As filed with the Securities and Exchange Commission on August 9, 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 June 30, 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 August 2, 2006 was:
50,226,931 shares of Class A common stock; and
3,380,257 shares of Class B common stock.
1
GENERAL COMMUNICATION, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 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 June 30, 2006
(unaudited) and December 31,2005...................................................4
Consolidated Statements of Operations for the
three and six months ended June 30, 2006 (unaudited)
and 2005 (unaudited)...............................................................6
Consolidated Statements of Stockholders' Equity
for the three and six months ended June 30, 2006
(unaudited) and 2005 (unaudited)...................................................7
Consolidated Statements of Cash Flows for the six
months ended June 30, 2006 (unaudited)
and 2005 (unaudited)...............................................................9
Notes to Interim Condensed Consolidated Financial
Statements (unaudited).............................................................10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................................31
Item 3. Quantitative and Qualitative Disclosures About
Market Risk...........................................................................56
Item 4. Controls and Procedures...............................................................56
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.....................................................................57
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds...........................57
Item 4. Submission of Matters to a Vote of Security Holders...................................58
Item 6. Exhibits..............................................................................59
Other items are omitted, as they are not applicable.
SIGNATURES................................................................................................60
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)
June 30, December 31,
ASSETS 2006 2005
- ------------------------------------------------------------------------------------------ ------------------- ----------------
Current assets:
Cash and cash equivalents $ 45,686 44,362
------------------- ----------------
Receivables 80,731 78,279
Less allowance for doubtful receivables 5,550 5,317
------------------- ----------------
Net receivables 75,181 72,962
Deferred income taxes, net 20,801 19,596
Prepaid expenses 6,286 8,347
Inventories 2,881 1,556
Notes receivable from related parties 2,685 922
Property held for sale 2,315 2,312
Other current assets 5,938 2,572
------------------- ----------------
Total current assets 161,773 152,629
------------------- ----------------
Property and equipment in service, net of depreciation 434,847 453,008
Construction in progress 24,306 8,337
------------------- ----------------
Net property and equipment 459,153 461,345
------------------- ----------------
Cable certificates 191,565 191,565
Goodwill 42,181 42,181
Other intangible assets, net of amortization 7,813 6,201
Deferred loan and senior notes costs, net of amortization of $1,953 and $1,451 at
June 30, 2006 and December 31, 2005, respectively 7,509 8,011
Notes receivable from related parties 84 2,544
Other assets 8,143 9,299
------------------- ----------------
Total other assets 257,295 259,801
------------------- ----------------
Total assets $ 878,221 873,775
=================== ================
See accompanying notes to interim condensed consolidated financial statements.
4 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
(Amounts in thousands) (Unaudited)
June 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2006 2005
- ------------------------------------------------------------------------------------------ ------------------ -----------------
Current liabilities:
Current maturities of obligations under long-term debt and capital leases $ 1,894 1,769
Accounts payable 26,640 23,217
Deferred revenue 15,139 16,439
Accrued payroll and payroll related obligations 13,176 17,925
Accrued interest 8,703 9,588
Accrued liabilities 6,759 6,814
Subscriber deposits 408 361
------------------ -----------------
Total current liabilities 72,719 76,113
Long-term debt 473,360 474,115
Obligation under capital lease, excluding current maturity 1,192 ---
Obligation under capital lease due to related party, excluding current maturity 597 628
Deferred income taxes, net of deferred income tax benefit 77,955 69,753
Other liabilities 12,146 9,546
------------------ -----------------
Total liabilities 637,969 630,155
------------------ -----------------
Stockholders' equity:
Common stock (no par):
Class A. Authorized 100,000 shares; issued 51,568 and 51,200 shares at
June 30, 2006 and December 31, 2005, respectively 177,108 178,351
Class B. Authorized 10,000 shares; issued 3,380 and 3,843 shares at
June 30, 2006 and December 31, 2005, respectively; convertible on a
share-per-share basis into Class A common stock 2,855 3,247
Less cost of 290 and 291 Class A and Class B common shares held in treasury
at June 30, 2006 and December 31, 2005, respectively (1,723) (1,730)
Paid-in capital 17,856 16,425
Notes receivable with related parties issued upon stock option exercise (1,279) (1,722)
Retained earnings 45,435 49,049
------------------ -----------------
Total stockholders' equity 240,252 243,620
------------------ -----------------
Commitments and contingencies
Total liabilities and stockholders' equity $ 878,221 873,775
================== =================
See accompanying notes to interim condensed consolidated financial statements.
5
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
(Amounts in thousands, except per share amounts) 2006 2005 2006 2005
----------- ------------ ----------- ------------
Revenues $ 118,220 110,665 231,042 217,175
Cost of goods sold (exclusive of depreciation and amortization shown
separately below) 38,598 36,045 74,782 71,245
Selling, general and administrative expenses 40,667 38,019 80,281 75,199
Bad debt expense (recovery) 1,338 194 1,839 (159)
Depreciation and amortization expense 20,172 18,348 40,333 36,052
----------- ------------ ----------- ------------
Operating income 17,445 18,059 33,807 34,838
----------- ------------ ----------- ------------
Other income (expense):
Interest expense (8,696) (8,403) (17,250) (16,735)
Amortization of loan and senior notes fees (251) (448) (502) (931)
Interest income 482 112 639 291
Other 282 --- 169 ---
----------- ------------ ----------- ------------
Other expense, net (8,183) (8,739) (16,944) (17,375)
----------- ------------ ----------- ------------
Net income before income taxes and cumulative effect
of a change in accounting principle 9,262 9,320 16,863 17,463
Income tax expense 3,856 4,036 7,535 7,516
----------- ------------ ----------- ------------
Net income before cumulative effect of a change in
accounting principle 5,406 5,284 9,328 9,947
Cumulative effect of a change in accounting principle,
net of income tax benefit of $425 --- --- (608) ---
----------- ------------ ----------- ------------
Net income 5,406 5,284 8,720 9,947
Preferred stock dividends --- 55 --- 148
----------- ------------ ----------- ------------
Net income available to common shareholders $ 5,406 5,229 8,720 9,799
=========== ============ =========== ============
Basic net income per common share:
Net income before cumulative effect of a change in accounting
principle $ 0.10 0.10 0.17 0.18
Cumulative effect of a change in accounting principle --- --- (0.01) ---
----------- ------------ ----------- ------------
Net income $ 0.10 0.10 0.16 0.18
=========== ============ =========== ============
Diluted net income per common share:
Net income before cumulative effect of a change in accounting
principle $ 0.09 0.09 0.16 0.18
Cumulative effect of a change in accounting principle --- --- (0.01) ---
----------- ------------ ----------- ------------
Net income $ 0.09 0.09 0.15 0.18
=========== ============ =========== ============
See accompanying notes to interim condensed consolidated financial statements.
6
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 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 --- --- --- --- --- 9,947 9,947
Tax effect of excess stock compensation
expense for tax purposes over amounts
recognized for financial reporting
purposes --- --- --- 104 --- --- 104
Common stock repurchases --- --- --- --- --- (8,252) (8,252)
Common stock retirements (8,538) --- --- --- --- 8,538 ---
Shares issued under stock option plan 469 --- --- --- --- --- 469
Redemption of Series B redeemable
preferred stock --- --- --- --- --- (2,358) (2,358)
Stock based compensation expense --- --- --- 96 --- --- 96
Purchase of treasury stock --- --- (30) --- --- --- (30)
Payment received on note receivable
issued to related party upon stock
option exercise --- --- --- --- 38 --- 38
Preferred stock dividends --- --- --- --- --- (148) (148)
---------------------------------------------------------------------------
Balances at June 30, 2005 $178,814 3,248 (1,732) 15,157 (2,978) 41,627 234,136
===========================================================================
See accompanying notes to interim condensed consolidated financial statements.
7 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2006 AND 2005
(Unaudited)
(Continued)
Notes
Class A Receivable
Class A Class B Shares Issued to
Common Common Held in Paid-in Related Retained
(Amounts in thousands) Stock Stock Treasury Capital Parties Earnings Total
---------------------------------------------------------------------------
Balances at December 31, 2005 $178,351 3,247 (1,730) 16,425 (1,722) 49,049 243,620
Net income --- --- --- --- --- 8,720 8,720
Cumulative effect adjustments upon
implementation of Statement of
Financial Accounting Standard No. 123(R) --- --- --- (191) --- --- (191)
Common stock repurchases --- --- (1) --- --- (21,870) (21,871)
Common stock retirements (9,167) (369) --- --- --- 9,536 ---
Shares issued under stock option plan 7,683 --- --- --- --- --- 7,683
Class B shares converted to Class A 23 (23) --- --- --- --- ---
Issuance of stock granted under the
Director Compensation Plan 218 --- --- --- --- --- 218
Payments received on notes receivable
issued to related parties upon stock
option exercise --- --- --- --- 443 --- 443
Stock based compensation expense --- --- --- 1,622 --- --- 1,622
Issuance of stock awards --- --- 8 --- --- --- 8
---------------------------------------------------------------------------
Balances at June 30, 2006 $177,108 2,855 (1,723) 17,856 (1,279) 45,435 240,252
===========================================================================
See accompanying notes to interim condensed consolidated financial statements.
8
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2006 AND 2005
(Unaudited)
(Amounts in thousands) 2006 2005
-------------- -------------
Cash flows from operating activities:
Net income $ 8,720 9,947
Adjustments to reconcile net income to net cash provided by operating
activities, net of acquisition:
Depreciation and amortization expense 40,333 36,052
Deferred income tax expense 7,409 7,516
Share-based compensation expense 2,260 96
Cumulative effect of a change in accounting principle, net 608 ---
Amortization of loan and senior notes fees 502 931
Deferred compensation 239 449
Bad debt expense 233 172
Loss on disposal of property and equipment 19 459
Other noncash income and expense items 468 598
Change in operating assets and liabilities (7,068) (2,867)
-------------- -------------
Net cash provided by operating activities 53,723 53,353
-------------- -------------
Cash flows from investing activities:
Purchases of property and equipment (35,219) (47,690)
Purchases of other assets and intangible assets (3,133) (2,021)
Notes receivable payments from related parties 649 ---
Notes receivable issued to related parties (55) (13)
Net cash acquired in business combination 52 ---
Additions to property held for sale (3) (191)
Proceeds from sales of assets --- 445
-------------- -------------
Net cash used in investing activities (37,709) (49,470)
-------------- -------------
Cash flows from financing activities:
Purchase of common stock to be retired (21,870) (8,048)
Proceeds from common stock issuance 7,683 469
Repayment of Senior Credit Facility (925) ---
Payments received on notes receivable from related parties issued upon stock
option exercise 443 ---
Repayments of capital lease obligations (20) (3,171)
Purchase of treasury stock (1) (30)
Redemption of Series B redeemable preferred stock --- (6,607)
Payment of preferred stock dividends --- (237)
Payment of debt issuance costs --- (86)
-------------- -------------
Net cash used in financing activities (14,690) (17,710)
-------------- -------------
Net increase (decrease) in cash and cash equivalents 1,324 (13,827)
Cash and cash equivalents at beginning of period 44,362 31,452
-------------- -------------
Cash and cash equivalents at end of period $ 45,686 17,625
============== =============
See accompanying notes to interim condensed consolidated financial statements.
9
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
The accompanying unaudited interim condensed consolidated financial statements
include the accounts of General Communication, Inc. ("GCI") and its subsidiaries
and have been prepared in accordance with generally accepted accounting
principles for interim financial information. Accordingly, they do not include
all of the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements. They
should be read in conjunction with our audited consolidated financial statements
for the year ended December 31, 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.
10 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
(c) Earnings per Common Share
Earnings per common share ("EPS") and common shares used to
calculate basic and diluted EPS consist of the following (amounts
in thousands, except per share amounts):
Three Months Ended June 30,
2006 2005
----------------------------------- ----------------------------------
Income Shares Income Shares
(Num- (Denom- Per-share (Num- (Denom- Per-share
erator) inator) Amounts erator) inator) Amounts
---------- ------------ ----------- ---------- ----------- -----------
Net income $ 5,406 $ 5,284
Less Series B preferred stock
dividends --- 55
---------- ----------
Basic EPS:
Net income 5,406 55,688 $ 0.10 5,229 54,637 $ 0.10
Effect of Dilutive Securities:
Unexercised stock options --- 1,572 --- --- 975 ---
---------- ------------ ---------- ---------- ----------- ----------
Diluted EPS:
Net income $ 5,406 57,260 $ 0.09 $ 5,229 55,612 $ 0.09
========== ============ ========== ========== =========== ==========
Six Months Ended June 30,
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 $ 9,328 $ 9,947
Less Series B preferred stock
dividends --- 148
---------- ----------
Basic EPS:
Net income before cumulative
effect of a change in
accounting principle 9,328 55,526 $ 0.17 9,799 54,815 $ 0.18
Effect of Dilutive Securities:
Unexercised stock options --- 1,415 --- --- 1,104 ---
---------- ------------ ----------- ---------- ----------- ----------
Diluted EPS:
Net income before cumulative
effect of a change in
accounting principle $ 9,328 56,941 $ 0.16 $ 9,799 55,919 $ 0.18
========== ============ =========== ========== =========== ==========
11 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
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.
Stock options for the three and six months ended June 30, 2006 and
2005, which have been excluded in the computations of diluted EPS
because the effect of including these stock options would have been
anti-dilutive consist of the following (shares, in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2006 2005 2006 2005
-------------- ----------- ------------- -----------
Weighted average shares associated with outstanding
stock options 1,336 582 1,430 401
============== =========== ============= ===========
Series B redeemable preferred stock common equivalent shares
outstanding of $470,000 and $623,000 for the three and six months
ended June 30, 2005, respectively, are not included in the diluted
EPS calculations because they are anti-dilutive for purposes 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.
12 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
(d) Common Stock
Following are the changes in common stock for the six months ended
June 30, 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 12 (12)
Shares issued under stock option plan 83 ---
Shares retired (892) ---
------------- ------------
Balances at June 30, 2005 51,028 3,850
============= ============
Balances at December 31, 2005 51,200 3,843
Class B shares converted to Class A 27 (27)
Shares issued under stock option plan 1,166 ---
Shares issues under the Director Compensation Plan 17 ---
Shares retired (842) (436)
------------- ------------
Balances at June 30, 2006 51,568 3,380
============= ============
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 $50.0 million of repurchases
through June 30, 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 six months ended June 30, 2006 and 2005 we repurchased
1,857,000 and 931,000 shares of our Class A and B common stock at a
cost of approximately $21.9 million and $8.7 million, respectively.
The cost of the repurchased 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 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.
13 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
(e) Asset Retirement Obligations
Following is a reconciliation of the beginning and ending aggregate
carrying amount of our asset retirement obligations at June 30,
2006 and 2005 (amounts in thousands):
Balance at December 31, 2004 $ 2,971
Accretion expense for the six months ended
June 30, 2005 99
--------
Balance at June 30, 2005 $ 3,070
========
Balance at December 31, 2005 $ 3,210
Accretion expense for the six months ended
June 30, 2006 86
Liability settled (4)
--------
Balance at June 30, 2006 $ 3,292
========
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
$2,260,000 of share-based compensation expense, net of estimated
forfeitures, during the six months ended June 30, 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 income per common share for each period as if we had
applied the fair value method to measure share-based compensation
expense.
14 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
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.
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 six months ended
June 30, 2006 (amounts in thousands, except per share amounts):
Under APB No.
As Reported 25 Under SFAS 123
--------------- ---------------- ---------------
Operating income $ 33,807 35,966 33,807
Net income before income taxes and cumulative effect of a
change in accounting principle 16,863 19,022 16,863
Cumulative effect of a change in accounting principle,
net of income tax benefit of $425 (608) --- ---
Net income available to common stockholders 8,720 10,599 9,328
Cash flow from operating activities (1) 54,073 54,073 54,073
Cash flow from financing activities (1) (15,133) (15,133) (15,133)
Basic net income per common share:
Net income before cumulative effect of a change in
accounting principle $ 0.17 0.19 0.17
Cumulative effect of a change in accounting principle (0.01) --- ---
--------------- ---------------- ---------------
Net income $ 0.16 0.19 0.17
=============== ================ ===============
Diluted net income per common share:
Net income before cumulative effect of a change in
accounting principle $ 0.16 0.19 0.16
Cumulative effect of a change in accounting principle (0.01) --- ---
--------------- ---------------- ---------------
Net income $ 0.15 0.19 0.16
=============== ================ ===============
---------------
(1) For the six months ended June 30, 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.
---------------
15 (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 six months ended June 30, 2006 of outstanding stock options
recognized under the provisions of SFAS 123(R) (amounts
in thousands, except per share amounts):
2006
-----------
Share-based employee compensation expense $ 2,260
Income tax benefit 929
-----------
Net decrease in income $ 1,331
===========
Decrease in EPS:
Basic and diluted $ 0.02
===========
The following illustrates the effect on net income and EPS for the
six months ended June 30, 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 (amounts in thousands, except
per share amounts):
Three Months
Ended June 30, Six Months Ended
2005 June 30, 2005
----------------- ------------------
Net income available to common shareholders, as reported $ 5,229 9,799
Total share-based employee compensation expense included
in reported net income, net of related tax effects 48 96
Less share-based employee compensation expense determined
under the SFAS 123 fair value method, net of related
tax effects (401) (911)
----------------- ------------------
Pro forma net income $ 4,876 8,984
================= ==================
EPS:
Basic - as reported $ 0.10 0.18
================= ==================
Diluted - as reported $ 0.09 0.18
================= ==================
Basic and diluted - pro forma $ 0.09 0.16
================= ==================
(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.
16 (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
Financial Accounting Standards Board ("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) New Accounting Pronouncements
In June 2006, the FASB issued Emerging Issues Task Force ("EITF")
Issue No. 06-03, "How Taxes Collected from Customers and Remitted
to Governmental Authorities Should Be Presented in the Income
Statement (That Is, Gross versus Net Presentation)" which includes
any tax assessed by a governmental authority that is directly
imposed on a revenue-producing transaction between a seller and a
customer and may include, but is not limited to, sales, use, value
added, and some excise taxes. EITF No. 06-03 states that the
presentation of taxes within its scope on either a gross (included
in revenues and costs) or a net (excluded from revenues) basis is
an accounting policy decision that should be disclosed in a
company's financial statements. In addition, for any such taxes
that are reported on a gross basis, a company should disclose the
amounts of those taxes in interim and annual financial statements
for each period for which an income statement is presented if those
amounts are significant. The disclosure of those taxes can be done
on an aggregate basis. We will begin application of EITF No. 06-03
on January 1, 2007 and do not expect it to have a material effect
on our results of operations, financial position and cash flows.
In July 2006, the FASB issued FASB Interpretation ("FIN") 48,
"Accounting for Uncertainty in Income Taxes" which clarifies the
accounting for uncertainty in income taxes recognized in an
enterprise's financial statements in accordance with FASB Statement
No. 109, "Accounting for Income Taxes." FIN 48 prescribes a
recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance
on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition. We will
begin application of FIN 48 on January 1, 2007 and do not expect it
to have a material effect on our results of operations, financial
position, and cash flows.
(k) Reclassifications
Reclassifications have been made to the 2005 financial statements
to make them comparable with the 2006 presentation.
17 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
(2) Consolidated Statements of Cash Flows Supplemental Disclosures
Changes in operating assets and liabilities, net of acquisition, consist
of (amounts in thousands):
Six month periods ended June 30, 2006 2005
------------ ------------
Increase in accounts receivable $ (2,591) (3,130)
Decrease in prepaid expenses 521 696
Increase in inventories (1,325) (284)
(Increase) decrease in other current assets (1,255) 137
Increase (decrease) in accounts payable 3,309 (437)
Decrease in deferred revenues (1,300) (1,106)
Increase (decrease) in accrued payroll and payroll
related obligations (4,749) 546
Increase in accrued liabilities 883 338
Decrease in accrued interest (885) (23)
Increase (decrease) in subscriber deposits 47 (48)
Increase in components of other long-term liabilities 277 444
------------ ------------
$ (7,068) (2,867)
============ ============
We paid interest totaling approximately $18.0 million and $16.7 million
during the six months ended June 30, 2006 and 2005, respectively.
Income tax refunds received totaled $0 and $202,000 during the six months
ended June 30, 2006 and 2005, respectively. We paid income taxes of
$76,000 and $100,000 during the six months ended June 30, 2006 and 2005,
respectively.
We recorded a net cumulative effect adjustment (expense) of $672,000
during the six months ended June 30, 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 six months ended June 30, 2006 for share-based
compensation instruments outstanding at December 31, 2005 for which the
requisite service is not expected to be rendered. We recorded $104,000
during the six months ended June 30, 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 six months ended June 30, 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 June 30, 2006. The
remaining useful lives of our cable certificates and goodwill were
evaluated as of June 30, 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 June 30, 2006.
18 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
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 as follows
(amounts in thousands):
Three Months Ended June 30, Six Months Ended June 30,
2006 2005 2006 2005
-------------- ------------- ------------- ------------
Amortization expense $ 399 313 788 605
============== ============= ============= ============
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 $ 1,626
2007 1,538
2008 1,287
2009 963
2010 442
(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 option agreements are settled in cash. Our
share repurchase program as described in note 11 in the "Notes to
Consolidated Financial Statements" included in Part II of our December
31, 2005 annual report on 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 July 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.
19 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
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.
The 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 six months ended June 30, 2006 and 2005:
2006 2005
-------------------- ---------------------
Expected term (years) 5.0 - 5.9 5.0 - 5.2
Volatility 54.7% - 57.6% 44.8% - 45.5%
Risk-free interest rate 4.8% - 5.1% 3.7% - 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
approximately $1.1 million, net of income tax benefit of $469,000 and is
reported as a component of the cumulative effect of a change in
accounting principle in the accompanying Consolidated Statement of
Operations for the six months ended June 30, 2006.
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 a change in accounting principle in the accompanying
Consolidated Statement of Operations for the six months ended June 30,
2006.
The weighted average grant date fair value of options granted during the
six months ended June 30, 2006 and 2005 was $6.46 per share and $4.55
per share, respectively. The total fair value of options vesting during
20 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
the six months ended June 30, 2006 and 2005 was approximately $2.2
million and $2.9 million, respectively.
Unrecognized share-based compensation expense was approximately $12.6
million as of June 30, 2006, relating to a total of 3.2 million unvested
stock options. We expect to recognize this share-based compensation
expense over a weighted average period of approximately 3.3 years.
The following is a summary of our 1986 Stock Option Plan activity for
the six months ended June 30, 2006:
Weighted Average
Shares Exercise Price
---------------- -----------------
Outstanding at December 31, 2005 6,550,777 $7.27
Granted 931,950 $12.07
Exercised (1,165,692) $6.61
Forfeited (51,900) $8.96
----------------
Outstanding at June 30, 2006 6,265,135 $8.09
================
Available for grant at June 30, 2006 440,115
================
The following is a summary of activity for stock options granted not
pursuant to the 1986 Stock Option Plan for the six months ended June 30,
2006:
Weighted Average
Shares Exercise Price
---------------- -----------------
Outstanding at December 31, 2005 and
June 30, 2006 250,000 $6.50
================
Available for grant at June 30, 2006 ---
================
21 (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 June 30, 2006:
Options Outstanding
---------------------------------------------------------------------------------------------------
Weighted Average
Remaining Aggregate
Range of Contractual Life Weighted Average Intrinsic Value
Exercise Prices Shares (years) Exercise Price (thousands)
---------------------------------------------------------------------------------------------------
$3.11-$6.00 1,013,651 4.97 $5.49 $6,756
$6.01-$6.35 52,000 4.53 $6.13 $307
$6.36-$6.50 1,287,889 4.03 $6.50 $7,277
$6.51-$7.00 201,234 3.69 $7.00 $1,037
$7.01-$7.25 1,125,000 5.69 $7.25 $5,513
$7.26-$8.40 691,993 5.98 $8.01 $2,863
$8.41-$9.75 793,520 8.36 $9.40 $2,183
$9.76-$11.50 976,348 9.35 $10.88 $1,239
$11.51-$11.95 1,000 9.75 $11.95 $---
$11.96-$13.11 372,500 9.92 $13.11 $---
---------------------------------------------------------------------------------------------------
$3.11-$13.11 6,515,135 6.33 $8.03 $27,175
===================================================================================================
Options Vested
--------------------------------------------------------------------------------------------------
Weighted Average
Remaining Aggregate
Range of Contractual Life Weighted Average Intrinsic Value
Exercise Prices Shares (years) Exercise Price (thousands)
--------------------------------------------------------------------------------------------------
$3.11-$6.00 701,501 4.33 $5.31 $4,799
$6.01-$6.35 51,200 4.50 $6.13 $305
$6.36-$6.50 1,185,089 3.80 $6.50 $6,696
$6.51-$7.00 200,834 3.69 $7.00 $1,035
$7.01-$7.25 549,995 5.64 $7.25 $2,695
$7.26-$8.40 449,293 4.94 $7.81 $1,948
$8.41-$9.75 129,333 6.49 $9.02 $404
$9.76-$11.50 53,198 6.19 $10.79 $72
$11.51-$11.95 --- --- $--- $---
$11.96-13.11 --- --- $--- $---
--------------------------------------------------------------------------------------------------
$3.11-$13.11 3,320,443 4.52 $6.74 $17,954
==================================================================================================
The total intrinsic value, determined as of the date of exercise, of
options exercised in the six months ended June 30, 2006 and 2005 were
$5.8 million and $284,000, respectively. We received $7.7 million and
$469,000 in cash from stock option exercises in the six months ended June
30, 2006 and 2005, respectively. We used cash of $4.9 million and $0 to
settle stock option agreements in the six months ended June 30, 2006 and
2005, respectively.
22 (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 six months
ended June 30, 2005 have been reclassified for comparability purposes, as
follows:
o Revenue and cost of goods sold (exclusive of depreciation and
amortization expense) ("Cost of Goods Sold") for the six months ended
June 30, 2005 were reclassified to conform to the new segment
organizational structure. A combination of specific identification
and general allocations were employed to reclassify amounts for the
six months ended June 30, 2005. 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 customer composition for the six months ended June 30, 2005
for purposes of reclassifying revenue and Cost of Goods Sold amounts
for the six months ended June 30, 2005.
o Selling, general and administrative ("SG&A") expenses for the six
months ended June 30, 2005 were reclassified to conform to the new
segment organizational structure. A combination of specific and
general allocations were employed to reclassify amounts for the six
months ended June 30, 2005, as follows:
o Certain SG&A expenses for the six months ended June 30, 2006
were directly charged to each new reportable segment. The
amount of comparable SG&A directly charged to each segment
during the six months ended June 30, 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 six
months ended June 30, 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 Bad debt recovery for the six months ended June 30, 2005 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 bad debt recovery for the six months ended
June 30, 2005.
23 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Depreciation and amortization expense for the six months ended June 30,
2005 is no longer allocated to reportable segments as our Chief Operating
Decision Maker now evaluates each 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 six months ended June 30, 2006 are
allocated to our segments using segment margin for the year ended
December 31, 2005. Bad debt expense for the six months ended June 30,
2006 is allocated to our segments using a combination of specific
identification and allocations based upon segment revenue for the six
months ended June 30, 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.
24 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Summarized financial information for our reportable segments for the
three and six months ended June 30, 2006 and 2005 follows (amounts in
thousands):
Total
Network Commer- Managed Reportable
Three months ended June 30, Consumer Access cial Broadband Segments
-----------------------------------------------------------------------
2006
------
Revenues:
Intersegment $ --- --- 1,386 --- 1,386
External 44,223 41,377 26,013 6,607 118,220
-----------------------------------------------------------------------
Total revenues $ 44,223 41,377 27,399 6,607 119,606
=======================================================================
Earnings from operations before
depreciation, amortization, net
interest expense and income taxes $ 7,878 22,812 5,156 2,053 37,899
=======================================================================
2005
------
Revenues:
Intersegment $ 15 1,607 6,166 39 7,827
External 40,349 36,907 26,407 7,002 110,665
-----------------------------------------------------------------------
Total revenues $ 40,364 38,514 32,573 7,041 118,492
=======================================================================
Earnings from operations before
depreciation, amortization, net
interest expense and income taxes $ 7,228 20,569 7,061 1,549 36,407
=======================================================================
25 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Total
Network Commer- Managed Reportable
Six months ended June 30, Consumer Access cial Broadband Segments
-----------------------------------------------------------------------
2006
------
Revenues:
Intersegment $ --- --- 2,724 --- 2,724
External 86,886 79,200 52,141 12,815 231,042
-----------------------------------------------------------------------
Total revenues $ 86,886 79,200 54,865 12,815 233,766
=======================================================================
Earnings from operations before
depreciation, amortization, net
interest expense and income taxes $ 15,955 42,681 11,812 3,861 74,309
=======================================================================
2005
------
Revenues:
Intersegment $ 29 3,439 11,989 39 15,496
External 80,541 71,051 51,766 13,817 217,175
-----------------------------------------------------------------------
Total revenues $ 80,570 74,490 63,755 13,856 232,671
=======================================================================
Earnings from operations before
depreciation, amortization, net
interest expense and income taxes $ 15,181 38,849 12,725 4,135 70,890
=======================================================================
A reconciliation of reportable segment revenues to consolidated revenues
follows (amounts in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2006 2005 2006 2005
-------------- -------------- -------------- --------------
Reportable segment revenues $ 119,606 118,492 233,766 232,671
Less intersegment revenues eliminated in
consolidation 1,386 7,827 2,724 15,496
-------------- -------------- -------------- --------------
Consolidated revenues $ 118,220 110,665 231,042 217,175
============== ============== ============== ==============
26 (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 Six Months Ended
June 30, June 30,
2006 2005 2006 2005
------------- -------------- ------------- --------------
Reportable segment earnings from operations
before depreciation and amortization
expense, net interest expense and income
taxes $ 37,899 36,407 74,309 70,890
Less depreciation and amortization expense 20,172 18,348 40,333 36,052
Less other income 282 --- 169 ---
------------- -------------- ------------- --------------
Consolidated operating income 17,445 18,059 33,807 34,838
Less other expense, net 8,183 8,739 16,944 17,375
------------- -------------- ------------- --------------
Consolidated net income before income
taxes and cumulative effect of a
change in accounting principle $ 9,262 9,320 16,863 17,463
============= ============== ============= ==============
(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 Intelsat,
Ltd.'s ("Intelsat" acquired PanAmSat Corporation on June 30, 2006) 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
Intelsat and JSAT International, Inc. The leased capacity is expected to
replace our existing transponder capacity on Intelsat'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
27 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
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 96,264
-----------
Total minimum lease payments $ 128,352
===========
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 and Capacity Leases
We leased a portion of our 800-mile fiber optic system capacity that
extends from Prudhoe Bay to Valdez via Fairbanks, and provided
management and maintenance services for this capacity to a significant
customer. The lessee signed a contract with a competitor in March 2005,
started the transition of its circuits from our fiber optic cable system
to our competitor's microwave system in June 2006, and plans to have the
transition complete by November 2006. We expect to sign an agreement
with our competitor to lease capacity on our fiber optic cable system
and provide certain other services in association with their contract.
We expect this transition to result in a $9.5 million annual decrease in
the data component of Commercial Services segment revenue when it is
completed with a decrease of approximately one-half the annual decrease
in the year ended December 31, 2006 depending upon the pace of the
transition.
The following summary of minimum future service revenues reflects the
termination of our contract and includes the expected revenue from the
new agreement we expect to sign with our competitor in addition to our
other operating lease agreements included in the summary in note 16
included in Part II of our December 31, 2005 annual report on Form 10-K
(amounts in thousands):
Years ending December 31,
2006 $ 19,301
2007 11,694
2008 10,734
2009 8,154
2010 5,574
2011 and thereafter 52,700
---------------
Total minimum future service revenues $ 108,157
===============
28 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
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 Federal Communications Commission ("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
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. In June 2006, we entered into a Reorganization
Agreement with the members of Alaska DigiTel and certain other parties
setting forth the formal terms and conditions the principal terms of
which are the same as those in the superseded memorandum of
understanding. GCI, Denali PCS, LLC and Alaska DigiTel ("Alaska DigiTel
Applicants") jointly filed applications with the FCC seeking the
requisite regulatory consent to the parties' transaction. Matanuska
Telephone Association filed a Petition to Deny the applications with the
FCC in February 2006. ACS Wireless, Inc. filed an objection to the
applications with the FCC in July 2006. The Alaska DigiTel Applicants
are opposing these adverse filings. It is uncertain when the FCC will
act upon the contested applications. We are uncertain when this
transaction will close.
29 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
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 June 30, 2006 Consolidated Balance Sheet.
Indefeasible Right of Use ("IRU") Commitment
On July 31, 2006, through our subsidiary GCC we entered into an
agreement to purchase an IRU in the Kodiak-Kenai Cable Company, LLC's
marine-based fiber optic cable system linking Anchorage to Kenai, Homer,
Kodiak and Seward, Alaska. The new system is under construction and we
anticipate it will be placed into service in the first quarter of 2007.
We have committed to purchase a minimum of $8.0 million to $8.5 million
in IRU capacity in three installments through 2011.
30
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 were 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 six and three months ended June 30,
2005 have been reclassified to reflect the organizational changes for
comparability purposes. A combination of specific identification and general
allocations were employed to reclassify 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 three and six months
ended June 30, 2005 customer composition for purposes of reclassifying 2005
revenue and Cost of Goods Sold balances.
31
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, 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 our voice products to our data and wireless products
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.
The primary factors that contribute to year-to-year changes in local access
services revenues include the average number of subscribers to our services
32
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 June 30, 2006 and 2005 total lines in service represent a
statewide market share of approximately 26% and 24%, respectively. At June 30,
2006 and 2005 approximately 86% and 85%, respectively, of our lines are provided
on our own facilities and leased local loops. At June 30, 2006 and 2005
approximately 7% 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.
On September 23, 2005, February 2, 2006 and July 18, 2006, the RCA issued orders
granting us certification to serve the service areas of Ketchikan Public
Utilities, Cordova Telephone Cooperative, Copper Valley Telephone Cooperative,
Matanuska Telephone Cooperative, the Glacier State area served by ACS of the
Northland, Alaska Telephone Company, Interior Telephone Company, United-KUC and
Mukluk Telephone Company. The affected rural local exchange carriers have
appealed various aspects of the certification rulings.
We plan to offer service in these new areas using a combination of methods. To a
large extent, we plan to use our existing cable network to deliver local
services. Where we do not have cable plant, we may use wireless technologies and
resale of other carrier's services. We may lease portions of an existing
carrier's network or seek wholesale discounts, but our application is not
dependent upon access to either UNEs of the Incumbent Local Exchange Carrier's
("ILEC") network or wholesale discount rates for resale of ILEC services.
On May 2, 2005 we tendered an interconnection request to the City of Ketchikan
d/b/a Ketchikan Public Utilities ("KPU"), which had been authorized by the RCA
to provide video programming services through its KPU CommVision division on
April 26, 2005. Under the terms of Section 251(f)(1)(C) of the
Telecommunications Act of 1996 KPU's current rural exemption from negotiation
will be forfeited if, and when, KPU commences offering video programming. On
June 3, 2005, we entered into a stipulation with KPU recognizing that KPU will
forfeit its rural exemption and that negotiations for interconnection would
commence when KPU commences offering video programming. Negotiations began in
December 2005 and culminated in a contract in June 2006. The Ketchikan City
Council approved the contract in June 2006 and the contract will be submitted to
the RCA for final approval in August 2006.
We plan to have deployed more than 35,000 additional digital local phone service
("DLPS") lines which utilize our Anchorage coaxial cable facilities by 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.
33
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.
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.
34
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. 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. 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. There are several competing
companies in Alaska that actively sell broadband services.
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 22,900 and 12,200 combined Consumer and Commercial wireless lines in
service at June 30, 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 $53.90 and $52.62 during the
three and six months ended June 30, 2006, respectively, 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 wireless 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.
The Alaska DigiTel Applicants jointly filed applications with the FCC seeking
the requisite regulatory consent to the parties' transaction. Matanuska
Telephone Association filed a Petition to Deny the applications with the FCC in
February 2006. ACS Wireless, Inc. filed an objection to the applications with
35
the FCC in July 2006. The Alaska DigiTel Applicants are opposing these adverse
filings. It is uncertain when the FCC will act upon the contested applications.
We are uncertain when this transaction will close.
36
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):
Percent- Percent-
age age
Change(1) Change(1)
Three Months Ended 2006 Six Months Ended 2006
June 30, vs. June 30, vs.
(Unaudited) 2006 2005 2005 2006 2005 2005
---- ---- ---- ---- ---- ----
Statements of Operations Data:
Revenues:
Consumer services segment 37.4% 36.5% 9.6% 37.6% 37.1% 7.9%
Network Access services segment 35.0% 33.3% 12.1% 34.3% 32.7% 11.5%
Commercial services segment 22.0% 23.9% (1.5%) 22.6% 23.8% 0.7%
Managed broadband services segment 5.6% 6.3% (5.7%) 5.5% 6.4% (7.3%)
-------------------------------------------------------------------------------
Total revenues 100.0% 100.0% 6.8% 100.0% 100.0% 6.4%
Selling, general and administrative
expenses 34.4% 34.4% 7.0% 34.7% 34.6% 6.8%
Bad debt expense (recovery) 1.1% 0.2% 589.7% 0.8% (0.1%) 1,256.6%
Depreciation and amortization expense 17.1% 16.6% 10.0% 17.5% 16.6% 11.9%
Operating income 14.4% 16.3% (6.1%) 14.4% 16.0% (4.3%)
Net income before income taxes and
cumulative effect of a change in
accounting principle 7.4% 8.4% (5.8%) 7.1% 8.0% (6.2%)
Net income before cumulative effect
of a change in accounting principle 4.4% 4.8% (2.7%) 3.9% 4.6% (8.9%)
Net income 4.4% 4.8% (2.7%) 3.7% 4.6% (15.0%)
<FN>
--------------------------
(1)Percentage change in underlying data.
--------------------------
</FN>
Three Months Ended June 30, 2006 ("second quarter of 2006") Compared To Three
Months Ended June 30, 2005 ("second quarter of 2005")
Overview of Revenues and Cost of Goods Sold
Total revenues increased 6.8% from $110.7 million in the second quarter of 2005
to $118.2 million in the second quarter of 2006. Revenue increases in our
Consumer and Network Access segments were partially off-set by decreased revenue
in our Commercial and Managed Broadband segments. See the discussion below for
more information by segment.
Total Cost of Goods Sold increased 7.1% from $36.0 million in the second quarter
of 2005 to $38.6 million in the second quarter of 2006. Increases in the
37
Consumer, Network Access and Commercial segments' Cost of Goods Sold were
partially off-set by decreased Cost of Goods Sold in our Managed Broadband
segment. See the discussion below for more information by segment.
Consumer Services Segment Overview
Consumer services segment revenue in the second quarter of 2006 represented
37.4% of consolidated revenues. The components of Consumer services segment
revenue are as follows (amounts in thousands):
Second Quarter Percentage
2006 2005 Change
-------------- ------------- ----------------
Voice $ 11,451 11,593 (1.2%)
Video 22,329 21,142 5.6%
Data 7,258 6,321 14.8%
Wireless 3,185 1,293 146.3%
-------------- ------------- ----------------
Total Consumer services segment revenue $ 44,223 40,349 9.6%
============== ============= ================
Selected key performance indicators for our Consumer services segment follow:
June 30, Percentage
2006 2005 Change
-------------- ------------- ----------------
Voice:
Total local access lines in service(1) 67,700 68,200 (0.7%)
DLPS local access lines in service(1) 25,300 12,400 104.0%
Video:
Basic subscribers(2) 121,900 121,200 0.6%
Digital programming tier subscribers(3) 55,100 48,700 13.1%
HD/DVR converter boxes(4) 18,800 7,400 154.1%
Homes passed 217,100 211,000 2.9%
Data:
Cable modem subscribers(5) 75,000 64,300 16.6%
<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, 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>
38
Second Quarter Percentage
2006 2005 Change
-------------- ------------- ----------------
Voice:
Long-distance minutes carried (in millions) 35.9 40.5 (11.4%)
Video:
Average monthly gross revenue per subscriber(1) $60.92 $59.22 2.9%
<FN>
-------------------
(1) Quarter-to-date average monthly consumer video revenues divided by the
average of consumer video basic subscribers at the beginning and ending of
the period.
-------------------
</FN>
We have 92,800 Consumer long-distance customers at June 30, 2006. A
long-distance customer is defined as a customer account that is invoiced a
monthly long-distance plan fee or has made a long-distance call during the
month. Due to our implementation of a new unified billing system on September 1,
2005 this statistic is not available for June 30, 2005.
Consumer Services Segment Revenues
The 1.2% decrease in voice revenue is primarily due to the decrease in
long-distance minutes carried for these customers. The decrease is partially
off-set by a $157,000 increase in support from the Universal Service Program.
The 5.6% increase in video revenue is primarily due to an increase in digital
programming tier subscribers in the second quarter of 2006, the rate increases
previously described, and a 23.2% increase in equipment rental revenue to $3.2
million in the second quarter of 2006. The increase in equipment rental revenue
is primarily caused by the increased use of digital distribution technology.
The 14.8% increase in data revenue is primarily due to a 16.7% increase in cable
modem revenue to $6.1 million in the second quarter of 2006 as compared to the
second quarter of 2005. The increase in cable modem revenue is primarily due to
the increase in subscribers.
The 146.3% 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 9.0% to $17.1 million
from the second quarter of 2005 to the second 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 six months of 2005 and the first
six months of 2006.
Network Access Services Segment Overview
Network access services segment revenue in the second quarter of 2006
represented 35.0% of consolidated revenues. The components of Network Access
services segment revenue are as follows (amounts in thousands):
Second Quarter Percentage
2006 2005 Change
-------------- ------------- ----------------
Voice $ 27,844 23,940 16.3%
Data 13,533 12,967 4.4%
-------------- ------------- ----------------
Total Network Access services segment revenue $ 41,377 36,907 12.1%
============== ============= ================
39
Selected key performance indicators for our Network Access services segment
follow:
Second Quarter Percentage
2006 2005 Change
-------------- ------------- ----------------
Voice:
Total local access lines in service (1) 3,300 3,600 (8.3)%
<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.
- ------------------
</FN>
Network Access Services Segment Revenues
The 16.3% increase in voice revenue is primarily due to the increase in minutes
carried for our other common carrier customers partially off-set by a 4.2%
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.
Network Access Services Segment Cost of Goods Sold
Network Access services segment Cost of Goods Sold increased 12.9% to $8.8
million from the second quarter of 2005 to the second quarter of 2006 primarily
due to increased voice minutes carried.
Commercial Services Segment Overview
Commercial services segment revenue in the second quarter of 2006 represented
22.0% of consolidated revenues. The components of Commercial services segment
revenue are as follow (amounts in thousands):
Second Quarter Percentage
2006 2005 Change
-------------- ------------- ----------------
Voice $ 8,097 8,796 (7.9%)
Video 1,933 1,889 2.3%
Data 15,400 15,468 (0.4%)
Wireless 583 254 129.5%
-------------- ------------- ----------------
Total Commercial services segment revenue $ 26,013 26,407 (1.5%)
============== ============= ================
40
Selected key performance indicators for our Commercial services segment follow:
June 30, Percentage
2006 2005 Change
-------------- ------------- ----------------
Voice:
Total local access lines in service(1) 40,400 40,100 0.7%
DLPS local access lines in service(1) 1,100 400 175.0%
Data:
Cable modem subscribers(2) 7,100 5,900 20.3%
<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>
Second Quarter Percentage
2006 2005 Change
-------------- ------------- ----------------
Voice:
Long-distance minutes carried (in millions) 34.4 35.9 (4.2%)
We have 11,700 Commercial long-distance customers at June 30, 2006. A
long-distance customer is defined as a customer account that is invoiced a
monthly long-distance plan fee or has made a long-distance call during the
month. Due to our implementation of a new unified billing system on September 1,
2005 this statistic is not available for June 30, 2005.
We leased a portion of our 800-mile fiber optic system capacity that extends
from Prudhoe Bay to Valdez via Fairbanks, and provided management and
maintenance services for this capacity to a significant customer. The lessee
signed a contract with a competitor in March 2005, started the transition of
their circuits from our fiber optic cable system to our competitor's microwave
system in June 2006, and plans to have the transition complete by November 2006.
We expect to sign an agreement with our competitor to lease capacity on our
fiber optic cable system in association with their contract. We expect this
transition to result in a $9.5 million annual decrease in the data component of
Commercial Services segment revenue when it is completed with a decrease of
approximately one-half the annual decrease in the year ended December 31, 2006
depending upon the pace of the transition.
Commercial Services Segment Revenues
The 7.9% decrease in voice revenue is primarily due to the decrease in minutes
carried for our Commercial customers.
The 0.4% decrease in data revenue is primarily due to the following:
o A $475,000 or 84.8% decrease resulting from product sales in second
quarter 2005 that did not recur in second quarter 2006, and
o A $65,000 or 0.9% decrease in managed services revenue primarily due to
a $428,000 or 12.0% decrease in revenue earned from the lease and
provision of management and maintenance services on a portion of our
800-mile fiber optic system capacity that extends from Prudhoe Bay to
Valdez via Fairbanks as described above partially off-set by a $363,000
or 10.3% increase in special project revenues.
The decrease is partially off-set by a $494,000 or 15.6% increase in private
line and private network services due to an increase in the number of circuits
sold.
41
Commercial Services Segment Cost of Goods Sold
Commercial services segment Cost of Goods Sold increased 4.1% to $11.6 million
from the second quarter of 2005 to the second quarter of 2006 primarily due to a
$449,000 or 198.7% increase in wireless Cost of Goods Sold resulting from
increased revenue.
Managed Broadband Services Segment Overview
Managed broadband services segment revenue in the second quarter of 2006
represented 5.6% of consolidated revenues. Managed broadband services segment
revenue, which includes data products only, decreased $397,000 to $6.6 million
in the second quarter of 2006 as compared to the second quarter of 2005.
Selected key performance indicators for our Commercial services segment follow:
June 30, Percentage
2006 2005 Change
-------------- ------------- ----------------
Managed broadband services:
SchoolAccess(R) customers 45 43 4.7%
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 second quarter of
2006 as compared to 2005 and a decrease in the rate charged for certain circuits
purchased by our rural health customers. An increase in single-site
SchoolAccess(R) customers from which we generate less revenue was partially
off-set by the decrease in multi-site SchoolAccess(R) customers.
Managed Broadband Services Segment Cost of Goods Sold
Managed broadband services segment Cost of Goods Sold decreased $316,000 to $1.1
million from the second quarter of 2005 to the second quarter of 2006. The
decrease is primarily due to a second quarter of 2005 analysis of circuit costs
directly contributing to the Managed Broadband services segment revenues. The
analysis resulted in a $535,000 increase in Broadband services Cost of Goods
Sold in the second quarter of 2005 that included first and second quarter 2005
circuit costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 7.0% to $40.7 million in
the second quarter of 2006 primarily due to a $1.5 million increase in our
share-based compensation expense mostly resulting from our adoption of SFAS No.
123(R) on January 1, 2006. Following our adoption of SFAS No. 123(R) we
recognized $1.6 million 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 $ 508 605 348 121 1,582
============= ============ =============== ============ ==========
As a percentage of total revenues, selling, general and administrative expenses
were 34.4% in the second quarter of 2006 and 2005.
42
Bad Debt Expense
Bad debt expense increased $1.1 million to a net expense of $1.3 million in the
second quarter of 2006 as compared to the second quarter of 2005. The increase
is primarily due to the following:
o A $996,000 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 second quarter of 2006
as compared to the second quarter of 2005, and
o A $479,000 increase in the allowance for our long-distance, local
service and Internet invoices generated by the unified order management
and fulfillment, billing, customer service, cash application, and
credit and collection system to which we converted on September 1,
2005. The allowance increase is due to an increase in the age of
certain invoices as we resolve billing issues.
Depreciation and Amortization Expense
Depreciation and amortization expense increased 10.0% to $20.2 million in the
second 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 $21.4 million
investment in equipment and facilities placed into service during the second
quarter of 2006 for which a partial year of depreciation will be recorded in
2006.
Income Tax Expense
Income tax expense totaled $3.9 million in the second quarter of 2006 and $4.0
million in the second quarter of 2005. Our effective income tax rate decreased
from 43.3% in the second quarter of 2005 to 41.6% in the second quarter of 2006.
At June 30, 2006, we have (1) tax net operating loss carryforwards of
approximately $153.8 million that will begin expiring in 2010 if not utilized,
and (2) alternative minimum tax credit carryforwards of approximately $2.2
million available to offset regular income taxes payable in future years. We
estimate that we will utilize net operating loss carryforwards of $22.0 million
to $27.0 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.
Six Months Ended June 30, 2006 ("2006") Compared To Six Months Ended
June 30, 2005 ("2005")
Overview of Revenues and Cost of Goods Sold
Total revenues increased 6.4% from $217.2 million in 2005 to $231.0 million in
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 5.1% from $71.2 million in 2005 to $74.8
43
million in 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.
Consumer Services Segment Overview
Consumer services segment revenue in 2006 represented 37.6% of consolidated
revenues. The components of Consumer services segment revenue are as follow
(amounts in thousands):
Percentage
2006 2005 Change
-------------- ------------- ----------------
Voice $ 22,763 23,589 (3.5%)
Video 44,331 42,136 5.2%
Data 14,219 12,566 13.2%
Wireless 5,573 2,250 147.7%
-------------- ------------- ----------------
Total Consumer services segment revenue $ 86,886 80,541 7.9%
============== ============= ================
Selected key performance indicators for our Consumer services segment follow:
Percentage
2006 2005 Change
-------------- ------------- ----------------
Voice:
Long-distance minutes carried (in millions) 72.8 81.3 (10.5%)
Video:
Average monthly gross revenue per subscriber(1) $60.55 $59.24 2.2%
<FN>
------------------------
(1) Year-to-date average monthly consumer video revenues divided by the average
of consumer video basic subscribers at the beginning and ending of the
period.
------------------------
</FN>
Please refer to our three-month results of operations discussion for our June
30, 2006 and 2005 selected key performance indicators.
Consumer Services Segment Revenues
The 3.5% decrease in voice revenue is primarily due to the decrease in
long-distance minutes carried for these customers and a $502,000 decrease in
support from the Universal Service Program in 2006 as compared to 2005. The
decrease is partially off-set by an approximately $300,000 increase in local
service revenue in 2006 as compared to 2005 due to the implementation of the
monthly network access fee in April 2005.
The 5.2% increase in video revenue is primarily due to an increase in digital
programming tier subscribers in 2006, the rate increases previously described,
and a 22.1% increase in equipment rental revenue to $6.4 million in 2006. The
increase in equipment rental revenue is primarily caused by the increased use of
digital distribution technology.
The 13.2% increase in data revenue is primarily due to a 13.4% increase in cable
modem revenue to $12.0 million in 2006 as compared to 2005. The increase in
cable modem revenue is primarily due to the increase in subscribers.
44
The 147.7% 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 7.8% to $33.0 million
from 2005 to 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 six
months of 2005 and first six months of 2006.
Network Access Services Segment Overview
Network access services segment revenue in 2006 represented 34.3% of
consolidated revenues. The components of Network Access services segment revenue
are as follows (amounts in thousands):
Percentage
2006 2005 Change
-------------- ------------- ----------------
Voice $ 52,328 44,909 16.5%
Data 26,872 26,142 2.8%
-------------- ------------- ----------------
Total Network Access services segment revenue $ 79,200 71,051 11.5%
============== ============= ================
Selected key performance indicators for our Network Access services segment
follow:
Percentage
2006 2005 Change
-------------- ------------- ----------------
Voice:
Long-distance minutes carried (in millions) 619.5 497.9 24.4%
Network Access Services Segment Revenues
The 16.5% increase in voice revenue is primarily due to the increase in minutes
carried for our other common carrier customers partially off-set by a 4.3%
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 12.8% to $17.6
million from 2005 to 2006 primarily due to increased voice minutes carried.
45
Commercial Services Segment Overview
Commercial services segment revenue in 2006 represented 22.6% of consolidated
revenues. The components of Commercial services segment revenue are as follows
(amounts in thousands):
Percentage
2006 2005 Change
-------------- ------------- ----------------
Voice $ 16,120 17,577 (8.3%)
Video 3,659 3,533 3.6%
Data 31,310 30,214 3.6%
Wireless 1,052 442 138.0%
-------------- ------------- ----------------
Total Commercial services segment revenue $ 52,141 51,766 0.7%
============== ============= ================
Selected key performance indicators for our Commercial services segment follow:
Percentage
2006 2005 Change
-------------- ------------- ----------------
Voice:
Long-distance minutes carried (in millions) 69.5 71.0 (2.1%)
Please refer to our three-month results of operations discussion for our June
30, 2006 and 2005 selected key performance indicators.
Commercial Services Segment Revenues
The 8.3% decrease in voice revenue is primarily due to the decrease in minutes
carried for our Commercial customers.
The 3.6% increase in data revenue is primarily due to the following:
o A $682,000 increase in managed services revenue primarily due to a
$988,000 or 14.8% increase in special project revenues partially
off-set by a $306,000 or 4.3% decrease in revenue earned from the lease
and provision of management and maintenance services on a portion of
our 800-mile fiber optic system capacity that extends from Prudhoe Bay
to Valdez via Fairbanks as described above, and
o A 7.8% increase to $7.1 million in private line and private network
services due to an increase in the number of circuits sold.
The 138.0% increase in wireless revenue is primarily due to the increase in
wireless subscribers.
Commercial Services Segment Cost of Goods Sold
Commercial services segment Cost of Goods Sold decreased 2.3% to $22.0 million
from 2005 to 2006 primarily due to decreased voice minutes carried and cost
savings resulting from the increased deployment of DLPS lines in the last six
months of 2005 and first six months of 2006. 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 2006 as compared to 2005.
46
Managed Broadband Services Segment Overview
Managed broadband services segment revenue in 2006 represented 5.5% of
consolidated revenues. Managed broadband services segment revenue, which
includes data products only, decreased 7.3% to $12.8 million in 2006 as compared
to 2005.
Please refer to our three-month results of operations discussion for our June
30, 2006 and 2005 selected key performance indicators.
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 2006 as compared to 2005
and a decrease in the rate charged for certain circuits purchased by our rural
health customers. An increase in single-site SchoolAccess(R) customers from
which we generate less revenue was partially off-set by the decrease in
multi-site SchoolAccess(R) customers.
Managed Broadband Services Segment Cost of Goods Sold
Managed broadband services segment Cost of Goods Sold decreased $332,000 to $2.1
million from 2005 to 2006.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 6.8% to $80.3 million in
2006 primarily due to the following:
o A $2.2 million increase in our share-based compensation expense
primarily due to our adoption of SFAS No. 123(R) on January 1, 2006.
Following our adoption of SFAS No. 123(R) we recognized $2.3 million 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 $ 770 811 509 170 2,260
============= ============ =============== ============ ==========
o A $1.8 million increase in health insurance costs primarily resulting
from a decrease in our reserve for incurred but not reported health
insurance claims in 2005 in order to reflect historical experience that
was not repeated in 2006 and an increase in our medical claims in 2006.
The selling, general and administrative expenses increase is partially off-set
by a $677,000 decrease in our company-wide success sharing bonus accrual in
2006.
As a percentage of total revenues, selling, general and administrative expenses
increased to 34.7% in 2006 from 34.6% in 2005, primarily due to an increase in
selling, general and administrative expenses without a proportional increase in
revenues.
47
Bad Debt Expense (Recovery)
Bad debt expense (recovery) increased $2.0 million to a net expense of $1.8
million in 2006 primarily due to the following:
o A $1.5 million decrease in the realization of a recovery from Verizon
through a reduction to bad debt expense in 2006 as compared to 2005,
and
o A $859,000 increase in the allowance for our long-distance, local
service and Internet invoices generated by the unified order management
and fulfillment, billing, customer service, cash application, and
credit and collection system to which we converted on September 1,
2005. The allowance increase is due to an increase in the age of
certain invoices as we resolve billing issues.
Depreciation and Amortization Expense
Depreciation and amortization expense increased 11.9% to $40.3 million in 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 $21.4 million investment in equipment and
facilities placed into service during 2006 for which a partial year of
depreciation will be recorded in 2006.
Income Tax Expense
Income tax expense totaled $7.5 million in 2006 and $7.5 million in 2005. Our
effective income tax rate increased from 43.0% in 2005 to 44.7% in 2006 due
primarily to adjustments to deferred tax assets and liabilities balances in
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 approximately $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 June 30,
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 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 June 30, 2006 Consolidated
Statement of Operations.
48
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 six months ended
June 30, 2006 and 2005 follows (amounts in thousands):
2006 2005
-------------- -------------
Customer premise equipment $ 7,799 7,138
Line extensions 4,677 1,363
Upgrade/rebuild 2,561 7,441
Support capital 610 508
Scalable infrastructure 386 1,818
Commercial 17 169
-------------- -------------
Sub-total 16,050 18,437
Remaining reportable segments capital
expenditures 19,169 29,253
-------------- -------------
$ 35,219 47,690
============== =============
The standardized definition of a customer relationship is the number of
customers that receive at least one level of service utilizing our cable
services segment's facilities, encompassing voice, video, and data services,
without regard to which services customers purchase. At June 30, 2006 and 2005
we had 123,800 and 125,400 customer relationships, respectively.
The standardized definition of a revenue generating unit is the sum of all
primary analog video, digital video, high-speed data, and telephony customers,
not counting additional outlets. At June 30, 2006 and 2005 we had 247,800 and
220,500 revenue generating units, respectively.
Liquidity and Capital Resources
Cash flows from operating activities totaled $53.7 million for the six months
ended June 30, 2006 as compared to $53.4 million for the six months ended June
30, 2005.
Other sources of cash during the six months ended June 30, 2006 included $7.7
million from the issuance of our Class A common stock. Other uses of cash during
the six months ended June 30, 2006 included expenditures of $35.2 million for
property and equipment, including construction in progress, and the purchase of
$21.9 million of common stock to be retired.
Working capital totaled $89.1 million at June 30, 2006, a $12.5 million increase
as compared to $76.5 million at December 31, 2005. The increase is primarily due
to a $2.6 million reclassification of a long-term deposit to current assets, a
$2.5 million reclassification of the current portion of Notes Receivable from
Related Parties from non-current assets at June 30, 2006 as compared to December
31, 2005 and a $1.3 million increase in Cash and Cash Equivalents resulting from
a net positive cash flow during the six months ended June 30, 2006.
Net receivables increased $2.2 million from December 31, 2005 to June 30, 2006
primarily due to the timing of payments on trade receivables from several large
customers.
49
Senior Notes
We were in compliance with all Senior Notes loan covenants at June 30, 2006.
Senior Credit Facility
We were in compliance with all Senior Credit Facility loan covenants at June 30,
2006.
Capital Lease Obligation
On March 31, 2006, through our subsidiary GCC we entered into an agreement to
lease transponder capacity on Intelsat's 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 Intelsat and JSAT International, Inc. The
leased capacity is expected to replace our existing transponder capacity on
Intelsat'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 96,264
-----------
Total minimum lease payments $ 128,352
===========
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.
Capital Expenditures
Our expenditures for property and equipment, including construction in progress,
totaled $35.2 million and $47.7 million during the six months ended June 30,
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
50
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 $50.0
million of repurchases through June 30, 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 six
months ended June 30, 2006 we repurchased 1,857,442 shares of our common stock
at a cost of approximately $21.9 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. In June 2006
we entered into a Reorganization Agreement with the members of Alaska DigiTel
and certain other parties setting forth the formal terms and conditions the
principal terms of which are the same as those in the superseded memorandum of
understanding. The Alaska DigiTel Applicants jointly filed applications with the
FCC seeking the requisite regulatory consent to the parties' transaction.
Matanuska Telephone Association filed a Petition to Deny the applications with
the FCC in February 2006. ACS Wireless, Inc. filed an objection to the
applications with the FCC in July 2006. The Applicants are opposing these
adverse filings. It is uncertain when the FCC will act upon the contested
applications. We are uncertain when this transaction 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 June 30, 2006 Consolidated Balance Sheet.
On July 31, 2006, through our subsidiary GCC we entered into an agreement to
purchase an IRU in the Kodiak-Kenai Cable Company, LLC's marine-based fiber
optic cable system linking Anchorage to Kenai, Homer, Kodiak and Seward, Alaska.
The new system is under construction and we anticipate it will be placed into
service in the first quarter of 2007. We have committed to purchase a minimum of
$8.0 million to $8.5 million in IRU capacity in three installments through 2011.
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, short-term investments, credit
facilities, and other external financing and equity sources. Should cash flows
51
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 February 2014. For a
discussion of our Senior Notes and 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 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.
52
New Accounting Standards
For a discussion of our new accounting standards see note 1(j) in the
accompanying "Notes to Interim Condensed Consolidated Financial Statements"
included in Part I, Item 1 of this Report.
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 six months
ended June 30, 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.
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
53
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 $62.9 million associated with income tax net operating
losses that were generated from 1992 to 2003, and that expire from 2010
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 $2.2 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
54
acquired net operating losses would not be utilized for income tax
purposes, and elected with our December 31, 1996 income tax returns to
forego utilization of such acquired losses. Deferred tax assets were
not recorded associated with the foregone losses and, accordingly, no
valuation allowance was provided. We have not recorded a valuation
allowance on the deferred tax assets as of June 30, 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 are not
able to predict the effect of changes in the price and production volumes of
North Slope oil on Alaska's economy or on us.
55
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 June 30, 2006, we have
borrowed $158.4 million subject to interest rate risk. On this amount, each 1%
increase in the LIBOR interest rate would result in $1,584,000 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 vigorously monitor the effectiveness of
these processes, procedures and controls, and will make any further changes as
management determines appropriate.
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 June 30, 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.
56
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.
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 and Class B common stock during the quarter ended June
30, 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 Programs
Period Shares Purchased per Share or Programs (1) (2)
--------------------------- ----------------- -------------- ------------------- -----------------------
April 1, 2006 to
April 30, 2006 576,193 (3) $11.45 2,880,435 $20,720,000
May 1, 2006 to May 31,
2006 172,300 (3) $11.63 3,052,735 $18,715,000
June 1, 2006 to June 30,
2006 792,000 (3) $12.27 3,844,735 $8,999,000
-----------------
Total 1,540,493
=================
<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
57
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 $50.0 million through June 30,
2006 consisting of $30.0 million through December 31, 2005 and $20.0
million through June 30, 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>
PART II.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Date of the meeting: June 26, 2006
Purpose of meeting: Annual shareholders meeting
(b) Name of each director elected at the meeting and the name of
each other director whose term of office as a director
continued after the meeting:
Name Votes for Votes withheld
------------------------------- ---------------- -------------------
Stephen M. Brett 77,181,772 526,470
Ronald A. Duncan 73,387,700 4,320,542
Stephen R. Mooney 59,016,743 18,691,499
Scott M. Fisher 77,289,488 418,754
Directors, in addition to those listed above, whose term of
office as director continued after the meeting:
Jerry A. Edgerton
William P. Glasgow
James M. Schneider
(c) Not applicable
(d) Not applicable
58
PART II.
ITEM 6.
EXHIBITS
Exhibit No. Description
--------------------------------------------------------------------------------------------------------
10.135 Tenth Amendment to Contract for Alaska Access Services between General
Communication, Inc. and its wholly owned subsidiary GCI Communication Corp., and
MCI Communications Services, Inc. d/b/a Verizon Business Services
(successor-in-interest to MCI Network Services, Inc., which was formerly known as
MCI WorldCom Network Services) *
10.136 Reorganization Agreement among General Communication, Inc., Alaska DigiTel, LLC, The
Members of Alaska DigiTel, LLC, AKD Holdings, LLC and The Members of Denali PCS,
LLC dated as of June 16, 2006 (Nonmaterial schedules and exhibits to the Reorgination
Agreement have been omitted pursuant to Item 601b.2 of Regulation S-K. We agree to
furnish supplementally to the Commission upon request a copy of any omitted schedule
or exhibit.) *
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.
-------------------------
59
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENERAL COMMUNICATION, INC.
Signature Title Date
- -------------------------------------- -------------------------------------------- -----------------------
/s/ Ronald A. Duncan President and Director August 8, 2006
- -------------------------------------- (Principal Executive Officer) -----------------------
Ronald A. Duncan
/s/ John M. Lowber Senior Vice President, Chief Financial August 8, 2006
- -------------------------------------- Officer, Secretary and Treasurer -----------------------
John M. Lowber (Principal Financial Officer)
/s/ Alfred J. Walker Vice President, Chief Accounting August 8, 2006
- -------------------------------------- Officer -----------------------
Alfred J. Walker (Principal Accounting Officer)
60