As filed with the Securities and Exchange Commission on November 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 September 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 .
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes No X .
The number of shares outstanding of the registrant's classes of common stock as
of October 31, 2005 was:
51,437,973 shares of Class A common stock; and
3,845,424 shares of Class B common stock.
1
GENERAL COMMUNICATION, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 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 September 30, 2005
(unaudited) and December 31, 2004..................................................5
Consolidated Statements of Income for the
three and nine months ended September 30, 2005 (unaudited)
and 2004 (unaudited)...............................................................7
Consolidated Statements of Stockholders' Equity
for the nine months ended September 30, 2005
(unaudited) and 2004 (unaudited)...................................................8
Consolidated Statements of Cash Flows for the nine
months ended September 30, 2005 (unaudited)
and 2004 (unaudited)...............................................................10
Notes to Interim Condensed Consolidated Financial
Statements (unaudited).............................................................11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................................27
Item 3. Quantitative and Qualitative Disclosures About
Market Risk...........................................................................62
Item 4. Controls and Procedures...............................................................62
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.....................................................................63
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds...........................64
Item 6. Exhibits..............................................................................65
Other items are omitted, as they are not applicable.
SIGNATURES................................................................................................66
2
Cautionary Statement Regarding Forward-Looking Statements
You should carefully review the information contained in this Quarterly Report,
but you 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 Private Securities Litigation Reform Act of 1995.
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 The effect on us of industry consolidation including the merger and
potential acquisition of two of our large wholesale customers by
companies which may have 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 any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements.
4
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands) (Unaudited)
September 30, December 31,
ASSETS 2005 2004
- ------------------------------------------------------------------------------------------ ------------------- ----------------
Current assets:
Cash and cash equivalents $ 12,719 31,452
------------------- ----------------
Receivables 84,531 74,429
Less allowance for doubtful receivables 3,919 2,317
------------------- ----------------
Net receivables 80,612 72,112
Deferred income taxes, net 14,192 13,893
Prepaid expenses 7,758 7,907
Property held for sale 2,284 2,282
Inventories 1,054 1,215
Notes receivable from related parties 458 475
Other current assets 487 2,429
------------------- ----------------
Total current assets 119,564 131,765
------------------- ----------------
Property and equipment in service, net of depreciation 449,329 432,249
Construction in progress 16,000 22,505
------------------- ----------------
Net property and equipment 465,329 454,754
------------------- ----------------
Cable certificates 191,241 191,241
Goodwill 41,972 41,972
Other intangible assets, net of amortization of $2,537 and $1,625 at September 30, 2005
and December 31, 2004, respectively 6,305 6,265
Deferred loan and senior notes costs, net of amortization of $1,200 and $2,602 at
September 30, 2005 and December 31, 2004, respectively 8,271 10,341
Notes receivable from related parties 3,413 3,345
Other assets 13,003 9,508
------------------- ----------------
Total other assets 264,205 262,672
------------------- ----------------
Total assets $ 849,098 849,191
=================== ================
See accompanying notes to interim condensed consolidated financial statements.
5 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
(Amounts in thousands) (Unaudited)
LIABILITIES, REDEEMABLE PREFERRED STOCK, AND September 30, December 31,
STOCKHOLDERS' EQUITY 2005 2004
- ------------------------------------------------------------------------------------------ ------------------ -----------------
Current liabilities:
Current maturities of obligations under long-term debt and capital leases $ 1,763 6,407
Accounts payable 25,209 28,742
Accrued payroll and payroll related obligations 16,682 15,350
Deferred revenue 14,416 16,253
Accrued liabilities 5,965 6,849
Accrued interest 3,612 8,747
Subscriber deposits 377 437
------------------ -----------------
Total current liabilities 68,024 82,785
Long-term debt 474,433 436,969
Obligations under capital leases, excluding current maturities --- 32,750
Obligation under capital lease due to related party, excluding current maturity 642 672
Deferred income taxes, net of deferred income tax benefit 58,493 49,111
Other liabilities 10,408 8,385
------------------ -----------------
Total liabilities 612,000 610,672
------------------ -----------------
Redeemable preferred stock --- 4,249
------------------ -----------------
Stockholders' equity:
Common stock (no par):
Class A. Authorized 100,000 shares; issued 51,386 and 51,825 shares at
September 30, 2005 and December 31, 2004, respectively 180,765 186,883
Class B. Authorized 10,000 shares; issued 3,845 and 3,862 shares at
September 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 292 and 288 Class A and Class B common shares held in treasury
at September 30, 2005 and December 31, 2004, respectively (1,714) (1,702)
Paid-in capital 15,845 14,957
Notes receivable with related parties issued upon stock option exercise (2,978) (3,016)
Retained earnings 41,932 33,900
------------------ -----------------
Total stockholders' equity 237,098 234,270
------------------ -----------------
Commitments and contingencies
Total liabilities, redeemable preferred stock, and stockholders' equity $ 849,098 849,191
================== =================
See accompanying notes to interim condensed consolidated financial statements.
6
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
(Amounts in thousands, except per share amounts) 2005 2004 2005 2004
----------- ------------ ------------ ------------
Revenues $ 113,761 106,622 330,936 319,324
Cost of goods sold (exclusive of depreciation, amortization and
accretion shown separately below) 36,345 32,876 107,590 104,878
Selling, general and administrative expenses 38,620 37,324 113,819 108,830
Restructuring charge 1,894 --- 1,894 ---
Bad debt expense (recovery) 31 (281) (128) (1,165)
Depreciation, amortization and accretion expense 18,559 15,297 54,710 46,759
----------- ------------ ------------ ------------
Operating income 18,312 21,406 53,051 60,022
----------- ------------ ------------ ------------
Other income (expense):
Interest expense (8,964) (6,722) (25,600) (20,275)
Loss on early extinguishment of debt and termination of capital
lease (2,797) --- (2,797) (6,136)
Amortization and write-off of loan and senior notes fees (2,224) (400) (3,155) (3,414)
Interest income 266 86 557 273
----------- ------------ ------------ ------------
Other expense, net (13,719) (7,036) (30,995) (29,552)
----------- ------------ ------------ ------------
Net income before income taxes 4,593 14,370 22,056 30,470
Income tax expense 2,308 5,075 9,824 11,525
----------- ------------ ------------ ------------
Net income 2,285 9,295 12,232 18,945
Preferred stock dividends --- 381 148 1,228
----------- ------------ ------------ ------------
Net income available to common shareholders $ 2,285 8,914 12,084 17,717
=========== ============ ============ ============
Basic net income per common share $ 0.04 0.15 0.22 0.31
=========== ============ ============ ============
Diluted net income per common share $ 0.04 0.15 0.22 0.30
=========== ============ ============ ============
See accompanying notes to interim condensed consolidated financial statements.
7
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 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 --- --- --- --- --- 18,945 --- 18,945
Change in fair value of cash flow
hedge, net of change in income tax
liability of $207 --- --- --- --- --- --- 308 308
---------
Comprehensive income 19,253
Tax effect of excess stock compensation
expense for tax purposes over amounts
recognized for financial reporting
purposes --- --- --- 534 --- --- --- 534
Shares issued under stock option plan 2,228 --- --- --- --- --- --- 2,228
Amortization of the excess of GCI stock
market value over stock option exercise
cost on date of stock option grant --- --- --- 247 --- --- --- 247
Class B shares converted to Class A 2 (2) --- --- --- --- --- ---
Conversion of Series B preferred stock to
Class A common stock 6,420 --- --- --- --- --- --- 6,420
Payments received on notes receivable
issued to related parties upon stock
option exercise --- --- --- --- 620 --- --- 620
Purchase of treasury stock --- --- (367) --- --- --- --- (367)
Preferred stock dividends --- --- --- --- --- (1,228) --- (1,228)
----------------------------------------------------------------------------------------
Balances at September 30, 2004 $ 211,012 3,267 (2,284) 13,617 (4,351) 33,088 --- 254,349
========================================================================================
See accompanying notes to interim condensed consolidated financial statements.
8 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 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
Net income --- --- --- --- --- 12,232 12,232
Tax effect of excess stock compensation
expense for tax purposes over amounts
recognized for financial reporting
purposes --- --- --- 737 --- --- 737
Common stock repurchases --- --- --- --- --- (10,688) (10,688)
Common stock retirements (8,994) --- --- --- --- 8,994 ---
Shares issued under stock option plan 2,876 --- --- --- --- --- 2,876
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 --- --- --- 151 --- --- 151
Issuance of stock awards --- --- 22 --- --- --- 22
Purchase of treasury stock --- --- (34) --- --- --- (34)
Payment received on note receivable
issued to related party upon stock
option exercise --- --- --- --- 38 --- 38
Preferred stock dividends --- --- --- --- --- (148) (148)
---------------------------------------------------------------------------
Balances at September 30, 2005 $ 180,765 3,248 (1,714) 15,845 (2,978) 41,932 237,098
===========================================================================
See accompanying notes to interim condensed consolidated financial statements.
9
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(Unaudited)
(Amounts in thousands) 2005 2004
-------------- -------------
Cash flows from operating activities:
Net income $ 12,232 18,945
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation, amortization and accretion expense 54,710 46,759
Deferred income tax expense 9,824 11,435
Amortization and write-off of loan and senior notes fees 3,155 3,414
Bad debt expense, net of write-offs 1,000 115
Deferred compensation 640 427
Loss on disposal of property and equipment 178 ---
Compensatory stock options 151 248
Loss on early extinguishment of debt and termination of capital lease 2,797 6,136
Other noncash income and expense items 731 654
Change in operating assets and liabilities (18,691) (25,267)
-------------- -------------
Net cash provided by operating activities 66,727 62,866
-------------- -------------
Cash flows from investing activities:
Purchases of property and equipment, including construction period interest (65,838) (82,810)
Purchases of other assets and intangible assets (2,470) (2,297)
Proceeds from sales of assets 1,995 1,190
Additions to property held for sale (212) (128)
Notes receivable issued to related parties (18) (27)
Payments received on notes receivable from related parties --- 1,847
Refund of deposit --- 699
-------------- -------------
Net cash used in investing activities (66,543) (81,526)
-------------- -------------
Cash flows from financing activities:
Borrowing on Senior Credit Facility 38,832 20,000
Repayment of capital lease obligations (38,981) (3,538)
Purchase of common stock to be retired (10,484) ---
Redemption of Series B redeemable preferred stock (6,607) ---
Proceeds from common stock issuance 2,876 2,228
Payment upon early termination of capital lease (2,797) ---
Payment of debt issuance costs (1,085) (6,659)
Repayment of Senior Credit Facility (400) (53,832)
Payment of preferred stock dividends (237) (1,042)
Purchase of treasury stock (34) (367)
Issuance of new Senior Notes --- 245,720
Repayment of old Senior Notes --- (180,000)
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 (18,917) 16,994
-------------- -------------
Net decrease in cash and cash equivalents (18,733) (1,666)
Cash and cash equivalents at beginning of period 31,452 10,435
-------------- -------------
Cash and cash equivalents at end of period $ 12,719 8,769
============== =============
See accompanying notes to interim condensed consolidated financial statements.
10
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.
11 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
(c) Earnings per Common Share
Earnings per common share ("EPS") and common shares used to
calculate basic and diluted EPS consist of the following (amounts
in thousands, except per share amounts):
Three Months Ended September 30,
2005 2004
---------------------------------- ----------------------------------
Income Shares Income Shares
(Num- (Denom- Per-share (Num- (Denom- Per-share
erator) inator) Amounts erator) inator) Amounts
---------- ----------- ----------- ---------- ----------- -----------
Net income $ 2,285 $ 9,295
---------- ----------
Less preferred stock dividends:
Series B --- 230
Series C --- 151
---------- ----------
--- 381
---------- ----------
Basic EPS:
Net income 2,285 54,677 $ 0.04 8,914 58,031 $ 0.15
Effect of Dilutive Securities:
Unexercised stock options --- 1,304 --- --- 1,000 ---
Series B redeemable preferred stock --- --- --- 230 1,677 ---
---------- ----------- ----------- ---------- ----------- -----------
Diluted EPS:
Net income $ 2,285 55,981 $ 0.04 $ 9,144 60,708 $ 0.15
========== =========== =========== ========== =========== ===========
Nine Months Ended September 30,
2005 2004
------------------------------------ -----------------------------------
Income Shares Income Shares
(Num- (Denom- Per-share (Num- (Denom- Per-share
erator) inator) Amounts erator) inator) Amounts
------------ ----------- ----------- ----------- ----------- -----------
Net income $ 12,232 $ 18,945
------------ -----------
Less preferred stock dividends:
Series B 148 778
Series C --- 450
------------ -----------
148 1,228
------------ -----------
Basic EPS:
Net income 12,084 54,765 $ 0.22 17,717 57,027 $ 0.31
Effect of Dilutive Securities:
Unexercised stock options --- 1,190 --- --- 1,135 ---
------------ ----------- ----------- ----------- ----------- -----------
Diluted EPS:
Net income $ 12,084 55,955 $ 0.22 $ 17,717 58,162 $ 0.30
============ =========== =========== =========== =========== ===========
12 (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 nine months ended
September 30, 2005 and 2004 are not included in the diluted EPS
calculations and consist of the following (shares, in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Series B redeemable preferred stock --- --- 413 1,677
Series C redeemable preferred stock --- 833 --- 833
------------ ------------ ------------ ------------
Anti-dilutive common equivalent shares outstanding --- 833 413 2,510
============ ============ ============ ============
Weighted average shares associated with outstanding stock options
for the three and nine months ended September 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 Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
----------- ------------ ------------ ------------
Weighted average shares associated with outstanding
stock options 126 736 230 292
=========== ============ ============ ============
(d) Common Stock
Following are the changes in common stock for the nine months ended
September 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 388 ---
Conversion of Series B preferred stock to Class A
common stock 1,160 ---
------------- ------------
Balances at September 30, 2004 54,139 3,866
============= ============
Balances at December 31, 2004 51,825 3,862
Class B shares converted to Class A 17 (17)
Shares issued under stock option plan 480 ---
Shares retired (936) ---
------------- ------------
Balances at September 30, 2005 51,386 3,845
============= ============
13 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
At September 30, 2005 and December 31, 2004 we held 309,000 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 September 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 September 30, 2005 and December 31, 2004.
Our 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 $25.0 million
of repurchases through September 30, 2005. During the nine month
period ended September 30, 2005 we repurchased 1,175,212 shares of
our Class A common stock at a cost of approximately $10.7 million.
The repurchases have complied with the restrictions of SEC rule
10b-18. Our Board of Directors authorized repurchases up to $5.0
million per quarter on an indefinite basis depending upon market
conditions.
(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 September 30,
2005 we have no preferred stock outstanding. At December 31, 2004
we had $4.2 million of redeemable Series B preferred stock
outstanding. We have 1,000,000 shares of preferred stock authorized
and had 4,314 shares of Series B issued and outstanding 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
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 September
30, 2005 and 2004 (amounts in thousands):
Balance at December 31, 2003 $ 2,005
Accretion expense for the nine months ended
September 30, 2004 134
Liability settled (6)
Other (43)
--------
Balance at September 30, 2004 $ 2,090
========
Balance at December 31, 2004 $ 2,971
Accretion expense for the nine months ended
September 30, 2005 148
--------
Balance at September 30, 2005 $ 3,119
========
14 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Our asset retirement obligations were included in Other Liabilities
at September 30, 2005 and December 31, 2004.
(g) Stock Option Plan
At September 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.
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 Staff Accounting Bulletin ("SAB") No. 107 expressing the
SEC staff's view regarding the interaction between SFAS No. 123R
and certain SEC rules and regulations, and regarding the valuation
of share-based payment arrangements for public companies. In August
2005 the FASB staff issued FASB Staff Position ("FSP") SFAS 123R-1
regarding the recognition and measurement requirements of
freestanding financial instruments originally issued as employee
compensation. In October 2005 the FASB staff issued FSP SFAS 123R-2
regarding guidance on application of grant date as defined in SFAS
123. We estimate the application of SFAS No. 123R will result in an
increase in our compensation cost for all share-based payments of
approximately $2.0 million to $2.5 million during the year ended
December 31, 2006.
15 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Stock-based employee compensation cost is reflected over the
options' vesting period of generally five years and compensation
cost for options granted prior to January 1, 1996 is not
considered. The following table illustrates the effect on net
income and EPS for the three and nine months ended September 30,
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 Nine Months Ended
September 30, September 30,
------------------------- ------------------------
2005 2004 2005 2004
----------- ---------- ---------- ----------
Net income, as reported $ 2,285 9,295 12,232 18,945
Total stock-based employee
compensation expense included in
reported net income, net of related
tax effects 172 53 245 129
Total stock-based employee
compensation expense under the
fair-value based method for all
awards, net of related tax effects (390) (594) (1,327) (1,682)
----------- ---------- ---------- ----------
Pro forma net income $ 2,067 8,754 11,150 17,392
=========== ========== ========== ==========
Basic net income per common share,
as reported $ 0.04 0.15 0.22 0.31
=========== ========== ========== ==========
Diluted net income per common share,
as reported $ 0.04 0.15 0.22 0.30
=========== ========== ========== ==========
Basic and diluted net income per
common share, pro forma $ 0.04 0.14 0.20 0.28
=========== ========== ========== ==========
The calculation of total stock-based employee compensation expense
under the fair-value based method includes weighted-average
assumptions of a risk-free interest rate, volatility and an
expected life.
(h) New Accounting Standards
Effective July 1, 2005, we adopted SFAS 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
16 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
exchange. The adoption of SFAS 153 did not have a material effect
on our results of operations, financial position or cash flows.
(2) Consolidated Statements of Cash Flows Supplemental Disclosures
Changes in operating assets and liabilities consist of (amounts in
thousands):
Nine month periods ended September 30, 2005 2004
------------ ------------
Increase in accounts receivable $ (12,027) (5,365)
Decrease in prepaid expenses 149 4,352
(Increase) decrease in inventories 161 (1,042)
Decrease in other current assets 79 1,064
Decrease in accounts payable (3,533) (6,783)
Increase (decrease) in accrued payroll and payroll
related obligations 1,332 (3,520)
Decrease in deferred revenues (1,837) (7,431)
Decrease in accrued interest (5,135) (5,785)
Increase (decrease) in accrued liabilities 1,097 (252)
Decrease in subscriber deposits (60) (180)
Increase (decrease) in components of other long-term
liabilities 1,083 (325)
------------ ------------
$ (18,691) (25,267)
============ ============
We paid interest totaling approximately $30.1 million and $27.1 million
during the nine months ended September 30, 2005 and 2004, respectively.
We capitalized interest of $0 and approximately $1.1 million during the
nine months ended September 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 nine
months ended September 30, 2005 and 2004, respectively. We paid income
taxes of $133,000 and $90,000 during the nine months ended September 30,
2005 and 2004, respectively.
We recorded $737,000 and $534,000 during the nine months ended September
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 and August 2004, 3,108 and 3,328 shares of our Series B
preferred stock, respectively, were converted to 560,000 and 599,640
shares of our Class A common stock, respectively, 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 September 30, 2005.
The remaining useful lives of our cable certificates and goodwill were
evaluated as of September 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 September 30, 2005.
17 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
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 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
(amounts in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
-------------- ----------- ------------- -----------
Amortization expense $ 307 224 913 575
============== =========== ============= ===========
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 $ 1,234
2006 1,280
2007 1,210
2008 958
2009 643
(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.
18 (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 Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
-------------- ----------- ------------- -----------
MCI credit realized $ 1,445 1,090 3,334 3,386
============== =========== ============= ===========
The remaining unused MCI credit totaled $324,000 and $3.7 million at
September 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) Restructuring Charge
On August 22, 2005 we committed to a reorganization plan to more
efficiently meet the demands of technological and product convergence by
realigning along customer lines rather than product lines. The
reorganization plan includes integration of several functions resulting
in the layoff of 76 employees by November 30, 2005. The reorganization is
expected to be completed and become effective on January 1, 2006.
Beginning January 1, 2006 we will be reorganized under Consumer,
Commercial, Carrier and Managed Broadband segments, replacing the Long
Distance, Cable, Local Access and Internet services segments.
Charges incurred in relation to the reorganization plan were accounted
for under SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities." We recognized approximately $1.9 million in
Restructuring Charge during the three months and nine months ended
September 30, 2005. Our estimate of the total costs to be incurred under
this plan is $2.2 million of which $1.9 million has been recognized as a
liability for one-time termination benefits in accordance with SFAS No.
146. The following table sets forth the restructuring charges by segment
during the three and nine months ended September 30, 2005 (amounts in
thousands):
Reportable Segments
------------------------------------------------------------
Long- Local Total
Distance Cable Access Internet Reportable
Services Services Services Services Segments All Other Total
----------- ----------- ----------- ----------- ------------- ---------- ----------
Estimated total
restructuring charges
to be incurred $ 673 316 203 158 1,350 810 2,160
=========== =========== =========== =========== ============= ========== ==========
Total restructuring
charges recognized at
September 30, 2005 $ 547 302 194 152 1,195 699 1,894
=========== =========== =========== =========== ============= ========== ==========
19 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Following is a reconciliation of our beginning and ending liability
related to the reorganization plan at September 30, 2005 (amounts in
thousands):
Balance at December 31, 2004 $ ---
Restructuring charge incurred 1,894
Cash paid (591)
Non-cash charges (13)
--------
Balance at September 30, 2005 $ 1,290
========
(6) Long-term Debt
On August 31, 2005 our April 2004 Senior Credit Facility was amended and
restated. The $215.0 million Amended and Restated Senior Secured Credit
Facility ("Amended Senior Credit Facility") includes a $160.0 million
term loan and a $55.0 million revolving credit facility with a $25.0
million sublimit for letters of credit. Proceeds were used to pay down
our previous Senior Credit Facility and to pay off our Satellite
Transponder Capital Lease with the remainder used to pay financing fees.
Outstanding principal of $35.8 million on the Satellite Transponder
Capital Lease was repaid, and we incurred a $2.8 million charge due to
the early termination of the capital lease which is classified as Loss on
Early Extinguishment of Debt during the three and nine months ended
September 30, 2005 on our Consolidated Statements of Income.
The Amended Senior Credit Facility decreased the interest rate on the
term loan from LIBOR plus 2.25% to LIBOR plus 1.50%. The interest rate on
the revolving portion of the previous Senior Credit Facility was LIBOR
plus a margin dependent upon our Total Leverage Ratio (as defined)
ranging from 1.75% to 2.50%. The Amended Senior Credit Facility reduced
the revolving credit facility interest rate to LIBOR plus the following
applicable margin dependent upon our Total Leverage ratio (as defined):
Total Leverage Applicable
Ratio (as defined) Margin
------------------------- --------------
>
= 3.75 0.175%
>
= 3.25 but < 3.75 0.150%
>
= 2.75 but < 3.25 0.125%
< 2.75 0.100%
The commitment fee we are required to pay on the unused portion of the
commitment was reduced to 0.375%.
The Amended Senior Credit Facility increased our allowed Total Leverage
Ratio (as defined) limit to 4.50:1.0 and our Senior Debt Ratio (as
defined) limit to 2.25:1.0. Our Fixed Charge Coverage Ratio (as defined)
must be less than 1.0:1.0.
Our term loan is fully drawn and we have letters of credit outstanding
totaling $5.5 million at September 30, 2005, which leaves $49.5 million
available to draw under the revolving credit facility if needed. We have
not borrowed under the revolving credit facility in 2005.
20 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
This transaction was a substantial modification of our April 2004 Senior
Credit Facility and we therefore recognized $1.8 million in Amortization
and Write-off of Loan and Senior Notes Fees during the three and nine
months ended September 30, 2005 in our Consolidated Statements of Income.
Deferred loan fees of $362,000 were determined not to be a substantial
modification and continue to be amortized over the life of the Amended
Senior Credit Facility.
In connection with the Amended Senior Credit Facility, we paid bank fees
and other expenses of $1.0 million during the three and nine months ended
September 30, 2005. These costs will be amortized over the life of the
Amended Senior Credit Facility.
Borrowings under the Amended Senior Credit Facility are subject to
certain financial covenants and restrictions on indebtedness, dividend
payments, financial guarantees, business combinations, and other related
items. We were in compliance with all loan covenants at September 30,
2005.
As of September 30, 2005 maturities of long-term debt under the Amended
Senior Credit Facility were as follows (amounts in thousands):
Years Ending December 31,
--------------------------
2005 $ 800
2006 1,600
2007 1,600
2008 1,600
2009 1,600
2010 and thereafter 152,800
----------
$ 160,000
==========
(7) 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 nine months ended September
30, 2004 have been reclassified to reflect the changes.
21 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
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, Kotzebue, the Matanuska-Susitna Valley,
Nome, Petersburg, Seward, Soldotna, Valdez and Wrangell and retail
cable modem service (through our Internet services segment) in all of
our locations in Alaska except Kotzebue.
Local access services. We offer facilities based competitive local
exchange services in Anchorage, Fairbanks and Juneau and plan to
provide similar competitive local exchange services in other locations
pending regulatory approval and subject to availability of capital.
Revenue, 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.
22 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Summarized financial information for our reportable segments for the nine
months ended September 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 $ 12,871 2,810 6,401 829 22,911 1,008 23,919
External 141,940 78,422 38,463 22,287 281,112 49,824 330,936
-------------------------------------------------------------------------------
Total revenues $ 154,811 81,232 44,864 23,116 304,023 50,832 354,855
===============================================================================
Earnings (loss) from
operations before
depreciation,
amortization, accretion,
net interest expense and
income taxes $ 82,363 33,026 1,316 9,112 125,817 (18,056) 107,761
===============================================================================
Operating income (loss) $ 62,814 17,608 (3,798) 6,514 83,138 (30,087) 53,051
===============================================================================
2004
----
Revenues:
Intersegment $ 10,490 1,866 7,053 2,460 21,869 558 22,427
External 136,729 75,243 34,558 19,592 266,122 53,202 319,324
-------------------------------------------------------------------------------
Total revenues $ 147,219 77,109 41,611 22,052 287,991 53,760 341,751
===============================================================================
Earnings (loss) from
operations before
depreciation,
amortization, accretion,
net interest expense and
income taxes $ 81,036 33,190 (231) 6,409 120,404 (13,623) 106,781
===============================================================================
Operating income (loss) $ 63,430 19,118 (3,158) 4,158 83,548 (23,526) 60,022
===============================================================================
A reconciliation of reportable segment revenues to consolidated revenues
follows (amounts in thousands):
Nine months ended September 30, 2005 2004
--------------- ---------------
Reportable segment revenues $ 304,023 287,991
Plus All Other revenues 50,832 53,760
Less intersegment revenues eliminated in consolidation 23,919 22,427
--------------- ---------------
Consolidated revenues $ 330,936 319,324
=============== ===============
23 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
A reconciliation of reportable segment earnings from operations before
depreciation, amortization and accretion expense, net other expense and
income taxes to consolidated net income before income taxes follows
(amounts in thousands):
Nine months ended September 30, 2005 2004
-------------- ----------------
Reportable segment earnings from operations before
depreciation, amortization and accretion expense, net other
expense and income taxes $ 125,817 120,404
Less All Other loss from operations before depreciation,
amortization and accretion expense, net other expense and
income taxes 18,056 13,623
-------------- ----------------
Consolidated earnings from operations before
depreciation, amortization and accretion expense, net
other expense and income taxes 107,761 106,781
Less depreciation, amortization and accretion expense 54,710 46,759
-------------- ----------------
Consolidated operating income 53,051 60,022
Less other expense, net 30,995 29,552
-------------- ----------------
Consolidated net income before income taxes $ 22,056 30,470
============== ================
A reconciliation of reportable segment operating income to consolidated
net income before income taxes follows (amounts in thousands):
Nine months ended September 30, 2005 2004
--------------- ---------------
Reportable segment operating income $ 83,138 83,548
Less All Other operating loss 30,087 23,526
--------------- ---------------
Consolidated operating income 53,051 60,022
Less other expense, net 30,995 29,552
--------------- ---------------
Consolidated net income before income taxes $ 22,056 30,470
=============== ===============
(7) 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 a Formal Complaint
against AT&T and its subsidiary AT&T Alascom with the FCC on June 17,
2005 and an Amended Formal Complaint was filed on July 6, 2005, seeking
both injunctive relief and damages to remedy the discrimination. We are
unable to predict the outcome of our complaint with certainty at this
time.
24 (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 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 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 litigation.
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.
25 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
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 may utilize the microwave system in place of or 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 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
==========
26
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 nine
months ended September 30, 2004 have been reclassified to reflect the change.
27
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 Nine Months Ended 2005
September 30, vs. September 30, vs.
(Unaudited) 2005 2004 2004 2005 2004 2004
---- ---- ---- ---- ---- ----
Statements of Income Data:
Revenues:
Long-distance services segment 43.6% 44.1% 5.6% 42.9% 42.8% 3.8%
Cable services segment 23.0% 23.6% 3.8% 23.7% 23.6% 4.2%
Local access services segment 11.0% 10.8% 8.0% 11.6% 10.8% 11.3%
Internet services segment 6.7% 6.3% 13.5% 6.7% 6.1% 13.8%
All other 15.7% 15.2% 10.6% 15.1% 16.7% (6.4%)
-------------------------------------------------------------------------------
Total revenues 100.0% 100.0% 6.7% 100.0% 100.0% 3.6%
Selling, general and administrative
expenses 33.9% 35.0% 3.5% 34.4% 34.1% 4.6%
Restructuring charge 1.7% --- NM 0.6% --- NM
Bad debt expense (recovery) 0.0% (0.3%) 111.0% 0.0% (0.4%) (89.0%)
Depreciation, amortization and
accretion expense 16.3% 14.3% 21.3% 16.5% 14.6% 17.0%
Operating income 16.1% 20.1% (14.5%) 16.0% 18.8% (11.6%)
Net income before income taxes 4.0% 13.5% (68.0%) 6.7% 9.5% (27.6%)
Net income 2.0% 8.7% (75.4%) 3.7% 5.9% (35.4%)
28
Percentage Percentage
Change (1) Change (1)
Three Months Ended 2005 Nine Months Ended 2005
September 30, vs. September 30, vs.
(Unaudited) 2005 2004 2004 2005 2004 2004
---- ---- ---- ---- ---- ----
Other Operating Data:
Long-distance services segment
operating income (2) 47.1% 53.0% (6.3%) 44.3% 46.4% (1.0%)
Cable services segment operating
income (3) 20.0% 23.6% (11.9%) 22.5% 25.4% (7.9%)
Local access services segment
operating loss (4) (16.1%) (15.9%) (9.6%) (9.9%) (9.1%) (20.3%)
Internet services segment operating
income (5) 30.5% 24.6% 40.7% 29.2% 21.2% 56.7%
<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.
NM - Not meaningful.
--------------------------
</FN>
Three Months Ended September 30 ("third quarter") 2005 Compared To Three Months
Ended September 30, 2004
Overview of Revenues and Cost of Goods Sold
Total revenues increased 6.7% from $106.6 million in the third quarter of 2004
to $113.8 million in the third quarter of 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 10.6% from $32.9 million in the third quarter
of 2004 to $36.3 million in the third quarter of 2005. Increases in
long-distance services, cable services, and Internet services segments and All
Other Services Cost of Goods Sold were partially off-set by decreased local
access 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 the third quarter of 2005 represented
43.6% of consolidated revenues. Our provision of interstate and intrastate
long-distance services, and private line and leased dedicated capacity services
accounted for 90.8% of our total long-distance services segment revenues during
the third quarter of 2005.
29
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 the third quarter of 2005 and 2004 we realized approximately $1.4 million
and $1.1 million, respectively, of the MCI credit against amounts payable for
services received from MCI.
The remaining unused MCI credit totaled $324,000 at September 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") through 2010, at which time rates will be
contractually set.
In May 2005 Verizon Communications, Inc. agreed to merge with MCI, our major
customer. The merger was approved by MCI shareholders in October 2005. The
merger received FCC approval, but requires other regulatory approvals. We are
unable to predict the impact that a merger with 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 in March 2007
with two one-year automatic extensions to March 2009. In 2005 we amended the
original agreement to include Tariff 11 Rates.
30
In August 2005 Sprint and Nextel Communications, Inc. completed their merger.
While this merger has not had a material adverse effect on our financial
position, results of operations and liquidity, we are unable to predict the
long-term 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 6.4% to $50.0 million in
the third quarter of 2005. The components of long-distance services segment
revenues are as follows (amounts in thousands):
Third Quarter Percentage
2005 2004 Change
-------------- ------------- ----------------
Common carrier message telephone services $ 25,250 21,046 20.0%
Residential, commercial and governmental message telephone
services 8,782 10,149 (13.5%)
Private line and private network services 11,038 10,973 0.6%
Lease of fiber optic cable system capacity 4,581 4,840 (5.4%)
-------------- ------------- ----------------
Total long-distance services segment revenue $ 49,651 47,008 5.6%
============== ============= ================
Common Carrier Message Telephone Services Revenue
The increase in message telephone service revenues from our other common carrier
customers in the third quarter of 2005 resulted from a 29.2% increase in
wholesale minutes carried to 301.7 million minutes.
The third quarter 2005 increase in message telephone service revenues from other
common carriers was partially off-set by a 4.7% 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.
31
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:
Third Quarter Percentage
2005 2004 Change
------------------ ------------------ ----------------
Retail minutes carried 74.8 million 77.3 million (3.2%)
Average rate per minute (1) $0.132 $0.133 (0.8%)
<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.
</FN>
We had 91,500 and 90,300 active residential, commercial and governmental
customers at August 31, 2005 and September 30, 2004, respectively. An active
customer is a subscriber who has had calling activity during August 2005 and
September 2004, respectively. We converted to a new unified order management and
fulfillment, billing, customer service, cash application, and credit and
collection system on September 1, 2005. The conversion to the new system is
still very recent and reports necessary to determine the number of active
customers at September 30, 2005 are not yet complete. We do not believe the
number of active customers at September 30, 2005 is materially different from
the number of active customers at August 31, 2005.
The decrease in message telephone service revenues from residential, commercial,
and governmental customers in the third quarter of 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 decrease in fiber optic cable system capacity lease revenues is primarily
due to rate compression in the third quarter of 2005 as compared to the third
quarter of 2004 and disconnection of a customer starting in May 2005. The
decrease is partially off-set by the resolution of a billing matter with a
customer in the third quarter of 2005 which resulted in revenue recognition of
$417,000.
Long-distance Services Segment Cost of Goods Sold
Long-distance services segment Cost of Goods Sold increased 18.9% to $11.6
million in the third quarter of 2005 primarily due to the following:
o A 11.9% increase in minutes carried to 347.7 million minutes in the
third quarter of 2005,
o A $472,000 credit received in the third quarter of 2004 from a vendor
due to a rate overcharge,
o Receipt of a $429,000 refund in the third quarter of 2004 from an
intrastate access cost pool that previously overcharged us for access
services, and
o In the course of business we estimate unbilled long-distance services
Cost of Goods Sold based upon minutes of use processed through our
network and established rates. Such estimates are revised when
subsequent billings are received, payments are made, billing matters
are researched and resolved, tariffed billing periods lapse, or when
disputed charges are resolved. In the third quarter of 2004 we had a
favorable adjustment of $450,000.
The increase in long-distance services segment Cost of Goods Sold is partially
off-set by the following:
o Recognition of a $501,000 refund received in the third quarter of 2005
from a vendor due to a rate overcharge in 2001 and 2002, and
o 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
32
traffic. The statewide average cost savings is approximately $.010 and
$.046 per minute for originating and terminating 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 decreased 6.3% to $23.4 million
from the third quarter of 2004 to the third quarter of 2005 primarily due to the
following:
o A 18.9% increase in long-distance services segment Costs of Goods Sold
to $11.6 million in the third quarter of 2005, as discussed above,
o A 7.2% increase in long-distance services segment selling, general and
administrative expenses to $8.2 million in the third quarter of 2005
primarily due to an increase in promotion expenses. The increase is
partially off-set by a decrease in fiber repair expenses in the third
quarter of 2005 due to the repair of AULP East in July 2004,
o Recognition of $547,000 as the long-distance services segment's portion
of the restructuring charge in the third quarter of 2005 discussed
further below, and
o A 18.4% increase in long-distance services segment depreciation,
amortization and accretion expense to $6.6 million in the third quarter
of 2005 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 nine months ended September 30, 2005 for which a
partial year of depreciation will be recorded in the year ended
December 31, 2005.
The decrease was partially off-set by a 5.6% increase in long-distance services
segment revenue to $49.7 million in the third quarter of 2005, as discussed
above.
Cable Services Segment Overview
Cable services segment revenues in the third quarter of 2005 represented 23.0%
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.
33
Cable Services Segment Revenues and Cost of Goods Sold
Selected key performance indicators for our cable services segment follow:
September 30, Percentage
2005 2004 Change
------------- ------------- ----------------
Basic subscribers 136,400 134,300 1.6%
Digital programming tier subscribers 51,300 42,600 20.4%
Cable modem subscribers 74,200 61,200 21.2%
Homes passed 213,100 206,000 3.4%
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.
Digital programming tier subscribers are a sub-set of basic subscribers. Cable
modem subscribers may also be basic subscribers though basic cable service is
not required to receive cable modem service.
The increases in digital programming tier subscribers and cable modem
subscribers are primarily due to customers migrating to bundled product
offerings that include digital programming and cable modem service.
The components of cable services segment revenues are as follows (amounts in
thousands):
Third Quarter Percentage
2005 2004 Change
-------------- ------------- ----------------
Programming services $ 18,800 18,127 3.7%
Cable modem services (cable services segment's allocable
share) 3,338 3,106 7.5%
Equipment rental and installation fees 2,795 2,454 13.9%
Advertising sales 1,009 1,304 (22.6%)
Other 237 220 7.7%
-------------- ------------- ----------------
Total cable services segment revenue $ 26,179 25,211 3.8%
============== ============= ================
Average gross revenue per average basic subscriber per month increased $2.87 or
4.6% in the third quarter of 2005.
The increase in programming services revenue is primarily due to an increase in
basic and digital programming tier subscribers in the third quarter of 2005. The
increase in equipment rental and installation fees revenue is primarily caused
by the increased use of digital distribution technology. The decrease in
advertising sales revenue in the third quarter of 2005 is primarily caused by
Olympic and political advertising in the third quarter of 2004 that did not
recur in the third quarter of 2005.
Cable services segment Cost of Goods Sold increased 7.8% to $7.4 million in the
third quarter of 2005 primarily due to programming cost increases in the third
quarter of 2005 for certain of our cable programming service offerings.
34
Cable Services Segment Operating Income
Cable services segment operating income decreased 11.9% to $5.2 million from the
third quarter of 2004 to the third quarter of 2005 primarily due to the
following:
o The 7.8% decrease in Cost of Goods Sold to $7.4 million in the third
quarter of 2005 described above
o A $289,000 increase in cable services segment selling, general and
administrative expenses to $7.7 million in the third quarter of 2005
primarily due to an increase in labor costs,
o Recognition of $302,000 as the cable services segment's portion of the
restructuring charge in the third quarter of 2005 discussed further
below, and
o A 10.5% increase in cable services segment depreciation, amortization
and accretion expense to $5.2 million in the third quarter of 2005 as
compared to the third quarter of 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 nine months ended September 30, 2005 for
which a partial year of depreciation will be recorded in the year ended
December 31, 2005.
The increase in Cable services segment operating income was partially off-set by
the 3.8% increase in revenue to $26.2 million in the third quarter of 2005
described above.
Local Access Services Segment Overview
During the third quarter of 2005 local access services segment revenues
represented 11.0% 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. We plan to continue
to deploy additional DLPS lines during the year ended December 31, 2005.
35
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. On September 23, 2005,
the RCA issued an order approving the application for the first five service
areas, and extended the timeframe for an additional 90 days for a decision on
the application to offer local service in the remaining six areas covered by our
cable facilities.
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 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 litigation.
On February 22, 2005, in a complaint proceeding brought by us, the RCA held that
Matanuska Telephone Association's ("MTA") had surrendered its rural exemption
under Section 251(f)(1)(C) in the service territory designated by its wholly
owned subsidiary, MTA Visions, when MTA Visions began to provide video service
to customers in competition with us. After we requested interconnection services
in accordance with the RCA's order, including access to UNEs, MTA subsequently
filed a petition under Section 251(f)(2) with the RCA to suspend only our right
to arbitrate access to UNEs. While the suspension proceeding is underway, our
right to arbitrate access to UNEs with MTA is temporarily suspended, but our
right to arbitrate the terms for other interconnection services with MTA is not.
We are continuing to negotiate these other interconnection services with MTA and
have designated an arbitrator to resolve remaining disputed issues in November
2005.
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.
36
On September 30, 2005, ACS of Anchorage, Inc. petitioned the FCC for forbearance
from its statutory obligations to provide access to UNEs at the regulated rate.
The FCC has set a December 13, 2005 comment date and January 27, 2006 reply
comment date. The statutory deadline for decision is September 30, 2006, with an
opportunity for a 90-day extension. The ability to obtain UNEs is an important
element of our local access services segment, and the outcome of this proceeding
could result in a change in our Cost of Goods Sold in the Anchorage market via
the facilities of the ILEC. We are unable to predict the outcome of this
proceeding with certainty at this time.
Local Access Services Segment Revenues and Cost of Goods Sold
Selected key performance indicators for our local services segment follow:
September 30, Percentage
2005 2004 Change
------------- ------------- ----------------
Total lines in service 111,900 110,400 1.4%
DLPS lines in service 16,800 4,000 320.0%
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 25% and 24%, respectively.
Our access line mix follows:
September 30,
2005 2004
----------- -----------
Residential customers 61% 61%
Business customers 36% 35%
Internet access customers 3% 4%
At September 30, 2005 and 2004 approximately 86% and 85%, respectively, of our
lines are provided on our own facilities and leased local loops. At September
30, 2005 and 2004 approximately 7% and 6%, respectively, of our lines are
provided using the UNE platform delivery method.
Local access services segment revenues increased 8.0% in the third quarter of
2005 to $12.5 million primarily due to growth in the average number of lines in
service.
Local access services segment Cost of Goods Sold decreased 9.2% to $7.1 million
in the third quarter of 2005 primarily due to the cost savings resulting from
the increased deployment of DLPS lines in the third quarter of 2005. The
decrease is partially off-set by growth in the average number of lines in
service in the third quarter of 2005 and the increased UNE lease rates payable
to ACS in Fairbanks and Juneau which 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 9.6% to $2.0 million from
the third quarter of 2004 to the third quarter of 2005 primarily due to the
following:
o A $677,000 increase in local access services segment selling, general
and administrative expenses to $5.2 million in the third quarter of
2005 primarily due to an increase in labor costs,
37
o Recognition of $194,000 as the local access services segment's portion
of the restructuring charge in the third quarter of 2005 discussed
further below, and
o An 90.1% increase in local access services segment depreciation,
amortization and accretion expense to $1.8 million in the third quarter
of 2005 as compared to the third quarter of 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 nine months ended
September 30, 2005 for which a partial year of depreciation will be
recorded in 2005.
The operating loss increase was partially off-set by the 8.0% revenue increase
to $12.5 million in the third quarter of 2005 discussed above and the 9.2%
decrease in Cost of Goods Sold to $7.1 million in the third quarter of 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 $1.7 million and $1.9 million and the long-distance services
segment operating income would have been reduced by an equal amount in the third
quarter of 2005 and the third quarter of 2004, respectively.
Internet Services Segment Overview
During the third quarter of 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).
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.
38
Internet Services Segment Revenues and Cost of Goods Sold
Selected key performance indicators for our Internet services segment follow:
September 30, Percentage
2005 2004 Change
------------ ------------ ---------------
Cable modem subscribers 74,200 61,200 21.2%
Dial-up subscribers 18,800 39,900 (52.9%)
------------ ------------ ---------------
Total Internet subscribers 93,000 101,100 (8.0%)
============ ============ ===============
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 resulting from the implementation
of a new customer service information system.
Total Internet services segment revenues increased 13.5% to $7.6 million in the
third quarter of 2005 primarily due to the 48.4% increase in its allocable share
of cable modem revenues to $4.3 million in the third quarter of 2005 as compared
to the third quarter of 2004. The increase in cable modem revenues is primarily
due to growth in cable modem subscribers. Additionally, in the third quarter of
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 the third quarter of 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 $7.1
million and $6.7 million in the third quarter of 2005 and the third quarter of
2004, respectively, if the change in the external revenue distribution had not
occurred.
Internet services Cost of Goods Sold increased $168,000 to $1.9 million in the
third quarter of 2005 associated with increased Internet services segment
revenues.
Internet Services Segment Operating Income
Internet services segment operating income increased 40.7% to $2.3 million from
the third quarter of 2004 to the third quarter of 2005 primarily due to the
13.5% increase in Internet services segment revenues to $7.6 million in the
third quarter of 2005 as described above and a $200,000 decrease in selling,
general and administrative expenses to $2.3 million in the third quarter of
2005.
39
The operating income increase is partially off-set by the following:
o The $168,000 increase in Cost of Goods Sold to $1.9 million in the
third quarter of 2005 as described above,
o Recognition of $152,000 as the Internet services segment's portion of
the restructuring charge in the third quarter of 2005 discussed further
below, and
o A 9.1% increase in Internet services segment depreciation, amortization
and accretion expense to $779,000 in the third quarter of 2005 as
compared to the third quarter of 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 nine months ended September
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 7 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 15.7% of total revenues
in the third quarter of 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 may utilize the microwave system in place
of or 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 changed or cancelled.
All Other Revenues and Cost of Goods Sold
All Other revenues increased 10.6% to $17.9 million in the third quarter of 2005
primarily due to a 21.9% increase in revenues from managed services to $8.9
million. The increase in managed services revenue is primarily due to special
project revenue for services sold to two customers and a 107.3% increase in
revenues from our cellular telephone services to $1.9 million resulting from
increased promotion of our digital cellular telephone service.
All Other revenues would have increased 13.3% to $18.3 million in the third
quarter of 2005 if we had not changed the allocation of external revenue between
our Internet services segment and Broadband services. In the third quarter of
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
40
was eliminated from the All Other category. In the third quarter of 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.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 3.5% to $38.6 million in
the third quarter of 2005 primarily due to a $1.6 million increase in labor and
health insurance costs resulting from an increased number of employees and a
$697,000 increase in our company-wide success sharing bonus accrual. As a
percentage of total revenues, selling, general and administrative expenses
decreased to 33.9% in the third quarter of 2005 from 35.0% in the third quarter
of 2004, primarily due to an increase in revenues without a proportional
increase in selling, general and administrative expenses.
Restructuring Charge
On August 22, 2005 we committed to a reorganization plan to more efficiently
meet the demands of technological and product convergence by realigning along
customer lines rather than product lines. Effective January 1, 2006 we will be
reorganized under Consumer, Commercial, Carrier and Managed Broadband segments,
replacing the Long Distance, Cable, Local Access and Internet services segments.
The reorganization plan includes integration of several functions resulting in
the layoff of 76 employees by November 30, 2005. In the third quarter of 2005 we
recognized a restructuring charge of approximately $1.9 million for workforce
reduction costs across all functions. The restructuring charge has been
allocated to our reportable segments as follows (amounts in thousands):
Reportable segment:
Long-distance services $ 547
Cable services 302
Local access services 194
Internet services 152
----------
1,195
All other 699
----------
Total restructuring charge $ 1,894
==========
Our estimate of the total costs to be incurred under this plan is $2.2 million.
Bad Debt Expense (Recovery)
Bad debt expense (recovery) increased approximately $312,000 to a net expense of
$31,000 in the third quarter of 2005. The increase is primarily due to
allowances established for certain Broadband services customers. The bad debt
expense is partially off-set by realization of approximately $1.4 million of the
MCI credit through a reduction to bad debt expense in the third quarter of 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 the third quarter of 2004. The remaining unused MCI credit is
$324,000 at September 30, 2005.
Depreciation, Amortization and Accretion Expense
Depreciation, amortization and accretion expense increased 21.3% to $18.6
million in the third quarter of 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,
41
o Our $72.3 million investment in equipment and facilities placed into
service during the nine months ended September 30, 2005 for which a
partial year of depreciation will be recorded in 2005, and
o A $527,000 increase in depreciation expense during the third quarter of
2005 due to a decreased useful life of our satellite transponders
resulting from the failure of the propulsion system on the Galaxy XR
satellite.
Other Expense, Net
Other expense, net of other income, increased 95.0% to $13.7 million in the
third quarter of 2005 primarily due to the following:
o As described further in "Liquidity and Capital Resources" below, we
finalized a $215.0 Amended and Restated Senior Secured Credit Facility
("Amended Senior Credit Facility") in August 2005 to replace our May
21, 2004 Senior Credit Facility resulting in the following increased
expenses:
o We recognized a $2.8 million Loss on Early Extinguishment of Debt
in the third quarter of 2005 resulting from termination of our
Satellite Transponder Capital Lease,
o We recognized approximately $1.8 million in Amortization and
Write-off of Loan and Senior Notes Fees in the third quarter of
2005 because a portion of the Amended Senior Credit Facility was a
substantial modification of the May 21, 2004 Senior Credit
Facility, and
o An increase in interest expense of approximately $765,000 in the
third quarter of 2005 due to an increase in the outstanding
balance owed on the new facility.
o An increase in interest expense of approximately $1.4 million in the
third quarter of 2005 on our new Senior Notes due to an increase in the
outstanding balance owed.
The increase in other expense, net of other income is partially off-set by
decreased interest rates on our Amended Senior Credit Facility in the third
quarter of 2005 as compared to the third quarter of 2004.
Income Tax Expense
Income tax expense was $2.3 million in the third quarter of 2005 and $5.1
million in the third quarter of 2004. The change was due to decreased net income
before income taxes in the third quarter of 2005 as compared to the third
quarter of 2004. Our effective income tax rate increased from 35.3% in the third
quarter of 2004 to 50.3% in the third quarter of 2005 due to adjustments to
deferred tax assets and liabilities balances in the third quarter of 2004 and
increases in nondeductible expenses in the third quarter of 2005.
At September 30, 2005, we have (1) tax net operating loss carryforwards of
approximately $172.8 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 $10.0 million
to $11.0 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
42
estimate that our effective annual income tax rate for financial statement
purposes will be 43% to 45% in the year ended December 31, 2005.
Nine Months Ended September 30, 2005 ("2005") Compared To Nine Months Ended
September 30, 2004 ("2004")
Overview of Revenues and Cost of Goods Sold
Total revenues increased 3.6% from $319.3 million in 2004 to $330.9 million in
2005. Revenue increases in each of our segments were partially off-set by a
decrease in All Other Services revenues. See the discussion below for more
information by segment.
Total Cost of Goods Sold increased 2.6% from $104.9 million in 2004 to $107.6
million in 2005. Cost of Goods Sold increases in each of our segments were
partially off-set by a decrease in All Other Services 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 42.9% of consolidated
revenues. Our provision of interstate and intrastate long-distance services, and
private line and leased dedicated capacity services accounted for 90.2% 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 $3.3 million and $3.4 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 more
information about this segment.
Long-distance Services Segment Revenues
Total long-distance services segment revenues increased 3.8% to $141.9 million
in 2005. The components of long-distance services segment revenues are as
follows (amounts in thousands):
Percentage
2005 2004 Change
-------------- ------------- -------------
Common carrier message telephone services $ 67,196 62,885 6.9%
Residential, commercial and governmental message telephone
services 27,925 30,406 (8.2%)
Private line and private network services 32,903 32,008 2.8%
Lease of fiber optic cable system capacity 13,916 11,430 21.7%
-------------- ------------- -------------
Total long-distance services segment revenue $ 141,940 136,729 3.8%
============== ============= =============
43
Common Carrier Message Telephone Services Revenue
The 2005 increase in message telephone service revenue from our other common
carrier customers resulted from a 18.3% increase in wholesale minutes carried to
799.6 million minutes.
The increase in message telephone service revenues from other common carriers in
2005 was partially off-set by a 8.6% decrease in the average rate per minute on
minutes carried for other common carriers primarily due to the Tariff 11 Rate
decrease effective January 23, 2005.
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:
Percentage
2005 2004 Change
------------------ ------------------ ----------------
Retail minutes carried 227.2 million 230.3 million (1.3%)
Average rate per minute (1) $0.132 $0.132 0.0%
<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.
</FN>
Please refer to our discussion of the three-month results of operations for more
information about the number of active residential, commercial and governmental
customers.
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 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 and
the resolution of a billing matter with a certain customer in 2005 which
resulted in revenue recognition of $417,000. The increase is partially off-set
by rate compression in 2005 as compared to 2004 and disconnection of a customer
in May 2005.
Long-distance Services Segment Cost of Goods Sold
Long-distance services segment Cost of Goods Sold increased 5.4% to $36.4
million in 2005 primarily due to the following:
o A 13.3% increase in minutes carried to 1.0 billion minutes,
o Receipt of a $1.2 million refund in 2004 from an intrastate access cost
pool that previously overcharged us for access services,
o A $472,000 credit received in 2004 from a vendor due to a rate
overcharge, and
o In the course of business we estimate unbilled long-distance services
Cost of Goods Sold based upon minutes of use processed through our
network and established rates. Such estimates are
44
revised when subsequent billings are received, payments are made,
billing matters are researched and resolved, tariffed billing periods
lapse, or when disputed charges are resolved. In 2004 we had a
favorable adjustment of $450,000.
The increase in long-distance services segment Cost of Goods Sold is partially
off-set by the following:
o Recognition of a $501,000 refund received in 2005 from a vendor due to
a rate overcharge in 2001 and 2002,
o 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 $.046 per minute for
originating and terminating interstate and intrastate traffic,
respectively. We expect cost savings to continue to occur as
long-distance traffic originated, carried, and terminated on our own
facilities grows, and
o We performed an analysis of circuit costs directly contributing to
long-distance services segment and Broadband services revenues and, as
a result, decreased the allocation of Cost of Goods Sold to the
long-distance services segment by $808,000 in 2005. Broadband services
segment Cost of Goods Sold included in the All Other category was
increased an equal amount in 2005.
Long-distance Services Segment Operating Income
Long-distance services segment operating income decreased 1.0% to $62.8 million
from 2004 to 2005 primarily due to the following:
o A 5.4% increase in long-distance services segment Cost of Goods Sold to
$36.4 million as discussed above,
o A 3.2% increase in long-distance services segment selling, general and
administrative expenses to $24.4 million in 2005,
o Recognition of $547,000 as the long-distance services segment's portion
of the restructuring charge discussed above, and
o A 11.0% increase in long-distance services segment depreciation,
amortization and accretion expense to $19.5 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 nine months ended September 30, 2005 for which a
partial year of depreciation will be recorded in the year ended
December 31, 2005.
The decrease in long-distance services segment operating income was partially
off-set by a 3.8% increase in long-distance services segment revenue to $141.9
million in 2005, as discussed above.
Cable Services Segment Overview
Cable services segment revenues in 2005 represented 23.7% of consolidated
revenues.
Please refer to our discussion of the three-month results of operations for more
information about this segment.
45
Cable Services Segment Revenues and Cost of Goods Sold
The components of cable services segment revenues are as follows (amounts in
thousands):
Percentage
2005 2004 Change
-------------- ------------- ----------------
Programming services $ 56,475 54,875 2.9%
Cable modem services (cable services segment's allocable
share) 9,912 9,636 2.9%
Equipment rental and installation fees 8,339 7,155 16.5%
Advertising sales 2,970 2,919 1.7%
Other 726 658 10.3%
-------------- ------------- ----------------
Total cable services segment revenue $ 78,422 75,243 4.2%
============== ============= ================
Average gross revenue per average basic subscriber per month increased $3.04 or
4.8% in 2005.
The increase in programming services revenue is primarily due to an increase in
basic and digital programming tier 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 8.4% to $22.0 million in
2005 primarily due to a $407,000 refund received in 2004 from a supplier
retroactive to August 2003, an arrangement with a supplier in which we earned a
$328,000 rebate in 2004 upon us 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 7.9% to $17.6 million from
2004 to 2005 primarily due to the following:
o The 8.4% increase in Cost of Goods Sold to $22.0 million in 2005
described above,
o A 6.3% increase in cable services segment selling, general and
administrative expenses to $22.4 million in 2005 primarily due to an
increase in labor costs and contract labor and contract services
expenses,
o Recognition of $302,000 as the cable services segment's portion of the
restructuring charge discussed further above, and
o A 9.6% increase in cable services segment depreciation, amortization
and accretion expense to $15.4 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 nine months
ended September 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 4.2% increase in cable services segment revenues to $78.4 million in 2005
described above.
46
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 nine months
ended September 30, 2005 and 2004 follows (amounts in thousands):
2005 2004
-------------- -------------
Customer premise equipment $ 12,330 12,136
Upgrade/rebuild 10,291 6,516
Line extensions 2,620 517
Scalable infrastructure 2,315 3,782
Support capital 685 1,013
Commercial 270 348
-------------- -------------
Sub-total 28,511 24,312
Remaining reportable segments and
All Other capital expenditures 37,327 58,498
-------------- -------------
$ 65,838 82,810
============== =============
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 September 30, 2005 and
2004 we had 124,300 and 122,100 customer relationships, respectively.
The standardized definition of a revenue generating unit is the sum of all
primary analog video, digital video, high-speed data, and telephony customers,
not counting additional outlets. At September 30, 2005 and 2004 we had 227,400
and 199,400 revenue generating units, respectively.
Local Access Services Segment Overview
During 2005 local access services segment revenues represented 11.6% of
consolidated revenues.
Please refer to our discussion of the three-month results of operations for more
information about this segment.
Local Access Services Segment Revenues and Cost of Goods Sold
Local access services segment revenues increased 11.3% in 2005 to $38.5 million
primarily due to the following:
o Growth in the average number of lines in service,
o $1.6 million increase in support from the Universal Service Program,
and
o A $519,000 increase in local access services private line revenue to
$2.0 million in 2005.
Local access services segment Cost of Goods Sold increased 1.9% to $21.6 million
in 2005 primarily due to 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
47
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.
The increase in local access services segment Cost of Goods Sold is partially
off-set by cost savings resulting from the increased deployment of DLPS lines in
2005.
Local Access Services Segment Operating Loss
Local access services segment operating loss increased 20.3% to $3.8 million
from 2004 to 2005 primarily due to the following:
o The 1.9% increase in Cost of Goods Sold to $21.6 million discussed
above,
o A 11.7% increase in local access services segment selling, general and
administrative expenses to $15.0 million in 2005 primarily due to an
increase in interconnect rates resulting from a renewed Anchorage
interconnection agreement beginning in November 2004 and increased
labor costs,
o Recognition of $194,000 as the local access services segment's portion
of the restructuring charge discussed further above, and
o An 74.7% increase in local access services segment depreciation,
amortization and accretion expense to $5.1 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 nine months ended September 30, 2005 for which a
partial year of depreciation will be recorded in 2005.
The operating loss increase was partially off-set by the 11.3% revenue increase
to $38.5 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 $5.1 million and $5.2 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 6.7% of consolidated
revenues.
Please refer to our discussion of the three-month results of operations for more
information about this segment.
Internet Services Segment Revenues and Cost of Goods Sold
Total Internet services segment revenues increased 13.8% to $22.3 million in
2005 primarily due to the 24.9% increase in its allocable share of cable modem
revenues to $10.5 million in 2005 as compared to 2004. The increase in cable
modem revenues is primarily due to growth in cable modem subscribers.
48
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.
Additionally, in 2004 an intracompany service valued at approximately $514,000
was not eliminated from Internet services segment revenue and selling, general
and administrative expenses until the year ended December 31, 2004. Internet
services segment revenue would have been $21.4 million and $19.1 million in 2005
and 2004, respectively, if the change in the external revenue distribution had
not occurred and the elimination of the intracompany service had been recognized
during the nine months ended September 30, 2004.
Internet services Cost of Goods Sold increased 6.8% to $5.6 million in 2005
associated with increased Internet services segment revenues.
Internet Services Segment Operating Income
Internet services segment operating income increased 56.7% to $6.5 million from
2004 to 2005 primarily due to the 13.8% increase in Internet services segment
revenues to $22.3 million in 2005 as described above and a $635,000 decrease in
selling, general and administrative expenses to $7.2 million. The decrease in
selling, general and administrative expenses is primarily due to the elimination
of an intracompany service that was not recognized until the year ended December
31, 2004. If the elimination of the intracompany service had been recognized
during the nine months ended September 30, 2004, Internet services segment
selling, general and administrative expenses would have decreased $121,000.
The operating income increase is partially off-set by the following:
o A 6.8% increase in Cost of Goods Sold to $5.6 million as described
above,
o Recognition of $152,000 as the Internet services segment's portion of
the restructuring charge discussed further above, and
o A 15.4% increase in Internet services segment depreciation,
amortization and accretion expense to $2.6 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 nine months ended September 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 15.1% of total revenues
in 2005.
Please refer to our discussion of the three-month results of operations for more
information about the All Other category.
All Other Revenues and Cost of Goods Sold
All Other revenues decreased 6.4% to $49.8 million in 2005 primarily due to $6.1
million earned in 2004 from an equipment sale and installation project and a
$889,000 decrease in product sales revenue primarily due to the sale of product
to a customer in 2004 that did not recur in 2005. The decrease in All Other
revenues is partially off-set by a 9.7% increase in managed services revenues to
49
$22.7 million primarily due to special project revenue earned in 2005 for
services sold to two customers and a 88.8% increase in revenues from our
cellular telephone services to $4.6 million resulting from increased promotion
of our digital cellular telephone service.
All Other revenues would have decreased 4.7% to $50.7 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 6.8% to $22.0 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 managed services and cellular telephone services
revenues.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 4.6% to $113.8 million in
2005 primarily due to a $3.0 million increase in labor and health insurance
costs resulting from an increased number of employees, a $1.4 million increase
in contract labor and contract services expenses associated with special
projects, and a $858,000 increase in our company-wide success sharing bonus
accrual. As a percentage of total revenues, selling, general and administrative
expenses increased to 34.4% in 2005 from 34.1% in 2004, primarily due to an
increase in selling, general and administrative expenses without a proportional
increase in revenues.
Restructuring Charge
Please refer to our discussion in the three-month results of operations for
information about the restructuring charge.
Bad Debt Recovery
Bad debt recovery decreased 89.0% to a net recovery of $128,000 in 2005. The
decrease is primarily due to allowances established for certain Broadband
services customers.
Bad debt recovery includes realization of approximately $3.3 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
$3.4 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 17.0% to $54.7
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 $72.3 million investment in equipment and facilities placed into
service during the nine months ended September 30, 2005 for which a
partial year of depreciation will be recorded in 2005, and
50
o A $1.1 million increase in depreciation expense during 2005 due to the
decreased useful life of our satellite transponders resulting from the
failure of the propulsion system on the Galaxy XR satellite.
Other Expense, Net
Other expense, net of other income, increased 4.9% to $31.0 million in 2005
primarily due to following:
o As described further in "Liquidity and Capital Resources" below, we
finalized a $215.0 Amended and Restated Senior Secured Credit Facility
in August 2005 to replace our May 21, 2004 Senior Credit Facility
resulting in the following increased expenses:
o We recognized a $2.8 million Loss on Early Extinguishment of Debt
in 2005 resulting from termination of our Satellite Transponder
Capital Lease,
o We recognized approximately $1.8 million in Amortization and
Write-off of Loan and Senior Notes Fees in 2005 because a portion
of the Amended Senior Credit Facility was a substantial
modification of the May 21, 2004 Senior Credit Facility, and
o An increase in interest expense of approximately $2.0 million in
2005 due to an increase in the outstanding balance owed on the new
facility.
o An increase in interest expense of approximately $3.4 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 $1.1 million in 2005
due to construction period interest expense capitalization in 2004.
Partially offsetting the increases described above were the following:
o Decreased interest rates on our Senior Credit Facility and Senior Notes
in 2005 as compared to 2004,
o In 2004 we paid bond call premiums totaling $6.1 million to redeem our
old Senior Notes, and
o As a result of redeeming our old Senior Notes we recognized $2.3
million in unamortized old Senior Notes fee expense in 2004.
Income Tax Expense
Income tax expense was $9.8 million 2005 and $11.5 million 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 37.8% in 2004 to 44.5% in 2005 due to
adjustments to deferred tax assets and liabilities balances in 2004 and
increases in nondeductible expenses in 2005.
Liquidity and Capital Resources
Cash flows from operating activities totaled $66.7 million for the first nine
months of 2005 as compared to $62.9 million for the first nine months of 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 sources of cash during the first nine months of 2005 included $38.8
million in borrowings on our Amended Senior Credit Facility, as discussed below,
and $2.9 million from the issuance of our Class A common stock. Other uses of
cash during the first nine months of 2005 included expenditures of
51
$65.8 million for property and equipment, including construction in progress,
$39.0 million in capital lease obligation repayments, the purchase of $10.5
million of common stock to be retired and to be held in treasury for general
corporate purposes, and the $6.6 million repurchase of the remaining 4,314
shares of our Series B preferred stock.
Working capital totaled $51.5 million at September 30, 2005, a $2.5 million
increase as compared to $49.0 million at December 31, 2004. The increase is
primarily due to the $8.5 million increase in outstanding net accounts
receivable in 2005 as compared to 2004 and the $4.6 million decrease in the
portion of our Senior Credit Facility classified as current maturity at
September 30, 2005 as compared to December 31, 2004 due to the amendment of our
Senior Credit Facility discussed below. The increases are partially off-set by
the use of $10.5 million to repurchase shares of our Class A common stock in
2005 as compared to no such repurchases in 2004.
Net receivables increased $8.5 million from December 31, 2004 to September 30,
2005 primarily due to the timing of payments on trade receivables from a certain
large customer and a seasonal increase in trade receivables for broadband
services provided to hospitals and health clinics.
We have outstanding Senior Notes of $316.2 million at September 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.
Semi-annual interest payments of approximately $11.6 million were paid in
February 2005 and August 2005. The next semi-annual interest payment is due
February 2006.
The Senior Notes limit our ability to make cash dividend payments. The Senior
Notes are due in February 2014.
We were in compliance with all Senior Notes loan covenants at September 30,
2005.
On August 31, 2005 our April 2004 Senior Credit Facility was amended and
restated. The Amended Senior Credit Facility includes a $160.0 million term loan
and a $55.0 million revolving credit facility with a $25.0 million sublimit for
letters of credit. Proceeds were used to pay down our previous Senior Credit
Facility and to pay off our Satellite Transponder Capital Lease with the
remainder used to pay financing fees. Outstanding principal of $35.8 million on
the Satellite Transponder Capital Lease was repaid, and we incurred a $2.8
million charge due to the early termination of the capital lease which is
classified as Loss on Early Extinguishment of Debt during the three and nine
months ended September 30, 2005 in our Consolidated Statements of Income.
52
The Amended Senior Credit Facility decreased the interest rate on the term loan
from LIBOR plus 2.25% to LIBOR plus 1.50%. The interest rate on the revolving
portion of the previous Senior Credit Facility was LIBOR plus a margin dependent
upon our Total Leverage Ratio (as defined) ranging from 1.75% to 2.50%. The
Amended Senior Credit Facility reduced the revolving credit facility interest
rate to LIBOR plus the following applicable margin dependent upon our Total
Leverage ratio (as defined):
Total Leverage Applicable
Ratio (as defined) Margin
------------------------- --------------
>
= 3.75 0.175%
>
= 3.25 but < 3.75 0.150%
>
= 2.75 but < 3.25 0.125%
< 2.75 0.100%
The commitment fee we are required to pay on the unused portion of the
commitment was reduced to 0.375%.
The Amended Senior Credit Facility increased our allowed Total Leverage Ratio
(as defined) limit to 4.50:1.0 and our Senior Debt Ratio (as defined) limit to
2.25:1.0. Our Fixed Charge Coverage Ratio (as defined) must be less than
1.0:1.0.
Our term loan is fully drawn and we have letters of credit outstanding totaling
$5.5 million at September 30, 2005, which leaves $49.5 million available to draw
under the revolving credit facility if needed. We have not borrowed under the
revolving credit facility in 2005.
This transaction was a substantial modification of our April 2004 Senior Credit
Facility and we therefore recognized $1.8 million in Amortization and Write-off
of Loan and Senior Notes Fees during the three and nine months ended September
30, 2005 in our Consolidated Statements of Income. Deferred loan fees of
$362,000 were determined not to be a substantial modification and continue to be
amortized over the life of the Amended Senior Credit Facility.
In connection with the Amended Senior Credit Facility, we paid bank fees and
other expenses of $1.0 million during the three and nine months ended September
30, 2005.
Borrowings under the Amended Senior Credit Facility are subject to certain
financial covenants and restrictions on indebtedness, dividend payments,
financial guarantees, business combinations, and other related items. We were in
compliance with all Amended Senior Credit Facility loan covenants at September
30, 2005.
53
As of September 30, 2005 maturities of long-term debt under the Amended Senior
Credit Facility were as follows (amounts in thousands):
Years Ending December 31,
--------------------------
2005 $ 800
2006 1,600
2007 1,600
2008 1,600
2009 1,600
2010 and thereafter 152,800
----------
$ 160,000
==========
Our expenditures for property and equipment, including construction in progress,
totaled $65.8 million and $82.8 million during the nine months ended September
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 August 2005 Sprint and Nextel Communications, Inc. completed their merger.
While this merger has not had a material adverse effect on our financial
position, results of operations and liquidity, we are unable to predict the
long-term outcome this merger will have upon us.
In May 2005 Verizon Communications, Inc. agreed to merge with MCI, our major
customer. The merger was approved by MCI shareholders in October 2005. The
merger received FCC approval, but requires other regulatory approvals. We are
unable to predict the impact that a merger with 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 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. 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
54
from our lenders and preferred shareholder for up to $25.0 million of
repurchases through September 30, 2005. During the nine month period ended
September 30, 2005 we repurchased 1,175,212 shares of our Class A common stock
at a cost of approximately $10.7 million. We expect to continue the repurchases
at a rate of approximately $5.0 million per quarter for an indefinite period
subject to the availability of free cash flow, availability under our credit
facilities, and the price of our Class A and Class B common stock. 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 regarding the valuation of share-based payment arrangements for
public companies. In August 2005 the FASB staff issued FASB Staff Position
("FSP") FAS 123(R)-1 regarding the recognition and measurement requirements of
freestanding financial instruments originally issued as employee compensation.
In October 2005 the FASB staff issued FSP FAS 123(R)-2 regarding guidance on
application of grant date as defined in SFAS 123. We estimate the application of
SFAS No. 123R and other applicable guidance will result in an increase in our
compensation cost for all share-based payments of approximately $2.0 million to
$2.5 million during the year ended December 31, 2006.
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 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.
55
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 on 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 on
December 31, 2005 and do not expect it to result in a change to our SFAS No. 131
disclosures.
In October 2005 the FASB issued FSP No. FAS 13-1, "Accounting for Rental Costs
Incurred During a Construction Period." FSP No. FAS 13-1 requires a reporting
entity to recognize rental costs associated with ground or building operating
leases that are incurred during a construction period as rental expense in
income from continuing operations. We will begin application of FSP No. FAS 13-1
on January 1, 2006 and do not expect it to have a material effect on our results
of operations, financial position and cash flows.
Critical Accounting Policies
Our accounting and reporting policies comply with accounting principles
generally accepted in the United States 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
56
principles generally accepted in the United States of America. For all of these
policies, management cautions that future events rarely develop exactly as
forecast, and the best estimates routinely require adjustment. Management has
discussed the development and the selection of critical accounting policies with
our Audit Committee.
Those policies considered to be critical accounting policies for the nine months
ended September 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, "Goodwill and Other
Intangible Assets." 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
57
annual and quarterly impairment analyses and quarterly evaluations of
remaining useful lives are critical. Any changes in key assumptions
about the 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 $70.7 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 September 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
58
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.
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
$59.33 on October 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
59
has also been proposed. The economic viability of a natural gas pipeline depends
upon the price of and demand for natural gas. Either project could have a
positive impact on the State of Alaska's revenues and 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 in contract negotiations with ConocoPhillips, BP and ExxonMobil to
construct a natural gas pipeline. In October 2005 the State of Alaska announced
that it has reached agreement with ConocoPhillips on the base fiscal contract
terms. The State is continuing to negotiate with BP and ExxonMobil. Ultimate
approval of any contract is uncertain as it must be approved by the Alaska
legislature.
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
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are not able to predict the effect of changes in the price and production
volumes of North Slope oil on Alaska's economy or on us.
Seasonality
Long-distance 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. Our schedule of certain known
contractual obligations has been updated to reflect our Amended Senior Credit
Facility in August 2005, the pay-off of our Satellite Transponder Capital Lease
in August 2005, and our repurchase of the remaining 4,314 shares of Series B
preferred stock in May 2005.
Payments Due by Period
----------------------------------------------------------------
Less than 1 1 to 3 4 to 5 More Than 5
Total Year Years Years Years
------------- ----------- ------------ ------------ ------------
(Amounts in thousands)
Long-term debt $ 480,000 800 3,200 3,200 472,800
Interest on long-term debt 220,400 23,200 46,400 46,400 104,400
Capital lease obligations, including
interest 1,974 495 510 517 452
Operating lease commitments 72,771 14,564 21,080 15,070 22,057
Purchase obligations 43,168 24,076 15,183 3,909 ---
------------- ----------- ------------ ------------ ------------
Total contractual obligations $ 818,313 63,135 86,373 69,096 599,709
============= =========== ============ ============ ============
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 Senior Notes 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 discussion of our Amended Senior Credit Facility see note 6 in
the accompanying "Notes to Interim Condensed Consolidated Financial Statements."
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 and the accompanying "Notes to Interim Condensed
Consolidated Financial Statements."
61
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. 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 commitment to purchase a certain number
of outdoor, network powered multi-media adapters, indoor multi-media adapters,
cable modems, and cable modem termination systems of $13.5 million, a remaining
$13.9 million commitment for our Alaska Airlines agreement as further described
in note 15 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 Amended Senior Credit Facility carries interest rate risk. Amounts borrowed
under this Agreement bear interest at LIBOR plus 1.50% 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 September 30,
2005, we have borrowed $159.6 million subject to interest rate risk. On this
amount, each 1% increase in the LIBOR interest rate would result in $1,596,000
of 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
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is accumulated and communicated to management to allow timely decisions
regarding required disclosure.
Changes in Internal Controls
On September 1, 2005 we converted our commercial and consumer long-distance
services (excluding our carrier customers), local access services, Internet
services, and cellular telephone services order management and fulfillment,
billing, customer service, cash application, and credit and collection systems
to a new unified system. The implementation of the new system has resulted in
certain changes to our processes and procedures affecting internal control over
financial reporting. We have committed substantial internal and external
resources to revise and document processes and related internal controls.
The conversion to the new system is still very recent. Due to the complexities
of implementing a new billing system across multiple segments and products, we
expect to continue to experience a period of stabilization and fine-tuning for
several months. While nothing has come to our attention that would lead us to
believe that we may experience material errors or misstatements of financial
results during this time, we recognize that this continues to be a complex
transition that will require close monitoring and evaluation. We believe we have
the processes and appropriate management in place to effectively manage this
transition.
Our evaluation of the operating effectiveness of related key controls will occur
during the fourth quarter of 2005.
Except as discussed above, there were no changes in our internal control over
financial reporting during the third 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 7 to the accompanying "Notes to Interim Condensed
Consolidated Financial Statements" and is incorporated herein by reference.
63
PART II.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) Not applicable.
(b) Not applicable.
(c) The following table provides information about repurchases of shares
of our Class A common stock during the quarter ended September 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)
--------------------------- ----------------- -------------- ------------------- -----------------------
July 1, 2005 to July 31,
2005 --- $ --- 1,196,943 $13.703 million
August 1, 2005 to August
31, 2005 19,250 (3) $10.44 1,216,193 $13.502 million
September 1, 2005 to
September 30, 2005 225,200 (4) $9.93 1,441,393 $11.266 million
-----------------
Total 244,450
=================
<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. We expect to
continue the repurchases throughout and beyond 2005 subject to the
availability of free cash flow, availability under our credit facilities,
and the price of our Class A and Class B common stock. We do not intend to
terminate this plan in 2005. No plan has expired during the quarter ended
September 30, 2005.
(2) The total amount approved for repurchase was $25.0 million through
September 30, 2005 consisting of $10.0 million through December 31, 2004
and an additional $5.0 million per quarter through September 30, 2005.
(3) Private party transactions made under our publicly announced repurchase
plan.
(4) Open-market purchases and private party transactions made under our
publicly announced repurchase plan.
</FN>
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PART II.
ITEM 6.
EXHIBITS
Exhibit No. Description
--------------------------------------------------------------------------------------------------------
10.129 Ninth Amendment to Contract for Alaska Access Services between General
Communication, Inc. and its wholly owned subsidiary GCI Communication Corp., and
MCI WorldCom Network Services, Inc. *
10.130 Amended and Restated Credit Agreement among GCI Holdings, Inc. and Calyon New York
Branch as Administrative Agent, Sole Lead Arranger, and Co-Bookrunner, The Initial
Lenders and Initial Issuing Bank Named Herein as Initial Lenders and Initial
Issuing Bank, General Electric Capital Corporation as Syndication Agent, and Union
Bank of California, N.A., CoBank, ACB, CIT Lending Services Corporation and Wells
Fargo Bank, N.A. as Co-Documentation Agents, dated as of August 31, 2005
10.131 Amended and Restated 1986 Stock Option Plan of General Communication, Inc. as of
June 7, 2005
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
-------------------------
* CONFIDENTIAL PORTION has been omitted pursuant to a
request for confidential treatment by us to, and the
material has been separately filed with, the
Securities and Exchange Commission. Each omitted
Confidential Portion is marked by three asterisks.
-------------------------
65
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENERAL COMMUNICATION, INC.
Signature Title Date
- -------------------------------------- -------------------------------------------- -----------------------
/s/ President and Director November 7, 2005
- -------------------------------------- -----------------------
Ronald A. Duncan (Principal Executive Officer)
/s/ Senior Vice President, Chief Financial November 7, 2005
- -------------------------------------- Officer, Secretary and Treasurer -----------------------
John M. Lowber (Principal Financial Officer)
/s/ Vice President, Chief Accounting November 7, 2005
- -------------------------------------- Officer -----------------------
Alfred J. Walker (Principal Accounting Officer)
66