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As filed with the Securities and Exchange Commission on May 10, 2005
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-5890
GCI, INC.
(Exact name of registrant as specified in its charter)
STATE OF ALASKA 91-1820757
(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 No X .
1
GCI, INC.
A WHOLLY-OWNED SUBSIDIARY OF GENERAL COMMUNICATION, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2005
TABLE OF CONTENTS
Page No.
--------
Cautionary Statement Regarding Forward-Looking Statements.................................................3
PART I. FINANCIAL INFORMATION
Item l. Consolidated Balance Sheets as of March 31, 2005
(unaudited) and December 31, 2004..................................................6
Consolidated Statements of Income for the
three months ended March 31, 2005 (unaudited)
and 2004 (unaudited)...............................................................8
Consolidated Statements of Stockholder's Equity
for the three months ended March 31, 2005
(unaudited) and 2004 (unaudited)...................................................9
Consolidated Statements of Cash Flows for the three
months ended March 31, 2005 (unaudited)
and 2004 (unaudited)...............................................................10
Notes to Interim Condensed Consolidated Financial
Statements (unaudited).............................................................11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................................22
Item 3. Quantitative and Qualitative Disclosures About
Market Risk...........................................................................44
Item 4. Controls and Procedures...............................................................44
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.....................................................................45
Item 6. Exhibits..............................................................................46
Other items are omitted, as they are not applicable.
SIGNATURES................................................................................................47
2
Cautionary Statement Regarding Forward-Looking Statements
You should carefully review the information contained in this Quarterly Report,
but should particularly consider any risk factors that we set forth in this
Quarterly Report and in other reports or documents that we file from time to
time with the Securities and Exchange Commission ("SEC"). In this Quarterly
Report, in addition to historical information, we state our future strategies,
plans, objectives or goals and our beliefs of future events and of our future
operating results, financial position and cash flows. In some cases, you can
identify those so-called "forward-looking statements" by words such as "may,"
"will," "should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," "project," or "continue" or the negative of those words
and other comparable words. All forward-looking statements involve known and
unknown risks, uncertainties and other important factors that may cause our
actual results, performance, achievements, plans and objectives to differ
materially from any future results, performance, achievements, plans and
objectives expressed or implied by these forward-looking statements. In
evaluating those statements, you should specifically consider various factors,
including those outlined below. Those factors may cause our actual results to
differ materially from any of our forward-looking statements. For these
statements, we claim the protection of the safe harbor for forward-looking
statements provided by the Securities Reform Act. Such risks, uncertainties and
other factors include but are not limited to those identified below.
o Local and general market conditions and obstacles, including possible
material adverse changes in the economic conditions in the markets we
serve and in general economic conditions; the continuing impact of the
current stagnant communications industry due to high levels of
competition in the long-distance market resulting in continuing
pressures to reduce prices; and an oversupply of long-haul capacity and
high debt loads;
o The efficacy of laws enacted by Congress and the State of Alaska
legislature; rules and regulations to be adopted by the Federal
Communications Commission ("FCC") and state public regulatory agencies
to implement the provisions of the 1996 Telecom Act; the outcome of
litigation relative thereto; and the impact of regulatory changes
relating to access reform;
o The outcome of our negotiations with Incumbent Local Exchange Carriers
("ILECs") and state regulatory arbitrations and approvals with respect
to interconnection agreements;
o Changes in, or failure, or inability, to comply with, government
regulations, including, without limitation, regulations of the FCC, the
Regulatory Commission of Alaska ("RCA"), and adverse outcomes from
regulatory proceedings;
o Changes in regulations governing Unbundled Network Elements ("UNEs");
o Changes in the treatment or classification of services using a
particular technology, including Internet protocol;
o Our responses to competitive products, services and pricing, including
pricing pressures, technological developments, alternative routing
developments, and the ability to offer combined service packages that
include long-distance, local, cable and Internet services;
o The extent and pace at which different competitive environments develop
for each segment of our business;
3
o The extent and duration for which competitors from each segment of the
communications industries are able to offer combined or full service
packages prior to our being able to do so;
o Competitor responses to our products and services and overall market
acceptance of such products and services;
o Our ability to purchase network elements or wholesale services from
ILECs at a price sufficient to permit the profitable offering of local
telephone service at competitive rates;
o Success and market acceptance for new initiatives, some of which are
untested;
o The level and timing of the growth and profitability of existing and
new initiatives, particularly local telephone services expansion
including deploying digital local telephone service and wireless
services;
o Start-up costs associated with entering new markets, including
advertising and promotional efforts;
o Risks relating to the operations of new systems and technologies and
applications to support new initiatives;
o The risks associated with technological requirements, technology
substitution and changes and other technological developments;
o Prolonged service interruptions which could affect our business;
o Development and financing of communications, local telephone, wireless,
Internet and cable networks and services;
o Future financial performance, including the availability, terms and
deployment of capital; the impact of regulatory and competitive
developments on capital outlays, and the ability to achieve cost
savings and realize productivity improvements and the consequences of
increased leverage;
o Availability of qualified personnel;
o Uncertainties in federal military spending levels in markets in which
we operate;
o Uncertainties surrounding the 2005 base realignment and closure program
and potential military base closures in markets in which we operate;
o The effect on us of industry consolidation including the potential
acquisition of one or more of our large wholesale customers by a
company with commercial relationships with other providers and the
ongoing global and domestic trend towards consolidation in the
communications industry, which may result in our competitors being
larger and better financed with extensive resources and greater
geographic reach, allowing them to compete more effectively;
o The effect on us of pricing pressures, new program offerings and
continuing market consolidation in the markets served by our
significant customers, MCI, Inc. ("MCI") and Sprint Corporation
("Sprint"); and
o Other risks detailed from time to time in our periodic reports filed
with the SEC.
You should not place undue reliance on any such forward-looking statements.
Further, any forward-looking statement, and such risks, uncertainties and other
factors speak only as of the date on which they were originally made and we
expressly disclaim any obligation or undertaking to disseminate any updates or
revisions to any forward-looking statement to reflect any change in our
expectations with regard to those statements or any other change in events,
conditions or circumstances on which any such statement is based, except as
required by law. New factors emerge from time to time, and it is not possible
for us to predict what factors will arise or when. In addition, we cannot assess
the impact of each factor on our business or the extent to which
4
any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements.
5
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
GCI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands) (Unaudited)
March 31, December 31,
ASSETS 2005 2004
- ------------------------------------------------------------------------------------ ----------------- -------------------
Current assets:
Cash and cash equivalents $ 21,766 31,452
----------------- -------------------
Receivables 70,690 74,429
Less allowance for doubtful receivables 2,060 2,317
----------------- -------------------
Net receivables 68,630 72,112
Deferred income taxes, net 13,031 13,893
Prepaid expenses 7,763 7,907
Property held for sale 2,282 2,282
Inventories 1,024 1,215
Notes receivable from related parties 385 475
Other current assets 1,736 2,429
----------------- -------------------
Total current assets 116,617 131,765
----------------- -------------------
Property and equipment in service, net of depreciation 430,799 432,249
Construction in progress 30,952 22,505
----------------- -------------------
Net property and equipment 461,751 454,754
----------------- -------------------
Cable certificates 191,241 191,241
Goodwill 41,972 41,972
Other intangible assets, net of amortization of $1,917 and $1,625 at March 31, 2005
and December 31, 2004, respectively 6,566 6,265
Deferred loan and senior notes costs, net of amortization of $3,085 and $2,602 at
March 31, 2005 and December 31, 2004, respectively 9,901 10,341
Notes receivable from related parties 3,527 3,345
Other assets 12,283 9,508
----------------- -------------------
Total other assets 265,490 262,672
----------------- -------------------
Total assets $ 843,858 849,191
================= ===================
See accompanying notes to interim condensed consolidated financial statements.
6 (Continued)
GCI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
(Amounts in thousands) (Unaudited)
March 31, December 31,
LIABILITIES AND STOCKHOLDER'S EQUITY 2005 2004
- ------------------------------------------------------------------------------------ ----------------- -------------------
Current liabilities:
Current maturities of obligations under long-term debt and capital leases $ 14,450 6,407
Accounts payable 28,472 28,742
Deferred revenue 15,880 16,253
Accrued payroll and payroll related obligations 15,175 15,350
Due to related party 7,063 10,004
Accrued liabilities 6,361 6,760
Accrued interest 2,900 8,747
Subscriber deposits 409 437
----------------- -------------------
Total current liabilities 90,710 92,700
Long-term debt 429,047 436,969
Obligations under capital leases, excluding current maturities 31,134 32,750
Obligation under capital lease due to related party, excluding current maturity 662 672
Deferred income taxes, net of deferred income tax benefit 51,667 49,111
Other liabilities 9,401 8,385
------------------ -----------------
Total liabilities 612,621 620,587
------------------ -----------------
Stockholder's equity:
Class A common stock. Authorized 10 shares; issued .01 shares at
March 31, 2005 and December 31, 2004 206,622 206,622
Paid-in capital 3,647 5,677
Retained earnings 20,968 16,305
------------------ -----------------
Total stockholder's equity 231,237 228,604
------------------ -----------------
Commitments and contingencies
Total liabilities and stockholder's equity $ 843,858 849,191
================== =================
See accompanying notes to interim condensed consolidated financial statements.
7
GCI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
(Amounts in thousands) 2005 2004
------------- -------------
Revenues $ 106,510 108,916
Cost of goods sold (exclusive of depreciation, amortization and
accretion shown separately below) 35,200 38,745
Selling, general and administrative expenses 37,180 35,404
Bad debt recovery (353) (397)
Depreciation, amortization and accretion expense 17,754 15,758
------------- -------------
Operating income 16,729 19,406
------------- -------------
Other income (expense):
Interest expense 8,282) (7,517)
Loss on early extinguishment of debt --- (6,136)
Amortization and write-off of loan and senior notes fees (483) (2,627)
Interest income 179 108
------------- -------------
Other expense, net (8,586) (16,172)
------------- -------------
Net income before income taxes 8,143 3,234
Income tax expense 3,480 1,309
------------- -------------
Net income $ 4,663 1,925
============= =============
See accompanying notes to interim condensed consolidated financial statements.
8
GCI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(Unaudited)
Shares of Accumulated
Class A Class A Retained Other
Common Common Paid-in Earnings Comprehensive
(Amounts in thousands, except share amounts) Stock Stock Capital (Deficit) Income (Loss) Total
-----------------------------------------------------------------------------
Balances at December 31, 2003 100 $ 206,622 44,904 (4,947) (308) 246,271
Components of comprehensive income:
Net income --- --- --- 1,925 --- 1,925
Change in fair value of cash flow hedge, net of
change in income tax effect of $58 --- --- --- --- 95 95
-----------
Comprehensive income 2,020
Net contribution from General Communication, Inc. --- --- 922 --- --- 922
-----------------------------------------------------------------------------
Balances at March 31, 2004 100 $ 206,622 45,826 (3,022) (213) 249,213
=============================================================================
Balances at December 31, 2004 100 $ 206,622 5,677 16,305 --- 228,604
Net income --- --- --- 4,663 --- 4,663
Net distribution to General Communication, Inc. --- --- (2,030) --- --- (2,030)
-----------------------------------------------------------------------------
Balances at March 31, 2005 100 $ 206,622 3,647 20,968 --- 231,237
=============================================================================
See accompanying notes to interim condensed consolidated financial statements.
9
GCI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(Unaudited)
(Amounts in thousands) 2005 2004
-------------- -------------
Cash flows from operating activities:
Net income $ 4,663 1,925
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation, amortization and accretion expense 17,754 15,758
Deferred income tax expense 3,480 1,309
Amortization and write-off of loan and senior notes fees 483 2,627
Deferred compensation 355 127
Bad debt expense (recovery), net of write-offs (257) 64
Compensatory stock options 48 77
Loss on early extinguishment of debt --- 6,136
Other noncash income and expense items 5 311
Change in operating assets and liabilities (6,579) (13,559)
-------------- -------------
Net cash provided by operating activities 19,952 14,775
-------------- -------------
Cash flows from investing activities:
Purchases of property and equipment, including construction period interest (24,414) (25,201)
Purchases of other assets and intangible assets (1,445) (672)
Notes receivable issued to related parties (13) ---
Proceeds from sales of assets --- 859
Refund of deposit --- 699
Payments received on notes receivable from related parties --- 662
Additions to property held for sale --- (81)
-------------- -------------
Net cash used in investing activities (25,872) (23,734)
-------------- -------------
Cash flows from financing activities:
Repayments of capital lease obligations (1,583) (409)
(Distribution to) contribution from General Communication, Inc. (2,140) 451
Payment of debt issuance costs (43) (6,429)
Issuance of new Senior Notes --- 245,720
Repayment of old Senior Notes --- (180,000)
Repayment of Senior Credit Facility --- (53,832)
Borrowing on Senior Credit Facility --- 10,000
Payment of bond call premiums --- (6,136)
-------------- -------------
Net cash provided by (used in) financing activities (3,766) 9,365
-------------- -------------
Net increase (decrease) in cash and cash equivalents (9,686) 406
Cash and cash equivalents at beginning of period 31,452 10,435
-------------- -------------
Cash and cash equivalents at end of period $ 21,766 10,841
============== =============
See accompanying notes to interim condensed consolidated financial statements.
10
GCI, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
The accompanying unaudited interim condensed consolidated financial statements
include the accounts of GCI, Inc. and its subsidiaries and have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. They should be read in
conjunction with our audited consolidated financial statements for the year
ended December 31, 2004, filed as part of our annual report on Form 10-K. In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. The results of
operations for interim periods are not necessarily indicative of the results
that may be expected for an entire year or any other period.
(l) Business and Summary of Significant Accounting Principles
In the following discussion, GCI, Inc. and its direct and indirect
subsidiaries are referred to as "we," "us" and "our."
Basis of Presentation
We were incorporated in Alaska in 1997 to affect the issuance of senior
notes. As a wholly-owned subsidiary of General Communication, Inc.
("GCI"), we received through our initial capitalization all ownership
interests in subsidiaries previously held by GCI.
(a) Business
We offer the following services:
o Long-distance telephone service between Alaska and the
remaining United States and foreign countries,
o Cable television services throughout Alaska,
o Facilities-based competitive local access services in
Anchorage, Fairbanks, and Juneau, Alaska,
o Internet access services,
o Origination and termination of traffic in Alaska for certain
common carriers,
o Private line and private network services,
o Managed services to certain commercial customers,
o Broadband services, including our SchoolAccess(TM) offering to
rural school districts and a similar offering to rural
hospitals and health clinics,
o Sales and service of dedicated communications systems and
related equipment,
o Lease and sales of capacity on our undersea fiber optic cable
systems used in the transmission of interstate and intrastate
private line, switched message long-distance and Internet
services between Alaska and the remaining United States and
foreign countries, and
o Distribution of white and yellow pages directories to
residential and business customers in certain markets we serve
and on-line directory products.
(b) Principles of Consolidation
The consolidated financial statements include the consolidated
accounts of GCI, Inc. and its wholly owned subsidiaries with all
significant intercompany transactions eliminated.
11 (Continued)
GCI, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
(c) Earnings per Common Share
We are a wholly owned subsidiary of GCI and, accordingly, are not
required to present earnings per share. Our common stock is not
publicly traded.
(d) Asset Retirement Obligations
Following is a reconciliation of the beginning and ending aggregate
carrying amount of our asset retirement obligations at March 31,
2005 and 2004 (amounts in thousands):
Balance at December 31, 2003 $ 2,005
Accretion expense for the three months
ended March 31, 2004 43
Other (11)
--------
Balance at March 31, 2004 $ 2,037
========
Balance at December 31, 2004 $ 2,971
Accretion expense for the three months
ended March 31, 2005 49
--------
Balance at March 31, 2005 $ 3,020
========
(e) Stock Option Plan
At March 31, 2005, GCI had one stock-based employee compensation
plan. We account for this plan under the recognition and
measurement principles of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. We use the intrinsic-value method and
compensation expense is recorded on the date of grant only if the
current market price of the underlying stock exceeds the exercise
price. We have adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the
date of grant. Alternatively, SFAS No. 123 also allows entities to
continue to apply the provisions of APB Opinion No. 25.
We have adopted SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure." This Statement amends SFAS
No. 123 to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, this Statement
amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results.
We have elected to continue to apply the provisions of APB Opinion
No. 25 and provide the pro forma disclosure as required by SFAS No.
148.
12 (Continued)
GCI, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Stock-based employee compensation cost is reflected over the
options' vesting period of generally five years and compensation
cost for options granted prior to January 1, 1996 is not
considered. The following table illustrates the effect on net
income for the three months ended March 31, 2005 and 2004, if we
had applied the fair-value recognition provisions of SFAS No. 123
to stock-based employee compensation (amounts in thousands):
Three Months Ended
March 31,
2005 2004
----------- -----------
Net income, as reported $ 4,663 1,925
Total stock-based employee compensation expense included in
reported net income, net of related tax effects 27 45
Total stock-based employee compensation expense under the
fair-value based method for all awards, net of related tax effects (511) (523)
----------- -----------
Pro forma net income $ 4,179 1,447
=========== ===========
The calculation of total stock-based employee compensation expense
under the fair-value based method includes weighted-average
assumptions of a risk-free interest rate, volatility and an
expected life.
(f) New Accounting Standards
In December 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 153, "Exchanges of Nonmonetary Assets," which
amends APB Opinion No. 29, "Accounting for Nonmonetary
Transactions". The guidance in APB Opinion No. 29 is based on the
principle that exchanges of nonmonetary assets should be measured
based on the fair value of the assets exchanged. The guidance in
that Opinion, however, included certain exceptions to that
principle. SFAS No. 153 amends APB Opinion No. 29 to eliminate the
exception for nonmonetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. A
nonmonetary exchange has commercial substance if the future cash
flows of the entity are expected to change significantly as a
result of the exchange. We will adopt this statement July 1, 2005
and do not expect it to have a material effect on our results of
operations, financial position and cash flows.
In March 2005, the FASB issued FASB Interpretation ("FIN") 47,
"Accounting for Conditional Asset Retirement Obligations." FIN 47
clarifies that the term conditional asset retirement obligation as
used in SFAS No. 143, "Accounting for Asset Retirement
Obligations", refers to a legal obligation to perform an asset
retirement activity in which the timing and (or) method of
settlement are conditional on a future event that may or may not be
within the control of the entity. The obligation to perform the
asset retirement activity is unconditional even though uncertainty
exists about the timing and (or) method of settlement. Thus, the
timing and (or) method of settlement may be conditional on a future
event. Accordingly, an entity is required to recognize a liability
for the fair value of a conditional asset retirement obligation if
the fair value of the liability can be reasonably estimated. The
fair value of a liability for the
13 (Continued)
GCI, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
conditional asset retirement obligation should be recognized when
incurred--generally upon acquisition, construction, or development
and (or) through the normal operation of the asset. We will adopt
FIN 47 for our annual report for the year ended December 31, 2005
and do not expect it to have a material effect on our results of
operations, financial position and cash flows.
(2) Consolidated Statements of Cash Flows Supplemental Disclosures
Changes in operating assets and liabilities consist of (amounts in
thousands):
Three month periods ended March 31, 2005 2004
---------- ----------
Increase in accounts receivable $ 1,814 6,146
Increase in prepaid expenses 144 5,727
Increase in inventories 191 529
Increase in other current assets 693 175
Decrease in accounts payable (270) (10,562)
Decrease in deferred revenues (373) (6,539)
Decrease in accrued payroll and payroll related
obligations (175) (3,234)
Increase (decrease) in due to related party (2,941) 1,012
Decrease in accrued liabilities (399) (985)
Decrease in accrued interest (5,847) (5,725)
Decrease in subscriber deposits (28) (74)
Increase (decrease) in components of other long-term
liabilities 612 (29)
---------- -----------
$ (6,579) (13,559)
========== ===========
We paid interest totaling approximately $14.1 million and $13.7 million
during the three months ended March 31, 2005 and 2004, respectively. We
capitalized interest of approximately $0 and $416,000 during the three
months ended March 31, 2005 and 2004, respectively. Capitalized interest
is recorded as an addition to Property and Equipment.
GCI, Inc., as a wholly-owned subsidiary and member of the GCI controlled
group of corporations, files its income tax returns as part of the
consolidated group of corporations under GCI. Accordingly, the following
discussion of an income tax payment and refund reflects the consolidated
group's activity. Income tax refunds received totaled $202,000 and $0
during the three months ended March 31, 2005 and 2004, respectively. We
paid no income taxes during the three months ended March 31, 2005 and
2004.
(3) Intangible Assets
There have been no events or circumstances that indicate the
recoverability of the carrying amounts of indefinite-lived and
definite-lived intangible assets has changed as of March 31, 2005. The
remaining useful lives of our cable certificates and goodwill were
evaluated as of March 31, 2005 and events and circumstances continue to
support an indefinite useful life. Our review of the factors in SFAS No.
142, paragraph 11 indicates definite-lived intangible assets continue to
be amortized over their useful lives as of March 31, 2005.
14 (Continued)
GCI, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
On September 29, 2004, the SEC issued SEC Staff Announcement Topic "Use
of the Residual Method to Value Acquired Assets Other than Goodwill,"
("SEC Staff Announcement") requiring us to apply no later than January 1,
2005 a direct value method to determine the fair value of our intangible
assets with indefinite lives other than goodwill for purposes of
impairment testing. We adopted the SEC Staff Announcement on December 31,
2004. Our cable certificate assets were originally valued and recorded
using the residual method. Impairment testing of our cable certificate
assets as of December 31, 2004 used a direct value method pursuant to the
SEC Staff Announcement and did not result in impairment.
Cable certificates are allocated to our cable services segment. Goodwill
of approximately $41.0 million is allocated to the cable services segment
and approximately $1.0 million is allocated to the long-distance services
segment.
Amortization expense for amortizable intangible assets was $292,000 and
$159,000 during the three months ended March 31, 2005 and 2004,
respectively.
Amortization expense for amortizable intangible assets for each of the
five succeeding fiscal years is estimated to be (amounts in thousands):
Years Ending
December 31,
-------------------
2005 $ 1,212
2006 1,224
2007 1,155
2008 918
2009 591
(4) MCI Settlement and Release Agreement
On July 21, 2002 MCI and substantially all of its active United States
subsidiaries filed voluntary petitions for reorganization under Chapter
11 of the United States Bankruptcy Code in the United States Bankruptcy
Court. On July 22, 2003, the United States Bankruptcy Court approved a
settlement agreement for pre-petition amounts owed to us by MCI and
affirmed all of our existing contracts with MCI. MCI emerged from
bankruptcy protection on April 20, 2004. The remaining pre-petition
accounts receivable balance owed by MCI to us after this settlement was
$11.1 million ("MCI credit") which we have used and will continue to use
as a credit against amounts payable for services purchased from MCI.
15 (Continued)
GCI, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
After settlement, we began reducing the MCI credit as we utilized it for
services otherwise payable to MCI. Uncertainties exist with respect to
the potential realization and the timing of our utilization of the MCI
credit. We have accounted for our use of the MCI credit as a gain
contingency and, accordingly, will recognize a reduction of bad debt
expense as services are provided by MCI and the credit is realized. The
use of the credit is recorded as a reduction of bad debt expense. During
the three months ended March 31, 2005 and 2004 we realized $893,000 and
$1.2 million, respectively, of the MCI credit against amounts payable for
services received from MCI.
The remaining unused MCI credit totaled $2.8 million and $3.7 million at
March 31, 2005 and December 31, 2004, respectively. The credit balance is
not recorded on the Consolidated Balance Sheet as we are recognizing
recovery of bad debt expense as the credit is realized.
(5) Industry Segments Data
Our reportable segments are business units that offer different products.
The reportable segments are each managed separately and offer distinct
products with different production and delivery processes.
As of January 1, 2005 financial information for our SchoolAccess(TM)
offering to rural school districts and a similar offering to rural
hospitals and health clinics ("Broadband services") is not included in
the long-distance services segment but is included in "All Other"
category. Segment and All Other category data for the three months ended
March 31, 2004 have been restated to reflect the change.
We have four reportable segments as follows:
Long-distance services. We offer a full range of common carrier
long-distance services to commercial, government, other
telecommunications companies and residential customers, through our
networks of fiber optic cables, digital microwave, and fixed and
transportable satellite earth stations.
Cable services. We provide cable television services to residential,
commercial and government users in the State of Alaska. Our cable
systems serve 36 communities and areas in Alaska, including the
state's four largest urban areas, Anchorage, Fairbanks, the
Matanuska-Susitna Valley, and Juneau. We offer digital cable
television services in Anchorage, the Matanuska-Susitna Valley,
Fairbanks, Juneau, Ketchikan, Kenai, Soldotna, Kodiak, Seward,
Cordova, Valdez, and Nome and retail cable modem service (through our
Internet services segment) in all of our locations in Alaska except
Kotzebue.
Local access services. We offer facilities based competitive local
exchange services in Anchorage, Fairbanks and Juneau and plan to
provide similar competitive local exchange services in other locations
pending regulatory approval and subject to availability of capital.
Revenue, costs of sales and service and operating expenses for our
phone directories are included in the local access services segment.
Internet services. We offer wholesale and retail Internet services to
both consumer and commercial customers. We offer cable modem service
as further described in Cable services
16 (Continued)
GCI, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
above. Our undersea fiber optic cable systems allow us to offer
enhanced services with high-bandwidth requirements.
Included in the "All Other" category in the tables that follow are our
Broadband services, managed services, product sales and cellular
telephone services. None of these business units has ever met the
quantitative thresholds for determining reportable segments. Also
included in the All Other category are corporate related expenses
including information technology, accounting, legal and regulatory, human
resources, and other general and administrative expenses.
We evaluate performance and allocate resources based on (1) earnings or
loss from operations before depreciation, amortization and accretion
expense, net other expense and income taxes, and (2) operating income or
loss. The accounting policies of the reportable segments are the same as
those described in the summary of significant accounting policies in note
1 in the "Notes to Consolidated Financial Statements" included in Part II
of our December 31, 2004 annual report on Form 10-K. Intersegment sales
are recorded at cost plus an agreed upon intercompany profit.
We earn all revenues through sales of services and products within the
United States. All of our long-lived assets are located within the United
States of America, except approximately 82% of our undersea fiber optic
cable systems which transit international waters.
17 (Continued)
GCI, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Summarized financial information for our reportable segments for the
three months ended March 31, 2005 and 2004 follows (amounts in
thousands):
Reportable Segments
---------------------------------------------------------
Long- Local Total
Distance Cable Access Internet Reportable All
Services Services Services Services Segments Other Total
-------------------------------------------------------------------------------
2005
----
Revenues:
Intersegment $ 3,960 864 2,280 229 7,333 336 7,669
External 44,742 25,899 13,295 7,309 91,245 15,265 106,510
-------------------------------------------------------------------------------
Total revenues $ 48,702 26,763 15,575 7,538 98,578 15,601 114,179
===============================================================================
Earnings (loss) from
operations before
depreciation,
amortization, accretion,
net interest expense and
income taxes $ 24,257 11,600 1,100 2,964 39,921 (5,438) 34,483
===============================================================================
Operating income (loss) $ 18,005 6,502 (507) 1,869 25,869 (9,140) 16,729
===============================================================================
2004
----
Revenues:
Intersegment $ 3,434 617 2,340 926 7,317 186 7,503
External 44,526 24,852 11,792 6,406 87,576 21,340 108,916
-------------------------------------------------------------------------------
Total revenues $ 47,960 25,469 14,132 7,332 94,893 21,526 116,419
===============================================================================
Earnings (loss) from
operations before
depreciation,
amortization, accretion,
net interest expense and
income taxes $ 24,149 11,028 512 1,838 37,527 (2,363) 35,164
===============================================================================
Operating income (loss) $ 17,924 6,349 (380) 914 24,807 (5,401) 19,406
===============================================================================
A reconciliation of reportable segment revenues to consolidated revenues
follows (amounts in thousands):
Three months ended March 31, 2005 2004
--------------- ---------------
Reportable segment revenues $ 98,578 94,893
Plus All Other revenues 15,601 21,526
Less intersegment revenues eliminated in consolidation 7,669 7,503
--------------- ---------------
Consolidated revenues $ 106,510 108,916
=============== ===============
18 (Continued)
GCI, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
A reconciliation of reportable segment earnings from operations before
depreciation, amortization and accretion expense, net other expense and
income taxes to consolidated net income before income taxes follows
(amounts in thousands):
Three months ended March 31, 2005 2004
-------------- ----------------
Reportable segment earnings from operations before
depreciation, amortization and accretion expense, net other
expense and income taxes $ 39,921 37,527
Less All Other loss from operations before depreciation,
amortization and accretion expense, net other expense and
income taxes 5,438 2,363
-------------- ----------------
Consolidated earnings from operations before
depreciation, amortization and accretion expense, net
other expense and income taxes 34,483 35,164
Less depreciation, amortization and accretion expense 17,754 15,758
-------------- ----------------
Consolidated operating income 16,729 19,406
Less other expense, net 8,586 16,172
-------------- ----------------
Consolidated net income before income taxes $ 8,143 3,234
============== ================
A reconciliation of reportable segment operating income to consolidated
net income before income taxes follows (amounts in thousands):
Three months ended March 31, 2005 2004
--------------- ---------------
Reportable segment operating income $ 25,869 24,807
Less All Other operating loss 9,140 5,401
--------------- ---------------
Consolidated operating income 16,729 19,406
Less other expense, net 8,586 16,172
--------------- ---------------
Consolidated net income before income taxes $ 8,143 3,234
=============== ===============
19 (Continued)
GCI, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
(6) Commitments and Contingencies
Litigation and Disputes
We are involved in various lawsuits, billing disputes, legal proceedings,
and regulatory matters that have arisen from time to time in the normal
course of business. While the ultimate results of these items cannot be
predicted with certainty we do not expect at this time the resolution of
them to have a material adverse effect on our financial position, results
of operations or liquidity.
Telecommunication Services Agreements
We lease a portion of our 800-mile fiber optic system capacity that
extends from Prudhoe Bay to Valdez via Fairbanks, and provide management
and maintenance services for this capacity to a significant customer. The
telecommunications service agreement is for fifteen years and may be
extended for up to two successive three-year periods and, upon expiration
of the extensions, one additional year. The agreement may be canceled by
either party with 180 days written notice. On March 24, 2005, the lessee
announced that they had signed a contract with a competitor to build a
microwave system to run parallel with our fiber optic cable system. The
lessee also announced their intention to utilize the microwave system in
place of our fiber optic cable system. The lessee has not notified us in
writing of their intent to cancel our agreement. We are unable to predict
the financial impact of this event on our results of operations,
financial position and cash flows.
A summary of minimum future service revenues from this agreement, follows
(amounts in thousands):
Years ending December 31,
2005 $ 13,200
2006 13,200
2007 13,200
2008 13,200
2009 13,200
2010 and thereafter 85,276
----------
Total minimum future service revenues $ 151,276
==========
Anchorage UNEs Arbitration
On June 25, 2004 the RCA issued an order in our arbitration with Alaska
Communications Systems Group, Inc. ("ACS") to revise the rates, terms,
and conditions that govern access to UNEs in the Anchorage market. The
RCA's ruling set rates for numerous elements of ACS' network, the most
significant being the lease rate for local loops. The order initially
increased the loop rate from $14.92 to $19.15 per loop per month. We
immediately filed a petition for reconsideration with the RCA to correct
computational errors and raise other issues. On August 20, 2004, the RCA
ruled on the petition and retroactively lowered the loop rate to $18.64
per month. In January 2005 we appealed the RCA ruling to the Federal
District Court arguing that the pricing and methodology used by ACS and
approved by the RCA was flawed and in violation of federal law. We cannot
predict at this time the outcome of the lawsuit.
20 (Continued)
GCI, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Intrastate Access Refund
On May 15, 2003, AT&T Corp. ("AT&T") filed a petition with the FCC
requesting a declaratory ruling that intrastate access charges do not
apply to certain of its calling card offerings. When AT&T Alascom, a
subsidiary of AT&T, characterized calling card calls that originate and
terminate in Alaska as interstate, they shifted certain intrastate access
charges payable to Alaska local exchange carriers to us. In a proceeding
before the RCA, the RCA had already declared this AT&T Alascom practice
to be improper. After AT&T petitioned the FCC, the RCA stayed AT&T
Alascom's obligations to make back payments for the period prior to
April, 2004, but ordered AT&T Alascom to pay on an ongoing basis from
April 1, 2004. On February 23, 2005, the FCC also ruled against AT&T,
consistent with the RCA's prior findings. With this ruling, we can now
seek to collect refunds for the intrastate access charge amounts that
AT&T Alascom unlawfully shifted to us prior to April 1, 2004. On March
28, 2005, AT&T filed an appeal of the FCC order to the federal Court of
Appeals for the District of Columbia Circuit. AT&T has also sought from
the court a stay of the FCC's ruling. We have not completed our
calculations of the amounts due to us and cannot predict at this time the
ultimate amount to be refunded pursuant to this gain contingency, however
it could be material to our results of operations, financial position and
cash flows.
21
PART I.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
In the following discussion, GCI, Inc. and its direct and indirect subsidiaries
are referred to as "we," "us" and "our."
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and assumptions that affect the reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. On an on-going basis, we evaluate our
estimates and judgments, including those related to unbilled revenues, Cost of
Goods Sold (exclusive of depreciation, amortization and accretion shown
separately) ("Cost of Goods Sold") accruals, allowance for doubtful accounts,
depreciation, amortization and accretion periods, intangible assets, income
taxes, and contingencies and litigation. We base our estimates and judgments on
historical experience and on various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. See also our "Cautionary
Statement Regarding Forward-Looking Statements."
GCI, Inc. was incorporated under the laws of the State of Alaska in 1997 to
affect the issuance of senior notes. GCI, Inc., a wholly-owned subsidiary of
GCI, received through its initial capitalization all ownership interests in
subsidiaries previously held by GCI. Shares of GCI's Class A common stock are
traded on the Nasdaq National Market tier of the Nasdaq Stock Market under the
symbol GNCMA. Shares of GCI's Class B common stock are traded on the
Over-the-Counter market. Shares of GCI, Inc.'s common stock are not publicly
traded.
General Overview
Through our focus on long-term results, acquisitions, and strategic capital
investments, we strive to consistently grow our revenues and expand our margins.
We have historically met our cash needs for operations, regular capital
expenditures and maintenance capital expenditures through our cash flows from
operating activities. Historically, cash requirements for significant
acquisitions and major capital expenditures have been provided largely through
our financing activities.
As of January 1, 2005 financial information for Broadband services is not
included in the long-distance services segment but is included in "All Other"
category. Segment and All Other category data for the three months ended March
31, 2004 have been restated to reflect the change.
22
Results of Operations
The following table sets forth selected Statements of Income data as a
percentage of total revenues for the periods indicated (underlying data rounded
to the nearest thousands):
Percentage
Change (1)
Three Months Ended 2005
March 31, vs.
(Unaudited) 2005 2004 2004
---- ---- ----
Statements of Income Data:
Revenues:
Long-distance services segment 42.0% 40.9% 0.5%
Cable services segment 24.3% 22.8% 4.2%
Local access services segment 12.5% 10.8% 12.7%
Internet services segment 6.9% 5.9% 14.1%
All other 14.3% 19.6% (28.5%)
-----------------------------------------
Total revenues 100.0% 100.0% (2.2%)
Selling, general and administrative expenses 34.9% 32.5% 5.0%
Bad debt recovery (0.3%) (0.4%) (11.1%)
Depreciation, amortization and accretion expense 16.7% 14.5% 12.7%
Operating income 15.7% 17.8% (13.8%)
Net income before income taxes 7.6% 3.0% 151.8%
Net income 4.4% 1.8% 142.2%
Other Operating Data:
Long-distance services segment operating income (2) 40.2% 40.3% 0.4%
Cable services segment operating income (3) 25.1% 25.5% 2.4%
Local access services segment operating loss (4) (3.8%) (3.2%) (33.4%)
Internet services segment operating income (5) 25.6% 14.3% 104.5%
--------------------------
1 Percentage change in underlying data.
2 Computed by dividing total external long-distance services segment
operating income by total external long-distance services segment revenues.
3 Computed by dividing total external cable services segment operating income
by total external cable services segment revenues.
4 Computed by dividing total external local access services segment operating
loss by total external local access services segment revenues.
5 Computed by dividing total external Internet services segment operating
income by total external Internet services segment revenues.
--------------------------
23
Three Months Ended March 31, 2005 ("2005") Compared To Three Months Ended
March 31, 2004 ("2004")
Overview of Revenues and Cost of Goods Sold
Total revenues decreased 2.2% from $108.9 million in 2004 to $106.5 million in
2005. Revenue increases in each of our segments were off-set by a decrease in
All Other Services revenues. See the discussion below for more information by
segment.
Total Cost of Goods Sold decreased 9.2% from $38.7 million in 2004 to $35.2
million in 2005. Decreases in cable services segment and All Other Services Cost
of Goods Sold were partially off-set by increased long-distance services, local
access services and Internet services segments Cost of Goods Sold. See the
discussion below for more information by segment.
Long-Distance Services Segment Overview
Long-distance services segment revenue in 2005 represented 42.0% of consolidated
revenues. Our provision of interstate and intrastate long-distance services, and
private line and leased dedicated capacity services accounted for 89.2% of our
total long-distance services segment revenues during 2005.
Factors that have the greatest impact on year-to-year changes in long-distance
services segment revenues include the rate per minute charged to customers,
usage volumes expressed as minutes of use, and the number of private line, and
leased dedicated service in use.
Due in large part to the favorable synergistic effects of our bundling strategy,
the long-distance services segment continues to be a significant contributor to
our overall performance, although the migration of traffic from voice to data
and from fixed to mobile wireless continues.
Our long-distance services segment faces significant competition from AT&T
Alascom, long-distance resellers, and local telephone companies that have
entered the long-distance market. We believe our approach to developing,
pricing, and providing long-distance services and bundling different business
segment services will continue to allow us to be competitive in providing those
services.
On July 21, 2002 MCI and substantially all of its active United States
subsidiaries, on a combined basis a major customer, filed voluntary petitions
for reorganization under Chapter 11 of the United States Bankruptcy Code in the
United States Bankruptcy Court. On July 22, 2003, the United States Bankruptcy
Court approved a settlement agreement for pre-petition amounts owed to us by MCI
and affirmed all of our existing contracts with MCI. MCI emerged from bankruptcy
protection on April 20, 2004. The remaining pre-petition accounts receivable
balance owed by MCI to us after this settlement was $11.1 million which we have
used and will continue to use as a credit against amounts payable for services
purchased from MCI.
After settlement, we began reducing the MCI credit as we utilized it for
services otherwise payable to MCI. We have accounted for our use of the MCI
credit as a gain contingency, and, accordingly, are recognizing a reduction of
bad debt expense as services are provided by MCI and the credit is realized.
During 2005 and 2004 we realized approximately $893,000 and $1.2 million,
respectively, of the MCI credit against amounts payable for services received
from MCI.
24
The remaining unused MCI credit totaled $2.8 million at March 31, 2005. The
credit balance is not recorded on the Consolidated Balance Sheet as we are
recognizing recovery of bad debt expense as the credit is realized.
In 2005 we renewed our agreement to provide interstate and intrastate
long-distance services to MCI through December 2009 with five one-year automatic
extensions to December 2014. The amendment includes new rates mandated by the
Consolidated Appropriations Act for Fiscal Year 2005 signed into law December 8,
2004 and effective January 22, 2005 which will result in rate decreases of 3%
per year ("Tariff 11 Rates").
In May 2005 Verizon Communications, Inc. agreed to acquire MCI. Any such
acquisition will require approval of shareholders and anti-trust regulators. We
are unable to predict the impact that a merger with or an acquisition of MCI
will have upon us, however given the materiality of MCI's revenues to us, a
significant reduction in traffic or pricing could have a material adverse effect
on our financial position, results of operations and liquidity.
The initial term of our contract to provide interstate and intrastate
long-distance services to Sprint ends in March 2007 with two one-year automatic
extensions to March 2009. In 2005 we amended the original agreement to include
Tariff 11 Rates.
In December 2004 Sprint and Nextel Communications, Inc. announced a merger. The
agreement requires approval of shareholders and anti-trust regulators, as well
as state utility commissions that license phone service. We are unable to
predict the outcome this merger will have upon us.
Other common carrier traffic routed to us for termination in Alaska is largely
dependent on traffic routed to MCI and Sprint by their customers. Pricing
pressures, new program offerings, business failures, and market and business
consolidations continue to evolve in the markets served by MCI and Sprint. If,
as a result, their traffic is reduced, or if their competitors' costs to
terminate or originate traffic in Alaska are reduced, our traffic will also
likely be reduced, and our pricing may be reduced to respond to competitive
pressures, consistent with federal law. Additionally, disruption in the economy
resulting from terrorist attacks and other attacks or acts of war could affect
our carrier customers. We are unable to predict the effect on us of such
changes, however given the materiality of other common carrier revenues to us, a
significant reduction in traffic or pricing could have a material adverse effect
on our financial position, results of operations and liquidity.
Long-distance Services Segment Revenues
Total long-distance services segment revenues increased 0.5% to $44.7 million in
2005. The components of long-distance services segment revenues are as follows
(amounts in thousands):
2005 2004 Percentage Change
-------------- ------------- -----------------
Common carrier message telephone services $ 19,327 21,170 (8.7%)
Residential, commercial and governmental message telephone
services 9,600 9,893 (3.0%)
Private line and private network services 11,000 10,366 6.1%
Lease of fiber optic cable system capacity 4,815 3,097 55.5%
-------------- ------------- -----------------
Total long-distance services segment revenue $ 44,742 44,526 0.5%
============== ============= =================
25
Common Carrier Message Telephone Services Revenue
The 2005 decrease in message telephone service revenues from other common
carriers (principally MCI and Sprint) resulted from a 10.1% decrease in the
average rate per minute on minutes carried for other common carriers primarily
due to the decreased average rate per minute as agreed to in the June 2004
amendment of our contract to provide interstate and intrastate long-distance
services to Sprint.
The decrease in message telephone service revenues from other common carriers in
2005 was partially off-set by a 0.5% increase in wholesale minutes carried to
226.6 million minutes.
Residential, Commercial, and Governmental Message Telephone Services Revenue
Selected key performance indicators for our offering of message telephone
service to residential, commercial, and governmental customers follow:
2005 2004 Percentage Change
------------------ ------------------ -----------------
Retail minutes carried 75.9 million 76.2 million (0.4%)
Average rate per minute (1) $0.131 $0.130 0.8%
Number of active residential,
commercial and governmental
customers (2) 91,800 86,100 6.6%
------------------------------------
1 Residential, commercial, and governmental message telephone services
revenues excluding plan fees associated with the carriage of data services
divided by the retail minutes carried.
2 All current subscribers who have had calling activity during March 2005 and
2004, respectively.
The decrease in message telephone service revenues from residential, commercial,
and governmental customers in 2005 is primarily due to decreased minutes carried
for these customers and is partially off-set by an increase in the average rate
per minute and an increase in the number of active residential, commercial, and
governmental customers billed. The increase in the number of customers billed is
primarily due to our promotion of and our customers' enrollment in bundled
offerings to our residential customers, partially off-set by the effect of
customers substituting cellular phone, prepaid calling card, and email usage for
direct dial minutes.
Fiber Optic Cable System Capacity Lease Revenue
The increase in fiber optic cable system capacity lease revenues is primarily
due to a lease of capacity on the AULP East fiber optic cable system resulting
in increased monthly revenue of approximately $430,000 starting in July 2004.
Long-distance Services Segment Cost of Goods Sold
Long-distance services segment Cost of Goods Sold increased 2.6% to $12.8
million in 2005 primarily due to the receipt of a $400,000 refund in 2004 from
an intrastate access cost pool that previously overcharged us for access
services.
26
The increase in the long-distance services segment Cost of Goods Sold is
partially off-set by reduced access costs due to distribution and termination of
our traffic on our own local access services network instead of paying other
carriers to distribute and terminate our traffic. The statewide average cost
savings is approximately $.010 and $.063 per minute for interstate and
intrastate traffic, respectively. We expect cost savings to continue to occur as
long-distance traffic originated, carried, and terminated on our own facilities
grows.
Long-distance Services Segment Operating Income
Long-distance services segment operating income increased 0.5% to $18.0 million
from 2004 to 2005 primarily due to the following:
o A 0.5% increase in long-distance services segment revenue to $44.7
million in 2005, as discussed above, and
o A $337,000 decrease in long-distance services segment selling, general
and administrative expenses to $8.3 million in 2005.
The increase in long-distance services segment operating income was partially
off-set by the following:
o A 2.6% increase in long-distance services segment costs of goods sold
to $12.8 million in 2005, as discussed above, and
o A 0.4% increase in long-distance services segment depreciation,
amortization and accretion expense to $6.3 million in 2005 as compared
to 2004 primarily due to our investment in long-distance services
segment equipment and facilities placed into service during the year
ended December 31, 2004 for which a full year of depreciation will be
recorded in the year ended December 31, 2005, and our investment in
long-distance services segment equipment and facilities placed into
service during the three months ended March 31, 2005 for which a
partial year of depreciation will be recorded in the year ended
December 31, 2005.
Cable Services Segment Overview
Cable services segment revenues in 2005 represented 24.3% of consolidated
revenues. Our cable systems serve 36 communities and areas in Alaska, including
the state's four largest population centers, Anchorage, Fairbanks, the
Matanuska-Susitna Valley and Juneau. On February 1, 2005 we acquired all of the
assets of Barrow Cable TV, Inc. ("BCTV") for approximately $1.6 million. The
BCTV asset purchase resulted in approximately 950 additional subscribers and
approximately 1,100 additional homes passed.
We generate cable services segment revenues from four primary sources: (1)
digital and analog programming services, including monthly basic and premium
subscriptions, pay-per-view movies and other one-time events, such as sporting
events; (2) equipment rentals and installation; (3) cable modem services (shared
with our Internet services segment); and (4) advertising sales. During 2005
programming services generated 72.6% of total cable services segment revenues,
cable services' allocable share of cable modem services accounted for 12.6% of
such revenues, equipment rental and installation fees accounted for 10.6% of
such revenues, advertising sales accounted for 3.4% of such revenues, and other
services accounted for the remaining 0.8% of total cable services segment
revenues.
27
The primary factors that contribute to year-to-year changes in cable services
segment revenues include average monthly subscription rates and pay-per-view
buys, the mix among basic, premium and digital tier services, the average number
of cable television and cable modem subscribers during a given reporting period,
set-top box utilization and related rates, revenues generated from new product
offerings, and sales of cable advertising services.
Cable Services Segment Revenues and Cost of Goods Sold
Selected key performance indicators for our cable services segment follow:
March 31, Percentage
2005 2004 Change
------------- ------------- ----------------
Basic subscribers 136,100 134,000 1.6%
Digital programming tier subscribers 48,000 34,000 41.2%
Cable modem subscribers 69,300 51,700 34.0%
Homes passed 209,600 203,400 3.0%
A basic cable subscriber is defined as one basic tier of service delivered to an
address or separate subunits thereof regardless of the number of outlets
purchased. A digital programming tier subscriber is defined as one digital
programming tier of service delivered to an address or separate subunits thereof
regardless of the number of outlets or digital programming tiers purchased.
A cable modem subscriber is defined by the purchase of cable modem service
regardless of the level of service purchased. If one entity purchases multiple
cable modem service access points, each access point is counted as a subscriber.
Total cable services segment revenues increased 4.2% to $25.9 million and
average gross revenue per average basic subscriber per month increased $3.14 or
5.0% in 2005.
The increase in cable services segment revenues is primarily due to a 3.0%
increase in programming services to $18.8 million due to an increase in basic
subscribers in 2005 and a 54.4% increase in digital set-top box rental revenue
to $2.6 million in 2005 primarily caused by the increased use of digital
distribution technology.
Cable services segment Cost of Goods Sold decreased 0.7% to $7.0 million in 2005
primarily due to arrangements with suppliers in which we received rebates in
2005 upon us meeting specified goals. The decrease in Cable services segment
Cost of Goods Sold is partially off-set by programming cost increases for most
of our cable programming service offerings.
Cable Services Segment Operating Income
Cable services segment operating income increased 2.4% to $6.5 million from 2004
to 2005 primarily due to the 4.2% increase in cable services segment revenues to
$25.9 million in 2005 and the 0.7% decrease in Cost of Goods Sold to $7.0
million in 2005 described above, partially off-set by the following:
o A $566,000 increase in cable services segment selling, general and
administrative expenses to $7.1 million in 2005, and
o A 9.0% increase in cable services segment depreciation, amortization
and accretion expense to $5.1 million in 2005 as compared to 2004
primarily due to our investment in cable
28
services segment equipment and facilities placed into service during
the year ended December 31, 2004 for which a full year of depreciation
will be recorded in the year ended December 31, 2005, and our
investment in cable services segment equipment and facilities placed
into service during the three months ended March 31, 2005 for which a
partial year of depreciation will be recorded in the year ended
December 31, 2005.
Multiple System Operator ("MSO") Operating Statistics
Our operating statistics include capital expenditures and customer information
from our cable services segment and the components of our local access services
and Internet services segments which offer services utilizing our cable services
segment's facilities.
Our capital expenditures by standard reporting category for the three months
ended March 31, 2005 and 2004 follows (amounts in thousands):
2005 2004
------------- -------------
Customer premise equipment $ 3,558 3,438
Commercial 97 47
Scalable infrastructure 552 1,755
Line extensions 44 44
Upgrade/rebuild 4,057 1,770
Support capital 69 181
------------- -------------
Sub-total 8,377 7,235
Remaining reportable segments and
All Other capital expenditures 16,037 17,966
------------- -------------
$ 24,414 25,201
============= =============
The standardized definition of a customer relationship is the number of
customers that receive at least one level of service utilizing our cable
services segment's facilities, encompassing voice, video, and data services,
without regard to which services customers purchase. At March 31, 2005 and 2004
we had 124,200 and 122,100 customer relationships, respectively.
The standardized definition of a revenue generating unit is the sum of all
primary analog video, digital video, high-speed data, and telephony customers,
not counting additional outlets. At March 31, 2005 and 2004 we had 215,800 and
185,800 revenue generating units, respectively.
Local Access Services Segment Overview
During 2005 local access services segment revenues represented 12.5% of
consolidated revenues. We generate local access services segment revenues from
three primary sources: (1) business and residential basic dial tone services;
(2) business private line and special access services; and (3) business and
residential features and other charges, including voice mail, caller ID,
distinctive ring, inside wiring and subscriber line charges.
The primary factors that contribute to year-to-year changes in local access
services segment revenues include the average number of business and residential
subscribers to our services during a given reporting period, the average monthly
rates charged for non-traffic sensitive services, the number and type of
additional premium features selected, the traffic sensitive access rates charged
to carriers and the Universal Service Program.
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Our local access services segment faces significant competition in Anchorage,
Fairbanks, and Juneau from ACS, which is the largest ILEC in Alaska, and from
AT&T Alascom, Inc. in Anchorage for residential services. We believe our
approach to developing, pricing, and providing local access services and
bundling different business segment services will allow us to be competitive in
providing those services.
At March 31, 2005, 112,600 lines were in service as compared to approximately
108,600 lines in service at March 31, 2004. We estimate that our 2005 lines in
service represents a statewide market share of approximately 24%. A line in
service is defined as a revenue generating circuit or channel connecting a
customer to the public switched telephone network.
Our access line mix at March 31, 2005 follows:
o Residential lines represent approximately 61% of our lines,
o Business customers represent approximately 36% of our lines, and
o Internet access customers represent approximately 3% of our lines.
In April 2004 we successfully launched our DLPS deployment utilizing our
Anchorage coaxial cable facilities. This service delivery method allows us to
utilize our own cable facilities to provide local access service to our
customers and avoid paying local loop charges to the ILEC. To ensure the
necessary equipment is available to us, we have committed to purchase a certain
number of outdoor, network powered multi-media adapters. At March 31, 2005 we
had approximately 10,400 DLPS lines in service. We plan to continue to deploy
additional DLPS lines during the year ended December 31, 2005.
Approximately 85% of our lines are provided on our own facilities and leased
local loops. Approximately 6% of our lines are provided using the UNE platform
delivery method.
In January 2005 we applied to the RCA to expand our existing certification for
the provision of competitive local service. We applied to provide service in
competition with the existing service provider in five service areas which
include the communities of Ketchikan, Cordova, Chitina, Glenallen, McCarthy,
Mentasta, Tatitlek, Valdez, Delta Junction, Homer, Kenai, Kodiak, Soldotna,
Nenana, North Pole, and the area from Eagle River to Healy. In addition, we have
requested approval to offer local service in six areas covered by our cable
facilities only which include the communities of Wrangell, Petersburg, Sitka,
Seward, Bethel, and Nome.
We plan to offer service in these new areas using a combination of methods. To a
large extent, we plan to use our existing cable network to deliver local
services. Where we do not have cable plant, we may use wireless technologies and
resale of other carrier's services. We may lease portions of an existing
carrier's network or seek wholesale discounts, but our application is not
dependent upon access to either unbundled network elements of the ILEC's network
or wholesale discount rates for resale of ILEC services. We expect the RCA to
decide this application within the six month statutory requirement period.
On June 25, 2004 the RCA issued an order in our arbitration with ACS to revise
the rates, terms, and conditions that govern access to UNEs in the Anchorage
market. The RCA's ruling set rates for numerous elements of ACS' network, the
most significant being the lease rate for local loops. The order initially
increased the loop rate payable to ACS from $14.92 to $19.15 per loop per month.
We immediately filed a petition for reconsideration with the RCA to correct
computational errors and raise
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other issues. On August 20, 2004, the RCA ruled on the petition and
retroactively lowered the loop rate to $18.64 per month. In January 2005 we
appealed the RCA ruling to the Federal District Court arguing that the pricing
and methodology used by ACS and approved by the RCA was flawed and in violation
of federal law. We cannot predict at this time the outcome of the lawsuit.
On February 22, 2005, in a complaint proceeding brought by us, the RCA released
a ruling that Matanuska Telephone Association's ("MTA's") rural exemption for
the areas served by MTA Vision, Inc. had been lifted by virtue of its offering
of video programming services and that we may negotiate and arbitrate with MTA.
We tendered a renewed interconnection request to MTA on February 25, 2005 and
are proceeding with such negotiations. In the event negotiations are
unsuccessful, an arbitration will be requested which must be completed under the
provisions of the 1996 Telecom Act by November 25, 2005.
On May 2, 2005 we tendered an interconnection request to the City of Ketchikan
d/b/a Ketchikan Public Utilities ("KPU"), which had been authorized by the RCA
to provide video programming services through its KPU CommVision division on
April 26, 2005. Under the terms of Section 251(f)(1)(C) of the
Telecommunications Act of 1996 KPU's current rural exemption from negotiation
will be forfeited if, and when, KPU commences offering video programming. Under
the terms of Section 251(f)(1)(B), the RCA must conduct and complete an inquiry
on the continuation of KPU's rural exemption within 120 days of the
interconnection request or August 30, 2005.
Local Access Services Segment Revenues and Cost of Goods Sold
Local access services segment revenues increased 12.7% in 2005 to $13.3 million
primarily due to the following:
o Growth in the average number of lines in service, and
o $787,000 increase in support from the Universal Service Program.
Local access services segment Cost of Goods Sold increased 11.2% to $7.3 million
in 2005 primarily due to the growth in the average number of lines in service
and the increased costs resulting from the RCA's Anchorage UNE arbitration
settlement order in June 2004 which increased the UNE lease rate payable to ACS
from $14.92 to $18.64 per line per month beginning on June 25, 2004.
Additionally, the UNE lease rates payable to ACS in Fairbanks and Juneau
increased from $19.19 to $23.00 and $16.71 to $18.00, respectively, as of
January 1, 2005.
Local Access Services Segment Operating Loss
Local access services segment operating loss increased $127,000 to ($507,000)
from 2004 to 2005 primarily due to the following:
o The 11.2% increase in Cost of Goods Sold to $7.3 million discussed
above,
o A $175,000 increase in local access services segment selling, general
and administrative expenses to $4.9 million, and
o An 80.2% increase in local access services segment depreciation,
amortization and accretion expense to $1.6 million in 2005 as compared
to 2004 primarily due to our investment in local access services
segment equipment and facilities placed into service during the year
ended December 31, 2004 for which a full year of depreciation will be
recorded in the year ended December 31, 2005, and our investment in
local access services segment equipment and
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facilities placed into service during the three months ended March 31,
2005 for which a partial year of depreciation will be recorded in 2005.
The operating loss increase was partially off-set by the 12.7% revenue increase
to $13.3 million in 2005 discussed above.
The local access services segment operating results are negatively affected by
the allocation of all of the benefit of access cost savings to the long-distance
services segment. If the local access services segment received credit for the
access charge reductions recorded by the long-distance services segment, the
local access services segment operating loss would have improved by
approximately $1.8 million and the long-distance services segment operating
income would have been reduced by an equal amount in 2005. Avoided access
charges totaled approximately $1.7 million in 2004.
Internet Services Segment Overview
During 2005 Internet services segment revenues represented 6.9% of consolidated
revenues. We generate Internet services segment revenues from three primary
sources: (1) access product services, including commercial, Internet service
provider, and retail dial-up access; (2) network management services; and (3)
Internet services segment's allocable share of cable modem revenue (a portion of
cable modem revenue is also recognized by our cable services segment).
The primary factors that contribute to year-to-year changes in Internet services
segment revenues include the average number of subscribers to our services
during a given reporting period, the average monthly subscription rates, the
amount of bandwidth purchased by large commercial customers, and the number and
type of additional premium features selected.
Marketing campaigns continue to be deployed targeting residential and commercial
customers featuring bundled products. Our Internet offerings are bundled with
various combinations of our long-distance, cable, and local access services
segments' offerings and provide free or discounted basic or premium Internet
services. Value-added premium Internet features are available for additional
charges.
We compete with a number of Internet service providers in our markets. We
believe our approach to developing, pricing, and providing Internet services
allows us to be competitive in providing those services.
Internet Services Segment Revenues and Cost of Goods Sold
Selected key performance indicators for our Internet services segment follow:
March 31, Percentage
2005 2004 Change
------------ ------------ ---------------
Total Internet subscribers 101,700 100,600 1.1%
Cable modem subscribers 69,300 51,700 34.0%
Dial-up subscribers 32,400 48,900 (33.7%)
Total Internet subscribers are defined by the purchase of Internet access
service regardless of the level of service purchased. If one entity purchases
multiple Internet access service points, that entity is included in our total
Internet subscriber count at a rate equal to the number of access points
purchased. A subscriber with both cable modem and dial-up service is included
once as a cable modem subscriber.
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A dial-up subscriber is defined by the purchase of dial-up Internet service
regardless of the level of service purchased. If one entity purchases multiple
dial-up service access points, each access point is counted as a subscriber.
Total Internet services segment revenues increased 14.1% to $7.3 million in 2005
primarily due to the 12.4% increase in its allocable share of cable modem
revenues to $3.1 million in 2005 as compared to 2004. The increase in cable
modem revenues is primarily due to growth in cable modem subscribers.
Additionally, in 2004 the Internet services segment sold services to Broadband
services (included in the All Other category) and all of the revenue was
eliminated from the Internet services segment. In 2005 Broadband services and
Internet services are operating under a revenue-share agreement that has
resulted in an allocation of revenue between the Internet services segment and
the All Other category. Internet services segment revenue would have been $6.8
million and $6.4 million in 2005 and 2004, respectively, if the change in the
external revenue distribution had not occurred.
Internet services Cost of Goods Sold increased 6.9% to $1.9 million in 2005
associated with increased Internet services segment revenues.
Internet Services Segment Operating Income
Internet services segment operating income increased 104.5% to $1.9 million from
2004 to 2005 primarily due to the 14.1% increase in Internet services segment
revenues to $7.3 million in 2005 as described above and a $353,000 decrease in
selling, general and administrative expenses to $2.4 million.
The operating income increase is partially off-set by the 6.9% increase in Cost
of Goods Sold to $1.9 million as described above and a 18.5% increase in
Internet services segment depreciation, amortization and accretion expense to
$1.1 million in 2005 as compared to 2004 primarily due to our investment in
Internet services segment equipment and facilities placed into service during
the year ended December 31, 2004 for which a full year of depreciation will be
recorded in the year ended December 31, 2005, and our investment in Internet
services segment equipment and facilities placed into service during the three
months ended March 31, 2005 for which a partial year of depreciation will be
recorded in 2005.
All Other Overview
Revenues reported in the All Other category as described in note 5 in the
accompanying "Notes to Interim Condensed Consolidated Financial Statements"
include our Broadband services, managed services, product sales, and cellular
telephone services.
Revenues included in the All Other category represented 14.3% of total revenues
in 2005.
We lease a portion of our 800-mile fiber optic system capacity that extends from
Prudhoe Bay to Valdez via Fairbanks, and provide management and maintenance
services for this capacity to a significant customer. The telecommunications
service agreement is for fifteen years and may be extended for up to two
successive three-year periods and, upon expiration of the extensions, one
additional year. The agreement may be canceled by either party with 180 days
written notice. On March 24, 2005, the lessee announced that they had signed a
contract with a competitor to build a microwave system to run parallel with our
fiber optic cable system. The lessee also announced their intention to utilize
the microwave system in place of our fiber optic cable system. The lessee has
not notified us in writing of
33
their intent to cancel our agreement. Revenue associated with this agreement
totals approximately $13.2 million per year. We are unable to predict the
financial impact of this event on our results of operations, financial position
and cash flows, however we believe that operating income from sales or leases of
capacity and provision of other services on this fiber optic system to other
customers will partially offset operating income reductions that may result if
our contract is cancelled.
All Other Revenues and Cost of Goods Sold
All Other revenues decreased 28.5% to $15.3 million in 2005 primarily due to the
following:
o $6.1 million earned in 2004 from an equipment sale and installation
project, and
o A 1.7% decrease in Broadband services revenue to $7.2 million in 2005
as compared to 2004 due to a change in the allocation of external
revenue between our Internet services segment and Broadband services.
In 2004 all of a certain revenue stream was retained by Broadband
services and the associated internal Cost of Goods Sold purchased from
the Internet services segment was eliminated from the All Other
category. In 2005 Broadband services and Internet services operate
under a revenue-share agreement that has resulted in an allocation of
the revenue between the Internet services segment and the All Other
category. Broadband services revenue would have been $7.7 million and
$7.4 million in 2005 and 2004, respectively, if the change in the
external revenue allocation had not occurred.
All Other Cost of Goods Sold decreased 43.0% to $6.2 million in 2005. The
decrease in All Other Cost of Goods Sold is primarily due to $5.5 million in
costs in 2004 associated with an equipment sale and installation project.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 5.0% to $37.2 million in
2005 primarily due to a $879,000 increase in contract labor and contract
services expenses associated with special projects. As a percentage of total
revenues, selling, general and administrative expenses increased to 34.9% in
2005 from 32.5% in 2004, primarily due to an increase in selling, general and
administrative expenses without a proportional increase in revenues.
Bad Debt Recovery
Bad debt recovery decreased approximately $44,000 to a net recovery of
($353,000) in 2005. The bad debt recovery is primarily due to realization of
approximately $893,000 of the MCI credit through a reduction to bad debt expense
in 2005, as further discussed above in "Long Distance Services Segment
Overview." We realized approximately $1.2 million of the MCI credit through a
reduction to bad debt expense in 2004.
Depreciation, Amortization and Accretion Expense
Depreciation, amortization and accretion expense increased 12.7% to $17.8
million in 2005. The increase is primarily attributed to our $122.9 million
investment in equipment and facilities placed into service during 2004 for which
a full year of depreciation will be recorded in 2005, and the $16.0 million
investment in equipment and facilities placed into service during the three
months ended March 31, 2005 for which a partial year of depreciation will be
recorded in 2005.
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Other Expense, Net
Other expense, net of other income, decreased 46.9% to $8.6 million in 2005
primarily due to following:
o In 2004 we paid bond call premiums totaling $6.1 million to redeem our
old Senior Notes, and
o As a result of redeeming our old Senior Notes in 2004 we recognized
$2.3 million in unamortized old Senior Notes fee expense.
Partially offsetting the decreases described above was an increase in interest
expense of approximately $778,000 in 2005 on our new Senior Notes due to an
increase in the outstanding balance owed, partially off-set by a decreased
interest rate in 2005 as compared to 2004.
Income Tax Expense
GCI, Inc., as a wholly owned subsidiary and member of the GCI controlled group
of corporations, files its income tax returns as part of the consolidated group
of corporations under GCI. Accordingly, the following discussion reflects the
consolidated group's activity and balances.
Income tax expense was $3.5 million in 2005 and $1.3 million in 2004. The change
was due to increased net income before income taxes in 2005 as compared to 2004.
Our effective income tax rate increased from 40.5% in 2004 to 42.7% in 2005 due
to adjustments of deferred tax assets and liabilities in 2004.
At March 31, 2005, we have (1) tax net operating loss carryforwards of
approximately $175.4 million that will begin expiring in 2007 if not utilized,
and (2) alternative minimum tax credit carryforwards of approximately $1.9
million available to offset regular income taxes payable in future years. We
estimate that we will utilize net operating loss carryforwards of approximately
$15.4 million during the year ended December 31, 2005. Our utilization of
certain net operating loss carryforwards is subject to limitations pursuant to
Internal Revenue Code section 382.
Tax benefits associated with recorded deferred tax assets are considered to be
more likely than not realizable through future reversals of existing taxable
temporary differences and future taxable income exclusive of reversing temporary
differences and carryforwards. The amount of deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced which would result in
additional income tax expense. We estimate that our effective annual income tax
rate for financial statement purposes will be 42% to 44% in 2005.
Liquidity and Capital Resources
Cash flows from operating activities totaled $20.0 million in 2005 as compared
to $14.8 million in 2004. The 2005 increase is primarily due to increased cash
flow from our long-distance services, cable services, local access services and
Internet services segments and a $4.1 million decrease in the payment of our
company-wide success sharing bonus in 2005, partially off-set by decreased cash
flows from All Other Services.
Other uses of cash during 2005 included expenditures of $24.4 million for
property and equipment, including construction in progress, and the purchase of
$5.3 million of GCI's common stock.
35
Working capital totaled $25.9 million at March 31, 2005, a $13.2 million
decrease as compared to $39.1 million at December 31, 2004. The decrease is
primarily due to the $8.0 million increase in the portion of our Senior Credit
Facility classified as current maturity at March 31, 2005 as compared to
December 31, 2004, the use of $5.3 million to repurchase shares of GCI's Class A
common stock in 2005 as compared to no such repurchases in 2004, and the use of
cash to fund our capital expenditures during 2005.
We have outstanding Senior Notes of $316.0 million at March 31, 2005. We pay
interest of 7.25% on the Senior Notes. The Senior Notes are carried on our
Consolidated Balance Sheet net of the unamortized portion of the discount, which
is being amortized to Interest Expense over the life of the Senior Notes.
A semi-annual interest payment of approximately $11.6 million was paid in
February 2005; the next semi-annual interest payment will be made in August
2005.
The Senior Notes limit our ability to make cash dividend payments. The Senior
Notes are due in February 2014.
In December 2004 we sold $70.0 million in aggregate principal amount of senior
unsecured debt securities to qualified institutional buyers pursuant to Rule
144A and non-United States persons pursuant to Regulation S. On May 6, 2005, we
commenced an offer to exchange these privately issued Senior Notes that have
been registered under the Securities Act and have otherwise identical terms to
the original Senior Notes privately issued in February 2004 (except for
provisions relating to our obligations to consummate the exchange offer).
We were in compliance with all Senior Notes loan covenants at March 31, 2005.
Our Senior Credit Facility term loan is fully drawn and we have letters of
credit outstanding totaling $5.5 million, which leaves $44.5 million available
to draw under the revolving credit facility at March 31, 2005 if needed. We have
not borrowed under the revolving portion of our Senior Credit Facility in 2005.
Our ability to draw down the revolving portion of our Senior Credit Facility
could be diminished if we are not in compliance with all Senior Credit Facility
covenants or have a material adverse change at the date of the request for the
draw.
We are required to pay down $168,000 and $8.0 million in term loan principal on
our Senior Credit Facility by December 31, 2005 and March 31, 2006,
respectively. All outstanding amounts under our Senior Credit Facility are due
October 31, 2007. We expect to refinance our Senior Credit Facility in 2005.
We were in compliance with all Senior Credit Facility loan covenants at March
31, 2005.
Our expenditures for property and equipment, including construction in progress,
totaled $24.4 million and $25.2 million during the three months ended March 31,
2005 and 2004, respectively. Our capital expenditures requirements in excess of
approximately $25 million per year are largely success driven and are a result
of the progress we are making in the marketplace. We expect our 2005
expenditures for property and equipment for our core operations, including
construction in progress, to total $80.0 million to $85.0 million, depending on
available opportunities and the amount of cash flow we generate during 2005.
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Planned capital expenditures over the next five years include those necessary
for continued expansion of our long-distance, local exchange and Internet
facilities, supplementing our existing network backup facilities, continuing
deployment of DLPS, and upgrades to and expansions of our cable television
plant.
In December 2004 Sprint and Nextel Communications, Inc. announced a merger. The
agreement requires approval of shareholders and anti-trust regulators, as well
as state utility commissions that license phone service. Sprint is one of our
significant customers. We are unable to predict the outcome this merger will
have on us.
In May 2005 Verizon Communications, Inc. agreed to acquire MCI, our major
customer. Any such acquisition will require approval of shareholders and
anti-trust regulators. We are unable to predict the impact that a merger with or
an acquisition of MCI will have upon us, however given the materiality of MCI's
revenues to us, a significant reduction in traffic or pricing could have a
material adverse effect on our financial position, results of operations and
liquidity.
A migration of MCI's or Sprint's traffic off of our network without it being
replaced by other common carriers that interconnect with our network could have
a materially adverse impact on our financial position, results of operations and
liquidity.
Dividends on GCI's Series B preferred stock are payable in cash at the
semi-annual payment dates of April 30 and October 31 of each year. GCI's next
Series B preferred stock dividend is due April 30, 2005.
GCI's Board of Directors has authorized a common stock buyback program for the
repurchase of GCI's Class A and Class B common stock. We pay for the stock
repurchases on GCI's behalf. GCI's Board of Directors authorized us and we
obtained permission from our lenders and GCI's preferred shareholder for up to
$10.0 million of repurchases during the six month period ended June 30, 2005.
During the three month period ended March 31, 2005 we repurchased on GCI's
behalf 571,637 shares of GCI's Class A common stock at a cost of approximately
$5.7 million. We expect to continue the repurchases on GCI's behalf throughout
2005 subject to the availability of free cash flow, borrowing under our credit
facilities, the price of GCI's Class A and Class B common stock and the
requisite consents of our lenders and GCI's preferred shareholder. The
repurchases have and will continue to comply with the restrictions of SEC rule
10b-18.
The long-distance, local access, cable, Internet and wireless services
industries continue to experience substantial competition, regulatory
uncertainty, and continuing technological changes. Our future results of
operations will be affected by our ability to react to changes in the
competitive and regulatory environment and by our ability to fund and implement
new or enhanced technologies. We are unable to determine how competition,
economic conditions, and regulatory and technological changes will affect our
ability to obtain financing under acceptable terms and conditions.
We believe that we will be able to meet our current and long-term liquidity and
capital requirements, and fixed charges through our cash flows from operating
activities, existing cash, cash equivalents, short-term investments, credit
facilities, and other external financing and equity sources. Should cash flows
be insufficient to support additional borrowings and principal payments
scheduled under our existing credit facilities, capital expenditures will likely
be reduced.
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New Accounting Standards
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment,"
requiring all companies to measure compensation cost for all share-based
payments (including employee stock options) at fair value. After consideration
of the SEC's April 2005 amendment of the SFAS No. 123R compliance dates, SFAS
No. 123R is effective for annual periods beginning after June 15, 2005, or
December 15, 2005 for small business issuers. As of January 1, 2006, we will
apply SFAS No. 123R using a modified version of prospective application. Under
that transition method, compensation cost is recognized on or after January 1,
2006 for the portion of outstanding awards for which the requisite service has
not yet been rendered, based on the grant-date fair value of those awards
calculated under SFAS No. 123 for either recognition or pro forma disclosures.
In March 2005 the SEC issued SAB No. 107 expressing the SEC staff's view
regarding the interaction between SFAS No. 123R and certain SEC rules and
regulations and providing the staff's views regarding the valuation of
share-based payment arrangements for public companies. We estimate the
application of SFAS No. 123R will result in an increase in our compensation cost
for all share-based payments of approximately $2.3 million during the year ended
December 31, 2006.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets," which amends APB Opinion No. 29, "Accounting for Nonmonetary
Transactions". The guidance in APB Opinion No. 29 is based on the principle that
exchanges of nonmonetary assets should be measured based on the fair value of
the assets exchanged. The guidance in that Opinion, however, included certain
exceptions to that principle. SFAS No. 153 amends APB Opinion No. 29 to
eliminate the exception for nonmonetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of nonmonetary assets
that do not have commercial substance. A nonmonetary exchange has commercial
substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. We will adopt this statement July 1,
2005 and do not expect it to have a material effect on our results of
operations, financial position and cash flows.
In March 2005, the FASB issued FIN 47, "Accounting for Conditional Asset
Retirement Obligations." FIN 47 clarifies that the term conditional asset
retirement obligation as used in SFAS No. 143, "Accounting for Asset Retirement
Obligations", refers to a legal obligation to perform an asset retirement
activity in which the timing and (or) method of settlement are conditional on a
future event that may or may not be within the control of the entity. The
obligation to perform the asset retirement activity is unconditional even though
uncertainty exists about the timing and (or) method of settlement. Thus, the
timing and (or) method of settlement may be conditional on a future event.
Accordingly, an entity is required to recognize a liability for the fair value
of a conditional asset retirement obligation if the fair value of the liability
can be reasonably estimated. The fair value of a liability for the conditional
asset retirement obligation should be recognized when incurred--generally upon
acquisition, construction, or development and (or) through the normal operation
of the asset. We will adopt FIN 47 for our annual report for the year ended
December 31, 2005 and do not expect it to have a material effect on our results
of operations, financial position and cash flows.
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
38
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 GCI's Audit Committee.
Those policies considered to be critical accounting policies for the three
months ended March 31, 2005 are described below.
o We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required
payments. We also maintain an allowance for doubtful accounts based on
our assessment of the likelihood that our customers will satisfactorily
comply with rules necessary to obtain supplemental funding from the
Universal Service Administration Company ("USAC") for services provided
by us under our packaged communications offerings to rural hospitals,
health clinics and school districts. We base our estimates on the aging
of our accounts receivable balances, financial health of specific
customers, regional economic data, changes in our collections process,
our customers' compliance with USAC rules, and our historical write-off
experience, net of recoveries. If the financial condition of our
customers were to deteriorate or if they are unable to emerge from
reorganization proceedings, resulting in an impairment of their ability
to make payments, additional allowances may be required. If their
financial condition improves or they emerge successfully from
reorganization proceedings, allowances may be reduced. Such allowance
changes could have a material effect on our consolidated financial
condition and results of operations.
o We record all assets and liabilities acquired in purchase acquisitions,
including goodwill and other intangibles, at fair value as required by
SFAS No. 141, "Business Combinations." Goodwill and indefinite-lived
assets such as our cable certificates are not amortized but are
subject, at a minimum, to annual tests for impairment and quarterly
evaluations of whether events and circumstances continue to support an
indefinite useful life as required by SFAS No. 142. Other intangible
assets are amortized over their estimated useful lives using the
straight-line method, and are subject to impairment if events or
circumstances indicate a possible inability to realize the carrying
amount as required by SFAS No. 142. The initial goodwill and other
intangibles recorded and subsequent impairment analysis requires
management to make subjective judgments concerning estimates of the
applicability of quoted market prices in active markets and, if quoted
market prices are not available and/or are not applicable, how the
acquired asset will perform in the future using a discounted cash flow
analysis. Estimated cash flows may extend beyond ten years and, by
their nature, are difficult to determine over an extended timeframe.
Events and factors that may significantly affect the estimates include,
among others, competitive forces, customer behaviors and attrition,
changes in revenue growth trends, cost structures and technology, and
changes in discount rates, performance compared to peers,
39
material and ongoing negative economic trends, and specific industry or
market sector conditions. In determining the reasonableness of cash
flow estimates, we review historical performance of the underlying
asset or similar assets in an effort to improve assumptions utilized in
our estimates. In assessing the fair value of goodwill and other
intangibles, we may consider other information to validate the
reasonableness of our valuations including third-party assessments.
These evaluations could result in a change in useful lives in future
periods and could result in write-down of the value of intangible
assets. Our cable certificate and goodwill assets are our only
indefinite-lived intangible assets and because of their significance to
our consolidated balance sheet, our annual and quarterly impairment
analyses and quarterly evaluations of remaining useful lives are
critical. Any changes in key assumptions about the business and its
prospects, changes in market conditions or other externalities, or
recognition of previously unrecognized intangible assets for impairment
testing purposes could result in an impairment charge and such a charge
could have a material adverse effect on our consolidated results of
operations.
o We estimate unbilled long-distance services segment Cost of Goods Sold
based upon minutes of use carried through our network and established
rates. We estimate unbilled costs for new circuits and services, and
network changes that result in traffic routing changes or a change in
carriers. Carriers that provide service to us regularly make network
changes that can lead to new, revised or corrected billings. Such
estimates are revised or removed when subsequent billings are received,
payments are made, billing matters are researched and resolved,
tariffed billing periods lapse, or when disputed charges are resolved.
Revisions to previous estimates could either increase or decrease costs
in the year in which the estimate is revised which could have a
material effect on our consolidated financial condition and results of
operations.
o GCI, Inc., as a wholly owned subsidiary and member of the GCI
controlled group of corporations, files its income tax returns as part
of the consolidated group of corporations under GCI. Accordingly, the
following discussion reflects the consolidated group's activity and
balances. 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 $71.8 million associated with income tax net operating
losses that were generated from 1990 to 2003, and that expire from 2007
to 2024. Pre-acquisition income tax net operating losses associated
with acquired companies are subject to additional deductibility limits.
We have recorded deferred tax assets of approximately $1.9 million
associated with alternative minimum tax credits that do not expire.
Significant management judgment is required in developing our provision
for income taxes, including the determination of deferred tax assets
and liabilities and any valuation allowances that may be required
against the deferred tax assets. In conjunction with certain 1996
acquisitions, GCI determined that approximately $20.0 million of the
acquired net operating losses would not be utilized for income tax
purposes, and elected with its December 31, 1996 income tax returns to
forego utilization of such acquired losses. Deferred tax assets were
not recorded associated with the foregone losses and, accordingly, no
valuation allowance was provided. We have not recorded a valuation
allowance on the deferred tax assets as of March 31, 2005 based on
management's belief that future reversals of existing taxable temporary
differences and estimated future taxable income exclusive of reversing
temporary differences and carryforwards, will, more likely than not, be
sufficient to realize the benefit of these assets
40
over time. In the event that actual results differ from these estimates
or if our historical trends change, we may be required to record a
valuation allowance on deferred tax assets, which could have a material
adverse effect on our consolidated financial position or results of
operations.
Other significant accounting policies, not involving the same level of
measurement uncertainties as those discussed above, are nevertheless important
to an understanding of the financial statements. Policies related to revenue
recognition and financial instruments require difficult judgments on complex
matters that are often subject to multiple sources of authoritative guidance.
Certain of these matters are among topics currently under reexamination by
accounting standards setters and regulators. No specific conclusions reached by
these standard setters appear likely to cause a material change in our
accounting policies, although outcomes cannot be predicted with confidence. A
complete discussion of our significant accounting policies can be found in note
1 in the "Notes to Consolidated Financial Statements" of our annual report on
Form 10-K for the year ended December 31, 2004.
Geographic Concentration and the Alaska Economy
We offer voice and data telecommunication and video services to customers
primarily throughout Alaska. Because of this geographic concentration, growth of
our business and of our operations depends upon economic conditions in Alaska.
The economy of Alaska is dependent upon the natural resource industries, and in
particular oil production, as well as investment earnings, tourism, government,
and United States military spending. Any deterioration in these markets could
have an adverse impact on us. All of the federal funding and the majority of
investment revenues are dedicated for specific purposes, leaving oil revenues as
the primary source of general operating revenues. In fiscal 2004 the State of
Alaska reported that oil revenues, federal funding and investment revenues
supplied 28%, 23% and 41%, respectively, of the state's total revenues. In
fiscal 2005 state economists forecast that Alaska's oil revenues, federal
funding and investment revenues will supply 33%, 34% and 23%, respectively, of
the state's total projected revenues.
The volume of oil transported by the TransAlaska Oil Pipeline System over the
past 20 years has been as high as 2.0 million barrels per day in fiscal 1988.
Production has been declining over the last several years with an average of
0.980 million barrels produced per day in fiscal 2004. The state forecasts the
production rate to decline from 0.920 million barrels produced per day in fiscal
2005 to 0.833 million barrels produced per day in fiscal 2015.
Market prices for North Slope oil averaged $31.74 in fiscal 2004 and are
forecasted to average $41.75 in fiscal 2005. The closing price per barrel was
$49.20 on April 25, 2005. To the extent that actual oil prices vary materially
from the state's projected prices, the state's projected revenues and deficits
will change. When the price of oil is $30.00 per barrel or greater, every $1
change in the price per barrel of oil is forecasted to result in an
approximately $60.0 million change in the state's fiscal 2005 revenue. The
production policy of the Organization of Petroleum Exporting Countries and its
ability to continue to act in concert represents a key uncertainty in the
state's revenue forecast.
The State of Alaska maintains the Constitutional Budget Reserve Fund that is
intended to fund budgetary shortfalls. If the state's current projections are
realized, the Constitutional Budget Reserve Fund will be depleted in 2010. The
date the Constitutional Budget Reserve Fund is depleted is highly influenced by
the price of oil. If the fund is depleted, aggressive state action will be
necessary to increase revenues and reduce spending in order to balance the
budget. The governor of the State of Alaska and the Alaska legislature continue
to evaluate cost cutting and revenue enhancing measures.
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Should new oil discoveries or developments not materialize or the price of oil
become depressed, the long term trend of continued decline in oil production
from the Prudhoe Bay area is inevitable with a corresponding adverse impact on
the economy of the state, in general, and on demand for telecommunications and
cable television services, and, therefore, on us, in particular. Periodically
there are renewed efforts to allow exploration and development in the Arctic
National Wildlife Refuge ("ANWR"). The United States Energy Information Agency
estimates it could take nine years to begin oil field drilling after approval of
ANWR exploration.
Deployment of a natural gas pipeline from the State of Alaska's North Slope to
the Lower 48 States has been proposed to supplement natural gas supplies. A
competing natural gas pipeline through Canada has also been proposed. The
economic viability of a natural gas pipeline depends upon the price of and
demand for natural gas. Either project could have a positive impact on the State
of Alaska's revenues and could provide a substantial stimulus to the Alaska
economy. In October 2004 both houses of Congress passed and the President signed
legislation allowing loan guarantees of up to $18.0 billion, certain favorable
income tax provisions and tax credits, and expedited permitting and judicial
review for the construction of an Alaska natural gas pipeline. To support the
construction of a natural gas pipeline, the governor of the State of Alaska has
announced that he believes the state must assume some level of shipper risk,
serve as an equity partner or both. The State of Alaska is actively negotiating
applications to construct a natural gas pipeline.
Development of the ballistic missile defense system project may have a
significant impact on Alaskan telecommunication requirements and the Alaska
economy. The system is a fixed, land-based, non-nuclear missile defense system
with a land and space based detection system capable of responding to limited
strategic ballistic missile threats to the United States. The system includes
deployment of up to 100 ground-based interceptor silos and battle management
command and control facilities at Fort Greely, Alaska.
The United States Army Corps of Engineers awarded a construction contract in
2002 for test bed facilities. The contract is reported to contain basic
requirements and various options that could amount to $250 million in
construction, or possibly more, if all items are executed. Construction began on
the Fort Greely test bed in 2002. The first ground-based missile interceptor was
placed in an underground silo on July 22, 2004. The Missile Defense Agency is
reported to expect to have up to ten more interceptors emplaced by the end of
2005.
Tourism, air cargo, and service sectors have helped offset the prevailing
pattern of oil industry downsizing that has occurred during much of the last
several years.
We have, since our entry into the telecommunication marketplace, aggressively
marketed our services to seek a larger share of the available market. The
customer base in Alaska is limited, however, with a population of approximately
644,000 people. The State of Alaska's population is distributed as follows:
o 42% are located in the Municipality of Anchorage,
o 13% are located in the Fairbanks North Star Borough,
o 10% are located in the Matanuska-Susitna Borough,
o 5% are located in the City and Borough of Juneau, and
o The remaining 30% are located in other communities across the State of
Alaska.
42
No assurance can be given that the driving forces in the Alaska economy, and in
particular, oil production, will continue at appropriate levels to provide an
environment for expanded economic activity.
No assurance can be given that oil companies doing business in Alaska will be
successful in discovering new fields or further developing existing fields which
are economic to develop and produce oil with access to the pipeline or other
means of transport to market, even with a reduced level of royalties. We are not
able to predict the effect of changes in the price and production volumes of
North Slope oil on Alaska's economy or on us.
Seasonality
Long-distance services segment revenues (primarily those derived from our other
common carrier customers) have historically been highest in the summer months
because of temporary population increases attributable to tourism and increased
seasonal economic activity such as construction, commercial fishing, and oil and
gas activities. Cable services segment revenues are higher in the winter months
because consumers spend more time at home and tend to watch more television
during these months. The local access and Internet services segments do not
exhibit significant seasonality. Our ability to implement construction projects
is also hampered during the winter months because of cold temperatures, snow and
short daylight hours.
Schedule of Certain Known Contractual Obligations
The following table details future projected payments associated with our
certain known contractual obligations as of December 31, 2004, the date of our
most recent fiscal year-end balance sheet.
Payments Due by Period
----------------------------------------------------------------
More
Less than 1 1 to 3 4 to 5 Than 5
Total Year Years Years Years
------------- ----------- ------------ ------------ ------------
(Amounts in thousands)
Long-term debt $ 441,168 168 121,000 --- 320,000
Interest on long-term debt 220,400 23,200 46,400 46,400 104,400
Capital lease obligations, including
interest 53,560 9,461 17,849 25,798 452
Operating lease commitments 72,771 14,564 21,080 15,070 22,057
Redeemable preferred stock 4,249 --- --- --- 4,249
Purchase obligations 43,168 24,076 15,183 3,909 ---
------------- ----------- ------------ ------------ ------------
Total contractual obligations $ 835,316 71,469 221,512 91,177 451,158
============= =========== ============ ============ ============
For long-term debt included in the above table, we have included principal
payments on our Senior Credit Facility and on our Senior Notes. Interest on
amounts outstanding under our Senior Credit Facility is based on variable rates
and therefore the amount is not determinable. Our Senior Notes require
semi-annual interest payments of $11.6 million through August 2014. For a
discussion of our long-term debt see note 7 in the "Notes to Consolidated
Financial Statements" included in Part II of our December 31, 2004 annual report
on Form 10-K.
43
For a discussion of our capital and operating leases, see note 15 in the "Notes
to Consolidated Financial Statements" included in Part II of our December 31,
2004 annual report on Form 10-K.
We have included only the maturity redemption amount on GCI's Series B preferred
stock (cash dividends are excluded). GCI's Series B preferred stock is
convertible at $5.55 per share into GCI Class A common stock and the dividends
are payable semi-annually at the rate of 8.5%, plus accrued but unpaid
dividends, in cash. Mandatory redemption is required 12 years from the date of
closing. For more information about GCI's redeemable preferred stock, see Note
1(e) in the "Notes to Consolidated Financial Statements" included in Part II of
GCI's December 31, 2004 annual report on Form 10-K.
Purchase obligations include a remaining DLPS equipment purchase commitment of
$13.5 million, a remaining $13.9 million commitment for our Alaska Airlines
agreement as further described in note 15 in the "Notes to Consolidated
Financial Statements" included in Part II of our December 31, 2004 annual report
on Form 10-K, and a $411,000 maintenance contract commitment. The contracts
associated with these commitments are non-cancelable. Purchase obligations also
include open purchase orders for goods and services for capital projects and
normal operations totaling $15.4 million which are not included in our
Consolidated Balance Sheets at December 31, 2004, because the goods had not been
received or the services had not been performed at December 31, 2004. The open
purchase orders are cancelable.
PART I.
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
We are exposed to various types of market risk in the normal course of business,
including the impact of interest rate changes. We do not hold derivatives for
trading purposes.
Our Senior Credit Facility carries interest rate risk. Amounts borrowed under
this Agreement bear interest at Libor plus 2.25% or less depending upon our
Total Leverage Ratio (as defined). Should the Libor rate change, our interest
expense will increase or decrease accordingly. As of March 31, 2005, we have
borrowed $121.2 million subject to interest rate risk. On this amount, a 1%
increase in the interest rate would result in $1,212,000 in additional gross
interest cost on an annualized basis.
Our Satellite Transponder Capital Lease carries interest rate risk. Amounts
borrowed under this Agreement bear interest at Libor plus 3.25%. Should the
Libor rate change, our interest expense will increase or decrease accordingly.
As of March 31, 2005, we have borrowed $37.2 million subject to interest rate
risk. On this amount, a 1% increase in the interest rate would result in
$372,000 in additional gross interest cost on an annualized basis.
PART I.
ITEM 4.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, we
carried out an evaluation of the effectiveness of the design and operation of
our "disclosure controls and procedures" (as defined
44
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.
Changes in Internal Controls
There were no changes in our internal control over financial reporting during
the first quarter of 2005 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
PART II.
ITEM 1.
LEGAL PROCEEDINGS
Information regarding 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.
45
PART II.
ITEM 6.
EXHIBITS
Exhibit No. Description
--------------------------------------------------------------------------------------------------------
10.126 Audit Committee Charter (as revised by the board of directors of General
Communication, Inc. effective as of February 3, 2005)
10.127 Nominating and Corporate Governance Committee Charter (as revised by the board of
directors of General Communication, Inc. effective as of February 3, 2005)
10.128 Fifth amendment to contract for Alaska Access Services between Sprint Communications
Company L.P. and General Communication, Inc. and its wholly owned subsidiary GCI
Communication Corp. dated January 22, 2005 (1)
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
-------------------------
(1) CONFIDENTIAL PORTION has been omitted pursuant to a request for
confidential treatment by us to, and the material has been
separately filed with, the Securities and Exchange Commission.
Each omitted Confidential Portion is marked by three asterisks.
-------------------------
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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.
GCI, INC.
Signature Title Date
- -------------------------------------- -------------------------------------------- -----------------------
/s/ Ronald A. Duncan May 5, 2005
- -------------------------------------- President and Director -----------------------
Ronald A. Duncan (Principal Executive Officer)
/s/ G. Wilson Hughes May 5, 2005
- -------------------------------------- Vice President and Director -----------------------
G. Wilson Hughes
/s/ John M. Lowber May 5, 2005
- -------------------------------------- Secretary, Treasurer and Director -----------------------
John M. Lowber (Principal Financial and Accounting Officer)
47