Accretion Expense
Depreciation, amortization and accretion expense increased 17.2% to $18.4
million in 2005. The increase is primarily due to the following:
o Our $122.9 million investment in equipment and facilities placed
into service during 2004 for which a full year of depreciation will
be recorded in 2005,
o Our $33.2 million investment in equipment and facilities placed
into service during the six months ended June 30, 2005 for which a
partial year of depreciation will be recorded in 2005, and
o A $527,000 increase in depreciation expense during 2005 due to the
decreased useful life resulting from the failure of our Galaxy XR
satellite propulsion system.
Other Expense, Net
Other expense, net of other income, increased 37.0% to $8.7 million in 2005
primarily due to the following:
o An increase in interest expense of approximately $1.3 million in
2005 on our new Senior Notes due to an increase in the outstanding
balance owed, and
o An increase in interest expense of approximately $982,000 in 2005
on our Senior Credit Facility due to $631,000 in construction
period interest expense capitalization in 2004.
39
The increase in other expense, net of other income is partially off-set by
decreased interest rates on our Senior Credit Facility in 2005 as compared to
2004.
Income Tax Expense
Income tax expense was $4.0 million in 2005 and $5.1 million in 2004. The change
was due to decreased net income before income taxes in 2005 as compared to 2004.
Our effective income tax rate increased from 40.0% in 2004 to 43.3% in 2005 due
to adjustments to deferred tax assets and liabilities balances in 2004.
At June 30, 2005, we have (1) tax net operating loss carryforwards of
approximately $172.5 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. We
estimate that we will utilize net operating loss carryforwards of $18 million to
$19 million during the year ended December 31, 2005. Our utilization of certain
net operating loss carryforwards is subject to limitations pursuant to Internal
Revenue Code section 382.
Tax benefits associated with recorded deferred tax assets are considered to be
more likely than not realizable through future reversals of existing taxable
temporary differences and future taxable income exclusive of reversing temporary
differences and carryforwards. The amount of deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced which would result in
additional income tax expense. We estimate that our effective annual income tax
rate for financial statement purposes will be 42% to 44% in 2005.
Six Months Ended June 30, 2005 ("2005") Compared To Six Months Ended June 30,
2004 ("2004")
Overview of Revenues and Cost of Goods Sold
Total revenues increased 2.1% from $212.7 million in 2004 to $217.2 million in
2005. Revenue increases in each of our segments were off-set by a decrease in
All Other Services revenues. See the discussion below for more information by
segment.
Total Cost of Goods Sold decreased 1.0% from $72.0 million in 2004 to $71.2
million in 2005. A decrease in All Other Services Cost of Goods Sold was
partially off-set by increases in all of our segment's Cost of Goods Sold. See
the discussion below for more information by segment.
Long-Distance Services Segment Overview
Long-distance services segment revenue in 2005 represented 42.5% of consolidated
revenues. Our provision of interstate and intrastate long-distance services, and
private line and leased dedicated capacity services accounted for 89.9% of our
total long-distance services segment revenues during 2005.
After the settlement agreement for pre-petition amounts owed to us by MCI
discussed above, we have been recognizing a reduction of bad debt expense as
services are provided by MCI and the credit is realized. During 2005 and 2004 we
realized approximately $1.9 million and $2.3 million, respectively, of the MCI
credit against amounts payable for services received from MCI.
Please refer to our discussion of the three-month results of operations for
greater detail about this segment.
40
Long-distance Services Segment Revenues
Total long-distance services segment revenues increased 2.9% to $92.3 million in
2005. The components of long-distance services segment revenues are as follows
(amounts in thousands):
2005 2004 Percentage Change
-------------- ------------- -----------------
Common carrier message telephone services $ 41,939 42,396 (1.1%)
Residential, commercial and governmental message telephone
services 19,150 19,700 (2.8%)
Private line and private network services 21,865 21,035 3.9%
Lease of fiber optic cable system capacity 9,335 6,589 41.7%
-------------- ------------- -----------------
Total long-distance services segment revenue $ 92,289 89,720 2.9%
============== ============= =================
Common Carrier Message Telephone Services Revenue
The 2005 decrease in message telephone service revenues from our other common
carrier customers resulted from a 7.4% decrease in the average rate per minute
on minutes carried for other common carriers primarily due to the decreased
average rate per minute as agreed to in the June 2004 amendment of our contract
to provide interstate and intrastate long-distance services to Sprint, and the
Tariff 11 Rate decrease effective January 23, 2005.
The decrease in message telephone service revenues from other common carriers in
2005 was partially off-set by a 12.6% increase in wholesale minutes carried to
497.8 million minutes.
Residential, Commercial, and Governmental Message Telephone Services Revenue
Selected key performance indicators for our offering of message telephone
service to residential, commercial, and governmental customers follow:
2005 2004 Percentage Change
------------------ ------------------ -----------------
Retail minutes carried 152.3 million 153.0 million (0.5%)
Average rate per minute (1) $0.132 $0.131 0.8%
Number of active residential,
commercial and governmental
customers (2) 91,300 90,700 0.7%
<FN>
------------------------------------
1 Residential, commercial, and governmental message telephone services
revenues excluding plan fees associated with the carriage of data services
divided by the retail minutes carried.
2 All current subscribers who have had calling activity during June 2005 and
2004, respectively.
</FN>
The decrease in message telephone service revenues from residential, commercial,
and governmental customers in 2005 is primarily due to decreased minutes carried
for these customers and is partially off-set by an increase in the average rate
per minute and an increase in the number of active residential, commercial, and
governmental customers billed. The increase in the number of customers billed is
primarily due to our promotion of and our customers' enrollment in bundled
offerings to our
41
residential customers, partially off-set by the effect of customers substituting
cellular phone, prepaid calling card, and email usage for direct dial minutes.
Fiber Optic Cable System Capacity Lease Revenue
The increase in fiber optic cable system capacity lease revenues is primarily
due to a lease of capacity on the AULP East fiber optic cable system resulting
in increased monthly revenue of approximately $430,000 starting in July 2004.
Long-distance Services Segment Cost of Goods Sold
Long-distance services segment Cost of Goods Sold was $24.8 million in 2005 and
2004.
The benefit of a $800,000 refund in 2004 from an intrastate access cost pool
that previously overcharged us for access services was off-set by reduced access
costs in 2005 due to distribution and termination of our traffic on our own
local access services network instead of paying other carriers to distribute and
terminate our traffic. The statewide average cost savings is approximately $.010
and $.051 per minute for interstate and intrastate traffic, respectively. We
expect cost savings to continue to occur as long-distance traffic originated,
carried, and terminated on our own facilities grows.
Long-distance Services Segment Operating Income
Long-distance services segment operating income increased 2.5% to $39.4 million
from 2004 to 2005 primarily due to a 2.9% increase in long-distance services
segment revenue to $92.3 million in 2005, as discussed above. The increase in
long-distance services segment operating income was partially off-set by the
following:
o A 1.3% increase in long-distance services segment selling, general
and administrative expenses to $16.2 million in 2005, and
o A 7.6% increase in long-distance services segment depreciation,
amortization and accretion expense to $12.9 million in 2005 as
compared to 2004 primarily due to our investment in long-distance
services segment equipment and facilities placed into service
during the year ended December 31, 2004 for which a full year of
depreciation will be recorded in the year ended December 31, 2005,
and our investment in long-distance services segment equipment and
facilities placed into service during the six months ended June 30,
2005 for which a partial year of depreciation will be recorded in
the year ended December 31, 2005.
Cable Services Segment Overview
Cable services segment revenues in 2005 represented 24.0% of consolidated
revenues.
Please refer to our discussion of the three-month results of operations for
greater detail about this segment.
42
Cable Services Segment Revenues and Cost of Goods Sold
The components of cable services segment revenues are as follows (amounts in
thousands):
2005 2004 Percentage Change
-------------- ------------- -----------------
Programming services $ 37,675 36,542 3.1%
Cable modem services (cable services segment's allocable
share) 6,574 6,736 (2.4%)
Equipment rental and installation fees 5,544 4,702 17.9%
Advertising sales 1,961 1,615 21.4%
Other 489 438 11.6%
-------------- ------------- -----------------
Total cable services segment revenue $ 52,243 50,033 4.4%
============== ============= =================
Average gross revenue per average basic subscriber per month increased $3.12 or
5.0% in 2005.
The increase in programming services revenue is primarily due to an increase in
basic subscribers in 2005. The increase in equipment rental and installation
fees revenue is primarily caused by the increased use of digital distribution
technology.
Cable services segment Cost of Goods Sold increased 8.8% to $14.6 million in
2005 primarily due to a refund received in 2004 from a supplier retroactive to
August 2003, an arrangement with a supplier in which we earned a rebate in 2004
upon us meeting a specified goal, and programming cost increases in 2005 for
most of our cable programming service offerings. The increase in Cable services
segment Cost of Goods Sold is partially off-set by a rebate received in 2005
upon meeting specified goals according to arrangements with suppliers.
Cable Services Segment Operating Income
Cable services segment operating income decreased 6.1% to $12.4 million from
2004 to 2005 primarily due to the following:
o The 8.8% increase in Cost of Goods Sold to $14.6 million in 2005
described above,
o A $1.0 million increase in cable services segment selling, general
and administrative expenses to $14.7 million in 2005 primarily due
to an increase in labor costs and contract labor and contract
services expenses, and
o A 9.1% increase in cable services segment depreciation,
amortization and accretion expense to $10.2 million in 2005 as
compared to 2004 primarily due to our investment in cable services
segment equipment and facilities placed into service during the
year ended December 31, 2004 for which a full year of depreciation
will be recorded in the year ended December 31, 2005, and our
investment in cable services segment equipment and facilities
placed into service during the six months ended June 30, 2005 for
which a partial year of depreciation will be recorded in the year
ended December 31, 2005.
The decrease in Cable services segment operating income was partially off-set by
the 4.4% increase in cable services segment revenues to $52.2 million in 2005
described above.
43
Multiple System Operator ("MSO") Operating Statistics
Our operating statistics include capital expenditures and customer information
from our cable services segment and the components of our local access services
and Internet services segments which offer services utilizing our cable services
segment's facilities.
Our capital expenditures by standard reporting category for the six months ended
June 30, 2005 and 2004 follows (amounts in thousands):
2005 2004
-------------- -------------
Upgrade/rebuild $ 7,441 3,355
Customer premise equipment 7,138 6,970
Scalable infrastructure 1,818 2,805
Line extensions 1,363 149
Support capital 508 595
Commercial 169 213
-------------- -------------
Sub-total 18,437 14,087
Remaining reportable segments and
All Other capital expenditures 29,253 50,060
-------------- -------------
$ 47,690 64,147
============== =============
The standardized definition of a customer relationship is the number of
customers that receive at least one level of service utilizing our cable
services segment's facilities, encompassing voice, video, and data services,
without regard to which services customers purchase. At June 30, 2005 and 2004
we had 125,400 and 123,300 customer relationships, respectively.
The standardized definition of a revenue generating unit is the sum of all
primary analog video, digital video, high-speed data, and telephony customers,
not counting additional outlets. At June 30, 2005 and 2004 we had 220,500 and
192,000 revenue generating units, respectively.
Local Access Services Segment Overview
During 2005 local access services segment revenues represented 12.0% of
consolidated revenues.
Please refer to our discussion of the three-month results of operations for
greater detail about this segment.
Local Access Services Segment Revenues and Cost of Goods Sold
Local access services segment revenues increased 13.0% in 2005 to $26.0 million
primarily due to the following:
o Growth in the average number of lines in service, and
o $1.3 million increase in support from the Universal Service
Program.
Local access services segment Cost of Goods Sold increased 8.3% to $14.5 million
in 2005 primarily due to the growth in the average number of lines in service
and the increased costs resulting from the RCA's Anchorage UNE arbitration
settlement order in June 2004 which increased the UNE lease rate payable to ACS
from $14.92 to $18.64 per line per month beginning on June 25, 2004.
Additionally,
44
the UNE lease rates payable to ACS in Fairbanks and Juneau increased from $19.19
to $23.00 and $16.71 to $18.00, respectively, as of January 1, 2005.
Local Access Services Segment Operating Loss
Local access services segment operating loss increased 35.0% to $1.8 million
from 2004 to 2005 primarily due to the following:
o The 8.3% increase in Cost of Goods Sold to $14.5 million discussed
above,
o A $891,000 increase in local access services segment selling,
general and administrative expenses to $9.8 million in 2005 due to
additional costs associated with DLPS and an increase in
interconnect rates resulting from a renewed Anchorage
interconnection agreement beginning in June 2004, and
o An 67.1% increase in local access services segment depreciation,
amortization and accretion expense to $3.3 million in 2005 as
compared to 2004 primarily due to our investment in local access
services segment equipment and facilities placed into service
during the year ended December 31, 2004 for which a full year of
depreciation will be recorded in the year ended December 31, 2005,
and our investment in local access services segment equipment and
facilities placed into service during the six months ended June 30,
2005 for which a partial year of depreciation will be recorded in
2005.
The operating loss increase was partially off-set by the 13.0% revenue increase
to $26.0 million in 2005 discussed above.
The local access services segment operating results are negatively affected by
the allocation of all of the benefit of access cost savings to the long-distance
services segment. If the local access services segment received credit for the
access charge reductions recorded by the long-distance services segment, the
local access services segment operating loss would have improved by
approximately $3.4 million and $3.3 million and the long-distance services
segment operating income would have been reduced by an equal amount in 2005 and
2004, respectively.
Internet Services Segment Overview
During 2005 Internet services segment revenues represented 6.8% of consolidated
revenues.
Please refer to our discussion of the three-month results of operations for
greater detail about this segment.
Internet Services Segment Revenues and Cost of Goods Sold
Total Internet services segment revenues increased 13.9% to $14.7 million in
2005 primarily due to the 12.7% increase in its allocable share of cable modem
revenues to $6.2 million in 2005 as compared to 2004. The increase in cable
modem revenues is primarily due to growth in cable modem subscribers.
Additionally, in 2004 the Internet services segment sold services to Broadband
services (included in the All Other category) and all of the revenue was
eliminated from the Internet services segment. In 2005 Broadband services and
Internet services are operating under a revenue-share agreement that has
resulted in an allocation of revenue between the Internet services segment and
the All Other category. Internet services segment revenue would have been $13.8
million and $12.9 million in 2005 and 2004, respectively, if the change in the
external revenue distribution had not occurred.
45
Internet services Cost of Goods Sold increased 5.4% to $3.8 million in 2005
associated with increased Internet services segment revenues.
Internet Services Segment Operating Income
Internet services segment operating income increased 67.0% to $4.2 million from
2004 to 2005 primarily due to the 13.9% increase in Internet services segment
revenues to $14.7 million in 2005 as described above and a $435,000 decrease in
selling, general and administrative expenses to $4.8 million.
The operating income increase is partially off-set by the 5.4% increase in Cost
of Goods Sold to $3.8 million as described above and a 18.3% increase in
Internet services segment depreciation, amortization and accretion expense to
$1.8 million in 2005 as compared to 2004 primarily due to our investment in
Internet services segment equipment and facilities placed into service during
the year ended December 31, 2004 for which a full year of depreciation will be
recorded in the year ended December 31, 2005, and our investment in Internet
services segment equipment and facilities placed into service during the six
months ended June 30, 2005 for which a partial year of depreciation will be
recorded in 2005.
All Other Overview
Revenues included in the All Other category represented 14.7% of total revenues
in 2005.
Please refer to our discussion of the three-month results of operations for
greater detail about the All Other category.
All Other Revenues and Cost of Goods Sold
All Other revenues decreased 13.7% to $31.9 million in 2005 primarily due to
$6.1 million earned in 2004 from an equipment sale and installation project. The
decrease in All Other revenues is partially off-set by a 77.5% increase in
revenues from our cellular telephone services to $2.7 million resulting from
increased promotion of our digital cellular telephone service.
All Other revenues would have decreased 11.2% to $32.9 million in 2005 if we had
not changed the allocation of external revenue between our Internet services
segment and Broadband services. In 2004 all of a certain revenue stream was
retained by Broadband services and the associated internal Cost of Goods Sold
purchased from the Internet services segment was eliminated from the All Other
category. In 2005 Broadband services and Internet services operate under a
revenue-share agreement that has resulted in an allocation of the revenue
between the Internet services segment and the All Other category.
All Other Cost of Goods Sold decreased 19.2% to $13.6 million in 2005 due to
$5.5 million in costs in 2004 associated with an equipment sale and installation
project. The decrease in All Other Cost of Goods Sold is partially off-set by
increased costs associated with cellular telephone services revenues.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 5.2% to $75.2 million in
2005 primarily due to a $1.4 million increase in labor and health insurance
costs resulting from an increased number of employees and a $1.3 million
increase in contract labor and contract services expenses associated with
special projects. As a percentage of total revenues, selling, general and
administrative expenses
46
increased to 34.6% in 2005 from 33.6% in 2004, primarily due to an increase in
selling, general and administrative expenses without a proportional increase in
revenues.
Bad Debt Recovery
Bad debt recovery decreased 82.0% to a net recovery of $159,000 in 2005. The
decrease is primarily due to allowances established for two Broadband services
customers.
Bad debt recovery includes realization of approximately $1.9 million of the MCI
credit through a reduction to bad debt expense in 2005, as further discussed
above in "Long Distance Services Segment Overview." We realized approximately
$2.3 million of the MCI credit through a reduction to bad debt expense in 2004.
Depreciation, Amortization and Accretion Expense
Depreciation, amortization and accretion expense increased 14.9% to $36.2
million in 2005. The increase is primarily due to the following:
o Our $122.9 million investment in equipment and facilities placed
into service during 2004 for which a full year of depreciation will
be recorded in 2005,
o The $33.2 million investment in equipment and facilities placed
into service during the six months ended June 30, 2005 for which a
partial year of depreciation will be recorded in 2005, and
o A $527,000 increase in depreciation expense during 2005 due to the
decreased useful life resulting from the failure of our Galaxy XR
satellite propulsion system.
Other Expense, Net
Other expense, net of other income, decreased 23.3% to $17.3 million in 2005
primarily due to following:
o In 2004 we paid bond call premiums totaling $6.1 million to redeem
our old Senior Notes,
o As a result of redeeming our old Senior Notes we recognized $2.3
million in unamortized old Senior Notes fee expense in 2004, and
o Decreased interest rates primarily on our Senior Credit Facility
and Senior Notes in 2005 as compared to 2004
Partially offsetting the decreases described above were the following:
o An increase in interest expense of approximately $2.1 million in
2005 on our new Senior Notes due to an increase in the outstanding
balance owed, and
o An increase in interest expense of approximately $1.2 million in
2005 on our Senior Credit Facility due to $1.1 million in
construction period interest expense capitalization in 2004.
Income Tax Expense
Income tax expense was $7.5 million in 2005 and $6.5 million in 2004. The change
was due to increased net income before income taxes in 2005 as compared to 2004.
Our effective income tax rate increased from 40.3% in 2004 to 43.0% in 2005 due
to adjustments to deferred tax assets and liabilities balances in 2004.
47
Liquidity and Capital Resources
Cash flows from operating activities totaled $53.4 million in 2005 as compared
to $42.9 million in 2004. The 2005 increase is primarily due to increased cash
flow from our long-distance services, cable services, local access services and
Internet services segments and a $4.1 million decrease in the payment of our
company-wide success sharing bonus in 2005, partially off-set by decreased cash
flows from All Other Services.
Other uses of cash during 2005 included expenditures of $47.7 million for
property and equipment, including construction in progress, the purchase of $8.0
million of common stock to be retired and to be held in treasury for general
corporate purposes, the $6.6 million repurchase of the remaining 4,314 shares of
our Series B preferred stock from Toronto Dominion Investments, Inc., and $3.2
million in capital lease obligation repayments.
Working capital totaled $22.2 million at June 30, 2005, a $26.8 million decrease
as compared to $49.0 million at December 31, 2004. The decrease is primarily due
to the $16.0 million increase in the portion of our Senior Credit Facility
classified as current maturity at June 30, 2005 as compared to December 31,
2004, the use of $8.0 million to repurchase shares of our Class A common stock
in 2005 as compared to no such repurchases in 2004, and the use of cash to fund
our capital expenditures during 2005.
We have outstanding Senior Notes of $316.1 million at June 30, 2005. We pay
interest of 7.25% on the Senior Notes. The Senior Notes are carried on our
Consolidated Balance Sheet net of the unamortized portion of the discount, which
is being amortized to Interest Expense over the life of the Senior Notes.
A semi-annual interest payment of approximately $11.6 million was paid in
February 2005; the next semi-annual interest payment will be made in August
2005.
The Senior Notes limit our ability to make cash dividend payments. The Senior
Notes are due in February 2014.
In December 2004 GCI, Inc. sold $70.0 million in aggregate principal amount of
senior unsecured debt securities to qualified institutional buyers pursuant to
Rule 144A and non-United States persons pursuant to Regulation S. On May 6,
2005, we commenced an offer to exchange these privately issued Senior Notes that
have been registered under the Securities Act and have otherwise identical terms
to the original Senior Notes privately issued in February 2004 (except for
provisions relating to GCI Inc.'s obligations to consummate the exchange offer).
The exchange offer closing occurred on June 9, 2005, 2005, at which time all
$70.0 million in aggregate principal amount of the privately issued Senior Notes
were tendered and exchanged for the Senior Notes that have been registered under
the Securities Act.
We were in compliance with all Senior Notes loan covenants at June 30, 2005.
Our Senior Credit Facility term loan is fully drawn and we have letters of
credit outstanding totaling $5.5 million, which leaves $44.5 million available
to draw under the revolving credit facility at June 30, 2005 if needed. We have
not borrowed under the revolving portion of our Senior Credit Facility in 2005.
Our ability to draw down the revolving portion of our Senior Credit Facility
could be diminished if we are not
48
in compliance with all Senior Credit Facility covenants or have a material
adverse change at the date of the request for the draw.
We are required to pay down $168,000, $8.0 million, and $8.0 million in term
loan principal on our Senior Credit Facility by December 31, 2005, March 31,
2006, and June 30, 2006, respectively. All outstanding amounts under our Senior
Credit Facility are due October 31, 2007. We expect to refinance our Senior
Credit Facility during the third quarter of 2005.
We were in compliance with all Senior Credit Facility loan covenants at June 30,
2005.
Our expenditures for property and equipment, including construction in progress,
totaled $47.7 million and $64.1 million during the six months ended June 30,
2005 and 2004, respectively. Our capital expenditures requirements in excess of
approximately $25 million per year are largely success driven and are a result
of the progress we are making in the marketplace. We expect our 2005
expenditures for property and equipment for our core operations, including
construction in progress, to total approximately $85.0 million, depending on
available opportunities and the amount of cash flow we generate during 2005.
Planned capital expenditures over the next five years include those necessary
for continued expansion of our long-distance, local exchange and Internet
facilities, supplementing our existing network backup facilities, continuing
deployment of DLPS, and upgrades to and expansions of our cable television
plant.
In December 2004 Sprint and Nextel Communications, Inc. announced a merger. The
agreement requires approval of shareholders and anti-trust regulators, as well
as state utility commissions that license phone service. Sprint is one of our
significant customers. We are unable to predict the outcome this merger will
have on us.
In May 2005 Verizon Communications, Inc. agreed to acquire MCI, our major
customer. Any such acquisition is expected to require approval of shareholders
and anti-trust regulators. We are unable to predict the impact that a merger
with or an acquisition of MCI will have upon us, however given the materiality
of MCI's 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.
A migration of MCI's or Sprint's traffic off of our network without it being
replaced by other common carriers that interconnect with our network could have
a material adverse impact on our financial position, results of operations and
liquidity.
In May 2005 we repurchased the remaining 4,314 shares of our Series B preferred
stock for a total purchase price of $6.6 million from Toronto Dominion
Investments, Inc. The 4,314 preferred shares were convertible into 777,297
shares of our Class A common stock and the transaction price represented an
equivalent Class A common stock purchase price of $8.50 per share. The
repurchase of our Series B preferred stock was not part of our buyback program
discussed below.
GCI's Board of Directors has authorized a common stock buyback program for the
repurchase of our Class A and Class B common stock. Our Board of Directors
authorized us and we obtained permission from our lenders and preferred
shareholder for up to $20.0 million of repurchases through June 30, 2005. During
the six month period ended June 30, 2005 we repurchased 930,762 shares of our
Class A common stock at a cost of approximately $8.7 million. We expect to
continue the repurchases
49
throughout 2005 subject to the availability of free cash flow, availability
under our credit facilities, the price of our Class A and Class B common stock
and the requisite consents of our lenders. The repurchases have and will
continue to comply with the restrictions of SEC rule 10b-18.
The long-distance, local access, cable, Internet and wireless services
industries continue to experience substantial competition, regulatory
uncertainty, and continuing technological changes. Our future results of
operations will be affected by our ability to react to changes in the
competitive and regulatory environment and by our ability to fund and implement
new or enhanced technologies. We are unable to determine how competition,
economic conditions, and regulatory and technological changes will affect our
ability to obtain financing under acceptable terms and conditions.
We believe that we will be able to meet our current and long-term liquidity and
capital requirements, and fixed charges 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 December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment,"
requiring all companies to measure compensation cost for all share-based
payments (including employee stock options) at fair value. After consideration
of the SEC's April 2005 amendment of the SFAS No. 123R compliance dates, SFAS
No. 123R is effective for annual periods beginning after June 15, 2005, or
December 15, 2005 for small business issuers. As of January 1, 2006, we will
apply SFAS No. 123R using a modified version of prospective application. Under
that transition method, compensation cost is recognized on or after January 1,
2006 for the portion of outstanding awards for which the requisite service has
not yet been rendered, based on the grant-date fair value of those awards
calculated under SFAS No. 123 for either recognition or pro forma disclosures.
In March 2005 the SEC issued SAB No. 107 expressing the SEC staff's view
regarding the interaction between SFAS No. 123R and certain SEC rules and
regulations and providing the staff's views regarding the valuation of
share-based payment arrangements for public companies. We estimate the
application of SFAS No. 123R will result in an increase in our compensation cost
for all share-based payments of approximately $2.3 million during the year ended
December 31, 2006.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets," which amends APB Opinion No. 29, "Accounting for Nonmonetary
Transactions." The guidance in APB Opinion No. 29 is based on the principle that
exchanges of nonmonetary assets should be measured based on the fair value of
the assets exchanged. The guidance in that Opinion, however, included certain
exceptions to that principle. SFAS No. 153 amends APB Opinion No. 29 to
eliminate the exception for nonmonetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of nonmonetary assets
that do not have commercial substance. A nonmonetary exchange has commercial
substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. We will adopt this statement July 1,
2005 and do not expect it to have a material effect on our results of
operations, financial position and cash flows.
In March 2005, the FASB issued FASB Interpretation ("FIN") 47, "Accounting for
Conditional Asset Retirement Obligations." FIN 47 clarifies that the term
conditional asset retirement obligation as used in SFAS No. 143, "Accounting for
Asset Retirement Obligations," refers to a legal obligation to perform an
50
asset retirement activity in which the timing and (or) method of settlement are
conditional on a future event that may or may not be within the control of the
entity. The obligation to perform the asset retirement activity is unconditional
even though uncertainty exists about the timing and (or) method of settlement.
Thus, the timing and (or) method of settlement may be conditional on a future
event. Accordingly, an entity is required to recognize a liability for the fair
value of a conditional asset retirement obligation if the fair value of the
liability can be reasonably estimated. The fair value of a liability for the
conditional asset retirement obligation should be recognized when
incurred--generally upon acquisition, construction, or development and (or)
through the normal operation of the asset. We will adopt FIN 47 for our annual
report for the year ended December 31, 2005 and do not expect it to have a
material effect on our results of operations, financial position and cash flows.
In May 2005, the FASB issued SFAS 154, "Accounting Changes and Error
Corrections--a replacement of APB Opinion No. 20 and FASB Statement No. 3." SFAS
154 replaces APB Opinion No. 20, "Accounting Changes," and FASB Statement No. 3,
"Reporting Accounting Changes in Interim Financial Statements," and changes the
requirements for the accounting for and reporting of a change in accounting
principle. SFAS 154 applies to all voluntary changes in accounting principle. It
also applies to changes required by an accounting pronouncement in the unusual
instance that the pronouncement does not include specific transition provisions.
When a pronouncement includes specific transition provisions, those provisions
should be followed. We will adopt this statement January 1, 2006 and do not
expect it to have a material effect on our results of operations, financial
position and cash flows.
In June 2005, the FASB ratified EITF Issue No. 04-10, "Determining Whether to
Aggregate Operating Segments That Do Not Meet the Quantitative Thresholds,"
which clarifies the guidance in paragraph 19 of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." According to EITF Issue No.
04-10, operating segments that do not meet the quantitative thresholds can be
aggregated only if aggregation is consistent with the objective and basic
principles of SFAS No. 131, the segments have similar economic characteristics,
and the segments share a majority of the aggregation criteria listed in items
(a)-(e) in paragraph 17 of SFAS No. 131. We will adopt EITF Issue No. 04-10 for
our annual report for the year ended December 31, 2005 and do not expect it to
result in a change to our SFAS No. 131 disclosures.
Critical Accounting Policies
Our accounting and reporting policies comply with accounting principles
generally accepted in the United States of America. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions. The financial position and results
of operations can be affected by these estimates and assumptions, which are
integral to understanding reported results. Critical accounting policies are
those policies that management believes are the most important to the portrayal
of our financial condition and results, and require management to make estimates
that are difficult, subjective or complex. Most accounting policies are not
considered by management to be critical accounting policies. Several factors are
considered in determining whether or not a policy is critical in the preparation
of financial statements. These factors include, among other things, whether the
estimates are significant to the financial statements, the nature of the
estimates, the ability to readily validate the estimates with other information
including third parties or available prices, and sensitivity of the estimates to
changes in economic conditions and whether alternative accounting methods may be
utilized under accounting principles generally accepted in the United States of
America. For all of these policies, management
51
cautions that future events rarely develop exactly as forecast, and the best
estimates routinely require adjustment. Management has discussed the development
and the selection of critical accounting policies with our Audit Committee.
Those policies considered to be critical accounting policies for the six months
ended June 30, 2005 are described below.
o We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required
payments. We also maintain an allowance for doubtful accounts based
on our assessment of the likelihood that our customers will
satisfactorily comply with rules necessary to obtain supplemental
funding from the Universal Service Administration Company ("USAC")
for services provided by us under our packaged communications
offerings to rural hospitals, health clinics and school districts.
We base our estimates on the aging of our accounts receivable
balances, financial health of specific customers, regional economic
data, changes in our collections process, our customers' compliance
with USAC rules, and our historical write-off experience, net of
recoveries. If the financial condition of our customers were to
deteriorate or if they are unable to emerge from reorganization
proceedings, resulting in an impairment of their ability to make
payments, additional allowances may be required. If their financial
condition improves or they emerge successfully from reorganization
proceedings, allowances may be reduced. Such allowance changes
could have a material effect on our consolidated financial
condition and results of operations.
o We record all assets and liabilities acquired in purchase
acquisitions, including goodwill and other intangibles, at fair
value as required by SFAS No. 141, "Business Combinations."
Goodwill and indefinite-lived assets such as our cable certificates
are not amortized but are subject, at a minimum, to annual tests
for impairment and quarterly evaluations of whether events and
circumstances continue to support an indefinite useful life as
required by SFAS No. 142. Other intangible assets are amortized
over their estimated useful lives using the straight-line method,
and are subject to impairment if events or circumstances indicate a
possible inability to realize the carrying amount as required by
SFAS No. 142. The initial goodwill and other intangibles recorded
and subsequent impairment analysis requires management to make
subjective judgments concerning estimates of the applicability of
quoted market prices in active markets and, if quoted market prices
are not available and/or are not applicable, how the acquired asset
will perform in the future using a discounted cash flow analysis.
Estimated cash flows may extend beyond ten years and, by their
nature, are difficult to determine over an extended timeframe.
Events and factors that may significantly affect the estimates
include, among others, competitive forces, customer behaviors and
attrition, changes in revenue growth trends, cost structures and
technology, and changes in discount rates, performance compared to
peers, material and ongoing negative economic trends, and specific
industry or market sector conditions. In determining the
reasonableness of cash flow estimates, we review historical
performance of the underlying asset or similar assets in an effort
to improve assumptions utilized in our estimates. In assessing the
fair value of goodwill and other intangibles, we may consider other
information to validate the reasonableness of our valuations
including third-party assessments. These evaluations could result
in a change in useful lives in future periods and could result in
write-down of the value of intangible assets. Our cable certificate
and goodwill assets are our only indefinite-lived intangible assets
and because of their significance to our consolidated balance
sheet, our annual and quarterly impairment analyses and quarterly
evaluations of remaining useful lives are critical. Any changes in
key assumptions about the
52
business and its prospects, changes in market conditions or other
externalities, or recognition of previously unrecognized intangible
assets for impairment testing purposes could result in an
impairment charge and such a charge could have a material adverse
effect on our consolidated results of operations.
o We estimate unbilled long-distance services segment Cost of Goods
Sold based upon minutes of use carried through our network and
established rates. We estimate unbilled costs for new circuits and
services, and network changes that result in traffic routing
changes or a change in carriers. Carriers that provide service to
us regularly make network changes that can lead to new, revised or
corrected billings. Such estimates are revised or removed when
subsequent billings are received, payments are made, billing
matters are researched and resolved, tariffed billing periods
lapse, or when disputed charges are resolved. Revisions to previous
estimates could either increase or decrease costs in the year in
which the estimate is revised which could have a material effect on
our consolidated financial condition and results of operations.
o Our income tax policy provides for deferred income taxes to show
the effect of temporary differences between the recognition of
revenue and expenses for financial and income tax reporting
purposes and between the tax basis of assets and liabilities and
their reported amounts in the financial statements in accordance
with SFAS No. 109, "Accounting for Income Taxes." We have recorded
deferred tax assets of approximately $70.4 million associated with
income tax net operating losses that were generated from 1992 to
2003, and that expire from 2007 to 2023. Pre-acquisition income tax
net operating losses associated with acquired companies are subject
to additional deductibility limits. We have recorded deferred tax
assets of approximately $1.9 million associated with alternative
minimum tax credits that do not expire. Significant management
judgment is required in developing our provision for income taxes,
including the determination of deferred tax assets and liabilities
and any valuation allowances that may be required against the
deferred tax assets. In conjunction with certain 1996 acquisitions,
we determined that approximately $20.0 million of the acquired net
operating losses would not be utilized for income tax purposes, and
elected with our December 31, 1996 income tax returns to forego
utilization of such acquired losses. Deferred tax assets were not
recorded associated with the foregone losses and, accordingly, no
valuation allowance was provided. We have not recorded a valuation
allowance on the deferred tax assets as of June 30, 2005 based on
management's belief that future reversals of existing taxable
temporary differences and estimated future taxable income exclusive
of reversing temporary differences and carryforwards, will, more
likely than not, be sufficient to realize the benefit of these
assets over time. In the event that actual results differ from
these estimates or if our historical trends change, we may be
required to record a valuation allowance on deferred tax assets,
which could have a material adverse effect on our consolidated
financial position or results of operations.
Other significant accounting policies, not involving the same level of
measurement uncertainties as those discussed above, are nevertheless important
to an understanding of the financial statements. Policies related to revenue
recognition and financial instruments require difficult judgments on complex
matters that are often subject to multiple sources of authoritative guidance.
Certain of these matters are among topics currently under reexamination by
accounting standards setters and regulators. No specific conclusions reached by
these standard setters appear likely to cause a material change in our
accounting policies, although outcomes cannot be predicted with confidence. A
complete discussion of our significant accounting policies can be found in note
1 in the "Notes to Consolidated Financial Statements" of our annual report on
Form 10-K for the year ended December 31, 2004.
53
Geographic Concentration and the Alaska Economy
We offer voice and data telecommunication and video services to customers
primarily throughout Alaska. Because of this geographic concentration, growth of
our business and of our operations depends upon economic conditions in Alaska.
The economy of Alaska is dependent upon the natural resource industries, and in
particular oil production, as well as investment earnings, tourism, government,
and United States military spending. Any deterioration in these markets could
have an adverse impact on us. All of the federal funding and the majority of
investment revenues are dedicated for specific purposes, leaving oil revenues as
the primary source of general operating revenues. In fiscal 2004 the State of
Alaska reported that oil revenues, federal funding and investment revenues
supplied 28%, 23% and 41%, respectively, of the state's total revenues. In
fiscal 2005 state economists forecast that Alaska's oil revenues, federal
funding and investment revenues will supply 33%, 34% and 23%, 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
0.980 million barrels produced per day in fiscal 2004. The state forecasts the
production rate to decline from 0.920 million barrels produced per day in fiscal
2005 to 0.833 million barrels produced per day in fiscal 2015.
Market prices for North Slope oil averaged $31.74 in fiscal 2004 and are
forecasted to average $41.75 in fiscal 2005. The closing price per barrel was
$52.88 on July 21, 2005. To the extent that actual oil prices vary materially
from the state's projected prices, the state's projected revenues and deficits
will change. When the price of oil is $30.00 per barrel or greater, every $1
change in the price per barrel of oil is forecasted to result in an
approximately $60.0 million change in the state's fiscal 2005 revenue. The
production policy of the Organization of Petroleum Exporting Countries and its
ability to continue to act in concert represents a key uncertainty in the
state's revenue forecast.
The State of Alaska maintains the Constitutional Budget Reserve Fund that is
intended to fund budgetary shortfalls. If the state's current projections are
realized, the Constitutional Budget Reserve Fund will be depleted in 2010. The
date the Constitutional Budget Reserve Fund is depleted is highly influenced by
the price of oil. If the fund is depleted, aggressive state action will be
necessary to increase revenues and reduce spending in order to balance the
budget. The governor of the State of Alaska and the Alaska legislature continue
to evaluate cost cutting and revenue enhancing measures.
Should new oil discoveries or developments not materialize or the price of oil
become depressed, the long term trend of continued decline in oil production
from the Prudhoe Bay area is inevitable with a corresponding adverse impact on
the economy of the state, in general, and on demand for telecommunications and
cable television services, and, therefore, on us, in particular. Periodically
there are renewed efforts to allow exploration and development in the Arctic
National Wildlife Refuge ("ANWR"). The United States Energy Information Agency
estimates it could take nine years to begin oil field drilling after approval of
ANWR exploration.
Deployment of a natural gas pipeline from the State of Alaska's North Slope to
the Lower 48 States has been proposed to supplement natural gas supplies. A
competing natural gas pipeline through Canada has also been proposed. The
economic viability of a natural gas pipeline depends upon the price of and
demand for natural gas. Either project could have a positive impact on the State
of Alaska's revenues
54
and could provide a substantial stimulus to the Alaska economy. In October 2004
both houses of Congress passed and the President signed legislation allowing
loan guarantees of up to $18.0 billion, certain favorable income tax provisions
and tax credits, and expedited permitting and judicial review for the
construction of an Alaska natural gas pipeline. To support the construction of a
natural gas pipeline, the governor of the State of Alaska has announced that he
believes the state must assume some level of shipper risk, serve as an equity
partner or both. The State of Alaska is actively negotiating applications to
construct a natural gas pipeline.
Development of the ballistic missile defense system project may have a
significant impact on Alaskan telecommunication requirements and the Alaska
economy. The system is a fixed, land-based, non-nuclear missile defense system
with a land and space based detection system capable of responding to limited
strategic ballistic missile threats to the United States. The system includes
deployment of up to 100 ground-based interceptor silos and battle management
command and control facilities at Fort Greely, Alaska.
The United States Army Corps of Engineers awarded a construction contract in
2002 for test bed facilities. The contract is reported to contain basic
requirements and various options that could amount to $250 million in
construction, or possibly more, if all items are executed. Construction began on
the Fort Greely test bed in 2002. The first ground-based missile interceptor was
placed in an underground silo on July 22, 2004. The Missile Defense Agency is
reported to expect to have up to ten more interceptors emplaced by the end of
2005.
Tourism, air cargo, and service sectors have helped offset the prevailing
pattern of oil industry downsizing that has occurred during much of the last
several years.
We have, since our entry into the telecommunication marketplace, aggressively
marketed our services to seek a larger share of the available market. The
customer base in Alaska is limited, however, with a population of approximately
644,000 people. The State of Alaska's population is distributed as follows:
o 42% are located in the Municipality of Anchorage,
o 13% are located in the Fairbanks North Star Borough,
o 10% are located in the Matanuska-Susitna Borough,
o 5% are located in the City and Borough of Juneau, and
o The remaining 30% are located in other communities across the State
of Alaska.
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.
55
Seasonality
Long-distance services segment revenues (primarily those derived from our other
common carrier customers) have historically been highest in the summer months
because of temporary population increases attributable to tourism and increased
seasonal economic activity such as construction, commercial fishing, and oil and
gas activities. Cable services segment revenues are higher in the winter months
because consumers spend more time at home and tend to watch more television
during these months. The local access and Internet services segments do not
exhibit significant seasonality. Our ability to implement construction projects
is also hampered during the winter months because of cold temperatures, snow and
short daylight hours.
Schedule of Certain Known Contractual Obligations
The following table details future projected payments associated with our
certain known contractual obligations as of December 31, 2004, the date of our
most recent fiscal year-end balance sheet.
Payments Due by Period
----------------------------------------------------------------
More
Less than 1 1 to 3 4 to 5 Than 5
Total Year Years Years Years
------------- ----------- ------------ ------------ ------------
(Amounts in thousands)
Long-term debt $ 441,168 168 121,000 --- 320,000
Interest on long-term debt 220,400 23,200 46,400 46,400 104,400
Capital lease obligations, including
interest 53,560 9,461 17,849 25,798 452
Operating lease commitments 72,771 14,564 21,080 15,070 22,057
Redeemable preferred stock 4,249 --- --- --- 4,249
Purchase obligations 43,168 24,076 15,183 3,909 ---
------------- ----------- ------------ ------------ ------------
Total contractual obligations $ 835,316 71,469 221,512 91,177 451,158
============= =========== ============ ============ ============
For long-term debt included in the above table, we have included principal
payments on our Senior Credit Facility and on our Senior Notes. Interest on
amounts outstanding under our Senior Credit Facility is based on variable rates
and therefore the amount is not determinable. Our Senior Notes require
semi-annual interest payments of $11.6 million through August 2014. For a
discussion of our long-term debt see note 7 in the "Notes to Consolidated
Financial Statements" included in Part II of our December 31, 2004 annual report
on Form 10-K.
For a discussion of our capital and operating leases, see note 15 in the "Notes
to Consolidated Financial Statements" included in Part II of our December 31,
2004 annual report on Form 10-K.
In May 2005 we repurchased the remaining 4,314 shares of our Series B preferred
stock for a total purchase price of $6.6 million from Toronto Dominion
Investments, Inc. The 4,314 preferred shares were convertible into 777,297
shares of our Class A common stock and the transaction price represented an
equivalent Class A common stock purchase price of $8.50 per share.
Purchase obligations include a remaining DLPS equipment purchase commitment of
$13.5 million, a remaining $13.9 million commitment for our Alaska Airlines
agreement as further described in note 15
56
in the "Notes to Consolidated Financial Statements" included in Part II of our
December 31, 2004 annual report on Form 10-K, and a $411,000 maintenance
contract commitment. The contracts associated with these commitments are
non-cancelable. Purchase obligations also include open purchase orders for goods
and services for capital projects and normal operations totaling $15.4 million
which are not included in our Consolidated Balance Sheets at December 31, 2004,
because the goods had not been received or the services had not been performed
at December 31, 2004. The open purchase orders are cancelable.
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 Credit Facility carries interest rate risk. Amounts borrowed under
this Agreement bear interest at LIBOR plus 2.25% or less depending upon our
Total Leverage Ratio (as defined). Should the LIBOR rate change, our interest
expense will increase or decrease accordingly. As of June 30, 2005, we have
borrowed $121.2 million subject to interest rate risk. On this amount, a 1%
increase in the interest rate would result in $1,212,000 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 June 30, 2005, we have borrowed $35.7 million subject to interest rate
risk. On this amount, a 1% increase in the interest rate would result in
$357,000 in additional gross interest cost on an annualized basis.
PART I.
ITEM 4.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, we
carried out an evaluation of the effectiveness of the design and operation of
our "disclosure controls and procedures" (as defined in the Securities Exchange
Act of 1934 ("Exchange Act") Rules 13a - 15(e)) under the supervision and with
the participation of our management, including our Chief Executive Officer and
our Chief Financial Officer. Based upon that evaluation, our Chief Executive
Officer and our Chief Financial Officer concluded that our disclosure controls
and procedures are effective.
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in our reports
filed or submitted under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed in our
reports filed under the Exchange Act is accumulated and communicated to
management to allow timely decisions regarding required disclosure.
57
Changes in Internal Controls
There were no changes in our internal control over financial reporting during
the second quarter of 2005 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
All internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
We may enhance, modify, and supplement internal controls and disclosure controls
and procedures based on experience.
PART II.
ITEM 1.
LEGAL PROCEEDINGS
Information regarding material pending legal proceedings to which we are a party
is included in note 6 to the accompanying "Notes to Interim Condensed
Consolidated Financial Statements" and is incorporated herein by reference.
58
PART II.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) Not applicable.
(b) Not applicable.
(c) Repurchases made in the quarter ended June 30, 2005:
Issuer Purchases of Equity Securities
--------------------------------------------------------------------------------------------------------
(d) Maximum Number
(c) Total Number (or approximate
of Shares Dollar Value) of
Purchased as Part Shares that May Yet
(a) Total (b) Average of Publicly Be Purchased Under
Number of Price Paid Announced Plans the Plans or
Period Shares Purchased per Share or Programs (1) Programs (2)
--------------------------- ----------------- -------------- ------------------- -----------------------
April 1, 2005 to April
30, 2005 24 (3) $9.17 837,842 $11.698 million
May 1, 2005 to May 31,
2005 338,400 (4) $8.25 1,176,242 $8.907 million
June 1, 2005 to June 30,
2005 20,701 (3) $9.87 1,196,943 $8.703 million
-----------------
Total 359,125
=================
<FN>
(1) The repurchase plan was publicly announced on November 3, 2004. Our plan
does not have an expiration date, however transactions pursuant to the plan
are subject to periodic approval by our Board of Directors and must receive
the consents of our lenders. We expect to continue the repurchases
throughout 2005 subject to the availability of free cash flow, availability
under our credit facilities, the price of our Class A and Class B common
stock and the requisite consents of our lenders. We do not intend to
terminate this plan in 2005. No plan has expired during the quarter ended
June 30, 2005.
(2) The total amount approved for repurchase was $20.0 million through June 30,
2005 consisting of $10.0 million through December 31, 2004, an additional
$5.0 million through March 31, 2005, and an additional $5.0 million through
June 30, 2005.
(3) Private party transactions made under our publicly announced repurchase
plan.
(4) Open-market purchases made under our publicly announced repurchase plan.
</FN>
59
PART II.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Date of the meeting: June 27, 2005
Purpose of meeting: Annual shareholders meeting
(b) Name of each director elected at the meeting and the name of
each other director whose term of office as a director
continued after the meeting:
Name Votes for Votes withheld
--------------------- ------------ --------------
Jerry A. Edgerton 64,367,007 16,271,726
Directors, in addition to those listed above, whose term of
office as director continued after the meeting:
Stephen M. Brett
Ronald A. Duncan
Donne F. Fisher
William P. Glasgow
Stephen R. Mooney
James M. Schneider
(c) Other matters voted upon:
Approving an amendment to, and ratifying a restatement of,
the Company's Amended and Restated 1986 Stock Option Plan,
including establishing certain incentive stock options,
nonstatutory stock options, restricted stock awards and
otherwise revising the plan.
Votes for: 66,455,477
Votes against: 5,850,400
Votes withheld: 897,756
(d) Not applicable
PART II.
ITEM 5.
OTHER INFORMATION
Stephen A. Reinstadtler declined to run for re-election to serve as a member of
GCI's board of directors at GCI's annual shareholders' meeting. Mr.
Reinstadtler's term as a director of GCI expired on June 27, 2005, the date of
the meeting.
60
PART II.
ITEM 6.
EXHIBITS
Exhibit No. Description
--------------------------------------------------------------------------------------------------------
31.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 by our President and Director
31.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 by our Senior Vice President, Chief Financial
Officer, Secretary and Treasurer
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 by our President and Director
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 by our Senior Vice President, Chief Financial
Officer, Secretary and Treasurer
61
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENERAL COMMUNICATION, INC.
Signature Title Date
- -------------------------------------- -------------------------------------------- -----------------------
/s/ Ronald A. Duncan President and Director August 5, 2005
- -------------------------------------- (Principal Executive Officer) -----------------------
Ronald A. Duncan
/s/ John M. Lowber Senior Vice President, Chief Financial August 5, 2005
- -------------------------------------- Officer, Secretary and Treasurer -----------------------
John M. Lowber (Principal Financial Officer)
/s/ Alfred J. Walker Vice President, Chief Accounting August 5, 2005
- -------------------------------------- Officer -----------------------
Alfred J. Walker (Principal Accounting Officer)
62