As filed with the Securities and Exchange Commission on May 10, 2006
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2006
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 large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and larger accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one).
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
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 April 30, 2005 was:
51,393,626 shares of Class A common stock; and
3,383,555 shares of Class B common stock.
1
GENERAL COMMUNICATION, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2006
TABLE OF CONTENTS
Page No.
--------
Cautionary Statement Regarding Forward-Looking Statements.................................................3
PART I. FINANCIAL INFORMATION
Item l. Financial Statements
Consolidated Balance Sheets as of March 31, 2006
(unaudited) and December 31, 2005..................................................4
Consolidated Statements of Operations for the
three months ended March 31, 2006 (unaudited)
and 2005 (unaudited)...............................................................6
Consolidated Statements of Stockholders' Equity
for the three months ended March 31, 2006
(unaudited) and 2005 (unaudited)...................................................7
Consolidated Statements of Cash Flows for the three
months ended March 31, 2006 (unaudited)
and 2005 (unaudited)...............................................................8
Notes to Interim Condensed Consolidated Financial
Statements (unaudited).............................................................9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................................26
Item 3. Quantitative and Qualitative Disclosures About
Market Risk...........................................................................45
Item 4. Controls and Procedures...............................................................45
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.....................................................................46
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds...........................47
Item 6. Exhibits..............................................................................48
Other items are omitted, as they are not applicable.
SIGNATURES................................................................................................49
2
Cautionary Statement Regarding Forward-Looking Statements
You should carefully review the information contained in this Quarterly Report,
but should particularly consider any risk factors that we set forth in this
Quarterly Report and in other reports or documents that we file from time to
time with the Securities and Exchange Commission ("SEC"). In this Quarterly
Report, in addition to historical information, we state our future strategies,
plans, objectives or goals and our beliefs of future events and of our future
operating results, financial position and cash flows. In some cases, you can
identify those so-called "forward-looking statements" by words such as "may,"
"will," "should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," "project," or "continue" or the negative of those words
and other comparable words. All forward-looking statements involve known and
unknown risks, uncertainties and other important factors that may cause our
actual results, performance, achievements, plans and objectives to differ
materially from any future results, performance, achievements, plans and
objectives expressed or implied by these forward-looking statements. In
evaluating those statements, you should specifically consider various factors,
including those outlined below. Those factors may cause our actual results to
differ materially from any of our forward-looking statements. For these
statements, we claim the protection of the safe harbor for forward-looking
statements provided by the Private Securities Litigation Reform Act of 1995.
Such risks, uncertainties and other factors include but are not limited to those
identified under "Risk Factors" in our December 31, 2005 annual report on Form
10-K, including in conjunction with the forward-looking statements included in
this Quarterly Report.
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.
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands) (Unaudited)
March 31, December 31,
ASSETS 2006 2005
- ------------------------------------------------------------------------------------------ ------------------- ----------------
Current assets:
Cash and cash equivalents $ 43,031 44,362
------------------- ----------------
Receivables 82,598 78,279
Less allowance for doubtful receivables 5,891 5,317
------------------- ----------------
Net receivables 76,707 72,962
Deferred income taxes, net 17,485 19,596
Prepaid expenses 6,933 8,347
Notes receivable from related parties 3,484 922
Inventories 3,135 1,556
Property held for sale 2,314 2,312
Other current assets 2,540 2,572
------------------- ----------------
Total current assets 155,629 152,629
------------------- ----------------
Property and equipment in service, net of depreciation 440,814 453,008
Construction in progress 15,690 8,337
------------------- ----------------
Net property and equipment 456,504 461,345
------------------- ----------------
Cable certificates 191,565 191,565
Goodwill 42,181 42,181
Other intangible assets, net of amortization 6,274 6,201
Deferred loan and senior notes costs, net of amortization of $1,702 and $1,451
at March 31, 2006 and December 31, 2005, respectively 7,760 8,011
Notes receivable from related parties 90 2,544
Other assets 11,427 9,299
------------------- ----------------
Total other assets 259,297 259,801
------------------- ----------------
Total assets $ 871,430 873,775
=================== ================
See accompanying notes to interim condensed consolidated financial statements.
4 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
(Amounts in thousands) (Unaudited)
March 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2006 2005
- ------------------------------------------------------------------------------------------ ------------------ -----------------
Current liabilities:
Current maturities of obligations under long-term debt and capital leases $ 1,774 1,769
Accounts payable 22,401 23,217
Deferred revenue 16,104 16,439
Accrued payroll and payroll related obligations 14,757 17,925
Accrued liabilities 7,073 6,814
Accrued interest 2,919 9,588
Subscriber deposits 373 361
------------------ -----------------
Total current liabilities 65,401 76,113
Long-term debt 473,800 474,115
Obligation under capital lease, excluding current maturity 1,160 ---
Obligation under capital lease due to related party, excluding current maturity 613 628
Deferred income taxes, net of deferred income tax benefit 70,925 69,753
Other liabilities 10,876 9,546
------------------ -----------------
Total liabilities 622,775 630,155
------------------ -----------------
Stockholders' equity:
Common stock (no par):
Class A. Authorized 100,000 shares; issued 51,360 and 51,200 shares at
March 31, 2006 and December 31, 2005, respectively 177,214 178,351
Class B. Authorized 10,000 shares; issued 3,839 and 3,843 shares at
March 31, 2006 and December 31, 2005, respectively; convertible on a
share-per-share basis into Class A common stock 3,244 3,247
Less cost of 291 Class A and Class B common shares held in treasury at
March 31, 2006 and December 31, 2005 (1,730) (1,730)
Paid-in capital 16,912 16,425
Notes receivable with related parties issued upon stock option exercise (1,722) (1,722)
Retained earnings 54,737 49,049
------------------ -----------------
Total stockholders' equity 248,655 243,620
------------------ -----------------
Commitments and contingencies
Total liabilities and stockholders' equity $ 871,430 873,775
================== =================
See accompanying notes to interim condensed consolidated financial statements.
5
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
(Amounts in thousands, except per share amounts) 2006 2005
------------- -------------
Revenues $ 112,822 106,510
Cost of goods sold (exclusive of depreciation and amortization shown
separately below) 36,184 35,200
Selling, general and administrative expenses 39,614 37,180
Bad debt expense (recovery) 501 (353)
Depreciation and amortization expense 20,161 17,705
------------- -------------
Operating income 16,362 16,778
------------- -------------
Other income (expense):
Interest expense (8,554) (8,331)
Amortization of loan and senior notes fees (251) (483)
Interest income 157 179
Other (113) ---
------------- -------------
Other expense, net (8,761) (8,635)
------------- -------------
Net income before income taxes and cumulative effect of a change
in accounting principle 7,601 8,143
Income tax expense 3,679 3,480
------------- -------------
Net income before cumulative effect of a change in accounting
principle 3,922 4,663
Cumulative effect of a change in accounting principle, net of income
tax benefit of $425 (608) ---
------------- -------------
Net income 3,314 4,663
Preferred stock dividends --- 93
------------- -------------
Net income available to common shareholders $ 3,314 4,570
============= =============
Basic net income per common share:
Net income before cumulative effect of a change in accounting
principle $ 0.07 0.08
Cumulative effect of a change in accounting principle (0.01) 0.00
------------- -------------
Net income $ 0.06 0.08
============= =============
Diluted net income per common share:
Net income before cumulative effect of a change in accounting
principle $ 0.07 0.08
Cumulative effect of a change in accounting principle (0.01) 0.00
------------- -------------
Net income $ 0.06 0.08
============= =============
See accompanying notes to interim condensed consolidated financial statements.
6
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2006 AND 2005
(Unaudited)
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 --- --- --- --- --- 4,663 4,663
Tax effect of excess stock compensation
expense for tax purposes over amounts
recognized for financial reporting
purposes --- --- --- 62 --- --- 62
Common stock repurchases --- --- --- --- --- (5,256) (5,256)
Common stock retirements (3,147) --- --- --- --- 3,147 ---
Shares issued under stock option plan 207 --- --- --- --- --- 207
Amortization of the excess of GCI stock
market value over stock option exercise
cost on date of stock option grant --- --- --- 48 --- --- 48
Purchase of treasury stock --- --- (32) --- --- --- (32)
Preferred stock dividends --- --- --- --- --- (93) (93)
---------------------------------------------------------------------------
Balances at March 31, 2005 $ 183,943 3,248 (1,734) 15,067 (3,016) 36,361 233,869
===========================================================================
Balances at December 31, 2005 $ 178,351 3,247 (1,730) 16,425 (1,722) 49,049 243,620
Net income --- --- --- --- --- 3,314 3,314
Cumulative effect adjustments upon
implementation of Statement of
Financial Accounting Standard No. 123(R) --- --- --- (191) --- --- (191)
Common stock repurchases --- --- --- --- --- (3,550) (3,550)
Common stock retirements (5,924) --- --- --- --- 5,924 ---
Shares issued under stock option plan 4,784 --- --- --- --- --- 4,784
Class B shares converted to Class A 3 (3) --- --- --- --- ---
Amortization of the excess of GCI stock
market value over stock option exercise
cost on date of stock option grant --- --- --- 678 --- --- 678
---------------------------------------------------------------------------
Balances at March 31, 2006 $ 177,214 3,244 (1,730) 16,912 (1,722) 54,737 248,655
===========================================================================
See accompanying notes to interim condensed consolidated financial statements.
7
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2006 AND 2005
(Unaudited)
(Amounts in thousands) 2006 2005
-------------- -------------
Cash flows from operating activities:
Net income $ 3,314 4,663
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization expense 20,161 17,705
Deferred income tax expense 3,676 3,480
Share-based compensation expense 678 48
Cumulative effect of a change in accounting principle, net 608 ---
Bad debt expense (recovery), net of write-offs 574 (257)
Amortization of loan and senior notes fees 251 483
Deferred compensation 85 355
Other noncash income and expense items (69) 54
Change in operating assets and liabilities (16,449) (3,638)
-------------- -------------
Net cash provided by operating activities 12,829 22,893
-------------- -------------
Cash flows from investing activities:
Purchases of property and equipment (13,687) (24,414)
Purchases of other assets and intangible assets (1,231) (1,445)
Notes receivable issued to related parties (50) (13)
Additions to property held for sale (2) ---
-------------- -------------
Net cash used in investing activities (14,970) (25,872)
-------------- -------------
Cash flows from financing activities:
Proceeds from common stock issuance 4,784 207
Purchase of common stock to be retired (3,550) (5,256)
Repayment of Senior Credit Facility (400) ---
Repayments of capital lease obligations (24) (1,583)
Payment of debt issuance costs --- (43)
Purchase of treasury stock --- (32)
-------------- -------------
Net cash provided by (used in) financing activities 810 (6,707)
-------------- -------------
Net decrease in cash and cash equivalents (1,331) (9,686)
Cash and cash equivalents at beginning of period 44,362 31,452
-------------- -------------
Cash and cash equivalents at end of period $ 43,031 21,766
============== =============
See accompanying notes to interim condensed consolidated financial statements.
8
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, 2005, 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(R) 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 fiber optic cable systems
used in the transmission of interstate and intrastate private
line, switched message long-distance and Internet services
within Alaska and 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 wireless telephone services and sale of wireless
telephone handsets and accessories.
(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.
9 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
(c) Earnings per Common Share
Earnings per common share ("EPS") and common shares used to
calculate basic and diluted EPS consist of the following (amounts
in thousands, except per share amounts):
Three Months Ended March 31,
2006 2005
----------------------------------- ----------------------------------
Income Shares Income Shares
(Num- (Denom- Per-share (Num- (Denom- Per-share
erator) inator) Amounts erator) inator) Amounts
---------- ------------ ----------- ---------- ----------- -----------
Net income before cumulative
effect of a change in
accounting principle $ 3,922 $ 4,663
Less Series B preferred stock
dividends --- 93
---------- ----------
Basic EPS:
Net income before cumulative
effect of a change in
accounting principle 3,922 54,561 $ 0.07 4,570 55,108 $ 0.08
Effect of Dilutive Securities:
Unexercised stock options --- 1,656 --- --- 1,233 ---
---------- ------------ ----------- ---------- ----------- -----------
Diluted EPS:
Net income before cumulative
effect of a change in
accounting principle $ 3,922 56,217 $ 0.07 $ 4,570 56,341 $ 0.08
========== ============ =========== ========== =========== ===========
EPS are presented in accordance with Statement of Financial
Accounting Standard ("SFAS") No. 128, "Earnings Per Share." The
dilutive effect of share-based compensation arrangements are
computed using the treasury stock method. In applying the treasury
stock method, assumed proceeds are computed as the sum of (a) the
amount, if any, the employee must pay upon exercise, (b) the amount
of compensation cost attributed to future services and not yet
recognized, and (c) the amount of excess tax benefits, if any, that
would be credited to additional paid-in capital assuming exercise
of the options. Stock option agreements that may be settled in
common stock or in cash are presumed to be settled in common stock
and the resulting potential common shares are included in the
denominator of the diluted EPS calculation since the effect is more
dilutive. The numerator of the diluted EPS calculation has been
adjusted for changes in net income that would result if the
agreements had been reported as equity instruments for financial
reporting purposes during 2006.
10 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Stock options to acquire 993,000 and 228,000 shares for the three
months ended March 31, 2006 and 2005, respectively, were excluded
in the computations of diluted EPS because the effect of including
these stock options would have been anti-dilutive.
Series B redeemable preferred stock common equivalent shares
outstanding of 777,000 are not included in the diluted EPS
calculation for the three months ended March 31, 2005 because they
are anti-dilutive for purpose of calculating EPS.
We have not issued securities other than common stock that
contractually entitle the holder to participate in dividends and
earnings when, and if, we declare dividends on our common stock
and, therefore, we do not apply the two-class method of calculating
earnings per share.
(d) Common Stock
Following are the changes in common stock for the three months
ended March 31, 2006 and 2005 (shares, in thousands):
Class A Class B
------------- ------------
Balances at December 31, 2004 51,825 3,862
Class B shares converted to Class A 1 (1)
Shares issued under stock option plan 35 ---
Shares retired (295) ---
------------- ------------
Balances at March 31, 2005 51,566 3,861
============= ============
Balances at December 31, 2005 51,200 3,843
Class B shares converted to Class A 4 (4)
Shares issued under stock option plan 735 ---
Shares retired (579) ---
------------- ------------
Balances at March 31, 2006 51,360 3,839
============= ============
Our Board of Directors has authorized a common stock buyback
program for the repurchase of our Class A and Class B common stock
in order to reduce our outstanding shares of Class A and Class B
common stock. Our Board of Directors authorized us and we obtained
permission from our lenders for up to $45.0 million of repurchases
through March 31, 2006. We are authorized to continue our stock
repurchases of up to $5.0 million per quarter indefinitely and to
use stock option exercise proceeds to repurchase additional shares.
During the three months ended March 31, 2006 and 2005 we
repurchased 317,000 and 572,000 shares of our Class A common stock
at a cost of approximately $3.6 million and $5.7 million,
respectively. The cost of the repurchased Class A common stock is
included in Retained Earnings on our Consolidated Balance Sheets.
If stock repurchases are less than the total approved quarterly
amount the difference may be carried forward and applied against
future stock repurchases. We expect to continue the repurchases for
an indefinite period subject to the availability of free cash flow,
availability
11 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
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.
(e) Asset Retirement Obligations
Following is a reconciliation of the beginning and ending aggregate
carrying amount of our asset retirement obligations at March 31,
2006 and 2005 (amounts in thousands):
Balance at December 31, 2004 $ 2,971
Accretion expense for the three
months ended March 31, 2005 49
--------
Balance at March 31, 2005 $ 3,020
========
Balance at December 31, 2005 $ 3,210
Accretion expense for the three
months ended March 31, 2006 43
Liability settled (2)
--------
Balance at March 31, 2006 $ 3,251
========
Our asset retirement obligations are included in Other Liabilities.
(f) Share-based Payment Arrangements
Effective January 1, 2006, we adopted the provisions of SFAS No.
123(R), Share-Based Payment, and related interpretations, to
account for share-based compensation using the modified prospective
transition method and therefore will not restate our prior period
results. SFAS 123(R) supersedes Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees and
revises guidance in SFAS 123, Accounting for Stock-Based
Compensation. Among other things, SFAS 123(R) requires that
compensation expense be recognized in the financial statements for
share-based awards based on the grant date fair value of those
awards. The modified prospective transition method applies to (a)
unvested stock options under our 1986 Stock Option Plan ("Option
Plan") and unvested stock options not issued pursuant to a plan
that were outstanding as of December 31, 2005 based on the grant
date fair value estimated in accordance with the pro forma
provisions of SFAS 123, and (b) any new share-based awards granted
subsequent to December 31, 2005, based on the grant-date fair value
estimated in accordance with the provisions of SFAS 123(R).
Additionally, share-based compensation expense includes an estimate
for pre-vesting forfeitures and is recognized over the requisite
service periods of the awards on a straight-line basis, which is
generally commensurate with the vesting term. We have recorded
$678,000 of share-based compensation expense, net of estimated
forfeitures, during the first quarter of 2006 as a result of our
adoption of SFAS 123(R). See note 4 for information on the
assumptions we used to calculate the fair value of share-based
compensation.
Prior to January 1, 2006, we accounted for all of our stock option
agreements in accordance with APB No. 25 and related
interpretations. Accordingly, compensation expense for a stock
option grant was recognized only if the exercise price was less
than the market value of our common stock on the grant date. Prior
to our adoption of SFAS 123(R), as required under the disclosure
provisions of SFAS 123, as amended, we provided pro forma net
income and
12 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
income per common share for each period as if we had applied the
fair value method to measure share-based compensation expense.
SFAS 123(R) requires the benefits associated with tax deductions in
excess of recognized compensation cost to be reported as a
financing cash flow rather than as an operating cash flow as
previously required. For the three months ended March 31, 2006, we
did not record any excess tax benefit generated from stock option
exercises since we are in a net operating loss position and the
income tax deduction will not yet reduce income taxes payable.
The table below shows the effect of adopting SFAS No. 123(R) on
selected items and what those items would have been under previous
guidance under APB No. 25 and SFAS No. 123 for the three months
ended March 31, 2006 (in thousands, except per share data):
Under APB Under
As Reported No. 25 SFAS 123
--------------- ---------------- ---------------
Operating income $ 16,362 16,983 16,362
Net income before income taxes and cumulative effect of a
change in accounting principle 7,601 8,222 7,601
Cumulative effect of a change in accounting principle,
net of income tax benefit of $425 (608) --- ---
Net income available to common stockholders 3,314 4,288 3,922
Cash flow from operating activities (1) 12,829 12,829 12,829
Cash flow from financing activities (1) 810 810 810
Basic net income per common share:
Net income before cumulative effect of a change in
accounting principle $ 0.07 0.08 0.07
Cumulative effect of a change in accounting principle (0.01) 0.00 0.00
--------------- ---------------- ---------------
Net income $ 0.06 0.08 0.07
=============== ================ ===============
Diluted net income per common share:
Net income before cumulative effect of a change in
accounting principle $ 0.07 0.08 0.07
Cumulative effect of a change in accounting principle (0.01) 0.00 0.00
--------------- ---------------- ---------------
Net income $ 0.06 0.08 0.07
=============== ================ ===============
<FN>
----------------
(1) For the three months ended March 31, 2006, we did not record
any excess tax benefit generated from stock option exercises
since we are in a net operating loss position and the income tax
deduction will not yet reduce income taxes payable.
----------------
</FN>
13 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
The table below summarizes the impact on our results of operations
for the three months ended March 31, 2006 of outstanding stock
options recognized under the provisions of SFAS 123(R) (in
thousands, except per share data):
2006
---------
Share-based employee compensation expense $ 678
Income tax benefit 279
---------
Net decrease in income $ 399
=========
Decrease in EPS:
Basic $ 0.01
=========
Diluted $ 0.01
=========
The following illustrates the effect on net income and EPS for the
three months ended March 31, 2005 as if we had applied the fair
value method to measure share-based compensation, as required under
the disclosure provisions of SFAS No. 123 (in thousands, except per
share amounts):
2005
---------
Net income available to common shareholders, as reported $ 4,663
Total share-based employee compensation expense included in
reported net income, net of related tax effects 27
Less share-based employee compensation expense determined
under the SFAS 123 fair value method, net of related tax
effects (511)
---------
Pro forma net income $ 4,179
=========
EPS:
Basic - as reported $ 0.08
=========
Basic - pro forma $ 0.07
=========
Diluted - as reported $ 0.08
=========
Diluted - pro forma $ 0.07
=========
(g) Exchanges of Nonmonetary Assets
The cost of a nonmonetary asset or service acquired in exchange for
another nonmonetary asset or service is based upon the fair value
of the asset surrendered to obtain it unless the fair value is not
determinable, the exchange of a product or property held for sale
in the ordinary course of business for a product or property to be
sold in the same line of business to facilitate sales to customers
other than the parties to the exchange, or the exchange lacks
commercial substance. If the exceptions apply we value the
transaction using the recorded amount (after reduction, if
appropriate, for an indicated impairment of value) of the
nonmonetary asset or service relinquished. A gain or loss may be
recognized on the exchange.
14 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
(h) Rental Costs Incurred During a Construction Period
We 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.
(i) Reporting of Accounting Changes and Error Corrections
On January 1, 2006, we adopted 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.
(j) Reclassifications
Reclassifications have been made to the 2005 financial statements
to make them comparable with the 2006 presentation.
(2) Consolidated Statements of Cash Flows Supplemental Disclosures
Changes in operating assets and liabilities consist of (amounts in
thousands):
Three month periods ended March 31, 2006 2005
------------ ------------
(Increase) decrease in accounts receivable $ (4,319) 1,814
(Increase) decrease in prepaid expenses (31) 144
(Increase) decrease in inventories (1,579) 191
Decrease in other current assets 177 693
Decrease in accounts payable (816) (270)
Decrease in deferred revenues (335) (373)
Decrease in accrued payroll and payroll related
obligations (3,168) (175)
Increase (decrease) in accrued liabilities 259 (306)
Decrease in accrued interest (6,669) (5,847)
Increase (decrease) in subscriber deposits 12 (28)
Increase in components of other long-term liabilities 20 519
------------ ------------
$ (16,449) (3,638)
============ ============
We paid interest totaling approximately $15.2 million and $14.1 million
during the three months ended March 31, 2006 and 2005, respectively.
Income tax refunds received totaled $0 and $202,000 during the three
months ended March 31, 2006 and 2005, respectively. We paid no income
taxes during the three months ended March 31, 2006 and 2005.
15 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
We recorded a net cumulative effect adjustment (expense) of $672,000
during the three months ended March 31, 2006 to recognize the effect of
initially measuring share-based compensation liability instruments at
fair value. We recorded a net cumulative effect adjustment (benefit) of
$64,000 during the three months ended March 31, 2006 for share-based
compensation instruments outstanding at December 31, 2005 for which the
requisite service is not expected to be rendered. We recorded $62,000
during the three months ended March 31, 2005 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.
During the three months ended March 31, 2006 we financed a $1.2 million
acquisition of a building through a capital lease obligation.
(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 March 31, 2006. The
remaining useful lives of our cable certificates and goodwill were
evaluated as of March 31, 2006 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 March 31, 2006.
Cable certificates and goodwill are not allocated to a reportable segment
but are included in the All Other category of our segment assets.
Amortization expense for amortizable intangible assets was $388,000 and
$292,000 during the three months ended March 31, 2006 and 2005,
respectively.
Amortization expense for amortizable intangible assets for each of the
five succeeding fiscal years is estimated to be (amounts in thousands):
Years Ending
December 31,
--------------
2006 $ 1,284
2007 1,175
2008 946
2009 659
2010 149
(4) Share-Based Compensation
Our 1986 Stock Option Plan, as amended, provides for the grant of options
for a maximum of 13.2 million shares of GCI Class A common stock, subject
to adjustment upon the occurrence of stock dividends, stock splits,
mergers, consolidations or certain other changes in corporate structure
or capitalization. If an option expires or terminates, the shares subject
to the option will be available for further grants of options under the
Option Plan. Substantially all stock options granted vest in equal
installments over a period of five years, and expire ten years from the
date of grant. New shares are issued when stock option agreements are
exercised, unless the stock
16 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
option agreements are settled in cash. Our share repurchase program as
described in Note 11 in our 2005 Form 10-K may include the purchase of
shares issued pursuant to stock option agreement exercise transactions.
We are unable to estimate the number of such shares we may purchase
during the annual period beginning April 1, 2006.
We use a Black-Scholes-Merton option pricing model to estimate the fair
value of share-based awards under SFAS 123(R), which is the same
valuation technique we previously used for pro forma disclosures under
SFAS 123. The Black-Scholes-Merton option pricing model incorporates
various and highly subjective assumptions, including expected term and
expected volatility. We have reviewed our historical pattern of option
exercises and have determined that meaningful differences in option
exercise activity existed among employee job categories. Therefore, for
all stock options granted after January 1, 2006, we have categorized
these awards into two groups of employees for valuation purposes, which
is the same technique we previously used for pro forma disclosures under
SFAS 123.
We estimated the expected term of options granted by evaluating the
vesting period of stock option awards, employee's past exercise and
post-vesting employment departure behavior, and expected volatility of
the price of the underlying shares.
We estimated the expected volatility of our common stock at the grant
date using the historical volatility of our common stock over the most
recent period equal to the expected stock option term and evaluated the
extent to which available information indicated that future volatility
may differ from historical volatility.
Our risk-free interest rate assumption was determined using the Federal
Reserve nominal rates for U.S. Treasury zero-coupon bonds with maturities
similar to those of the expected term of the award being valued. We have
never paid any cash dividends on our common stock and we do not
anticipate paying any cash dividends in the foreseeable future.
Therefore, we assumed an expected dividend yield of zero.
The following table shows our assumptions used to compute the share-based
compensation expense and pro forma information for stock options granted
during the three months ended March 31, 2006 and 2005:
2006 2005
---------------- -----------------
Expected term (years) 4.6 - 5.5 4.7 - 5.1
Volatility 55.6% 45.5%
Risk-free interest rate 4.8% 4.2%
SFAS 123(R) requires us to measure share-based compensation liability
instruments at fair value as of January 1, 2006. Previously, we measured
those liability instruments at their intrinsic value determined as of
their grant date. The transition impact of adopting SFAS No. 123(R)
attributed to measuring such liability instruments at fair value totaled
$1.1 million, net of income tax benefit of $469,000 and is reported as a
component of the cumulative effect of change in accounting principle in
the accompanying March 31, 2006 Consolidated Statement of Operations.
17 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Additionally, SFAS 123(R) requires us to estimate pre-vesting option
forfeitures at the time of grant and periodically revise those estimates
in subsequent periods if actual forfeitures differ from those estimates.
We record share-based compensation expense only for those awards expected
to vest using an estimated forfeiture rate based on our historical
pre-vesting forfeiture data. Previously, we accounted for forfeitures as
they occurred under the pro forma disclosure provisions of SFAS 123 for
periods prior to 2006. The transition impact of adopting SFAS No. 123(R),
attributed to accruing for expected forfeitures on outstanding
share-based awards, totaled $108,000, net of income tax expense of
$44,000 and is reported as a component of the cumulative effect of change
in accounting principle in the accompanying March 31, 2006 Consolidated
Statement of Operations.
The weighted average grant date fair value of options granted during the
first quarter of 2006 and 2005 was $6.26 per share and $4.81 per share,
respectively. The total fair value of options vesting during the first
quarter of 2006 and 2005 was approximately $1.8 million and $2.4 million,
respectively.
Unrecognized share-based compensation expense was approximately $7.7
million as of March 31, 2006, relating to a total of 2.4 million unvested
stock options. We expect to recognize this share-based compensation
expense over a weighted average period of approximately 2.8 years.
The following is a summary of our 1986 Stock Option Plan activity for the
three months ended March 31, 2006:
Weighted Average
Shares Exercise Price
---------------- -----------------
Outstanding at December 31, 2005 6,550,777 $7.27
Granted 65,000 $10.94
Exercised (735,706) $6.51
Forfeited (45,300) $9.03
----------------
Outstanding at March 31, 2006 5,834,771 $7.39
================
Available for grant at March 31, 2006 1,054,746
================
The following is a summary of activity for stock options granted not
pursuant to the 1986 Stock Option Plan for the three months ended March
31, 2006:
Weighted Average
Shares Exercise Price
---------------- -----------------
Outstanding at December 31, 2005 and March 31,
2006 250,000 $6.50
================
Available for grant at March 31, 2006 ---
================
18 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
The following is a summary of all outstanding stock options at March 31,
2006:
Options Outstanding
- -----------------------------------------------------------------------------------------------
Weighted Average
Remaining Aggregate
Range of Contractual Life Weighted Average Intrinsic Value
Exercise Prices Shares (years) Exercise Price (thousands)
- -----------------------------------------------------------------------------------------------
$3.11-$5.99 430,990 4.29 $4.74 $3,142
$6.00-$6.04 645,830 5.62 $6.00 $3,894
$6.05-$6.49 52,000 4.78 $6.13 $307
$6.50-$6.94 1,450,889 4.22 $6.50 $8,074
$6.95-$7.24 314,634 3.00 $7.00 $1,532
$7.25-$7.39 1,175,000 5.94 $7.25 $5,617
$7.40-$8.49 723,108 6.11 $8.00 $2,912
$8.50-$9.99 788,520 8.58 $9.40 $2,077
$10.00-$11.94 502,800 9.12 $10.29 $851
$11.95 1,000 10.00 $11.95 $23
- -----------------------------------------------------------------------------------------------
$3.11-$11.95 6,084,771 5.84 $7.36 $28,429
===============================================================================================
Options Vested
- ---------------------------------------------------------------------------------------------------
Weighted Average
Remaining Aggregate
Range of Contractual Life Weighted Average Intrinsic Value
Exercise Prices Shares (years) Exercise Price (thousands)
- ---------------------------------------------------------------------------------------------------
$3.11-$5.99 378,990 3.99 $4.67 $2,789
$6.00-$6.04 347,930 4.67 $6.00 $2,098
$6.05-$6.49 51,000 4.74 $6.13 $301
$6.50-$6.94 1,291,289 3.86 $6.50 $7,192
$6.95-$7.24 314,234 3.03 $7.00 $1,530
$7.25-$7.39 599,995 5.89 $7.25 $2,868
$7.40-$8.49 473,408 5.03 $7.80 $2,001
$8.50-$9.99 132,733 6.94 $9.04 $397
$10.00-$11.94 55,100 7.30 $10.83 $48
$11.95 --- 5.25 $--- $19
- ---------------------------------------------------------------------------------------------------
$3.11-$11.95 3,644,679 4.53 $6.75 $19,243
===================================================================================================
The total intrinsic value, determined as of the date of exercise, of
options exercised in the first quarter of 2006 and 2005 were $3.4 million
and $0.2 million, respectively. We received $5.8 million and $262,000 in
cash from stock option exercises in the first quarter of 2006 and 2005,
respectively. We used cash to settle stock option agreements of $1.6
million and $0 in the first quarter of 2006 and 2005, respectively.
19 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
(5) Industry Segments Data
Our reportable segments are business units that offer different products.
The reportable segments are each managed separately and serve distinct
types of customers.
In the fourth quarter of 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.
Beginning January 1, 2006 our four reportable segments became Consumer,
Network Access, Commercial and Managed Broadband, replacing the
Long-distance, Cable, Local Access and Internet services segments.
Reportable segment data and All Other Category data for the first quarter
of 2005 have been reclassified for comparability purposes, as follows:
o First quarter of 2005 revenue and cost of goods sold (exclusive of
depreciation and amortization expense) ("Cost of Goods Sold") were
reclassified to conform to the new segment organizational structure.
A combination of specific identification and general allocations were
employed to reclassify first quarter of 2005 balances. Allocated
amounts were generally determined using segment revenue or customer
counts derived from first quarter of 2006 segment data. We believe
the first quarter of 2006 division of revenue and customers by
segment is representative of the first quarter of 2005 customer
composition for purposes of reclassifying first quarter of 2005
revenue and Cost of Goods Sold balances.
o First quarter 2005 selling, general and administrative ("SG&A")
expenses were reclassified to conform to the new segment
organizational structure. A combination of specific and general
allocations were employed to reclassify first quarter 2005 balances,
as follows:
o Certain SG&A expenses were directly charged to each new
reportable segment during the first quarter of 2006. The amount
of comparable SG&A directly charged to each segment during the
first quarter of 2005 based upon our new organizational structure
is not practicable to calculate. We believe the 2006 amounts are
representative of the amounts allocable during the same period of
2005, and therefore allocated such amounts to each reportable
segment in the first quarter of 2005.
o The remaining SG&A expenses, consisting of corporate related
expenses further described below, were allocated to each segment
using the percentage of each segment's margin for the year ended
December 31, 2004 to total margin for the same period.
o First quarter 2005 bad debt recovery was reclassified to conform to
the new segment organizational structure. A combination of specific
identification and general allocations based upon segment revenue for
the year ended December 31, 2005 were employed to reclassify first
quarter 2005 bad debt recovery.
Depreciation and amortization expense for the three months ended March
31, 2005 is no longer allocated to reportable segments as our Chief
Operating Decision Maker now evaluates each
20 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
segments' performance based upon its earnings from operations before
depreciation, amortization, net interest expense and income tax expense.
A description of our four reportable segments follows:
Consumer. We offer a full range of voice, video, data and wireless
services to residential customers.
Network Access. We offer a full range of voice and data services to
common carrier customers.
Commercial. We offer a full range of voice, video, data and wireless
services to business and governmental customers.
Managed Broadband. We offer data services to rural school districts,
rural hospitals and health clinics through our SchoolAccess(R) and
Rural Health initiatives.
Corporate related expenses including engineering, operations and
maintenance of our core network, information technology, accounting,
legal and regulatory, human resources, and other general and
administrative expenses for the first quarter of 2006 are allocated to
our segments using segment margin for the year ended December 31, 2005.
Bad debt expense for the first quarter of 2006 is allocated to our
segments using a combination of specific identification and allocations
based upon segment revenue for the quarter ended March 31, 2006.
We evaluate performance and allocate resources based on earnings from
operations before depreciation and amortization expense, net interest
expense and income tax expense. 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, 2005 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 and all of our satellite
transponders.
21 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Summarized financial information for our reportable segments for the
three months ended March 31, 2006 and 2005 follows (amounts in
thousands):
Reportable Segments
--------------------------------------------------------------------
Total
Network Commer- Managed Reportable
Consumer Access cial Broadband Segments
--------------------------------------------------------------------
2006
----
Revenues:
Intersegment $ --- --- 1,338 --- 1,338
External 42,663 37,823 26,128 6,208 112,822
--------------------------------------------------------------------
Total revenues $ 42,663 37,823 27,466 6,208 114,160
====================================================================
Earnings from operations before
depreciation, amortization, net
interest expense and income taxes $ 8,077 19,869 6,656 1,808 36,410
====================================================================
2005
----
Revenues:
Intersegment $ 14 1,832 5,823 --- 7,669
External 40,192 34,144 25,359 6,815 106,510
--------------------------------------------------------------------
Total revenues $ 40,206 35,976 31,182 6,815 114,179
====================================================================
Earnings from operations before
depreciation, amortization, net
interest expense and income taxes $ 7,953 18,280 5,664 2,586 34,483
====================================================================
A reconciliation of reportable segment revenues to consolidated revenues
follows (amounts in thousands):
Three months ended March 31, 2006 2005
------------- -------------
Reportable segment revenues $ 114,160 114,179
Less intersegment revenues eliminated in consolidation 1,338 7,669
------------- -------------
Consolidated revenues $ 112,822 106,510
============= =============
22 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
A reconciliation of reportable segment earnings from operations before
depreciation and amortization expense, net interest expense and income
taxes to consolidated net income before income taxes and cumulative
effect of a change in accounting principle follows (amounts in
thousands):
Three months ended March 31, 2006 2005
----------- -------------
Reportable segment earnings from operations before
depreciation and amortization expense, net interest expense
and income taxes $ 36,410 34,483
Less depreciation and amortization expense 20,161 17,705
Add other expense 113 ---
----------- -------------
Consolidated operating income 16,362 16,778
Less other expense, net 8,761 8,635
----------- -------------
Consolidated net income before income taxes and
cumulative effect of a change in accounting principle $ 7,601 8,143
=========== =============
(6) Commitments and Contingencies
Litigation, Disputes, and Regulatory Matters
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.
Capital Lease Obligation
On March 31, 2006, through our subsidiary GCI Communication Corp. ("GCC")
we entered into an agreement to lease transponder capacity on PanAmSat
Corporation's ("PanAmSat") Galaxy 18 Spacecraft that is expected to be
launched during 2007. We will also lease capacity on the Horizons 1
Satellite, which is owned jointly by PanAmSat and JSAT International,
Inc. The leased capacity is expected to replace our existing transponder
capacity on PanAmSat's Galaxy 10R satellite when it reaches its end of
life.
We will lease, subject to a termination option, C-band and Ku-Band
transponders over an expected term of approximately 14 years once the
satellite is placed into commercial operation in its assigned orbital
location, and the transponders meet specific performance specifications
and are made available for our use. The present value of the lease
payments, excluding telemetry, tracking and command services and back-up
protection, is expected to total $77.0 million to $82.0 million. We will
record the capital lease obligation and the addition to our Property and
Equipment when the satellite is made available for our use which is
expected to occur approximately one month after the expected July 2007
launch.
23 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
A summary of estimated future minimum lease payments for this lease
follows (amounts in thousands):
Years ending December 31:
2006 $ ---
2007 4,584
2008 9,168
2009 9,168
2010 9,168
2011 and thereafter 97,028
----------
Total minimum lease payments $ 129,116
==========
Upon payment of a monthly fee we have the option to terminate the lease
of the C-band transponders through June 1, 2007. We may forfeit our
termination option at which time we would no longer be obligated to
continue paying the monthly fee. If we elect to terminate our C-band
transponder lease we must return the transponders and pay a termination
fee.
Telecommunication Services Agreement
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 with a total outstanding
commitment of $138.1 million at December 31, 2005. 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. We have received notice from
the lessee of their intent to amend our agreement. We have agreed with
the lessee that the agreement may be canceled by the lessee with 60 days
written notice.
Anchorage Unbundled Network Elements Arbitration
On June 25, 2004, the Regulatory Commission of Alaska ("RCA") issued a
comprehensive decision setting forth new rates for unbundled network
elements ("UNE"), resale, and terms and conditions for interconnection in
the Anchorage arbitration. Significantly, the RCA raised the loop rate in
Anchorage to $19.15 but subsequently reduced the loop rate on
reconsideration to $18.64. The RCA also issued other various arbitration
rulings adverse to us, including adopting Alaska Communications Systems
Group, Inc.'s ("ACS") non-recurring and collocation cost models. On
December 7, 2004, the Commission issued a final order approving an
interconnection agreement. We have appealed various Commission
arbitration rulings.
On September 30, 2005, the ACS subsidiary serving Anchorage filed a
petition with the FCC, seeking forbearance from the requirement that it
provide access to UNEs, and that to the extent it voluntarily did so,
that the pricing provisions of the Act would not apply. We filed our
opposition on January 9, 2006 and our reply on February 23, 2006. The FCC
is required under statute to issue a decision by September 30, 2006, or
on its own motion, in an additional 90 days. If a decision is not issued
within the required timeframe, the petition is deemed granted. The
ability to obtain UNEs is an important element of our local exchange and
exchange access services
24 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
business, and the outcome of this proceeding could result in a change in
our ability to access segments of the Anchorage market via the facilities
of the ILEC and the cost of doing so. We cannot predict at this time the
outcome of this proceeding or its impact on us; however, our net cost of
providing local telephone services in Anchorage could be materially
adversely affected by an adverse decision.
Alaska DigiTel, LLC ("Alaska DigiTel") Investment We agreed to invest
approximately $29.5 million in exchange for a majority equity interest in
Alaska DigiTel, a small Alaska Personal Communication Services ("PCS")
provider. The existing owners will retain a minority ownership interest
and voting control of Alaska DigiTel. The exact percentage and dollar
amounts for our interest in Alaska DigiTel will vary in proportion to the
amount the existing owners elect to retain, but we expect to own between
75% and 85% after completion of the transaction. The transaction is based
on a post closing enterprise valuation of $37.0 million for Alaska
DigiTel. We will fund the transaction from cash on hand, by drawing down
additional debt, or a combination of the two. Matanuska Telephone
Association filed a petition with the FCC against our application in
February 2006. The Alaska DigiTel transaction requires certain regulatory
approvals and we are uncertain when it will close.
We have provided a $3.0 million bank depository account as collateral for
an Alaska DigiTel term loan. The amount is classified as Cash and Cash
Equivalents on our March 31, 2006 Consolidated Balance Sheet.
25
PART I.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
In the following discussion, General Communication, Inc. and its direct and
indirect subsidiaries are referred to as "we," "us" and "our."
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and assumptions that affect the reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. On an on-going basis, we evaluate our
estimates and judgments, including those related to unbilled revenues, Cost of
Goods Sold accruals, allowance for doubtful accounts, share-based compensation
expense, 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, 2006 we are reorganized under Consumer, Network Access,
Commercial and Managed Broadband reportable segments, replacing the
Long-distance, Cable, Local Access and Internet services reportable segments.
The realignment along customer lines rather than product lines allows us to more
efficiently meet the demands of technological and product convergence.
Segment and All Other category data for the first quarter of 2005 have been
reclassified to reflect the organizational changes for comparability purposes. A
combination of specific identification and general allocations were employed to
reclassify first quarter of 2005 balances. Allocated amounts were generally
determined using segment revenue or customer counts derived from first quarter
of 2006 segment data. We believe the first quarter of 2006 division of revenue
and customers by segment is representative of the first quarter of 2005 customer
composition for purposes of reclassifying first quarter of 2005 revenue and Cost
of Goods Sold balances.
26
The Network Access segment provides services to other common carrier customers
and the Managed Broadband segment provides services to rural school districts
and rural hospitals and health clinics. Following are our segments and the
services and products each offers to its customers:
Reportable Segments
---------------------------------------------------------
Managed
Services and Products Consumer Network Access Commercial Broadband
------------------------------------ ------------- -------------- -------------- -------------
Voice X X X
------------------------------------ ------------- -------------- -------------- -------------
Video X X
------------------------------------ ------------- -------------- -------------- -------------
Data X X X X
------------------------------------ ------------- -------------- -------------- -------------
Wireless X X
------------------------------------ ------------- -------------- -------------- -------------
An overview of our services and products follows.
Voice Services and Products
Long-distance Services
We generate long-distance services revenues from monthly plan fees and usage
charges.
Factors that have the greatest impact on year-to-year changes in long-distance
services revenues include the rate per minute charged to customers and usage
volumes expressed as minutes of use.
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.
Due in large part to the favorable synergistic effects of our bundling strategy
focused on consumer and commercial customers, long-distance services 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 service 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.
Local Access Services
We generate local access services revenues from three primary sources: (1) basic
dial tone services; (2) private line and special access services; and (3)
features and other charges, including voice mail, caller ID, distinctive ring,
inside wiring and subscriber line charges.
27
The primary factors that contribute to year-to-year changes in local access
services revenues include the average number of 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.
We estimate that our March 31, 2006 and 2005 total lines in service represent a
statewide market share of approximately 26% and 24%, respectively. At March 31,
2006 and 2005 approximately 86% and 85%, respectively, of our lines are provided
on our own facilities and leased local loops. At March 31, 2006 and 2005
approximately 5% and 6%, respectively, of our lines are provided using the UNE
platform delivery method.
Our local access service faces significant competition in Anchorage, Fairbanks,
and Juneau from ACS, which is the largest incumbent local exchange carrier
("ILEC") in Alaska, and from AT&T Alascom, Inc. ("Alascom") in Anchorage for
Consumer services. Alascom has received certification from the Regulatory
Commission of Alaska to provide local access services in Fairbanks and Juneau.
We believe our approach to developing, pricing, and providing local access
services and bundling different services will allow us to be competitive in
providing those services.
We plan to deploy 20,000 additional digital local phone service ("DLPS") lines
which utilize our Anchorage coaxial cable facilities during the year ended
December 31, 2006. 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.
Directory Advertising
We sell advertising in our yellow pages directories to commercial customers and
distribute white and yellow pages directories to customers in certain markets we
serve. We also sell on-line directory products.
Video Services and Products
We generate cable services revenues from three primary sources: (1) digital and
analog programming services, including monthly basic and premium subscriptions,
pay-per-view movies and one-time events, such as sporting events; (2) equipment
rentals and installation; and (3) advertising sales.
Our cable systems serve 40 communities and areas in Alaska, including the
state's four largest population centers, Anchorage, Fairbanks, the
Matanuska-Susitna Valley and the Kenai Peninsula.
The primary factors that contribute to period-to-period changes in cable
services 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 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.
We increased rates charged for certain cable services in eleven communities,
including three of the state's four largest population centers, Anchorage, the
Matanuska-Susitna Valley, and Fairbanks. The rate increases were primarily
effective in January 2006 and increased approximately 5% for those customers who
experienced an adjustment.
28
Data Services and Products
Internet Services
We generate Internet services revenues from two primary sources: (1) access
product services, including cable modem and dial-up access; and (2) network
management services.
The primary factors that contribute to year-to-year changes in Internet services
revenues include the average number of subscribers to our services during a
given reporting period, the average monthly subscription rates, the amount of
bandwidth purchased by large commercial customers, and the number and type of
additional premium features selected.
Marketing campaigns continue to be deployed featuring bundled products. Our
Internet offerings are bundled with various combinations of our long-distance,
cable, and local access services 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.
Private Line and Private Network Services
We generate private line and private network services revenue from two primary
sources: (1) leasing capacity on our facilities that utilize voice and data
transmission circuits, dedicated to particular subscribers, which link a device
in one location to another in a different location and (2) through the sale of
Internet Protocol based data services on a secured shared network to businesses
linking multiple enterprise locations. The factor that has the greatest impact
on year-to-year changes in private line and private network services revenues is
the number of private lines and private networks in use. We compete against
Alascom, ACS and other local telecommunication service providers.
Managed Services
We design, sell, install, service and operate, on behalf of certain customers,
communications and computer networking equipment and provide field/depot, third
party, technical support, communications consulting and outsourcing services
through our Network Solutions business. We also supply integrated voice and data
communications systems incorporating interstate and intrastate digital private
lines, point-to-point and multipoint private network and small earth station
services. Presently, there are a number of competing companies in Alaska that
actively sell and maintain data and voice communications systems.
Our ability to integrate communications networks and data communications
equipment has allowed us to maintain our market position based on "value added"
support services rather than price competition. These services are blended with
other transport products into unique customer solutions, including managed
services and outsourcing.
Broadband Services
We generate broadband services revenue through our SchoolAccess(R) and Rural
Health initiatives. Our customers may purchase end-to-end broadband services
solutions blended with other transport and software products such as video
conferencing and unique web content services. Presently, there are several
competing companies in Alaska that actively sell broadband services.
29
Our ability to provide end-to-end broadband services solutions has allowed us to
maintain our market position based on "value added" products and services rather
than solely based on price competition. These services are blended with other
transport and software products into unique customer solutions, including
SchoolAccess(R) and Rural Health applications such as video conferencing and
unique web content services.
Wireless Services and Products
We generate wireless services and equipment revenues from four primary sources:
(1) monthly plan fees; (2) usage and roaming charges; (3) wireless Internet
access; and (4) handset and accessory sales.
We offer wireless services by reselling Dobson Communications Corporation's
("Dobson") services. We provide limited wireless local access and Internet
services using our own facilities. We compete against Dobson, ACS, Alaska
DigiTel, and resellers of those services in Anchorage and other markets.
We have 20,100 and 9,600 combined Consumer and Commercial wireless lines in
service at March 31, 2006 and 2005, respectively. A wireless line in service is
defined as a revenue generating wireless device. Our average wireless revenue
per combined Consumer and Commercial subscriber is $49.52 during the three
months ended March 31, 2006, calculated by dividing our combined Consumer and
Commercial usage revenues by our combined Consumer and Commercial subscriber
count.
We have reached a definitive agreement to invest $29.5 million in Alaska
DigiTel. In exchange for the investment, we will receive a majority equity
interest in Alaska DigiTel but will not own voting control of the venture. We
view our investment as an incremental way to participate in future growth of the
wireless industry in Alaska. Our existing distribution agreement with Dobson
remains in full effect and our existing cellular products will continue to
compete with Alaska DigiTel in the Alaska market. The transaction is subject to
customary closing conditions, including documentation and regulatory approvals.
Matanuska Telephone Association filed a petition with the FCC against our
application in February 2006. We are not able to determine at this time when the
transaction will close.
30
Results of Operations
The following table sets forth selected Statements of Operations data as a
percentage of total revenues for the periods indicated (underlying data rounded
to the nearest thousands):
Percentage
Change (1)
Three Months Ended 2006
March 31, vs.
(Unaudited) 2006 2005 2005
---- ---- ----
Statements of Operations Data:
Revenues:
Consumer services segment 37.8% 37.7% 6.1%
Network Access services segment 33.5% 32.1% 10.8%
Commercial services segment 23.2% 23.8% 3.0%
Managed broadband services segment 5.5% 6.4% (8.9%)
----------------------------------------
Total revenues 100.0% 100.0% 5.9%
Selling, general and administrative expenses 35.1% 34.9% 6.6%
Bad debt expense (recovery) 0.4% (0.3%) 241.9%
Depreciation and amortization expense 17.9% 16.6% 13.9%
Operating income 14.5% 15.8% (2.5%)
Net income before income taxes and cumulative effect of a
change in accounting principle 6.7% 7.6% (6.7%)
Net income before cumulative effect of a change in
accounting principle 3.5% 4.4% (15.9%)
Net income 2.9% 4.4% (28.9%)
<FN>
--------------------------
(1)Percentage change in underlying data.
--------------------------
</FN>
Three Months Ended March 31, 2006 Compared To Three Months Ended March 31, 2005
Overview of Revenues and Cost of Goods Sold
Total revenues increased 5.9% from $106.5 million in the first quarter of 2005
to $112.8 million in the first quarter of 2006. Revenue increases in our
Consumer, Network Access and Commercial segments were partially off-set by
decreased revenue in our Managed Broadband segment. See the discussion below for
more information by segment.
Total Cost of Goods Sold increased 2.8% from $35.2 million in the first quarter
of 2005 to $36.2 million in the first quarter of 2006. Increases in the Consumer
and Network Access segments' Cost of Goods Sold were partially off-set by
decreased Cost of Goods Sold in our Commercial and Managed Broadband segments.
See the discussion below for more information by segment.
31
Consumer Services Segment Overview
Consumer services segment revenue in the first quarter of 2006 represented 38.0%
of consolidated revenues. The components of Consumer services segment revenue
are as follow (amounts in thousands):
First Quarter Percentage
2006 2005 Change
-------------- ------------- ----------------
Voice $ 11,311 11,997 (5.7%)
Video 22,003 20,994 4.8%
Data 6,961 6,245 11.5%
Wireless 2,388 956 149.8%
-------------- ------------- ----------------
Total Consumer services segment revenue $ 42,663 40,192 6.1%
============== ============= ================
Selected key performance indicators for our Consumer services segment follow:
March 31, Percentage
2006 2005 Change
-------------- ------------- ----------------
Voice:
Total local access lines in service(1) 68,600 69,000 (0.6%)
DLPS local access lines in service(1) 24,100 10,400 131.7%
Video:
Basic subscribers(2) 122,100 122,000 0.0%
Digital programming tier subscribers(3) 54,900 48,000 14.4%
HD/DVR converter boxes(4) 16,200 6,700 141.8%
Homes passed 216,000 209,600 3.1%
Data:
Cable modem subscribers(5) 74,000 63,300 16.9%
<FN>
----------------
1 A local access line in service is defined as a revenue generating circuit
or channel connecting a customer to the public switched telephone network.
2 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.
3 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.
Digital programming tier subscribers are a sub-set of basic subscribers.
4 An HD/DVR converter box is defined as one box rented by a digital
programming or basic tier subscriber. A digital programming or basic tier
subscriber is not required to rent an HD/DVR converter box to receive
service.
5 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,
32
each access point is counted as a subscriber. Cable modem subscribers may
also be basic subscribers though basic cable service is not required to
receive cable modem service.
----------------
</FN>
First Quarter Percentage
2006 2005 Change
-------------- ------------- ----------------
Voice:
Long-distance minutes carried (in millions) 36.9 40.8 (9.6%)
Video:
Average gross revenue per subscriber(1) $63.87 $59.25 7.8%
<FN>
----------------
1 Consumer video revenues divided by consumer video basic subscribers.
----------------
</FN>
Consumer Services Segment Revenues
The 5.7% decrease in voice revenue is primarily due to the decrease in
long-distance minutes carried for these customers and a $660,000 decrease in
support from the Universal Service Program.
The decrease in active long-distance customers is primarily due to a decrease in
the total number of long-distance services subscribers in the market resulting
from customers substituting wireless phone, prepaid calling card, VoIP, and
email usage for direct dial minutes and non-revenue affecting adjustments to our
customer database resulting from the implementation of a new customer service
and provisioning information system in September 2005.
The 4.8% increase in video revenue is primarily due to an increase in digital
programming tier subscribers in the first quarter of 2006, the rate increases
previously described, and a 20.3% increase in equipment rental and installation
fee revenue to $3.3 million in the first quarter of 2006. The increase in
equipment rental and installation fees revenue is primarily caused by the
increased use of digital distribution technology.
The 11.5% increase in data revenue is primarily due to a 12.5% increase in cable
modem revenue to $5.9 million in the first quarter of 2006 as compared to the
first quarter of 2005. The increase in cable modem revenue is primarily due to
the increase in subscribers.
The 149.8% increase in wireless revenue is primarily due to the increase in
wireless subscribers.
Consumer Services Segment Cost of Goods Sold
Consumer services segment Cost of Goods Sold increased 6.5% to $15.9 million
from the first quarter of 2005 to the first quarter of 2006 primarily due to
increased video and wireless Cost of Goods Sold resulting from increased
revenue. The increase in Cost of Goods Sold is partially off-set by decreased
voice Cost of Goods Sold primarily due to cost savings resulting from the
increased deployment of DLPS lines in the last nine months of 2005 and the first
quarter of 2006.
33
Network Access Services Segment Overview
Network access services segment revenue in the first quarter of 2006 represented
33.5% of consolidated revenues. The components of Network Access services
segment revenue are as follows (amounts in thousands):
First Quarter Percentage
2006 2005 Change
-------------- ------------- ----------------
Voice $ 24,485 20,969 16.8%
Data 13,338 13,175 1.2%
-------------- ------------- ----------------
Total Network Access services segment revenue $ 37,823 34,144 10.8%
============== ============= ================
Selected key performance indicators for our Network Access services segment
follow:
First Quarter Percentage
2006 2005 Change
-------------- ------------- ----------------
Voice:
Long-distance minutes carried (in millions) 288.0 226.6 27.1%
Network Access Services Segment Revenues
The 16.8% increase in voice revenue is primarily due to the increase in minutes
carried for our other common carrier customers partially off-set by a 4.4%
decrease in our rate per minute on minutes carried for other common carriers.
The average rate per minute decrease is primarily due to the annual 3.0% rate
decrease mandated by the Consolidated Appropriations Act for Fiscal Year 2005
effective January 2005 which will result in rate decreases of 3.0% per year
through 2010 and a change in the composition of traffic carried for other common
carriers.
Network Access Services Segment Cost of Goods Sold
Network Access services segment Cost of Goods Sold increased 12.7% to $8.8
million from the first quarter of 2005 to the first quarter of 2006 primarily
due to increased voice revenue and minutes carried.
Commercial Services Segment Overview
Commercial services segment revenue in the first quarter of 2006 represented
23.2% of consolidated revenues. The components of Commercial services segment
revenue are as follow (amounts in thousands):
First Quarter Percentage
2006 2005 Change
-------------- ------------- ----------------
Voice $ 8,023 8,782 (8.6%)
Video 1,726 1,644 5.0%
Data 15,910 14,746 7.9%
Wireless 469 187 150.8%
-------------- ------------- ----------------
Total Commercial services segment revenue $ 26,128 25,359 3.0%
============== ============= ================
34
Selected key performance indicators for our Commercial services segment follow:
March 31, Percentage
2006 2005 Change
-------------- ------------- ----------------
Voice:
Total local access lines in service(1) 40,600 39,900 1.8%
DLPS local access lines in service(1) 1,000 400 150.0%
Data:
Cable modem subscribers(2) 6,900 6,000 15.0%
<FN>
----------------
1 A local access line in service is defined as a revenue generating circuit
or channel connecting a customer to the public switched telephone network.
2 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.
----------------
</FN>
First Quarter Percentage
2006 2005 Change
-------------- ------------- ----------------
Voice:
Long-distance minutes carried (in millions) 35.1 35.1 0.0%
Commercial Services Segment Revenues
The 8.6% decrease in voice revenue is primarily due a $200,000 decrease in
support from the Universal Service Program.
The 7.9% increase in data revenue is primarily due to a 19.7% or $625,000
increase in managed services special projects for certain customers.
Commercial Services Segment Cost of Goods Sold
Commercial services segment Cost of Goods Sold decreased 8.4% to $10.4 million
from the first quarter of 2005 to the first quarter of 2006 primarily due to
decreased voice revenue. The overall Cost of Goods Sold decrease is partially
off-set by increased managed services Cost of Goods Sold primarily due to
increased managed services revenue in the first quarter of 2006 as compared to
2005.
Managed Broadband Services Segment Overview
Managed broadband services segment revenue in the first quarter of 2006
represented 5.5% of consolidated revenues. Managed broadband services segment
revenue, which includes data products only, decreased $607,000 in the first
quarter of 2006 as compared to the first quarter of 2005.
35
Selected key performance indicators for our Commercial services segment follow:
March 31, Percentage
2006 2005 Change
-------------- ------------- ----------------
Managed broadband services:
SchoolAccess(R) customers 47 43 9.3%
Rural health customers 21 21 0.0%
Managed Broadband Services Segment Revenues
The decrease in Managed Broadband services segment revenue is primarily due to a
decrease in our multi-site SchoolAccess(R) customers in the first quarter of
2006 as compared to 2005 and a decrease in the rate charged for certain circuits
purchased by our rural health customers. The decrease in multi-site
SchoolAccess(R) customers was off-set by an increase in single-site
SchoolAccess(R) customers from which we generate less revenue.
Managed Broadband Services Segment Cost of Goods Sold
Managed broadband services segment Cost of Goods Sold decreased $16,000 to $1.1
million from the first quarter of 2005 to the first quarter of 2006.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 6.6% to $39.6 million in
the first quarter of 2006 primarily due to the following:
o A $1.5 million increase in health insurance costs primarily resulting
from a decrease in our reserve for incurred but not reported health
insurance claims in the first quarter of 2005 in order to reflect
historical experience that was not repeated in the first quarter of
2006 and an increase in our medical claims in the first quarter of
2006, and
o A $637,000 increase in our share-based compensation expense primarily
due to our adoption of SFAS No. 123(R) on January 1, 2006. Upon our
adoption of SFAS No. 123(R) we recognized $678,000 in share-based
compensation expense which was allocated to our reportable segments as
follows (amounts in thousands):
Reportable Segments
------------------------------------------------------------------
Network Managed
Consumer Access Commercial Broadband Total
------------- ------------ --------------- ------------ ----------
Share-based compensation expense $ 262 206 161 49 678
============= ============ =============== ============ ==========
As a percentage of total revenues, selling, general and administrative expenses
increased to 35.1% in the first quarter of 2006 from 34.9% in the first quarter
of 2005, primarily due to an increase in selling, general and administrative
expenses without a proportional increase in revenues.
36
Bad Debt Expense (Recovery)
Bad debt expense (recovery) increased approximately $854,000 to a net expense of
$501,000 in the first quarter of 2006. The increase is primarily due to a
decrease in the realization of a recovery from MCI, Inc. (merged with Verizon
Communications Inc. ("Verizon") in January 2006) through a reduction to bad debt
expense in the first quarter of 2006 as compared to the first quarter of 2005.
Depreciation and Amortization Expense
Depreciation and amortization expense increased 13.9% to $20.2 million in the
first quarter of 2006. The increase is primarily due to our $95.3 million
investment in equipment and facilities placed into service during 2005 for which
a full year of depreciation will be recorded in 2006 and the $7.6 million
investment in equipment and facilities placed into service during the first
quarter of 2006 for which a partial year of depreciation will be recorded in
2006.
Income Tax Expense
Income tax expense totaled $3.7 million in the first quarter of 2006 and $3.5
million in the first quarter of 2005. Our effective income tax rate increased
from 42.7% in the first quarter of 2005 to 48.4% in the first quarter of 2006
due primarily to adjustments to deferred tax assets and liabilities balances in
the first quarter of 2006.
At March 31, 2006, we have (1) tax net operating loss carryforwards of
approximately $160.5 million that will begin expiring in 2009 if not utilized,
and (2) alternative minimum tax credit carryforwards of approximately $2.1
million available to offset regular income taxes payable in future years. We
estimate that we will utilize net operating loss carryforwards of $29.0 million
to $34.0 million during the year ended December 31, 2006. Our utilization of
certain net operating loss carryforwards is subject to limitations pursuant to
Internal Revenue Code section 382.
Tax benefits associated with recorded deferred tax assets are considered to be
more likely than not realizable through future reversals of existing taxable
temporary differences and future taxable income exclusive of reversing temporary
differences and carryforwards. The amount of deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced which would result in
additional income tax expense. We estimate that our effective annual income tax
rate for financial statement purposes will be 43% to 45% in the year ended
December 31, 2006.
Cumulative Effect of a Change in Accounting Principle
On January 1, 2006 we adopted SFAS No. 123(R), "Share-Based Payment." SFAS
123(R) requires us to measure share-based compensation liability instruments at
fair value as of January 1, 2006. Previously, we measured those liability
instruments at their intrinsic value determined as of their grant date. The
transition impact (expense) of adopting SFAS No. 123(R) attributed to measuring
such liability instruments at fair value totaled $1.1 million, net of income tax
benefit of $469,000 and is reported as a component of the cumulative effect of
change in accounting principle in the accompanying March 31, 2006 Consolidated
Statement of Operations.
Additionally, SFAS 123(R) requires us to estimate pre-vesting option forfeitures
at the time of grant and periodically revise those estimates in subsequent
periods if actual forfeitures differ from those estimates. We record share-based
compensation expense only for those awards expected to vest using an estimated
forfeiture rate based on our historical pre-vesting forfeiture data. Previously,
we accounted for forfeitures as they occurred under the pro forma disclosure
provisions of SFAS 123 for
37
periods prior to 2006. The transition impact (benefit) of adopting SFAS No.
123(R) attributed to accruing for expected forfeitures on outstanding
share-based awards totaled $108,000, net of income tax expense of $44,000 and is
reported as a component of the cumulative effect of change in accounting
principle in the accompanying March 31, 2006 Consolidated Statement of
Operations.
Multiple System Operator ("MSO") Operating Statistics
Our operating statistics include capital expenditures and customer information
from our Consumer and Commercial services segments which offer services
utilizing our cable services' facilities.
Our capital expenditures by standard reporting category for the three months
ended March 31, 2006 and 2005 follows (amounts in thousands):
2006 2005
------------ -----------
Customer premise equipment $ 4,005 3,558
Line extensions 1,753 44
Scalable infrastructure 211 552
Upgrade/rebuild 144 4,057
Support capital 122 69
Commercial 3 97
------------ -----------
Sub-total 6,238 8,377
Remaining reportable segments capital
expenditures 7,449 16,037
------------ -----------
$ 13,687 24,414
============ ===========
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 March 31, 2006 and 2005
we had 124,100 and 124,200 customer relationships, respectively.
The standardized definition of a revenue generating unit is the sum of all
primary analog video, digital video, high-speed data, and telephony customers,
not counting additional outlets. At March 31, 2006 and 2005 we had 243,500 and
215,800 revenue generating units, respectively.
Liquidity and Capital Resources
Cash flows from operating activities totaled $12.8 million for the three months
ended March 31, 2006 as compared to $22.9 million for the three months ended
March 31, 2005. The 2006 decrease is primarily due to a $3.7 million increase in
net accounts receivable as further described below and a $2.8 million payment of
our company-wide success sharing bonus in 2006.
Other sources of cash during the three months ended March 31, 2006 included $4.8
million from the issuance of our Class A common stock. Other uses of cash during
the three months ended March 31, 2006 included expenditures of $13.7 million for
property and equipment, including construction in progress, and the purchase of
$3.6 million of common stock to be retired.
Working capital totaled $90.2 million at March 31, 2006, a $13.7 million
increase as compared to $76.5 million at December 31, 2005. The increase is
primarily due to our $11.6 million Senior Notes
38
interest payment and our $2.8 million payment of our company-wide success
sharing bonus primarily using cash generated from operating activities during
the three months ended March 31, 2006 rather than decreasing our Cash and Cash
Equivalents balance, the $3.7 million increase in net receivables as further
described below, and a $2.6 million reclassification of the current portion of
Notes Receivable from Related Parties from non-current assets. The increase is
partially off-set by a $2.1 million decrease in the current deferred tax asset
for the net operating loss carryforward we expect to utilize during the year
ended December 31, 2006.
Net receivables increased $3.7 million from December 31, 2005 to March 31, 2006
primarily due to the net effect of the timing of payments on trade receivables
from several large customers at March 31, 2006.
Senior Notes
We were in compliance with all Senior Notes loan covenants at March 31, 2006.
Senior Credit Facility
We were in compliance with all Senior Credit Facility loan covenants at March
31, 2006.
Capital Lease Obligation
On March 31, 2006, through our subsidiary GCC we entered into an agreement to
lease transponder capacity on the PanAmSat Galaxy 18 Spacecraft that is expected
to be launched during 2007. We will also lease capacity on the Horizons 1
Satellite, which is owned jointly by PanAmSat and JSAT International, Inc. The
leased capacity is expected to replace our existing transponder capacity on
PanAmSat's Galaxy 10R satellite when it reaches its end of life.
We will lease, subject to a termination option, C-band and Ku-Band transponders
over an expected term of approximately 14 years once the satellite is placed
into commercial operation in its assigned orbital location, and the transponders
meet specific performance specifications and are made available for our use. The
present value of the lease payments, excluding telemetry, tracking and command
services and back-up protection, is expected to total $77.0 million to $82.0
million. We will record the capital lease obligation and the addition to our
Property and Equipment when the satellite is made available for our use which is
expected to occur approximately one month after the expected July 2007 launch.
A summary of estimated future minimum lease payments for this lease follows
(amounts in thousands):
Years ending December 31:
2006 $ ---
2007 4,584
2008 9,168
2009 9,168
2010 9,168
2011 and thereafter 97,028
----------
Total minimum lease payments $ 129,116
==========
Upon payment of a monthly fee, we have the option to terminate the lease of the
C-band transponders through June 1, 2007. We may forfeit our termination option
at which time we would no longer be obligated to continue paying the monthly
fee. If we elect to terminate our C-band transponder lease we must return the
transponders and pay a termination fee.
39
Capital Expenditures
Our expenditures for property and equipment, including construction in progress,
totaled $13.7 million and $24.4 million during the three months ended March 31,
2006 and 2005, respectively. Our capital expenditures requirements in excess of
approximately $25.0 million per year are largely success driven and are a result
of the progress we are making in the marketplace. We expect our 2006
expenditures for property and equipment for our core operations, including
construction in progress, to total $80.0 million to $90.0 million, depending on
available opportunities and the amount of cash flow we generate during 2006.
Share Repurchases
GCI's Board of Directors has authorized a common stock buyback program for the
repurchase of our Class A and Class B common stock in order to reduce our
outstanding shares of Class A and Class B common stock. Our Board of Directors
authorized us and we obtained permission from our lenders for up to $45.0
million of repurchases through March 31, 2006. We are authorized to continue our
stock repurchases of up to $5.0 million per quarter indefinitely and to use
stock option exercise proceeds to repurchase additional shares. If stock
repurchases are less than the total approved quarterly amount the difference may
be carried forward and applied against future stock repurchases. During the
three months ended March 31, 2006 we repurchased 316,949 shares of our Class A
common stock at a cost of approximately $3.6 million. We expect to continue the
repurchases 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.
Other Expenditures
We agreed to invest approximately $29.5 million in exchange for a majority
equity interest in Alaska DigiTel, a small Alaska PCS provider. The existing
owners will retain a minority ownership interest and voting control of Alaska
DigiTel. The exact percentage and dollar amounts for our interest in Alaska
DigiTel will vary in proportion to the amount the existing owners elect to
retain, but we expect to own between 75% and 85% after completion of the
transaction. The transaction is based on a post closing enterprise valuation of
$37.0 million for Alaska DigiTel. We will fund the transaction from cash on
hand, by drawing down additional debt, or a combination of the two. Matanuska
Telephone Association filed a petition with the FCC against our application in
February 2006. The Alaska DigiTel transaction requires certain regulatory
approvals and we are uncertain when it will close.
We have provided a $3.0 million bank depository account as collateral for an
Alaska DigiTel term loan. The amount is classified as Cash and Cash Equivalents
on our March 31, 2006 Consolidated Balance Sheet.
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 liquidity and capital requirements,
and fixed charges during the upcoming year through our cash flows from operating
activities, existing cash, cash equivalents,
40
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.
Schedule of Certain Known Contractual Obligations
The following table details future projected payments associated with certain
known contractual obligations as of December 31, 2005, the date of our most
recent fiscal year-end balance sheet. Our schedule of certain known contractual
obligations has been updated to reflect our transponder capacity capital lease
obligation discussed above.
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 $ 479,550 1,725 3,425 3,200 471,200
Interest on long-term debt 197,200 23,200 46,400 46,400 81,200
Capital lease obligations, including
interest 130,594 252 14,268 18,852 97,222
Operating lease commitments 79,532 19,359 24,254 15,875 20,044
Purchase obligations 26,322 15,753 10,569 --- ---
Other 29,500 29,500 --- --- ---
------------- ----------- ------------ ------------ ------------
Total contractual obligations $ 942,698 89,789 98,916 84,327 669,666
============= =========== ============ ============ ============
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, 2005 annual report
on Form 10-K. For discussion of our Senior Credit Facility see note 7 in the
"Notes to Consolidated Financial Statements" included in Part II of our December
31, 2005 annual report on Form 10-K.
For a discussion of our capital and operating leases, see note 16 in the "Notes
to Consolidated Financial Statements" included in Part II of our December 31,
2005 annual report on Form 10-K and note 6 in the accompanying "Notes to Interim
Condensed Consolidated Financial Statements."
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 $6.9 million and a
remaining $10.8 million commitment for our Alaska Airlines agreement as further
described in note 16 in the "Notes to Consolidated Financial Statements"
included in Part II of our December 31, 2005 annual report on Form 10-K. 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 $8.6 million which are not included in
our Consolidated Balance Sheets at December 31, 2005, because the goods had not
been
41
received or the services had not been performed at December 31, 2005. The open
purchase orders are cancelable.
Other consists of our commitment to acquire a substantial equity interest in
Alaska DigiTel for approximately $29.5 million as further described above.
New Accounting Standards
There are no new currently issued accounting standards that will affect our
results of operations, financial position or cash flows after March 31, 2006.
Critical Accounting Policies
Our accounting and reporting policies comply with accounting principles
generally accepted in the United States of America. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions. The financial position and results
of operations can be affected by these estimates and assumptions, which are
integral to understanding reported results. Critical accounting policies are
those policies that management believes are the most important to the portrayal
of our financial condition and results, and require management to make estimates
that are difficult, subjective or complex. Most accounting policies are not
considered by management to be critical accounting policies. Several factors are
considered in determining whether or not a policy is critical in the preparation
of financial statements. These factors include, among other things, whether the
estimates are significant to the financial statements, the nature of the
estimates, the ability to readily validate the estimates with other information
including third parties or available prices, and sensitivity of the estimates to
changes in economic conditions and whether alternative accounting methods may be
utilized under accounting principles generally accepted in the United States of
America. For all of these policies, management 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 three
months ended March 31, 2006 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 Administrative 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,
regulatory requirements, and our customers' compliance with USAC rules.
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.
42
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 the significance
of our cable certificate and goodwill assets to our consolidated
balance sheet, our annual and quarterly impairment analyses and
quarterly evaluations of remaining useful lives are critical. Any
changes in key assumptions about the 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 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 $65.5 million associated with income tax net operating
losses that were generated from 1992 to 2003, and that expire from
43
2009 to 2025. 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 $2.1 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 March 31, 2006 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, share-based payments, and financial instruments require difficult
judgments on complex matters that are often subject to multiple sources of
authoritative guidance. Certain of these matters are among topics currently
under reexamination by accounting standards setters and regulators. No specific
conclusions reached by these standard setters appear likely to cause a material
change in our accounting policies, although outcomes cannot be predicted with
confidence. A complete discussion of our significant accounting policies can be
found in note 1 in "Notes to Consolidated Financial Statements" included in Part
II of our December 31, 2005 annual report on Form 10-K.
Geographic Concentration and the Alaska Economy
We have one major customer, Verizon. Our remaining customers are located
primarily throughout Alaska. Because of this geographic concentration, our
growth and operations depend upon economic conditions in Alaska. The economy of
Alaska is dependent upon the natural resources industries, and in particular oil
production, as well as tourism, government, and United States military spending.
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. 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.
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
44
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.
PART I.
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
We are exposed to various types of market risk in the normal course of business,
including the impact of interest rate changes. We do not hold derivatives for
trading purposes.
Our Senior Credit Facility carries interest rate risk. Amounts borrowed under
this Agreement bear interest at LIBOR plus 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 March 31, 2006, we have
borrowed $158.8 million subject to interest rate risk. On this amount, each 1%
increase in the LIBOR interest rate would result in $1,588,000 of additional
gross interest cost on an annualized basis.
PART I.
ITEM 4.
Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, we
carried out an evaluation of the effectiveness of the design and operation of
our "disclosure controls and procedures" (as defined in the Securities Exchange
Act of 1934 ("Exchange Act") Rules 13a - 15(e)) under the supervision and with
the participation of our management, including our Chief Executive Officer and
our Chief Financial Officer. Based upon that evaluation, our Chief Executive
Officer and our Chief Financial Officer concluded that our disclosure controls
and procedures are effective.
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in our reports
filed or submitted under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed in our
reports filed under the Exchange Act is accumulated and communicated to
management to allow timely decisions regarding required disclosure.
(b) Changes in Internal Controls
During the first quarter of 2006 we corrected certain configuration settings in
our new customer billing system so that credits and other adjustments are
properly recorded. We will continue to monitor vigorously the effectiveness of
these processes, procedures and controls, and will make any further changes as
management determines appropriate.
45
Other than as expressly noted in the paragraph above, there were no changes in
our internal control over financial reporting identified in connection with the
evaluation of our controls performed during the quarter ended March 31, 2006
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
We may enhance, modify, and supplement internal controls and disclosure controls
and procedures based on experience.
Internal controls are a system designed to provide reasonable assurance to the
Company's management and board of directors regarding the preparation and fair
presentation of its financial statements. 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.
PART II.
ITEM 1.
LEGAL PROCEEDINGS
Information regarding material pending legal proceedings to which we are a party
is included in note 6 to the accompanying "Notes to Interim Condensed
Consolidated Financial Statements" and is incorporated herein by reference.
46
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 March 31, 2006:
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)
--------------------------- ----------------- -------------- ------------------- -----------------------
January 1, 2006 to
January 31, 2006 95,500 (3) $10.31 2,082,793 $24,885,000
February 1, 2006 to
February 28, 2006 --- $ --- 2,082,793 $24,885,000
March 1, 2006 to March
31, 2006 221,449 (3) $11.59 2,304,242 $22,319,000
-----------------
Total 316,949
=================
<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 2006 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 2006.
(2) The total amount approved for repurchase was $45.0 million through March
31, 2006 consisting of $30.0 million through December 31, 2005 and $15.0
million through March 31, 2006. If stock repurchases are less than the
total approved quarterly amount the difference may be carried forward and
applied against future stock repurchases, subject to Board of Directors
approval.
(3) Open-market purchases and private party transactions made under our
publicly announced repurchase plan.
</FN>
47
PART II.
ITEM 6.
EXHIBITS
Exhibit No. Description
--------------------------------------------------------------------------------------------------------
10.134 Full-time Transponder Capacity Agreement with PanAmSat Corporation dated March 31,
2006 *
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 four asterisks.
-------------------------
48
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENERAL COMMUNICATION, INC.
Signature Title Date
- -------------------------------------- -------------------------------------------- -----------------------
/s/ Ronald A. Duncan President and Director May 8, 2006
- -------------------------------------- (Principal Executive Officer) -----------------------
Ronald A. Duncan
/s/ John M. Lowber Senior Vice President, Chief Financial May 8, 2006
- -------------------------------------- Officer, Secretary and Treasurer -----------------------
John M. Lowber (Principal Financial Officer)
/s/ Alfred J. Walker Vice President, Chief Accounting May 8, 2006
- -------------------------------------- Officer -----------------------
Alfred J. Walker (Principal Accounting Officer)
49