GENERAL COMMUNICATION INC - 10-Q Quarterly Report

QuickLinks -- Click here to rapidly navigate through this document

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)

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2005

o	TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File No. 0-15279

GENERAL COMMUNICATION, INC.
(Exact name of registrant as specified in its charter)

STATE OF ALASKA		92-0072737
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer 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 (1) 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 ý No o.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý No o.

The number of shares outstanding of the registrant's classes of common stock as of April 29, 2005 was:

51,570,454 shares of Class A common stock; and
3,859,518 shares of Class B common stock.

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 1.	Consolidated Balance Sheets as of March 31, 2005 (unaudited) and December 31, 2004	5
		Consolidated Statements of Income for the three months ended March 31, 2005 (unaudited) and 2004 (unaudited)	7
		Consolidated Statements of Stockholders' Equity for the three months ended March 31, 2005 (unaudited) and 2004 (unaudited)	8
		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	21
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	41
	Item 4.	Controls and Procedures	42
PART II. OTHER INFORMATION
	Item 1.	Legal Proceedings	43
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43
	Item 6.	Exhibits	44
	Other items are omitted, as they are not applicable.
SIGNATURES			45

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.

•: 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;
•: 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;
•: The outcome of our negotiations with Incumbent Local Exchange Carriers ("ILECs") and state regulatory arbitrations and approvals with respect to interconnection agreements;
•: 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;
•: Changes in regulations governing Unbundled Network Elements ("UNEs");
•: Changes in the treatment or classification of services using a particular technology, including Internet protocol;
•: 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;
•: The extent and pace at which different competitive environments develop for each segment of our business;
•: 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;
•: Competitor responses to our products and services and overall market acceptance of such products and services;
•: 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;

•: Success and market acceptance for new initiatives, some of which are untested;
•: 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;
•: Start-up costs associated with entering new markets, including advertising and promotional efforts;
•: Risks relating to the operations of new systems and technologies and applications to support new initiatives;
•: The risks associated with technological requirements, technology substitution and changes and other technological developments;
•: Prolonged service interruptions which could affect our business;
•: Development and financing of communications, local telephone, wireless, Internet and cable networks and services;
•: 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;
•: Availability of qualified personnel;
•: Uncertainties in federal military spending levels in markets in which we operate;
•: Uncertainties surrounding the 2005 base realignment and closure program and potential military base closures in markets in which we operate;
•: 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;
•: 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
•: Other risks detailed from time to time in our periodic reports filed with the SEC.

You should not place undue reliance on any such forward-looking statements. Further, any forward-looking statement, and such risks, uncertainties and other factors speak only as of the date on which they were originally made and we expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement to reflect any change in our expectations with regard to those statements or any other change in events, conditions or circumstances on which any such statement is based, except as required by law. New factors emerge from time to time, and it is not possible for us to predict what factors will arise or when. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

GENERAL COMMUNICATION, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

			March 31, 2005		December 31, 2004
			(Unaudited)
			(Amounts in thousands)
ASSETS
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.

GENERAL COMMUNICATION, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Continued)

			March 31, 2005			December 31, 2004
			(Unaudited)
			(Amounts in thousands)
LIABILITIES, REDEEMABLE PREFERRED STOCK, AND STOCKHOLDERS' EQUITY
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
	Accrued liabilities			6,543		6,849
	Accrued interest			2,900		8,747
	Subscriber deposits			409		437

		Total current liabilities		83,829		82,785
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		605,740		610,672

Redeemable preferred stock				4,249		4,249

Stockholders' equity:
	Common stock (no par):
		Class A. Authorized 100,000 shares; issued 51,566 and 51,825 shares at March 31, 2005 and December 31, 2004, respectively		183,943		186,883
		Class B. Authorized 10,000 shares; issued 3,861 and 3,862 shares at March 31, 2005 and December 31, 2004, respectively; convertible on a share-per-share basis into Class A common stock		3,248		3,248
		Less cost of 288 Class A common shares held in treasury at March 31, 2005 and December 31, 2004		(1,734	)	(1,702	)
Paid-in capital				15,067		14,957
Notes receivable with related parties issued upon stock option exercise				(3,016	)	(3,016	)
Retained earnings				36,361		33,900

		Total stockholders' equity		233,869		234,270

Commitments and contingencies
		Total liabilities, redeemable preferred stock, and stockholders' equity	$	843,858		849,191

See accompanying notes to interim condensed consolidated financial statements.

GENERAL COMMUNICATION, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

			Three Months Ended March 31,
			2005			2004
			(Amounts in thousands, except per share amounts)
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
Preferred stock dividends				93		484

		Net income available to common shareholders	$	4,570		1,441

Basic net income per common share			$	0.08		0.03

Diluted net income per common share			$	0.08		0.02

See accompanying notes to interim condensed consolidated financial statements.

GENERAL COMMUNICATION, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

THREE MONTHS ENDED MARCH 31, 2005 AND 2004

(Unaudited)

			Class A Common Stock		Class B Common Stock		Class A Shares Held in Treasury		Paid-in Capital	Notes Receivable Issued to Related Parties		Retained Earnings		Accumulated Other Comprehensive Loss		Total
			(Amounts in thousands)
Balances at December 31, 2003			$	202,362	3,269		(1,917	)	12,836	(4,971	)	15,371		(308	)	226,642
Components of comprehensive income:
	Net income			—	—		—		—	—		1,925		—		1,925
	Change in fair value of cash flow hedge, net of change in income tax liability of $58			—	—		—		—	—		—		95		95

		Comprehensive income														2,020
Tax effect of excess stock compensation expense for tax purposes over amounts recognized for financial reporting purposes				—	—		—		260	—		—		—		260
Shares issued under stock option plan				995	—		—		—	—		—		—		995
Amortization of the excess of GCI stock market value over stock option exercise cost on date of stock option grant				—	—		—		77	—		—		—		77
Class B shares converted to Class A				2	(2	)	—		—	—		—		—		—
Conversion of Series B preferred stock to Class A common stock				3,092	—		—		—	—		—		—		3,092
Payments received on notes receivable issued to related parties upon stock option exercise				—	—		—		—	601		—		—		601
Preferred stock dividends				—	—		—		—	—		(484	)	—		(484	)

Balances at March 31, 2004			$	206,451	3,267		(1,917	)	13,173	(4,370	)	16,812		(213	)	233,203

See accompanying notes to interim condensed consolidated financial statements.

GENERAL COMMUNICATION, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

THREE MONTHS ENDED MARCH 31, 2005 AND 2004

(Unaudited)

(Continued)

		Class A Common Stock			Class B Common Stock	Class A Shares Held in Treasury		Paid-in Capital	Notes Receivable Issued to Related Parties		Retained Earnings		Total
		(Amounts in thousands)
Balances at December 31, 2004		$	186,883		3,248	(1,702	)	14,957	(3,016	)	33,900		234,270
Components of comprehensive income:
	Net income		—		—	—		—	—		4,663		4,663
Tax effect of excess stock compensation expense for tax purposes over amounts recognized for financial reporting purposes			—		—	—		62	—		—		62
Common stock repurchases			—		—	—		—	—		(5,256	)	(5,256	)
Common stock retirements			(3,147	)	—	—		—	—		3,147		—
Shares issued under stock option plan			207		—	—		—	—		—		207
Amortization of the excess of GCI stock market value over stock option exercise cost on date of stock option grant			—		—	—		48	—		—		48
Purchase of treasury stock			—		—	(32	)	—	—		—		(32	)
Preferred stock dividends			—		—	—		—	—		(93	)	(93	)

Balances at March 31, 2005		$	183,943		3,248	(1,734	)	15,067	(3,016	)	36,361		233,869

See accompanying notes to interim condensed consolidated financial statements.

GENERAL COMMUNICATION, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

THREE MONTHS ended MARCH 31, 2005 AND 2004

(Unaudited)

				2005			2004
				(Amounts in thousands)
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			(3,638	)	(14,554	)

			Net cash provided by operating activities		22,893		13,780

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:
	Purchase of common stock to be retired				(5,256	)	—
	Repayments of capital lease obligations				(1,583	)	(409	)
	Proceeds from common stock issuance				207		995
	Payment of debt issuance costs				(43	)	(6,429	)
	Purchase of treasury stock				(32	)	—
	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	)
	Payment received on note receivable from related parties issued upon stock option exercise				—		601
	Payment of preferred stock dividends				—		(150	)

		Net cash provided by (used in) financing activities			(6,707	)	10,360

		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.

GENERAL COMMUNICATION, INC. AND SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements

(Unaudited)

The accompanying unaudited interim condensed consolidated financial statements include the accounts of General Communication, Inc. ("GCI") and its subsidiaries and have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. They should