UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-15279
GENERAL COMMUNICATION, INC.
(Exact name of registrant as specified in its charter)
ALASKA 92-0072737
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2550 Denali Street Suite 1000 Anchorage, Alaska 99503
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (907) 868-5600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A common stock Class B common stock
(Title of class) (Title of class)
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 X No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer. Yes X No
The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the average bid and asked prices of such
stock as of the close of trading on as of the last business day of the
registrant's most recently completed second fiscal quarter of June 30, 2003 was
approximately $335,357,000.
The number of shares outstanding of the registrant's common
stock as of February 24, 2004, was:
Class A common stock - 53,271,720 shares; and,
Class B common stock - 3,865,580 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's definitive Proxy Statement to be filed
pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended,
in connection with the Annual Meeting of Stockholders of the registrant to be
held on June 10, 2004 are incorporated by reference into Part III of this
report.
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GENERAL COMMUNICATION, INC.
2003 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Glossary....................................................................................................................3
Cautionary Statement Regarding Forward-Looking Statements..................................................................11
Part I.....................................................................................................................13
Item 1. Business.......................................................................................................13
Item 2. Properties.....................................................................................................56
Item 3. Legal Proceedings..............................................................................................59
Item 4. Submissions of Matters to a Vote of Security Holders...........................................................59
Part II....................................................................................................................59
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters......................................59
Item 6. Selected Financial Data........................................................................................61
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..........................62
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.....................................................91
Item 8. Consolidated Financial Statements and Supplementary Data.......................................................91
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure...........................91
Item 9A. Controls and Procedures........................................................................................91
Part III...................................................................................................................92
Items 10, 11, 12, 13 and 14 are incorporated herein by reference from our
Proxy Statement for our 2004 Annual Shareholders' meeting............................................................92
Part IV....................................................................................................................93
Item 15. Exhibits, Consolidated Financial Statement Schedules, and Reports on Form 8-K..................................93
Item 15(b). Reports on Form 8-K.......................................................................................141
Item 15(c). Exhibits..................................................................................................141
SIGNATURES................................................................................................................147
This Annual Report on Form 10-K is for the year ending December 31, 2003. This
Annual Report modifies and supersedes documents filed prior to this Annual
Report. The Securities and Exchange Commission ("SEC") allows us to "incorporate
by reference" information that we file with them, which means that we can
disclose important information to you by referring you directly to those
documents. Information incorporated by reference is considered to be part of
this Annual Report. In addition, information that we file with the SEC in the
future will automatically update and supersede information contained in this
Annual Report.
2
Glossary
Access Charges -- Expenses incurred by an IXC and paid to LECs for accessing the
local networks of the LECs in order to originate and terminate long-distance
calls and provide the customer connection for Private Line services.
ACS -- Alaska Communications Systems Group, Inc., previously ALEC Holdings, Inc.
- -- ACS, one of our competitors, includes acquired properties from Century
Telephone Enterprises, Inc. and the Anchorage Telephone Utility ("ATU"). ATU
provided local telephone and long distance services primarily in Anchorage and
cellular telephone services in Anchorage and other Alaska markets.
Alaska United or AULP -- Alaska United Fiber System Partnership -- an Alaska
partnership, indirectly wholly owned by the Company. Alaska United was organized
to construct and operate fiber optic cable systems connecting various locations
in Alaska and the Lower 49 States and foreign countries through Seattle,
Washington.
AT&T -- AT&T Corp. -- A long distance carrier, parent company to AT&T Alascom.
AT&T Alascom -- Alascom, Inc. -- A wholly owned subsidiary of AT&T and one of
our competitors.
AULP East -- An undersea fiber optic cable system connecting Whittier, Valdez
and Juneau, Alaska and Seattle, Washington, which was placed into service in
February 1999.
AULP West -- A new undersea fiber optic cable system under construction
connecting Seward, Alaska to Warrenton, Oregon with a scheduled ready for
service date of April 30, 2004.
Basic Service -- The basic service tier includes, at a minimum, signals of local
television broadcast stations, any public, educational, and governmental
programming required by the franchise to be carried on the basic tier, and any
additional video programming service added to the basic tier by the cable
operator.
BOC -- Bell System Operating Company -- A LEC owned by any of the remaining
Regional Bell Operating Companies, which are holding companies established
following the AT&T Divestiture Decree to serve as parent companies for the BOCs.
Backbone -- A centralized high-speed network that interconnects smaller,
independent networks.
Bandwidth -- A range or band of the frequency spectrum, measured in Hertz (Hz).
It has become vogue, though strictly a misuse of the term, to say bandwidth is
the number of bits of data per second that can move through a communications
medium.
Broadband -- A high-capacity communications circuit/path, usually implying
speeds of 256 kilobits per second ("kbps") or better.
CAP -- Competitive Access Provider -- A company that provides its customers with
an alternative to the LEC for local transport of Private Line and special access
communications services.
Central Offices -- The switching centers or central switching facilities of the
LECs.
CLEC -- Competitive Local Exchange Carrier -- A company that provides its
customers with an alternative to the ILEC for local transport of communications
services, as allowed under the 1996 Telecom Act.
Co-Carrier Status -- A regulatory scheme under which the ILEC is required to
integrate new, competing providers of local exchange service, into the systems
of traffic exchange, inter-carrier compensation, and other inter-carrier
relationships that already exist among LECs in most jurisdictions.
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Collocation -- The ability of a CAP or CLEC to connect its network to the LEC's
central offices. Physical collocation occurs when a connecting carrier places
its network connection equipment inside the LEC's central offices. Virtual
collocation is an alternative to physical collocation pursuant to which the LEC
permits a CAP or CLEC to connect its network to the LEC's central offices on
comparable terms, even though the CAP's or CLEC's network connection equipment
is not physically located inside the central offices.
The Company -- GCI and its direct and indirect subsidiaries, also referred to as
"we," "us" and "our."
Compression or Decompression -- A method of encoding, decoding and processing
signals that allows transmission (or storage) of more information than the
medium would otherwise be able to support. Both compression and decompression
require processing capacity, but with many products, the signal delay time due
to processing is not noticeable.
DAMA -- Demand Assigned Multiple Access -- The Company's digital satellite earth
station technology that allows calls to be made between remote villages using
only one satellite hop thereby reducing satellite delay and capacity
requirements while improving quality.
Dark Fiber -- An inactive fiber-optic strand without electronics or optronics.
Dark fiber is not connected to transmitters, receivers and regenerators.
DBS -- Direct Broadcast Satellite -- Subscription television service obtained
from satellite transmissions using frequency bands that are internationally
allocated to the broadcast satellite services. Direct-to-home service such as
DBS has its origins in the large direct-to-home satellite antennas that were
first introduced in the 1970's for the reception of video programming
transmitted via satellite. Because these first-generation direct-to-home
satellites operated in the C-band frequencies at low power, direct-to-home
satellite antennas, or dishes, as they are also known, generally needed to be
seven to ten feet in diameter in order to receive the signals being transmitted.
More recently, licensees have been using the Ku and extended Ku-bands to provide
direct-to-home services enabling subscribers to use a receiving home satellite
parabolic dish typically less than one meter in diameter. The major providers of
DBS are currently DirecTV and EchoStar (marketed as the DISH Network).
DS-0 -- A data communications circuit that carries data at the rate of 64 kbps.
DS-1 -- A data communications circuit that carries data at the rate of 1.544
Megabits per second (Mb/s), often interchangeably referred to as a T-1.
DS-3 -- A data communications circuit that is equivalent to 28 multiplexed T-1
channels capable of transmitting data at 44.736 Mbps (sometimes called a T-3).
Dedicated -- Communications lines dedicated or reserved for use by particular
customers.
Digital -- A method of storing, processing and transmitting information through
the use of distinct electronic or optical pulses that represent the binary
digits 0 and 1. Digital transmission and switching technologies employ a
sequence of these pulses to represent information as opposed to the continuously
variable analog signal. Digital transmission is advantageous in that it is more
resistant to the signal degrading effects of noise (such as graininess or snow
in the case of video transmission, or static or other background distortion in
the case of audio transmission).
DLC -- Digital Loop Carrier -- A digital transmission system designed for
subscriber loop plant. Multiplexes a plurality of circuits onto very few wires
or onto a single fiber pair.
DLPS -- Digital Local Phone Service -- A term we use referring to our deployment
of voice telephone service utilizing our hybrid-fiber coax cable facilities.
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DOCSIS 1.1 -- Data-Over-Cable Service Interface Specification 1.1 -- An industry
specification that provides for high-speed Internet service tiers, using
techniques known as data fragmentation and quality of service. Under this
specification, which is compatible with the existing DOCSIS 1.0 specification,
cable operators can deliver high-speed Internet services simultaneously over the
same plant and in a path parallel to core video services.
DSL -- Digital Subscriber Line -- Technology that allows Internet access and
other high-speed data services at data transmission speeds greater than those of
modems over conventional telephone lines.
Equal Access -- Connection provided by a LEC permitting a customer to be
automatically connected to the IXC of the customer's choice when the customer
dials "1". Also refers to a generic concept under which the BOCs must provide
access services to AT&T's competitors that are equivalent to those provided to
AT&T.
FCC -- Federal Communications Commission -- A federal regulatory body empowered
to establish and enforce rules and regulations governing public utility
companies and others, such as the Company.
Frame Relay -- A wideband (64 kilobits per second to 1.544 Mbps) packet-based
data interface standard that transmits bursts of data over WANs. Frame-relay
packets vary in length from 7 to 1024 bytes. Data oriented, it is generally not
used for voice or video.
FTC -- Federal Trade Commission -- A federal regulatory body empowered to
establish and enforce rules and regulations governing companies involved in
trade and commerce.
GCC -- GCI Communication Corp. -- An Alaska corporation and a wholly owned
subsidiary of Holdings.
GCI -- General Communication, Inc. -- An Alaska corporation and the Registrant.
GCI, Inc. -- A wholly owned subsidiary of GCI, an Alaska corporation and issuer
of $180 million of senior notes (increased to $250 million in the first quarter
of 2004).
GFCC -- GCI Fiber Communication Co., Inc. -- An Alaska corporation and a wholly
owned subsidiary of Holdings. Holdings acquired all minority ownership interests
in GFCC in the third and fourth quarters of 2002. GFCC owns and operates a fiber
optic cable system constructed along the trans-Alaska oil pipeline corridor
extending from Prudhoe Bay to Valdez, Alaska. See Kanas.
Holdings -- GCI Holdings, Inc. -- A wholly owned subsidiary of GCI, Inc., an
Alaska corporation and party to the Company's Senior Credit Facility.
HDTV -- High-Definition Television -- A digital television format delivering
theater-quality pictures and CD-quality sound. HDTV offers an increase in
picture quality by providing up to 1,920 active horizontal pixels by 1,080
active scanning lines, representing an image resolution of more than two million
pixels. In addition to providing improved picture quality with more visible
detail, HDTV offers a wide screen format and Dolby(R) Digital 5.1 surround
sound.
ILEC -- Incumbent Local Exchange Carrier -- With respect to an area, the LEC
that -- (A) on the date of enactment of the Telecommunications Act of 1996,
provided telephone exchange service in such area; and (B)(i) on such date of
enactment, was deemed to be a member of the exchange carrier association
pursuant to section 69.601(b) of the FCC's regulations (47 C.F.R. 69.601(b)); or
(ii) is a person or entity that, on or after such date of enactment, became a
successor or assign of a member described in clause (i).
Interexchange -- Communication between two different LATAs or, in Alaska,
between two different local exchange serving areas.
IP -- Internet Protocol -- The method or protocol by which data is sent from one
computer to another on the Internet. Each computer (known as a host) on the
Internet has at least one IP address that uniquely identifies it from all other
computers on the Internet.
5
ISDN -- Integrated Services Digital Network -- A set of standards for
transmission of simultaneous voice, data and video information over fewer
channels than would otherwise be needed, through the use of out-of-band
signaling. The most common ISDN system provides one data and two voice circuits
over a traditional copper wire pair, but can represent as many as 30 channels.
Broadband ISDN extends the ISDN capabilities to services in the Gigabit per
second range.
ISP -- Internet Service Provider -- A company providing retail and/or wholesale
Internet services.
Internet -- A global collection of interconnected computer networks which use
TCP/IP, a common communications protocol.
IXC -- Interexchange Carrier -- A long-distance carrier providing services
between local exchanges.
Kanas -- Kanas Telecom, Inc. -- An Alaska corporation that was renamed GFCC in
2001.
LAN -- Local Area Network -- The interconnection of computers for sharing files,
programs and various devices such as printers and high-speed modems. LANs may
include dedicated computers or file servers that provide a centralized source of
shared files and programs.
LATA -- Local Access and Transport Area -- The approximately 200 geographic
areas defined pursuant to the AT&T Divestiture Decree. The BOCs were
historically prohibited from providing long-distance service between the LATA in
which they provide local exchange services, and any other LATA.
LEC -- Local Exchange Carrier -- A company providing local telephone services.
Each BOC is a LEC.
LMDS -- Local Multipoint Distribution System -- LMDS uses microwave signals
(millimeterwave signals) in the 28 GHz spectrum to transmit voice, video, and
data signals within small cells 3-10 miles in diameter. LMDS allows license
holders to control up to 1.3 GHz of wireless spectrum in the 28 GHz Ka-band. The
1.3 GHz can be used to carry digital data at speeds in excess of one gigabit per
second. The extremely high frequency used and the need for point to multipoint
transmissions limits the distance that a receiver can be from a transmitter.
This means that LMDS will be a "cellular" technology, based on multiple,
contiguous, or overlapping cells. LMDS is expected to provide customers with
multichannel video programming, telephony, video communications, and two-way
data services. ILECs and cable companies may not obtain the in-region 1150 MHz
license for three years following the date of the license grant. Within 10 years
following the date of the license grant, licensees will be required to provide
'substantial service' in their service regions.
Local Exchange -- A geographic area generally determined by a PUC, in which
calls generally are transmitted without toll charges to the calling or called
party.
Local Number Portability -- The ability of an end user to change Local Exchange
Carriers while retaining the same telephone number.
Lower 48 States or Lower 48 -- Refers to the 48 contiguous states south of or
below Alaska.
Lower 49 States or Lower 49 -- Refers to Hawaii and the Lower 48 States.
MAN -- Metropolitan Area Network -- LANs interconnected within roughly a 50-mile
radius. MANs typically use fiber optic cable to connect various wire LANs.
Transmission speeds may vary from 2 to 100 Mbps.
Mat-Su Valley -- The Matanuska and Susitna valleys are located in south-central
Alaska, to the north of Anchorage, and include the communities of Palmer and
Wasilla and the immediately surrounding areas.
MDU -- Multiple Dwelling Unit -- MDUs include multiple-family buildings, such as
apartment and condominium complexes.
6
MMDS -- Multichannel Multipoint Distribution Service -- Also known as wireless
cable. The FCC established the Multipoint Distribution Service (MDS) in 1972.
Originally, the FCC thought MDS would be used primarily to transmit business
data. However, the service became increasingly popular in transmitting
entertainment programming. Unlike conventional broadcast stations whose
transmissions are received universally, MDS programming is designed to reach
only a subscriber based audience. In 1983, the FCC reassigned eight channels
from the Instructional Television Fixed Service (ITFS) to MDS. These eight
channels make up the MMDS. Frequently, MDS and MMDS channels are used in
combination with ITFS channels to provide video entertainment programming to
subscribers.
MVPD -- Multi-channel Video Programming Distribution -- The distribution of
video programming over multiple platforms, such as cable and satellite.
MWNS -- MCI WorldCom Network Services -- A subsidiary of WorldCom, which had
previously entered into service agreements with the Company on behalf of
WorldCom.
Notes -- $250 million, 7.25% Senior Notes, due February 15, 2014 -- GCI, Inc.
issued $250 million in notes during the first quarter of 2004. The Notes are
senior unsecured and unsubordinated obligations and rank equally with all of
GCI's existing and future senior unsecured debts. The Notes pay interest on a
semi-annual basis.
OCC -- Other Common Carrier -- A long-distance carrier other than the Company.
OC-n -- An optical communications circuit that optically signals at a data rate
of n times 51.84 Mbps, where n can be 1, 3, 12, 24, 48, 96, or 192.
Pay-per-view -- Offering television broadcasts to viewers in a manner whereby
they pay only for the programs they watch rather than having to subscribe to the
whole channel or station on a full-time basis.
PCS -- Personal Communication Services -- PCS encompasses a range of advanced
wireless mobile technologies and services. It promises to permit communications
to anyone, anywhere and anytime while on the move. The Cellular
Telecommunications Industry Association (CTIA) defines PCS as a "wide range of
wireless mobile technologies, chiefly cellular, paging, cordless, voice,
personal communications networks, mobile data, wireless PBX, specialized mobile
radio, and satellite-based systems." The FCC defines PCS as a "family of mobile
or portable radio communications services that encompasses mobile and ancillary
fixed communications services to individuals and businesses and can be
integrated with a variety of competing networks."
PBX -- Private Branch Exchange -- A customer premise communication switch used
to connect customer telephones (and related equipment) to LEC central office
lines (trunks), and to switch internal calls within the customer's telephone
system. Modern PBXs offer numerous software-controlled features such as call
forwarding and call pickup. A PBX uses technology similar to that used by a
central office switch (on a smaller scale). (The acronym PBX originally stood
for "Plug Board Exchange.")
POP -- Point of Presence -- The physical access location interface between a LEC
and an IXC network. The point to which the telephone company terminates a
subscriber's circuit for long-distance service or leased line communications.
PRI -- Primary Rate Interface -- An ISDN circuit transmitting at T-1 (DS-1)
speed (equivalent to 24 voice-grade channels). One of the channels ("D") is used
for signaling, leaving 23 ("B") channels for data and voice communication.
Private Line -- Uses dedicated circuits to connect customer's equipment at both
ends of the line. Does not provide any switching capability (unless supported by
customer premise equipment). Usually includes two local loops and an IXC
circuit.
7
Private Network -- A communications network with restricted (controlled) access
usually made up of Private Lines (with some PBX switching).
RCA -- Regulatory Commission of Alaska -- A state regulatory body empowered to
establish and enforce rules and regulations governing public utility companies
and others, such as the Company, within the State of Alaska (sometimes referred
to as Public Service Commissions, or PSCs, or Public Utility Commissions, or
PUCs). Previously known as the Alaska Public Utilities Commission (APUC).
Reciprocal Compensation -- The same compensation of a CLEC for termination of a
local call by the ILEC on its network, as the new competitor pays the ILEC for
termination of local calls on the ILEC network.
Rogers -- Rogers American Cablesystems, Inc -- A cable television service
provider in Palmer and Wasilla, Alaska, that we acquired in 2001.
SchoolAccess(TM) -- The Company's Internet and related services offering to
schools in Alaska, and some sites in Arizona, Montana and New Mexico. The
federal mandate through the 1996 Telecom Act to provide universal service
resulted in schools across Alaska qualifying for varying levels of discounts to
support the provision of Internet services. The Universal Service Administrative
Company through its Schools and Libraries Division administers this federal
program.
SDN -- Software Defined Network -- A switched long-distance service for very
large users with multiple locations. Instead of putting together their own
network, large users can get special usage rates for calls carried on regular
switched long-distance lines.
Securities Reform Act -- The Private Securities Litigation Reform Act of 1995.
Senior Credit Facility -- Holding's $220.0 million credit facility. On October
30, 2003 we closed a $220.0 million bank facility to refinance the previously
outstanding Holding's credit facility. The new Senior Credit Facility includes a
term loan of $170.0 million and a revolving credit facility of $50.0 million.
The new Senior Credit Facility matures on October 31, 2007 and bears interest at
LIBOR plus 3.25%. You should see note 8 to the accompanying "Notes to
Consolidated Financial Statements" included in Part II of this Report for more
information.
SMATV -- Satellite Master Antenna Television -- (Also known as "private cable
systems") are multichannel video programming distribution systems that serve
residential, multiple-dwelling units ("MDUs"), and various other buildings and
complexes. A SMATV system typically offers the same type of programming as a
cable system, and the operation of a SMATV system largely resembles that of a
cable system -- a satellite dish receives the programming signals, equipment
processes the signals, and wires distribute the programming to individual
dwelling units. The primary difference between the two is that a SMATV system
typically is an unfranchised, stand-alone system that serves a single building
or complex, or a small number of buildings or complexes in relatively close
proximity to each other.
SONET -- Synchronous Optical Network -- A 1984 standard for optical fiber
transmission on the public network. 51.84 Mbps to 9.95 Gigabits per second,
effective for ISDN services including asynchronous transfer mode.
Sprint -- Sprint Corporation -- One of our significant customers.
T-1 -- A data communications circuit capable of transmitting data at 1.5 Mbps.
Tariff -- The schedule of rates and regulations set by communications common
carriers and filed with the appropriate federal and state regulatory agencies;
the published official list of charges, terms and conditions governing provision
of a specific communications service or facility, which functions in lieu of a
contract between the subscriber or user and the supplier or carrier.
8
TCP/IP -- Transmission Control Protocol/Internet Protocol -- A suite of network
protocols that allows computers with different architectures and operating
system software to communicate with other computers on the Internet.
TDM -- Time Division Multiplex -- A means by which multiple signals are combined
and carried on one transport medium by sequentially sharing the medium in slices
of time (time slots) for each of the various signals.
UNE -- Unbundled Network Element -- A discrete piece part of a telephone
network. Unbundled network elements are the basic network functions, i.e., the
piece parts needed to provide a full range of communications services. They are
physical facilities as well as all the features and capabilities provided by
those facilities.
VSAT -- Very Small Aperture Terminal -- A small, sometimes portable satellite
terminal that allows connection via a satellite link.
WAN -- Wide Area Network -- A remote computer communications system. WANs allow
file sharing among geographically distributed workgroups (typically at higher
cost and slower speed than LANs or MANs). WANs typically use common carriers'
circuits and networks. WANs may serve as a customized communication backbone
that interconnects all of an organization's local networks with communications
trunks that are designed to be appropriate for anticipated communication rates
and volumes between nodes.
World Wide Web or Web -- A collection of computer systems supporting a
communications protocol that permits multi-media presentation of information
over the Internet.
WorldCom -- WorldCom, Inc., d/b/a MCI ("MCI") -- Owns approximately 9% of our
common stock, presently has one representative on our Board, and is a major
customer. Prior to May 1, 2000, the company was named MCI WorldCom, Inc. See
also MWNS. On July 21, 2002 WorldCom 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.
You should see note 15 to the accompanying "Notes to Consolidated Financial
Statements" included in Part II of this Report for more information.
1984 Cable Act -- The Cable Communications Policy Act of 1984.
1992 Cable Act -- The Cable Television Consumer Protection and Competition Act
of 1992.
1996 Telecom Act -- The Telecommunications Act of 1996 -- The 1996 Telecom Act
was signed into law February 8, 1996. Under its provisions, BOCs were allowed to
immediately begin manufacturing, research and development; GTE Corp. could begin
providing interexchange services through its telephone companies nationwide;
laws in 27 states that foreclosed competition were pre empted; co-carrier status
for CLECs was ratified; and the physical collocation of competitors' facilities
in LECs central offices was allowed.
The purpose of the 1996 Telecom Act was to move from a regulated monopoly model
of telecommunications to a deregulatory competitive markets model. The act
breaks down the old barriers that prevented three groups of companies, the LECs,
including the BOCs, the long-distance carriers, and the cable TV operators, from
competing head-to-head with each other. The act requires LECs to let new
competitors into their business. It also requires the LECs to open up their
networks to ensure that new market entrants have a fair chance of competing. The
bulk of the act is devoted to establishing the terms under which the LECs, and
more specifically the BOCs, must open up their networks.
The 1996 Telecom Act substantially changed the competitive and regulatory
environment for telecommunications providers by significantly amending the
Communications Act of 1934 including certain of the rate regulation provisions
previously imposed by the Cable Television Consumer Protection and Competition
Act of 1992 (the "1992 Cable Act"). The 1996 Telecom Act eliminated rate
regulation of the
9
cable programming service tier in 1999. Further, the regulatory environment will
continue to change pending, among other things, the outcome of legal challenges,
legislative activity, and FCC rulemaking and enforcement activity in respect of
the 1992 Cable Act and the completion of a significant number of continuing FCC
rulemakings under the 1996 Telecom Act.
10
Cautionary Statement Regarding Forward-Looking Statements
You should carefully review the information contained in this Annual Report, but
should particularly consider any risk factors that we set forth in this Annual
Report and in other reports or documents that we file from time to time with the
Securities and Exchange Commission ("SEC"). In this Annual 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 Material adverse changes in the economic conditions in the markets we
serve and in general economic conditions, including the continuing
impact of the current depressed communications industry due to high
levels of competition in the long-distance market resulting in pressures
to reduce prices, an oversupply of long-haul capacity, excessive debt
loads; several high-profile company failures and potentially fraudulent
accounting practices by some companies;
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 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;
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 The degree to which we experience material competitive impacts to our
traditional service offerings prior to achieving adequate local service
entry;
o Competitor responses to our products and services and overall market
acceptance of such products and services;
o The outcome of our negotiations with ILECs and state regulatory
arbitrations and approvals with respect to interconnection agreements;
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, many of which are
untested;
o The level and timing of the growth and profitability of existing and new
initiatives, particularly yellow page directories, local telephone
services expansion including deploying digital local telephone service,
Internet services expansion 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 Local conditions and obstacles;
o The impact on our industry and indirectly on us of oversupply of
capacity resulting from excessive deployment of network capacity in
certain markets we do not serve;
11
o Uncertainties inherent in new business strategies, new product launches
and development plans, including local telephone services, Internet
services, wireless services, digital video services, cable modem
services, digital subscriber line services, transmission services, and
yellow page directories, and the offering of these services in
geographic areas with which we are unfamiliar;
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 Changes in, or failure, or inability, to comply with, government
regulations, including, without limitation, regulations of the FCC, the
RCA, and adverse outcomes from regulatory proceedings;
o Changes in regulations governing UNEs;
o Uncertainties in federal military spending levels and military base
closures in markets in which we operate;
o The ongoing global and domestic trend towards consolidation in the
communications industry, which may result in our competitors being
larger and better financed, and provide these competitors with extensive
resources and greater geographic reach, allowing them to compete more
effectively;
o The financial, credit and economic impacts of the MCI bankruptcy filing
on the industry in general and on us in particular;
o A significant delay in MCI's emergence from bankruptcy or a migration of
MCI's traffic off our network without it being replaced by other common
carriers that interconnect with our network;
o The effect on us of pricing pressures, new program offerings and market
consolidation in the markets served by our significant customers, MCI
and Sprint;
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;
o Under Statement of Financial Accounting Standard ("SFAS") 142, we must
test our intangibles for impairment at least annually, which may result
in a material, non-cash write-down of goodwill and could have a material
adverse impact on our financial position, results of operations or
liquidity; and
o Other risks detailed from time to time in our periodic reports filed
with the SEC.
You should not place undue reliance on any such forward-looking statements.
Further, any forward-looking statement, and such risks, uncertainties and other
factors speak only as of the date on which they were originally made and we
expressly disclaim any obligation or undertaking to disseminate any updates or
revisions to any forward-looking statement to reflect any change in our
expectations with regard to those statements or any other change in events,
conditions or circumstances on which any such statement is based, except as
required by law. New factors emerge from time to time, and it is not possible
for us to predict what factors will arise or when. In addition, we cannot assess
the impact of each factor on our business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements.
12
Part I
Item 1. Business
General
In this Annual Report, "we," "us" and "our" refer to General Communication, Inc.
and its direct and indirect subsidiaries.
GCI was incorporated in 1979 under the laws of the State of Alaska and has its
principal executive offices at 2550 Denali Street, Suite 1000, Anchorage, AK
99503-2781 (telephone number 907-868-5600).
GCI is primarily a holding company and together with its direct and indirect
subsidiaries, is a diversified communications provider with a leading position
in facilities-based long-distance service in the State of Alaska and is Alaska's
leading cable television and Internet services provider.
We are the leading integrated, facilities-based communications provider in
Alaska, offering local and long-distance voice, cable video, data and Internet
communications services to residential and business customers under our GCI
brand. A substantial number of our customers subscribe to product bundles that
include two or more of our services.
Since our founding, we have consistently expanded our product portfolio to
satisfy our customers' needs. We have benefited from the attractive and unique
demographic and economic characteristics of the Alaskan market. We are pioneers
of bundled communications services offerings, and believe our integrated
strategy of providing innovative bundles of voice, video and data services
provides us with an advantage over our competitors and will allow us to continue
to attract new customers, retain existing customers and expand our addressable
market. We hold leading market shares in long-distance, cable video and Internet
services and have gained significant market share in local access against the
incumbent provider.
Through our focus on long-term results and strategic capital investments, we
have consistently grown our revenues and expanded our margins. Our integrated
strategy provides us with competitive advantages in addressing the challenges of
converging telephony, video and broadband markets and has been a key driver of
our success. Using our extensive communications networks, we provide customers
with integrated communications services packages that we believe are unmatched
by any other competitor in Alaska.
Availability of Reports and Other Information
Internet users can access information about the Company and its services at
http://www.gci.com/, http://www.gcinetworksolutions.com/, and
http://www.alaskaunited.com/. The Company hosts Internet services at
http://www.gci.net/ and SchoolAccess(TM) services at http://www.gcisa.net/. We
make available on the http://www.gci.com/ website, free of charge, access to our
Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K, Proxy Statement on Schedule 14A and amendments to those materials
filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and
Exchange Act of 1934 as soon as reasonably practicable after we electronically
submit such material to the SEC. In addition, the SEC's website is
http://www.sec.gov/. The SEC makes available on this website, free of charge,
reports, proxy and information statements, and other information regarding
issuers, such as us, that file electronically with the SEC. Information on our
website or the SEC's website is not part of this document.
Financial Information About Industry Segments
We have four reportable segments: long-distance services, cable services, local
access services and Internet services. For information required by this section,
you should see Part II, Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations. Also refer to Note 13 included in
Part II, Item 8, Consolidated Financial Statements and Supplementary Data.
13
Recent Developments
New Senior Notes -- In February 2004, our subsidiary, GCI, Inc. issued $250
million principal amount of senior notes. These senior notes bear interest at
7.25% and are due in February 2014. GCI, Inc. intends to use the net proceeds
from the issuance of these senior notes to retire or repay other indebtedness.
In connection with the issuance of these senior notes, GCI, Inc. offered to
purchase all of its outstanding 9.75% Senior Notes due 2007 (the "2007 Notes")
for cash at 103.5% of the principal amount. Approximately $114.6 million
principal amount of the 2007 Notes were tendered and accepted pursuant to this
offer. GCI, Inc. called for redemption of the remaining outstanding 2007 Notes
at the redemption price of 103.25% of the principal amount. In addition to the
purchase and redemption of the 2007 Notes, approximately $53.8 million of
proceeds received from the issuance of the new senior notes were used to repay
indebtedness under our Senior Credit Facility.
Senior Credit Facility Waiver -- Compliance with the redemption notice
requirements in the 2007 Notes Indenture has resulted in a delay of up to sixty
days between the date the new senior notes were issued and the final redemption
date of the 2007 Notes. As a result of such delay, our total debt will
temporarily increase during the overlap period between the redemption of the
outstanding 2007 Notes and the issuance of the new senior notes. This temporary
increase does not comply with certain provisions of our Senior Credit Facility.
We have received a waiver of these provisions from the lenders under our Senior
Credit Facility until April 30, 2004.
Fiber System Taken out of Service -- We own a portion of the capacity of an
undersea fiber optic cable system linking Alaska to the Lower 48 states known as
the Alaska spur of the North Pacific Cable ("NPC"). The Alaska spur of the NPC
was removed from service in January 2004 by PT Cable, Inc. due to a dispute over
billings between PT Cable, Inc. and AT&T. We determined that the recorded value
for our NPC fiber asset was impaired at December 31, 2003 and recorded a $5.4
million charge in the fourth quarter in the financial statements included in
Part II of this report.
Free Cable Modem Service -- On January 26, 2004, we began offering new and
current customers free LiteSpeed cable modem Internet service when they sign up
for certain of our other services. LiteSpeed uses cable modems and is designed
for dial-up Internet access customers who want more Internet download speed and
greater convenience. Cable modems transmit data reliably at a much faster rate
than dial-up connections and do not tie up the telephone line. Our cable modem
service is available to a high percentage of Alaska homes in Anchorage, Bethel,
Cordova, Fairbanks, Homer, Juneau, Kenai, Ketchikan, Kodiak, Nome, Palmer,
Petersburg, Seward, Sitka, Soldotna, Valdez, Wasilla, and Wrangell.
Alaska Supreme Court Decision -- ACS, through subsidiary companies, provides
local telephone services in Fairbanks and Juneau, Alaska. The ACS subsidiaries
are classified as Rural Telephone Companies under the 1996 Telecom Act, which
entitles them to an exemption of certain material interconnection terms of the
1996 Telecom Act, until and unless such "rural exemption" is examined and not
continued by the RCA. On October 11, 1999, the RCA issued an order terminating
rural exemptions for the ILECs operating in the Fairbanks and Juneau markets so
that we could compete with these companies in the provision of local telephone
service. Upon appeal by ACS, on December 12, 2003, the Alaska Supreme Court
issued a decision in which it reversed the RCA's rural exemption decision on the
procedural ground that the competitor, not the incumbent, must shoulder the
burden of proof. The Court remanded the matter to the RCA for reconsideration
with the burden of proof assigned to us. Additionally, the Court left it to the
RCA to decide as a matter of discretion whether to change the state of
competition during the remand period. In accordance with the Court's ruling, the
RCA has re-opened the rural exemption dockets and scheduled a hearing to
commence on April 19, 2004. Additionally, the RCA issued a ruling on January 16,
2004, in which the RCA determined that we can continue to rely on unbundled
network elements from ACS to serve its existing customers in Juneau and
Fairbanks but that we may not serve new customers through purchase of unbundled
network elements pending the completion of the remand proceeding. Until this
matter is resolved, we may serve new customers using wholesale resale. We
believe it is unlikely that the rural exemptions will be restored in these
markets; however, if they are restored, we could be forced to discontinue
providing service to residential customers and perhaps to
14
commercial customers in these locations. See "Part I -- Item 1 -- Business --
Regulation, Franchise Authorizations and Tariffs -- Communications Operations --
Rural Exemption" for more information.
Historical Development of our Business During the Past Fiscal Year
Rural Internet -- We began a program in 2001 to bring affordable Internet access
service to 150 rural Alaska communities. In addition to deploying cable modem
service in all regional centers, we deployed wireless Internet access service,
including service at broadband data rates, to over 70 rural communities in 2003.
We now provide Internet access service to 85 communities across Alaska and
expect to provide service in the remaining communities in 2004.
Rural Health Program -- We completed service expansion and delivery of our Rural
Health program in 2003 to several rural Alaska health corporations that included
various service levels to villages in the Arctic Slope Native Association area,
as well as in Chenega Bay, Kotzebue, Nanwalek, Platinum, Port Graham, Seward,
and Tatitlek, and completed service expansion to Diomede Island in January 2004.
Directory Assistance -- During the fourth quarter of 2003, we began
self-providing interstate directory assistance for our retail customers, certain
wholesale customers, and for MCI, as an overflow Alaska directory assistance
provider.
Cable Television Changes -- We made significant changes and additions to our
cable television lineup in 2003, including new networks and, in Anchorage, we
introduced our first HDTV programming.
Hotel Broadband -- We introduced a new hotel broadband product in 2003 which
provides high-speed in-room cable modem Internet access to hotel customers.
State of Alaska Microwave System Contract -- On December 31, 2003, we were
awarded a time-and-materials contract from the State of Alaska to operate and
maintain their statewide private microwave system.
State of Alaska Communications Contract -- On December 17, 2003, we were awarded
a contract from the State of Alaska to provide communications services for an
initial term of 18 months, with two 12-month extensions possible thereafter.
Communications services include long-distance, IP telephony, voice and data
network management and maintenance, Internet, audio and video conferencing and
help desk. The total value of the contract was approximately $10 million. This
contract award followed the termination of the State of Alaska's prior contract
with an ILEC due to non-performance.
Pipeline Communications -- In December 2003, we successfully concluded a
three-year effort to upgrade our GFCC network and prove the system reliable. The
final stage of reliability testing and circuit conversion was completed,
bringing voice, data, Internet and cable television traffic onto the fiber
system serving the Alaskan oil industry. GFCC now carries a significant portion
of all communications between Valdez, Anchorage and the North Slope oil fields.
New Phone Directory -- On November 24, 2003, we began distribution of the
inaugural edition of the GCI Anchorage Directory and yellow pages to residential
and business customers in Anchorage, and launched our on-line directory product.
We worked with ALLTEL Publishing, a division of ALLTEL Corporation of Little
Rock, Arkansas, to produce and distribute the official GCI Anchorage phone
directory. ALLTEL Publishing produces approximately 408 directory titles in 38
states, including directories for its own telephone operations, and was formerly
the sales agent for the incumbent directories provider.
New Retail Store -- On November 22, 2003, we opened a new retail store serving
our south Anchorage market. The new store allows customers to pay their bills,
sign up for new services and experience our full range of products including
cable modem Internet access, digital cable television, local and long distance
telephone service, and cellular phone services. The new store allows customers
to purchase any of our services, pay bills and interact with customer service
representatives.
15
Senior Credit Facility -- On October 30, 2003, we refinanced our Senior Credit
Facility. The new facility, among other things, reduced the interest rate from
LIBOR plus 6.50% to LIBOR plus 3.25%. The new facility included a term loan of
$170.0 million and a revolving credit facility of $50.0 million. In February,
2004, we repaid approximately $43.8 million of the term loan, which cannot be
reborrowed.
ConnectMD -- On September 16, 2003, we introduced ConnectMD, a private medical
network that reaches clinics and hospitals in 110 rural Alaska communities and
currently offers healthcare providers access to continuing education courses
from two leading Seattle institutions. ConnectMD has partnered with
Seattle-based Children's Hospital and Regional Medical Center (Children's) and
Virginia Mason Medical Center. ConnectMD links primary healthcare providers in
Alaska to specialists and sub-specialists allowing them to securely share
information, such as confidential patient records and lab results, diagnose and
prescribe treatment for patients located in remote communities, and obtain
continuing medical education credits. Using Private Line and secure Internet,
ConnectMD has created a private medical network that we believe is
revolutionizing the way health care is provided in Alaska.
Airlines Mileage Program -- On September 2, 2003, we announced that we have
become a mileage plan partner with Alaska Airlines, offering new and existing
customers opportunities to earn frequent flyer miles. Our customers can earn
Alaska Airlines mileage plan miles by using qualifying local or long distance
telephone, Internet, cable television, cellular, GCI directories or cable
advertising services. Our residential and small business customers can earn one
mileage plan mile for every dollar spent on qualifying services. New customers
enrolling in a combination of services can earn up to 10,000 miles and current
customers are eligible for up to 7,500 bonus miles when adding or upgrading
services. In addition customers can earn up to 500 anniversary miles every six
months. The agreement requires the purchase of Alaska Airlines miles during the
year ended December 31, 2003 and in future years. The agreement has a remaining
commitment at December 31, 2003 totaling $16.0 million.
New Communications Policy for Alaska Areas -- On August 6, 2003, the FCC issued
a Report and Order eliminating a policy that prohibited the installation or
operation of more than one satellite earth station in any Alaska rural community
for competitive carriage of interstate message telephone service ("MTS")
communications. The FCC found that through a series of regulatory steps, the
environment that once called for restrictions on competitive facilities-based
entry had changed. This policy change allows us to install facilities and
provide competitive interstate MTS and other communications services over our
own equipment and network in rural communities where we presently have no
facilities.
Email Filter for Businesses -- On August 6, 2003, we introduced our eMail Guard
for Business product. Email Guard is an email filter that puts business owners
and employees in control of screening unwanted junk emails. We estimate that
more than 75% of email delivered to businesses today is spam. Our eMail Guard
product keeps unwanted messages off of the customer's network, Internet
connection and mail servers. Our Email Guard residential and business products
filtered approximately 31,000 messages containing suspected viruses and
1,991,000 messages containing suspected junk mail during a representative
24-hour period in February 2004.
MCI Settlement -- On July 24, 2003, following bankruptcy court approval, we
signed a settlement and release agreement with MWNS. The agreement affirmed
contractual terms and conditions between the two companies, settled MWNS'
pre-petition liabilities, settled billing disputes between the two companies,
and established a right to setoff our pre-petition payables. MWNS is a
subsidiary of MCI, which had previously entered into service agreements with GCI
on behalf of MCI.
Under terms of the agreement, MWNS settled its outstanding liability of $12.9
million for $12.1 million net of adjustments. In addition, the agreement reduced
our pre-petition claim to $12.1 million and further allowed us the right to
setoff approximately $1 million in prepetition payables owed by us to MWNS. MWNS
agreed to pay the remaining $11 million to us as a credit against our future
purchase of services from MWNS. Further, we agreed to pay to MWNS, and did pay,
the outstanding pre-petition payables balance of approximately $649,000 in
August 2003. Remaining credits available to us as of December 31, 2003 totaled
approximately $7.9 million.
16
Extended Supply Contract -- On July 24, 2003 MCI extended its Contract of Alaska
Access Services for five years to July 2008. This agreement sets the terms and
conditions under which we originate and terminate certain types of long distance
and data services in Alaska on MCI's behalf. In exchange for extending the term
of the contract, MCI receives a series of rate reductions implemented in phases
over the life of the contract.
AULP West -- On June 30, 2003, we announced our plan to build a second undersea
fiber optic cable system between Seward, Alaska and Warrenton, Oregon. The cable
will complement our existing AULP East fiber optic cable system between
Whittier, Alaska and Seattle, Washington. The two systems will provide
physically diverse nearly instant backup to each other in the event of an
outage. Fiber production was completed in January 2004 and began to be deployed
in February 2004. We expect to complete construction and testing in April 2004.
The 1,544-statute mile cable has a total design capacity of 640 Gigabits per
second access speed and is expected to be operational by May 2004.
RCA Renewal -- On May 21, 2003, the Senate of the State of Alaska passed and the
Governor later signed House Bill 111 which extended the life of the RCA until
2007. We believe that renewal of the RCA is important for consumers and
competition alike. The Alaska Senate voted to renew the Agency for four-years
without any statutory changes that affect the manner by which utilities in
Alaska are regulated.
Narrative Description of our Business
General
We are the largest Alaska-based and operated integrated communications provider.
A pioneer in bundled service offerings, we provide facilities-based local and
long distance voice, cable video, Internet and data communications services, and
resell wireless telephone services, to residential and business customers under
our GCI brand.
We generated consolidated revenues of $390.8 million in 2003. We ended the year
with approximately 85,600 long-distance customers, 106,100 local access lines in
service, 134,400 basic cable subscribers, and 95,700 total Internet subscribers,
including 46,000 cable modem subscribers. A substantial number of our customers
subscribe to product bundles that include two or more of our services.
Since our founding in 1979, we have consistently expanded our product portfolio
to satisfy our customers' needs. We have benefited from the attractive and
unique demographic and economic characteristics of the Alaskan market. We
believe our integrated strategy of providing innovative bundles of voice, video
and data services provides us with an advantage over our competitors and will
allow us to continue to attract new customers, retain existing customers and
expand our addressable market. We hold leading market shares in long-distance,
cable video and Internet services and have gained significant market share in
local access against an incumbent provider.
Through our focus on long-term results and strategic capital investments, we
have consistently grown our revenues and expanded our margins. Our integrated
strategy provides us with competitive advantages in addressing the challenges of
converging telephony, video and broadband markets and has been a key driver of
our success. Today, using our extensive communications networks, we provide
customers with integrated communications services packages that are unmatched by
any other competitor in Alaska.
We operate a broadband communications network that permits the delivery of a
seamless integrated bundle of communications, entertainment and information
services. We offer a wide array of consumer and business communications and
entertainment services--including local telephone, long-distance and wireless
communications, cable television, consulting services, network and desktop
computing outsourced services, and dial-up, broadband (cable modem, wireless and
DSL) and dedicated Internet access services at a wide range of speeds--all under
the GCI brand name.
17
We believe that the size and growth potential of the voice, video and data
market, the increasing deregulation of communications services, and the
increased convergence of telephony, wireless, and cable services offer us
considerable opportunities to continue to integrate our communications, Internet
and cable services and expand into communications markets both within and,
longer-term, possibly outside of Alaska.
Considerable deregulation has already taken place in the United States because
of the 1996 Telecom Act with the barriers to competition between long-distance,
local exchange and cable providers being lowered. We believe our acquisition of
cable television systems and our development of local exchange service, Internet
services, broadband services, and wireless services leave us well positioned to
take advantage of deregulated markets.
We are Alaska's leading provider of long-distance, cable television and data and
Internet services, as measured by revenues, and we are the second largest local
access provider, as measured by local access lines. We attribute our leadership
position to our commitment to provide our customers with high-quality products
in bundled offerings that maximize their satisfaction. We maintain a strong
competitive position, however there is active competition in the sale of
substantially all products and services we offer.
Competition in the Communications Industry
There is substantial competition in the communications industry. The traditional
dividing lines between providers offering long-distance telephone service, local
telephone service, wireless telephone service, Internet services and video
services are increasingly becoming blurred. Through mergers and various service
integration and product bundling strategies, major providers, including us, are
striving to provide integrated communications service offerings within and
across geographic markets.
Competitive Strengths
Market Leader. We are Alaska's leading provider of long-distance, cable
television and data and Internet services, as measured by revenues, and we are
the second largest local access provider, as measured by local access lines. We
attribute our leadership position to our commitment to provide our customers
with high-quality products in bundled offerings that maximize their
satisfaction.
Advanced Infrastructure and Robust Network Assets. We own and operate advanced
networks that provide integrated end-to-end solutions. Our hybrid-fiber coax
cable network enables us to offer last-mile broadband connectivity to our
customers. Our interstate and undersea fiber optic cable systems connect our
major markets in Alaska to the Lower 48 States. We employ satellite transmission
for rural intrastate and interstate traffic in markets where terrestrial based
network alternatives are not available. We have or expect to be able to obtain
satellite transponders to meet our long-term satellite capacity requirements. In
our local service markets, we offer services using our own facilities, unbundled
network elements and wholesale/resale.
Bundled Service Offerings. Ownership and control of our network and
communications assets have enabled us to effectively market bundled service
offerings. Bundling facilitates the integration of operations and administrative
support to meet the needs of our customers. Our product and service portfolio
includes stand-alone offerings and bundled combinations of local and
long-distance voice and data services, cable video, broadband (cable modem,
fixed wireless and DSL), dedicated Internet access services and other services.
Well-Recognized Brand Name. Our GCI brand is the oldest brand among major
communications providers in Alaska and positively differentiates our services
from those of our competitors. We believe our customers associate our brand name
with quality products. We continue to benefit from high name recognition and
strong customer loyalty, and the majority of our customers purchase multiple
services from us. We have been successful in selling new and enhanced products
to our customers based on perceived quality of products and brand recognition.
Favorable Alaskan Market Dynamics. The Alaskan communications market is
characterized by its large geographic size and isolated markets that include a
combination of major metropolitan areas and small,
18
dense population clusters, which create a deterrent to potential new entrants.
Due to the remote nature of its communities, the state's residents and
businesses rely extensively on our systems to meet their communications needs.
We believe that, when compared to national averages, Alaskan households spend
more on communications services. According to the United States Census Bureau,
the median household income in Alaska was 28% higher than the three-year United
States national average from 2000 to 2002, and according to the Alaska
Department of Revenue, in 2002, federal spending in Alaska was up 18%, year over
year. We believe there is a positive outlook for continued growth.
Experienced Management Team. Our experienced management team has a proven track
record and has consistently expanded our business and improved our operations.
Our senior management averages more than 23 years of experience in the
communications industry and more than 18 years with our company.
Business Strategy
We intend to continue to increase revenues and cash flow using the following
strategies:
Continue to Offer Bundled Products. We offer innovative service bundles to meet
the needs of our residential and business customers. Bundling our services
significantly improves customer retention, increases revenue per customer and
reduces customer acquisition expenses. Our experience indicates that our bundled
customers are significantly less likely to churn, and we experience less price
erosion when we effectively combine our offerings. Bundling improves our top
line growth, provides operating cost efficiencies that expand our margins and
drives our overall business performance. As a measure of success to date,
substantially all of our local customers subscribe to our long-distance service
and approximately one-third of our cable video subscribers also purchase our
high-speed Internet service.
Maximize Sales Opportunities. We successfully sell new and enhanced services and
products between and within our business segments to our existing customer base
to achieve increased revenues and penetration of our services. Through close
coordination of our customer service and sales and marketing efforts, our
customer service representatives cross sell and up sell our products. Many calls
into our customer service centers result in sales of additional products and
services. We actively seek to continue to encourage our existing customers to
acquire higher value, enhanced services.
Deliver Industry Leading Customer Service. We have positioned ourselves as a
customer service leader in the Alaska communications market. We operate our own
customer service department within our marketing group and maintain and staff
our own call centers. We have empowered our customer service representatives to
handle most service issues and questions on a single call. We prioritize our
customer services to expedite handling of our most valuable customers' issues,
particularly for our largest business customers. We believe our integrated
approach to customer service, including setting-up the service, programming
various network databases with the customer's information, installation, and
ongoing service, allows us to provide a customer experience that fosters
customer loyalty.
Leverage Communications Operations. We continue to expand and evolve our
integrated network for the delivery of our services. Our bundled strategy and
integrated approach to serving our customers creates efficiencies of scale and
maximizes network utilization. By offering multiple services, we are better able
to leverage our network assets and increase returns on our invested capital. We
periodically evaluate our network assets and continually monitor technological
developments that we can potentially deploy to increase network efficiency and
performance.
Expand Our Product Portfolio and Footprint in Alaska. Throughout our history, we
have successfully added and will continue to add new products to our product
portfolio. Management has a demonstrated history of evaluating potential new
products for our customers, and we will continue to assess revenue-enhancing
opportunities that create value for our customers. In addition to new services
such as digital video recorders, HDTV and video-on-demand, we are also expanding
the reach of our core products to new markets. Where feasible and where economic
analysis supports geographic expansion of our network coverage, we will pursue
19
opportunities to increase the scale of our facilities, enhance our ability to
serve our existing customers' needs and attract new customers.
Alaska Voice, Video and Data Markets
We estimate that the aggregate communications, cable television, and Internet
markets in Alaska generated revenues in 2003 of approximately $1.1 billion. Of
this amount, approximately $480 million was attributable to interstate and
intrastate long-distance service, $348 million was attributable to local
exchange services, $102 million was attributable to wireless phone service, $92
million was attributable to cable television, and $78 million was attributable
to all other services, including wireless and Internet services. We report
revenues from certain services, such as cable modem Internet access services, in
different reporting segments as compared to those used in this market data
presentation.
The Alaskan voice, video and data markets are unique within the United States.
Alaska is geographically distant from the rest of the United States and is
generally characterized by large geographical size and relatively small, dense
population clusters (with the exception of population centers such as Anchorage,
Fairbanks and Juneau). It lacks a well-developed terrestrial transportation
infrastructure, and the majority of Alaska's communities are accessible only by
air or water. As a result, Alaska's communication networks are different from
those found in the Lower 49 States.
Alaskans continue to rely extensively on satellite-based long-distance
transmission for intrastate calling between remote communities where investment
in a terrestrial network would be uneconomic or impractical. Also, given the
geographic isolation of Alaska's communities and lack, in many cases, of major
civic institutions such as hospitals, libraries and universities, Alaskans are
dependent on communications services to access the resources and information of
large metropolitan areas in Alaska, the rest of the United States and elsewhere.
In addition to satellite-based communications, the communications services
infrastructure in Alaska includes fiber optic cables between Anchorage, Valdez,
Fairbanks, Prudhoe Bay, and Juneau, traditional copper wire, and digital
microwave radio on the Kenai Peninsula and other locations. For interstate and
international communications, Alaska is connected to the Lower 48 States by
three fiber optic cables, one of which was taken out of service in January 2004.
See "Part I -- Item 1 -- Business -- Historical Development of our Business
During the Past Fiscal Year -- Fiber System Taken out of Service" for more
information.
Fiber optics is the preferred method of carrying Internet, voice, video, and
data communications over long-distances, eliminating the delay commonly found in
satellite connections. Widespread use of high capacity fiber optic facilities is
expected to allow continued expansion of business, government, educational, and
health care infrastructure in Alaska.
Long-Distance Services
Industry. Until the 1970s, AT&T had a virtual monopoly on long distance service
in the United States. In the 1970s, competitors such as MCI and Sprint began to
offer long distance service. With the gradual emergence of competition, basic
rates dropped, calling surged, and AT&T's dominance declined. More than 1,000
companies now offer wire-line long distance service. AT&T's 1984 toll revenues
were approximately 90% of those reported by all long distance carriers. The
FCC's regulation of AT&T as a "dominant" carrier ended in 1995. By 2002, AT&T's
revenues had declined to approximately 33% of all toll revenues. The two largest
market entrants, MCI and Sprint, have obtained a 30% combined market share
through 2002.
The FCC reports that approximately $84 billion was derived from toll services in
2002. In 2001, residential customers generated over 45% of toll revenues, and
35% of residential toll phone calls were interstate as opposed to 47% of
minutes. In 2001, approximately 30% of total toll services revenues was derived
from intrastate, 51% was derived from domestic interstate, and 19% was derived
from international toll services. Interstate long distance toll revenues
increased approximately 92% from $26 billion in 1984 to $50 billion in 2001, and
intrastate toll revenues increased approximately 38% from $21 billion in 1984 to
$29 billion in 2001, despite significant rate reductions in both categories
during this period.
20
The FCC reports that average revenue per minute of long distance calling dropped
from $0.32 in 1984, when competitive discount and promotional long distance
plans were introduced, to $0.10 in 2001. This average price per minute
represents a mix of international calling (an average of 35 cents per minute)
and domestic interstate calling (an average of 8 cents per minute). The decline
in prices since 1984 is more than 80% after adjusting for the impact of
inflation. The average annual rate of change in the consumer price index for
telephone services between 1990 and 2002 was reported to be 0.6% as compared to
3.6% for all services. The average revenue per minute for interstate and
international calls in 1990 was $0.27 (adjusted for inflation) as compared to
$0.10 in 2001.
The FCC reports that through July 2003 more than twenty-eight million households
have been added to the nation's telephone system since November 1983. An
estimated 3.6 million households were added between July 2002 and July 2003. As
of July 2003, 106.8 million households had telephone service. The FCC reports
that approximately 2% of all consumer expenditures are devoted to telephone
service. This percentage has remained relatively constant over the past 15
years, despite major changes in the industry and in telephone usage. Average
annual expenditures for telephone service increased from $877 per household in
2000 to $1,001 in 2002.
The FCC reports that approximately 104 million households had telephone services
as of November 2002, an increase of 25 million households since 1983. An
estimated 95.2% of households and virtually all businesses in the United States
subscribed to telephone service in July 2003. Approximately 92.9% of households
subscribed to telephone service in 1980.
The FCC reports that primary lines in service have grown over time, averaging
approximately 3% per year, which has historically reflected growth in the
population and the economy. The percentage of additional lines for households
with telephone service has increased significantly, from approximately 3% in
1988 to approximately 25% in 2001. The total number of lines, however, has
declined since 2000 because of the recession, because some consumers are
substituting wireless service for wireline service, and because some households
are eliminating second lines when they move from dial-up Internet service to
broadband service.
International communications has become an increasingly important segment of the
communications market. The FCC reports that the number of calls made from the
United States to other countries increased from 200 million in 1980 to 6.3
billion in 2001, and that Americans spent approximately $11.4 billion on
international calls in 2001. Consistent with domestic toll rates per minute,
international toll rates per minute have decreased significantly. On average,
carriers billed 34 cents per minute for international calls in 2001, a decline
of more than 74% since 1980. Five markets, Canada, Mexico, the United Kingdom,
Germany, and Japan, accounted for approximately 41% of the international calls
billed in the United States in 2001. AT&T, MCI, and Sprint combined accounted
for 88% of the international service billed in the United States in 2001.
While the 1996 Telecom Act has facilitated competition and rapid growth in the
communications market, the last three years have been a tumultuous time for that
marketplace. Industry analysts believe that overly optimistic projections of
data growth spurred companies to invest large amounts of capital to boost
network capacity. While demand for communications services grew, it did not grow
at a sufficient pace to justify the substantial build-out of fiber capacity. A
wide gap developed between the supply of network capacity and the demand for
data transmission. Network owners refocused their efforts to demonstrate
profitability over a much shorter time horizon than initially projected. A
downward spiral ensued, as some communications carriers went out of business
after failing to generate sufficient revenues to service their accelerating debt
loads. The resultant slowdown in capital expenditures left equipment
manufacturers with surplus inventory and personnel.
Industry analysts believe that the communications industry stabilized in 2003
and has begun to show signs of recovery. Growth in data is expected to continue
to be a key component of industry revenue growth. We believe that the data
communications business will eventually rival and perhaps become larger than the
traditional voice telephony market. The continuing migration of voice and other
traffic from analog to digital transmission and the growth in data attributed to
broadband applications are expected to fuel the growth in data.
21
The FCC issued a Report and Order (FCC 03-197) in 2003 eliminating a policy that
prohibited the installation or operation of more than one satellite earth
station in any Alaska rural community for competitive carriage of interstate MTS
communications. The FCC found that through a series of regulatory steps, the
environment that once called for restrictions on competitive facilities-based
entry had changed. This policy change allows us to install facilities and
provide competitive interstate MTS and other communications services over our
own equipment and network in rural communities where we presently have no
facilities.
We believe that federal and state legislators, courts and regulators will
continue to influence the communications industry in 2004. Consummation of
mergers between and spin-offs from long-distance companies, local access
services companies, ISPs and cable television companies have occurred which blur
the distinction between product lines and competitors.
Industry analysts believe companies will be successful in the long-term if they
can achieve and maintain a superior operating cost position, minimize regulatory
battles, offer a full suite of integrated services to their customers using a
network that is largely under their control, and continue to offer new and
enhanced services that customers wish to purchase.
See "Part I -- Item I -- Business -- Regulation, Franchise Authorizations and
Tariffs -- Long-Distance Services" for more information.
General. We supply a full range of common carrier long-distance and other
communications products and services. We operate a modern, competitive
communications network employing the latest digital transmission technology
based upon fiber optic facilities within and between Anchorage, Fairbanks and
Juneau, Alaska. Our facilities include a self-constructed and financed digital
fiber optic cable and additional owned capacity on another undersea fiber optic
cable (which was taken out of service in January 2004, (see "Part I -- Item 1 --
Business -- Historical Development of our Business During the Past Fiscal Year
- -- Fiber System Taken out of Service"), linking our Alaska terrestrial networks
to the networks of other carriers in the Lower 49 States. We use satellite
transponders to transmit voice and data traffic to remote areas of Alaska. We
operate digital microwave systems to link Anchorage with the Kenai Peninsula,
and our Prudhoe Bay Earth Station with Deadhorse. Digital microwave facilities
also are used to backup our fiber facilities from Anchorage to our Eagle River
earth station, and to our Fairbanks earth station from our Fairbanks
distribution center. Virtually all switched services are computer controlled,
digitally switched, and interconnected by a packet switched SS7 signaling
network.
We provide interstate and intrastate long-distance services throughout Alaska
using our own facilities or facilities leased from or swapped with other
carriers. We also provide (or join in providing with other carriers)
communications services to and from Alaska, Hawaii, the Lower 48 States, and
many foreign nations and territories.
We offer cellular services by reselling another cellular provider's services. We
offer wireless local access services over our own facilities, and have purchased
PCS and LMDS wireless broadband licenses in FCC auctions covering markets in
Alaska.
Products. Our long-distance services industry segment is engaged in the
transmission of interstate and intrastate-switched message telephone service and
Private Line and Private Network communications service between the major
communities in Alaska, and the remaining United States and foreign countries.
Our message toll services include intrastate, interstate and international
direct dial, toll-free 800, 888, 877 and 866 services, GCI calling card,
operator and enhanced conference calling, frame relay, SDN, ISDN technology
based services, as well as terminating northbound MTS traffic for MCI, Sprint
and several large resellers who do not have facilities of their own in Alaska.
We also provide origination of southbound calling card and toll-free 800, 888,
877 and 866 toll services for MCI, Sprint, and other IXCs. We offer our message
services to commercial, residential, and government subscribers. Subscribers
generally may cancel service at any time. Toll, Private Line, broadband and
related services account for approximately 49.6%, 53.5% and 53.5% of our 2003,
2002 and 2001 revenues, respectively. Broadband services include our
SchoolAccess(TM) and Rural
22
Health initiatives. Private Line and Private Network services utilize voice and
data transmission circuits, dedicated to particular subscribers, which link a
device in one location to another in a different location.
We have positioned ourselves as a price, quality, and customer service leader in
the Alaska communications market. The value of our long-distance services is
generally designed to be equal to or greater than that for comparable services
provided by our competitors.
In addition to providing communications services, we also design, sell, install,
service and operate, on behalf of certain customers, communications and computer
networking equipment and provide field/depot, third party, technical support,
communications consulting and outsourcing services through our Network Solutions
business. We also supply integrated voice and data communications systems
incorporating interstate and intrastate digital Private Lines, point-to-point
and multipoint Private Network and small earth station services. Our Network
Solutions sales and services revenue totaled $11.9 million, $12.4 million, and
$16.3 million in the years ended December 31, 2003, 2002 and 2001, respectively,
or approximately 3.0%, 3.4% and 4.6% of total revenues, respectively. Presently,
there are a number of competing companies in Alaska that actively sell and
maintain data and voice communications systems. Network Solutions' managed
services and product sales results are reported in the All Other category in the
Consolidated Financial Statements included in Part IV of this report.
Our ability to integrate communications networks and data communications
equipment has allowed us to maintain our market position based on "value added"
support services rather than price competition. These services are blended with
other transport products into unique customer solutions, including managed
services and outsourcing.
Facilities. Our communication facilities include an undersea fiber optic cable
system connecting Whittier, Valdez and Juneau, Alaska and Seattle, Washington,
which was placed into service in February 1999. As of the date of this report we
are constructing a new undersea fiber optic cable system connecting Seward,
Alaska to Warrenton, Oregon that we expect to be operational by May 2004. This
fiber optic cable system is designated AULP West and the original undersea fiber
optic cable system is now designated AULP East. The Seward cable landing station
will connect to our network in Anchorage and the Warrenton cable landing station
will connect to our network in Seattle via long-term leased capacity. The
combination of AULP West and AULP East will provide us with the ability to
provide fully protected geographically diverse routing of service between Alaska
and the Lower 48 States.
We also own a portion of the capacity on a second undersea fiber optic cable
system linking Alaska to the Lower 48 States known as the Alaska spur of the
NPC, which was taken out of service in January 2004. See "Part I -- Item 1 --
Business -- Historical Development of our Business During the Past Fiscal Year
- -- Fiber System Taken out of Service" for more information.
These undersea fiber optic cable systems allow us to carry our military base
traffic and our Anchorage, Delta Junction, Eagle River, Fairbanks, Girdwood,
Glenallen, Healy, Juneau, Kenai Peninsula, Ketchikan, Palmer, Prudhoe Bay,
Sitka, Valdez, Wasilla, and Whittier, Alaska traffic to and from the contiguous
Lower 48 States and between these instate locations over terrestrial circuits,
eliminating the one-quarter second delay associated with satellite circuits.
Other facilities include major earth stations at Barrow, Bethel, Cordova,
Dillingham, Dutch Harbor, Eagle River, Ketchikan, King Salmon, Kodiak, Kotzebue,
Nome, Prudhoe Bay, and Sitka, all in Alaska, serving the communities in their
vicinity, and at Issaquah, Washington, which provides interconnection to Seattle
and the Lower 48 States for traffic to and from major Alaska earth stations. The
Eagle River earth station is linked to the Anchorage distribution center by
fiber optic facilities.
We use SONET as a service delivery method for our terrestrial metropolitan area
networks as well as our long-haul terrestrial and undersea fiber optic cable
networks. As of December 31, 2003 we have completed interconnection of
approximately 70 businesses and co-location facilities within the Anchorage,
Juneau and Fairbanks metropolitan areas, as well as the 800-mile long Alyeska
pipeline right of way that connects Valdez
23
to Prudhoe Bay, Alaska. We currently connect Anchorage, Whittier, Juneau and
Seattle through our AULP East undersea fiber network. We use SONET-based next
generation multi-service nodes for purposes of delivering traditional TDM
services (at DS-0, DS-1 and DS-3 data rates) as well as next generation
services, such as optical OC-n and Ethernet. We have expanded our digital
cross-connect capacity through the addition of three large 3:1 cross connects
located in Anchorage and Seattle.
We completed construction of a fiber optic cable system from the Anchorage
distribution center to the Matanuska Telephone Association Eagle River central
office and to our major hub earth station in Eagle River in the second quarter
of 2000. The Issaquah earth station is connected with the Seattle distribution
center by means of diversely routed leased fiber optic cable transmission
systems, each having the capability to restore the other in the event of
failure. The Juneau earth station and distribution centers are collocated. We
have digital microwave facilities serving the Kenai Peninsula communities. We
maintain earth stations in Fairbanks (linked by digital microwave to the
Fairbanks distribution center), Juneau (collocated with the Juneau distribution
center), Anchorage (Benson earth station), and in Prudhoe Bay as fiber network
restoration earth stations. Our Benson earth station also uplinks our statewide
video service; such service may be pre-empted if earth station capacity is
needed to restore our fiber network between Anchorage and Prudhoe Bay.
In 2002, we constructed a 3.6-meter earth station at St. Paul, 6-meter earth
stations at Unalakleet and Mountain Village, and a 9-meter earth station at Ft.
Yukon, all in Alaska. These stations were constructed to support our
SchoolAccessTM distance learning and telemedicine networks, and primarily serve
surrounding villages.
We use our DAMA facilities to serve 57 additional locations throughout Alaska.
DAMA is a digital satellite earth station technology that allows calls to be
made between remote villages using only one satellite hop thereby reducing
satellite delay and capacity requirements while improving quality. In 1996, we
obtained the necessary RCA and FCC approvals waiving prohibitions against
construction of competitive facilities in certain rural Alaska communities,
allowing for deployment of DAMA technology in 56 sites in rural Alaska on a
demonstration basis. These prohibitions were removed by the FCC on August 6,
2003 allowing us to begin deploying earth stations in more locations in Alaska
(see "Part I -- Item 1 -- Business -- Historical Development of our Business
During the Past Fiscal Year -- New Communications Policy for Alaska Areas" for
more information). In addition, 69 (for a total of 126) C-band facilities
provide dedicated Internet access, Telehealth and Private Network services to
rural public schools, hospitals, health clinics, and natural resource
development industries throughout Alaska and in several locations in the Lower
48 States.
Our Anchorage, Fairbanks, and Juneau distribution centers contain electronic
switches to route calls to and from local exchange companies and, in Seattle, to
obtain access to MCI, Sprint and other carriers to distribute our southbound
traffic to the remaining 49 states and international destinations. In Anchorage,
a Lucent Technologies Inc. ("Lucent") 5ESS digital host switch is connected by
fiber to seven remote facilities that are co-located in the ILEC switching
centers, to provide both local and long-distance service. Our extensive
metropolitan area fiber network in Anchorage supports cable television, Internet
and telephony services. The Anchorage, Fairbanks, and Juneau facilities also
include digital access cross-connect systems, frame relay data switches,
Internet platforms, and in Anchorage and Fairbanks, co-location facilities for
interconnecting and hosting equipment for other carriers. We also maintain an
operator and customer service center in Wasilla, Alaska.
In 2001 we constructed a new switching center in Fairbanks and installed a new
Lucent switch to enable the provisioning of local telephone access services in
the Fairbanks market. The existing Fairbanks long-distance toll switch was
decommissioned in December 2001. Substantially all toll traffic originating in
Fairbanks is now routed to Anchorage. The first ILEC collocation office was also
constructed during 2001 to enable access to a portion of the Fairbanks ILEC UNE
loop facilities. Fairbanks UNE loop provisioning began in early 2002.
Construction of a second collocation office was completed in 2002.
We installed a new Lucent switch in our Juneau distribution center, also
enabling local services to be launched in the Juneau market in 2002. This new
switch also replaced the existing toll switch in Juneau, which we decommissioned
in 2002. One collocation office and a second adjacent collocation facility were
completed at
24
two of the Juneau ILEC central offices. We placed these collocation facilities
in service in 2002 enabling UNE loop access to a portion of the Juneau ILEC's
loop facilities. Provisioning customers via UNE in Fairbanks and Juneau is
presently subject to certain restrictions. See "Part I -- Item 1 -- Business --
Historical Development of our Business During the Past Fiscal Year -- Alaska
Supreme Court Decision" for more information.
Our Alcatel DSC DEX toll switch in Seattle was also decommissioned in 2002 after
its traffic was transitioned to our Lucent 5ESS switch in Seattle, which was
placed into service in 2000. Our Alcatel DSC DEX toll switch in Anchorage was
removed from service in the second quarter of 2003 and its traffic was moved to
our existing Lucent 5ESS network. Installation of a second Lucent 5ESS in
Anchorage began in the fourth quarter of 2003 to support network expansion and
enable additional network efficiencies. This switch is expected to be integrated
into our network by the second quarter of 2004.
Our operator services traffic was moved in early 2003 to our Lucent 5ESS switch
platform as an interim step to decommission our existing digital operator
switch. Our operator services traffic was moved in the fourth quarter of 2003 to
an integrated services platform that hosts operator services, answering
services, directory assistance and internal conferencing services.
We employ satellite transmission for rural intrastate and interstate traffic and
certain other major routes. We acquired satellite transponders on PanAmSat
Corporation ("PanAmSat") Galaxy XR satellite in March 2000 to meet our long-term
satellite capacity requirements. We further augmented capacity on Galaxy XR with
the lease of a seventh C-band transponder in October, 2002.
As demand for redundant, geographically diverse capacity on our network
increases, we will need to further augment our facilities between Alaska and the
Lower 48 States. In June 2003 we began the construction of AULP West connecting
Seward, Alaska and Warrenton, Oregon, with leased backhaul facilities to connect
it to our switching and distribution centers in Anchorage, Alaska and Seattle,
Washington. A consortium of companies has been selected to design, engineer,
manufacture, and install the undersea fiber optic cable system and a contract
has been signed at a total cost to us of $35.2 million. We expect the total cost
of the new fiber system to be approximately $51 million. We expect to fund
construction of the fiber optic cable system through our operating cash flows
and, to the extent necessary, with draws on our new Senior Credit Agreement. Our
capital expenditures for this project totaled approximately $16.5 million in
2003, all of which has been funded through our operating cash flows.
In 2000 we began deploying a new packet data satellite transmission technology
for the efficient transport of broadband data in support of our rural health and
SchoolAccessTM initiatives. We continued to deploy and upgrade this network
during 2003 and expect to further expand and upgrade this network during 2004.
An upgrade of the packet data satellite transmission equipment to a more
bandwidth efficient modulation scheme is expected to occur during the second
half of 2004. In addition, our SchoolAccessTM and rural wireless Internet
service is partially provisioned over a satellite based digital video broadcast
carrier that is scheduled to convert to a more efficient modulation scheme
during the second quarter of 2004. These projects reduce the requirement for new
satellite transponder bandwidth to support expected growth in rural health,
distance learning and rural Internet services.
Emerging technology that facilitates more efficient transport of fixed assigned
point-to-point satellite transmissions may become available during the second
quarter of 2004. This technology would allow fixed point-to-point transmissions
between two earth stations to transmit at the same frequency. Successful
development and implementation of this new technology may reduce the requirement
for new satellite bandwidth to meet our needs as expected growth in demand for
our services occurs. We are investigating the possible use of this new
technology to further increase the bandwidth utilization for a portion of our
satellite network.
We employ advanced digital transmission technologies to carry as many voice
circuits as possible through a satellite transponder without sacrificing voice
quality. Other technologies such as terrestrial microwave systems, metallic
cable, and fiber optics tend to be favored more for point-to-point applications
where the volume of traffic is substantial. With a sparse population spread over
a large geographic area, neither
25
terrestrial microwave nor fiber optic transmission technology is considered to
be economically feasible in rural Alaska in the foreseeable future.
Customers. We had approximately 85,600, 88,200 and 87,900 active Alaska
long-distance message telephone service subscribers at December 31, 2003, 2002
and 2001, respectively. Approximately 11,300, 11,600 and 12,200 of these were
business and government users at December 31, 2003, 2002 and 2001, respectively,
and the remainder were residential customers. Reductions in our business and
government customer counts were primarily attributed to continuing competitive
pressures in Anchorage and other markets we serve. Message telephone service
revenues (excluding broadband, operator services and Private Line revenues)
averaged approximately $10.6 million per month during 2003.
Equal access conversions have been completed in all communities we serve with
owned facilities. We estimate that we carry slightly over 50% of combined
business and residential traffic as a statewide average for both originating
interstate and intrastate message telephone service traffic.
A summary of our switched long-distance message telephone service traffic (in
minutes) follows:
Interstate Minutes
--------------------------------------
Combined
Interstate
Inter- and Inter- Intra-
South- North- Calling national national state Total
For Quarter ended bound (1) bound Card Minutes Minutes Minutes Minutes
- -----------------------------------------------------------------------------------------------------------------------
(Amounts in thousands)
March 31, 2001 126,681 74,252 2,087 1,424 204,444 38,763 243,207
June 30, 2001 141,091 76,256 1,926 1,530 220,803 40,407 261,210
September 30, 2001 160,600 87,230 1,961 1,634 251,425 39,355 290,780
December 31, 2001 130,638 90,812 1,946 1,362 224,758 39,246 264,004
------------------------------------------------------------------------------------------
Total 2001 559,010 328,550 7,920 5,950 901,430 157,771 1,059,201
==========================================================================================
March 31, 2002 133,455 91,061 1,683 1,413 227,612 40,781 268,393
June 30, 2002 144,143 105,001 1,582 1,462 252,188 44,528 296,716
September 30, 2002 159,564 90,839 1,463 1,527 253,393 46,860 300,253
December 31, 2002 138,735 78,483 1,341 1,506 220,065 43,595 263,660
------------------------------------------------------------------------------------------
Total 2002 575,897 365,384 6,069 5,908 953,258 175,764 1,129,022
==========================================================================================
March 31, 2003 132,172 78,882 1,186 1,487 213,727 45,345 259,072
June 30, 2003 142,333 83,749 1,107 1,508 228,697 52,489 281,186
September 30, 2003 159,439 96,512 1,055 1,514 258,520 55,918 314,438
December 31, 2003 144,829 107,620 1,013 1,546 255,008 49,553 304,561
------------------------------------------------------------------------------------------
Total 2003 578,773 366,763 4,361 6,055 955,952 203,305 1,159,257
==========================================================================================
--------------------------
(1) The 2001 Interstate Southbound minutes include traffic that originates
and terminates in Washington by us on behalf of an OCC customer.
All minutes data were taken from our internal billing statistics reports.
---------------------------
We entered into a significant business relationship with MCI in 1993 that
included the following agreements, among others.
o We agreed to terminate all Alaska-bound MCI long-distance traffic and MCI
agreed to terminate all of our long-distance traffic terminating in the
Lower 49 States excluding Washington, Oregon and Hawaii.
o The parties agreed to share certain communications network resources and
various marketing, engineering and operating resources. We also carry
MCI's 800, 888, 877 and 866 traffic originating in
26
Alaska and terminating in the Lower 49 States and handle traffic for MCI's
calling card customers when they are traveling in Alaska.
Concurrently with these agreements, MCI purchased approximately 31% (which
represented approximately 9% as of December 31, 2003) of GCI's Common Stock and
presently one representative serves on the Board. In conjunction with our
acquisition of cable television companies in 1996, MCI purchased an additional
two million shares at a premium to the then current market price for $13 million
or $6.50 per share. MCI sold 4.5 million shares of GCI Class A common stock in
2002.
Revenues attributed to MCI's message telephone traffic from these agreements
(excluding Private Line and other revenues) in 2003, 2002 and 2001 totaled $57.8
million, $54.7 million and $44.8 million, or 14.8%, 14.9% and 12.6% of total
revenues, respectively. The contract was amended in March 2001 extending its
term five years to March 2006. The amendment reduced the rate to be charged by
us for certain traffic over the extended term of the contract.
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. Chapter
11 allows a company to continue operating in the ordinary course of business in
order to maximize recovery for the company's creditors and shareholders.
On July 24, 2003, our contract to provide interstate and intrastate
long-distance services to MCI was extended for a minimum of five years to July
2008. The agreement sets the terms and conditions under which we originate and
terminate certain types of long-distance and data services in Alaska on MCI's
behalf. In exchange for extending the term of this exclusive contract, MCI will
receive a series of rate reductions implemented in phases over the life of the
contract.
On October 31, 2003, MCI's reorganization plan was approved by the United States
Bankruptcy Court. MCI requested in February 2004 that the United States
Bankruptcy Court for the Southern District of New York approve a 60-day
extension to the February 28, 2004 deadline to emerge from bankruptcy. An
extension to the deadline would give MCI time to complete financial filings with
the SEC. The financial filings are reported to be the last major task left for
MCI to emerge from bankruptcy.
See "Part I -- Item 1 -- Risks Relating to our Business and Operations -- Our
significant customer, MCI, is in bankruptcy," and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Long-Distance
Services Overview" for additional information.
In 1993 we entered into a long-term agreement with Sprint, pursuant to which we
agreed to terminate all Alaska-bound Sprint long-distance traffic and Sprint
agreed to handle substantially all of our international traffic. Services
provided pursuant to the contract with Sprint resulted in message telephone
service revenues (excluding Private Line and other revenues) in 2003, 2002 and
2001 of approximately $18.3 million, $23.5 million and $29.7 million, or
approximately 4.7%, 6.4% and 8.3% of total revenues, respectively. The contract
was amended in March 2002 extending its term five years to March 2007, with two
one-year automatic extensions thereafter. The amendment reduces the rate to be
charged by us for certain traffic over the extended term of the contract.
With the contracts and amendment described above, we believe that MCI, subject
to successful emergence from the bankruptcy process, and Sprint, our two largest
customers, will continue to make use of our services during the extended term.
MCI was a major customer of our long-distance services industry segment through
2003. Sprint met the threshold for classification as a major customer through
1998, and met the threshold again in 2001.
Other common carrier traffic routed to us for termination in Alaska is largely
dependent on traffic routed to our carrier customers by their customers. Pricing
pressures, new program offerings, revised business plans, and market
consolidation continue to evolve in the markets served by our carrier customers.
If, as a result, their traffic is reduced, or if their competitors' costs to
terminate or originate traffic in Alaska are reduced, our traffic
27
will also likely be reduced, and we may have to reduce our pricing to respond to
competitive pressures. We are unable to predict the effect of such changes on
our business; however the loss of one or both of MCI or Sprint as customers, a
material adverse change in our relationships with them or a material loss of or
reduction in their long-distance customers would have a material adverse effect
on our financial position, results of operations or liquidity.
We provide various services to the State of Alaska, BP Alaska, Wells Fargo Bank
Alaska, and Alyeska Pipeline Service Company. Although these customers do not
meet the threshold for classification as major customers, we do derive
significant revenues and gross profit from them. There are no other individual
customers, the loss of which would have a material impact on our revenues or
gross profit.
We provided broadband, Private Line and Private Network communications products
and services, including SchoolAccessTM and rural health Private Line facilities,
to 359 commercial and government customers at the end of 2003. These products
and services generated approximately 15.9%, 14.8% and 14.1% of total revenues
during the years ended December 31, 2003, 2002 and 2001, respectively.
Although we have several agreements to facilitate the origination and
termination of international toll traffic, we have neither foreign operations
nor export sales See "Part I -- Item 1 -- Business -- Financial Information
about our Foreign and Domestic Operations and Export Sales" for more
information.
Competition. The long-distance industry is intensely competitive and subject to
constant technological change. Competition is based upon price and pricing
plans, the type of services offered, customer service, billing services,
performance, perceived quality, reliability and availability. AT&T Alascom, as a
subsidiary of AT&T, has access to greater financial, technical and marketing
resources than we have. Future competitors could also be substantially larger
than we are, and have greater financial, technical and marketing resources than
we have.
In the long-distance market, we compete against AT&T Alascom, ACS, the Matanuska
Telephone Association, and certain smaller rural local telephone carrier
affiliates. There is also the possibility that new competitors will enter the
Alaska market. In addition, wireless services continue to grow as an alternative
to wireline services as a means of reaching customers.
Historically, we have competed in the long-distance market by offering discounts
from rates charged by our competitors and by providing desirable packages of
services. Discounts have been eroded in recent years due to lowering of prices
by AT&T Alascom and entry of other competitors into the long-distance markets we
serve. In addition, our competitors have also begun to offer their own packages
of services. If competitors lower their rates further or develop more attractive
packages of services, we may be forced to reduce our rates or add additional
services, which would have a material adverse effect on our financial position,
results of operations or liquidity.
Under the terms of the acquisition of Alascom by AT&T Corp., AT&T Alascom rates
and services must mirror those offered by AT&T Corp., so changes in AT&T Corp.
prices indirectly affect our rates and services. AT&T Corp.'s and AT&T Alascom's
interstate prices are regulated under a price cap plan whereby their rate of
return is not regulated or restricted. Price increases by AT&T Corp. and AT&T
Alascom generally improve our ability to raise prices while price decreases
pressure us to follow. We believe we have, so far, successfully adjusted our
pricing and marketing strategies to respond to AT&T Corp. and other competitors'
pricing practices. However, if competitors significantly lower their rates, we
may be forced to reduce our rates, which could have a material adverse effect on
our financial position, results of operations or liquidity.
ACS and other LECs have entered the interstate and international long-distance
market, and pursuant to RCA authorization, entered the intrastate long-distance
market. ACS and other LECs generally lease or buy long-haul capacity on
long-distance carriers' facilities to provide their interstate and intrastate
long-distance services.
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Another carrier completed construction of fiber optic facilities connecting
points in Alaska to the Lower 48 States in 1999. The additional fiber system
provides direct competition to services we provide on our owned fiber optic
facilities, however the fiber system provides an alternative routing path for us
in case of a major fiber outage in our systems. This carrier filed for Chapter
11 bankruptcy in 2001 and its assets were sold in 2002. We are currently in the
process of constructing the AULP West fiber optic cable system. If successfully
completed, it will provide us with owned capacity for route diversity.
In the wireless communications services market, we expect our PCS business
license in the future may be used to compete against Dobson Communications
Corporation ("Dobson"), ACS, Alaska DigiTel LLC, and resellers of those services
in Anchorage and other markets. The wireless communications industry continues
to experience significant consolidation. In February 2004 Cingular Wireless was
reported to have been successful in its bid to acquire AT&T Wireless for $41
billion, subject to shareholder approval. Dobson acquired its Anchorage wireless
properties in a 2003 asset exchange with AT&T Wireless. Dobson has acquired
wireless companies and negotiated roaming arrangements that give it a national
presence. Mergers and joint ventures in the industry have created large,
well-capitalized competitors with substantial financial, technical, marketing
and other resources. These competitors may be able to offer nationwide services
and plans more quickly and more economically than we can, and obtain roaming
rates that are more favorable than those that we obtain. We currently resell
Dobson analog and digital cellular services and provide limited wireless local
access and Internet services using our own facilities.
Our long-distance services sales efforts are primarily directed toward
increasing the number of subscribers we serve, selling bundled services, and
generating incremental revenues through product and feature up-sale
opportunities. We sell our long-distance communications services through
telemarketing, direct mail advertising, door-to-door selling, up-selling by our
customer service personnel, and local media advertising.
We expect competition to increase as new technologies, products and services
continue to develop. We cannot predict which of many possible future
technologies, products or services will be important to maintain our competitive
position or what expenditures will be required to develop and provide these
technologies, products or services. Our ability to compete successfully will
depend on marketing and on our ability to anticipate and respond to various
competitive factors affecting the industry, including new services that may be
introduced, changes in consumer preferences, economic conditions, market and
competitor consolidation, and pricing strategies by competitors. To the extent
we do not keep pace with technological advances or fail to timely respond to
changes in competitive factors in our industry and in our markets we could lose
market share or experience a decline in our revenue and net income. Competitive
conditions create a risk of market share loss and the risk that customers shift
to less profitable lower margin services. Competitive pressures also create
challenges to our ability to grow new business or introduce new services
successfully and execute on our business plan. Each of our business segments
also faces the risk of potential price cuts by our competitors that could
materially adversely affect our long-distance segment market share and results
of operations.
Cable Services
Industry. The programmed video services industry includes traditional broadcast
television, cable television, satellite systems such as DBS, private cable
operators, LEC entry, broadband service providers, wireless cable, open video
systems, home video sales and rentals, Internet video, and electric and gas
utilities. Cable television providers have added non-broadcast programming,
utilized improved technology to digitize signals and increase channel capacity,
and expanded service markets to include more densely populated areas and those
communities in which off-air reception is not problematic. Broadcast television
stations including network affiliates and independent stations generally serve
the urban centers. One or more local television stations may serve smaller
communities. Rural communities may not receive local broadcasting or have cable
systems but may receive direct broadcast programming via a satellite dish. More
rural communities are receiving local and regional station programming as
satellite system providers obtain local and regional programming content.
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During the last 50 years, the cable television industry has experienced
extensive growth and transformation. From initially offering clear reception of
broadcast stations, cable has grown into a broadband provider of video, Internet
and voice telephone services, expanding from analog technology to an
increasingly digital platform. The National Cable and Telecommunications
Association ("NCTA") reports that more than 30% of U.S. cable customers were
reported to have subscribed to digital cable television service at the end of
2003.
The 1996 Telecom Act enabled cable television operators to undertake a multiyear
upgrade of cable system infrastructure and lead in the transition from an analog
platform to a broadband digital platform. Industry progress was made in 2003 to
further deploy HDTV, video-on-demand, interactive and other new consumer-driven
services that rely on the broadband digital platform.
Cable television operators and programmers began providing HDTV services in
2002. HDTV has been described by some analysts as the most dramatic change for
viewers since the introduction of color television. Deployment of HDTV service
was reported by the NCTA to have increased approximately 90% during the first 11
months of 2003, reaching 70 million households by December 1, 2003 as compared
to 37 million at the end of 2002. In addition, the amount of cable HDTV
programming increased steadily, and now comes from a broader programming
services group.
The NCTA reported that in December 2002, the consumer electronics and cable
industries reached agreement on standards for the creation of digital cable
ready equipment for the home. The FCC approved those standards in September 2003
and new sets are becoming available in retail outlets.
The NCTA reported that at December 31, 2003, more than 90% of all cable homes
were reported to have been passed by cable plant with a capacity of at least
550MHz, and approximately 90 million cable homes were passed by systems with a
capacity of 750MHz or higher. The NCTA reported further that more than 95
million households were reported to have been passed by activated two-way plant
at the end of 2003. These upgrades position cable companies to compete more
effectively with their DBS competitors.
The growth of DBS is still, in part, attributable to the authority granted to
DBS operators to distribute local broadcast television stations in their local
markets by the Satellite Home Viewer Improvement Act of 1999 ("SHVIA").
Continued DBS subscriber growth is expected as local programming is offered in
more markets. The North American cable TV market was reported by the FCC to have
declined in 2003, as former cable subscribers either switched to satellite
services or cancelled their cable service. The FCC reports that since the
introduction of DBS service, its growth rate has exceeded the growth rate of
cable service by double digits in every year except in the year ended June 30,
2003, when DBS growth exceeded cable growth by approximately 9.2%. The NCTA
reports that while the number of basic cable TV subscribers decreased
approximately 0.2% in 2003, digital cable TV subscriber growth reached 23%
during the same period. Analysts believe that cable TV subscriber growth in the
future may result from cable television operators' ability to attract new
subscribers to their traditional analog video services, and from ongoing
deployments of digital video, voice, and data services.
As a converged platform, cable is a viable competitive alternative outside its
traditional video space, not only in the broadband space as a competitor with
technology such as DSL, but also in traditional telephony services as voice
becomes another application that is carried on data centric networks.
The most significant convergence of service offerings over cable plant continues
to be the pairing of Internet service with other service offerings. Cable
operators continue to build-out the broadband infrastructure that permits them
to offer high-speed Internet access. The most popular way to access the Internet
over cable is still through the use of a cable modem and personal computer.
Virtually all of the major multiple system operators offer Internet access via
cable modems in portions of their service areas. Like cable, the DBS
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industry is developing ways to bring advanced services to their customers. Many
MMDS and private cable operators also offer Internet access services. In
addition, broadband services providers continue to build advanced systems
specifically to offer a bundle of services, including video, voice, and
high-speed Internet access. We currently offer high-speed cable modem access in
Anchorage, Bethel, Cordova, Juneau, Eielson Air Force Base, Elmendorf Air Force
Base, Fairbanks, Fort Richardson, Fort Wainwright, Homer, Kenai, Kodiak,
Kotzebue, Nome, North Pole, Palmer, Petersburg, Seward, Sitka, Soldotna,
Wasilla, Wrangell, and Valdez.
The cable industry has expanded its competitive offerings to include business
and residential telephone services delivered over its fiber optic
infrastructure. Cable-delivered telephone service is a natural extension of a
network already capable of delivering digital and broadband services and
products. Once upgraded to a two-way capability, a cable system can offer
telephone service over the same cable line that already carries digital video,
high speed Internet, and other advanced services to consumers. Cable operators
are beginning to deploy IP telephony in addition to circuit-switched telephony
offerings. Circuit-switched service requires large capital expenditures for
switching equipment in addition to facility upgrades. Voice over IP is more
modular and does not require the large upfront cost needed to deploy
circuit-switched service. Voice over IP utilizes the data path already built,
and is expected to allow for easy software changes and additions to service
packages including innovative combinations of voice, data, and fax services. The
NCTA reports that cable-delivered residential telephone service subscribers
totaled an estimated 2.5 million through September 2003.
With digital transmissions and compression, cable operators are better able to
offer a variety and quality of channels to rival DBS, with pay-per-view choices
that can approximate video-on-demand. In 2000 we installed a commercial version
of video-on-demand for the Anchorage hotel market and continue to evaluate the
feasibility of deploying this technology in the residential market. With this
service, customers can access a wide selection of movies and other programming
at any time, with digital picture quality.
Kagan World Media reported that estimated 2003 total cable industry revenue
reached $51.3 billion, an estimated 3.8% increase over 2002. Operators face
constant pressure to keep rate increases at a minimum. According to the FCC, the
average monthly rate for cable services rose 8.2% over the 12-month period
ending July 1, 2002. Over the past several years, the FCC reports that operators
have averaged annual rate increases in the 5% range. While many public-interest
groups and press reports note that cable rates have increased at factors in
excess of the general rate of inflation, cable rates are reported to have lagged
national inflation on a per channel basis.
The FCC reports that cable operators attributed rate increases to increased
programming costs, an increase in the number of video and non-video services
offered, system upgrades, and general inflationary pressures. The escalation of
programming costs continues to adversely impact the economics of cable
operators. Programming costs are reported to be the largest cost item for major
system operators, and the fastest growing operating cost item for most. The NCTA
reported that, on the basis of financial data supplied to them by nine cable
operators, they found that these operators' yearly programming expenses, on a
per-subscriber basis, increased from $122 in 1999 to $180 in 2002 -- a 48
percent increase.
The FCC reports that 63.7% of homes passed by cable television facilities were
subscribers to cable television services at June 30, 2003. Our overall average
penetration of homes passed was 66.4% at December 31, 2003 with individual
systems ranging from 51.2% to 85.8%.
In Alaska, cable television was introduced in the 1970s to provide television
signals to communities with few or no available off-air television signals and
to communities with poor reception or other reception difficulties caused by
terrain interference. Since that time, as on the national level, the cable
television providers in Alaska have added non-broadcast programming, and DBS
providers have added local broadcast programming.
The market for programmed video services in Alaska includes traditional
broadcast television, cable television, wireless cable, and DBS systems.
Broadcast television stations including network affiliates and independent
stations serve the urban centers in Alaska. Eight, six and five broadcast
stations serve Anchorage, Fairbanks and Juneau, respectively. In addition,
several smaller communities such as Bethel are served by one local
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television station that is typically a PBS affiliate. Other rural communities
without cable systems receive a single state sponsored channel of television by
a satellite dish and a low power transmitter.
Advancements in technology, facility upgrades and plant expansions to enable the
ongoing migration to digital programming are expected to continue to have a
significant impact on cable services in the future. We expect that changing
federal, state and local regulations, intense competition, and developing
technologies and standards will continue to challenge the industry.
See "Part I -- Item I -- Business, Regulation, Franchise Authorizations and
Tariffs -- Cable Services" for more information.
General. We are the largest operator of cable systems in Alaska, serving
approximately 134,400 residential, commercial and government basic subscribers
at December 31, 2003. Our cable television systems serve 35 communities and
areas in Alaska, including the state's four largest urban areas, Anchorage,
Fairbanks, the Matanuska-Susitna Valley and Juneau. Our statewide cable systems
consist of approximately 2,300 miles of installed cable plant having 330 to 625
MHz of channel capacity.
Products. Programming services offered to our cable television systems
subscribers differ by system (all information as of December 31, 2003).
Anchorage and Mat-Su Valley system. The Anchorage and Mat-Su Valley system,
which is located in the urban center for Alaska, is fully addressable and offers
a basic analog service that includes approximately 18 channels and 2 additional
analog tiers offering 39 and 4 channels. This system also carries digital
service, offering enhanced picture and audio quality, over 25 digital special
interest channels, 45 channels of digital music, 2 channels of HDTV, digital
video recorders (beginning in 2004), and over 60 channels of premium and
pay-per-view products. Premium services are available either individually or as
part of a value package. Commercial subscribers such as hospitals, hotels and
motels are charged negotiated monthly service fees. Apartment and other
multi-unit dwelling complexes can receive basic service at a negotiated bulk
rate with the opportunity for additional services on a tenant pay basis.
Fairbanks, Juneau, Kenai, Soldotna, and Ketchikan systems. These systems offer a
basic analog service with 12 to 18 channels and an additional analog tier with
34 to 42 channels. These systems also carry digital service, over 17 special
interest channels, 45 channels of digital music, and over 50 channels of premium
and pay-per-view products.
Sitka System. This location offers an advanced analog service with a 15 channel
basic service, a 37 channel expanded basic service, five channels of premium
service, four channels of pay-per-view and 31 music channels.
Other systems. We own systems in the Alaska communities and areas of Bethel,
Cordova, Homer, Kodiak, Kotzebue, Nome, Petersburg, Seward, Valdez, and
Wrangell. These analog systems offer a basic service with 10 to 15 channels and
an expanded basic service with 27 to 42 channels. Several channels of premium
service are also available in all systems. Music service is available in Kodiak,
Petersburg, Valdez and Wrangell. Pay-per-view is available in Homer, Kodiak,
Kotzebue, Nome, Petersburg, Seward and Wrangell.
Facilities. Our cable television businesses are located in Anchorage, Bethel,
Chugiak, Cordova, Douglas, Eagle River, Eielson AFB, Elmendorf AFB, Fairbanks,
Fort Greely, Fort Richardson, Fort Wainwright, Homer, Juneau, Kachemak, Kenai,
Ketchikan, Kodiak, Kodiak Coast Guard Air Station, Kotzebue, Mount Edgecombe,
Nome, North Pole, Palmer, Petersburg, Peters Creek, Prudhoe Bay, Saxman, Seward,
Sitka, Soldotna, Valdez, Ward Cove, Wasilla, and Wrangell, Alaska. Our
facilities include cable plant and head-end distribution equipment. Certain of
our head-end distribution centers are co-located with customer service, sales
and administrative offices.
Customers. Our cable systems passed approximately 202,200, 196,900 and 192,200
homes at December 31, 2003, 2002 and 2001, respectively, and served
approximately 134,400, 136,100 and 132,000 basic
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subscribers at December 31, 2003, 2002 and 2001, respectively. Revenues derived
from cable television services totaled $96.0 million, $88.7 million and $76.6
million in 2003, 2002 and 2001, respectively.
Competition. The 1996 Telecom Act removed barriers to telephone company or LEC
entry into the video marketplace to facilitate competition between incumbent
cable operators and telephone companies. At the time of the 1996 Telecom Act, it
was expected that LECs would compete in the video delivery market and that cable
operators would provide local telephone exchange service. The FCC reports that
the four largest ILECs have largely exited the video business. A few smaller
LECs continue to offer, or are preparing to offer, multi-channel video
programming distribution.
We believe our greatest source of competition comes from the DBS industry. Two
major companies, DirecTV and Echostar are currently offering nationwide
high-power DBS services. Due to the existing structure of satellite orbital
slots, satellite transmission power and lack of local signals, competition from
DBS providers has been limited.
In the past, the majority of Alaska DBS subscribers were required to install
larger satellite dishes (generally three to six feet in diameter) because of the
weaker satellite signals currently available in northern latitudes, particularly
in communities surrounding, and north of, Fairbanks. In addition, the satellites
had a relatively low altitude above the horizon when viewed from Alaska, making
their signals subject to interference from mountains, buildings and other
structures. Recent satellite placements provide Alaska and Hawaii residents with
a DBS package that requires a smaller satellite dish (typically 18 inches);
however, a second larger dish is required if the subscriber wants to receive a
channel line-up similar to that provided by our cable systems. In addition to
the dish size and cost deterrents, DBS signals are subject to degradation from
atmospheric conditions such as rain and snow.
We expect the potential launch of new satellites, the addition of local stations
in 2003, and the changing nature of technology and of the DBS business will
result in greater satellite coverage and competition in Alaska.
Our cable television systems face competition from alternative methods of
receiving and distributing television signals, including digital video service
over telephone lines, wireless and SMATV systems, and from other sources of
news, information and entertainment such as off-air television broadcast
programming, newspapers, movie theaters, live sporting events, interactive
computer services, Internet services and home video products, including
videotape cassette and video disks. Our cable television systems also face
competition from potential overbuilds of our existing cable systems by other
cable television operators.
Several ILECs in the Lower 48 and the largest ILEC in Alaska have announced
marketing arrangements to provide DBS services along with local telephone and
other services. Similar arrangements could be extended to other ILECs in the
markets we serve in Alaska. In August 2003 DBS service provider EchoStar
launched Anchorage local network programming for an additional fee. We will
continue to strive to compete effectively by providing, at reasonable prices, a
greater variety of communication services than are available off-air or through
other alternative delivery sources. Additionally, we believe we offer superior
technical performance and responsive community-based customer service.
In November 2003, the ILEC in the Mat-Su Valley launched digital video service
over telephone lines in limited areas. Their product offerings and price points
are similar to our product offerings.
Competitive forces will be counteracted by offering expanded programming through
digital services and by providing high-speed data services. By June 30, 2003,
system upgrades were completed to make our systems reverse activated, thus
creating the necessary infrastructure to offer cable modem service to greater
than 99% of our homes passed. Over the succeeding two years, we expect to
establish a digital platform in the majority of our systems. These plant
upgrades combined with local broadcast programming are expected to provide an
attractive product in comparison to competitive offerings. In 2002, seven-year
retransmission agreements were signed with Anchorage broadcasters. These
agreements provide for the uplink/downlink of their signals into all our
systems, assuring local programming is available for the foreseeable future.
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High-speed data access competition takes two primary forms: cable modem access
service and DSL service. DSL service allows Internet access to subscribers at
data transmission speeds similar to cable modems over traditional telephone
lines. Numerous companies, including telephone companies, have introduced DSL
service and certain telephone companies are seeking to provide high-speed
broadband services, including interactive online services, without regard to
present service boundaries and other regulatory restrictions. Companies in the
Lower 49 States, including telephone companies and ISPs, have asked local, state
and federal governments to mandate that cable communications systems operators
provide capacity on their cable infrastructure so that these companies and
others may deliver Internet services directly to customers over cable
facilities. The FCC determined in March 2002 that cable system operators will
not be required to provide such "open access" to others. See "Part I -- Item 1
- -- Business, Regulation, Franchise Authorizations and Tariffs -- Cable Services"
for more information.
Other new technologies may become competitive with non-entertainment services
that cable television systems can offer. The FCC has authorized television
broadcast stations to transmit textual and graphic information useful to both
consumers and businesses. The FCC also permits commercial and non-commercial FM
stations to use their subcarrier frequencies to provide non-broadcast services
including data transmissions. The FCC established an over-the-air interactive
video and data service that will permit two-way interaction with commercial and
educational programming along with informational and data services. LECs and
other common carriers also provide facilities for the transmission and
distribution to homes and businesses of interactive computer-based services,
including the Internet, as well as data and other non-video services. The FCC
has conducted spectrum auctions for licenses to provide PCS, as well as other
services. PCS and other services will enable license holders, including cable
operators, to provide voice and data services. We own a statewide license to
provide PCS in Alaska.
Cable television systems generally operate pursuant to franchises granted on a
non-exclusive basis. The 1992 Cable Act gives local franchising authorities
jurisdiction over basic cable service rates and equipment in the absence of
"effective competition," prohibits franchising authorities from unreasonably
denying requests for additional franchises and permits franchising authorities
to operate cable systems. Well-financed businesses from outside the cable
industry (such as the public utilities that own certain of the poles on which
cable is attached) may become competitors for franchises or providers of
competing services.
Our cable services sales efforts are primarily directed toward increasing the
number of subscribers we serve, selling bundled services, and generating
incremental revenues through product and feature up-sale opportunities. We sell
our cable services through telemarketing, direct mail advertising, door-to-door
selling, up-selling by our customer service personnel, and local media
advertising.
Advances in communications technology as well as changes in the marketplace are
constantly occurring. We cannot predict the effect that ongoing or future
developments might have on the communications and cable television industries or
on us specifically.
Local Access Services
Industry. The FCC reported that end-user customers obtained local service at
June 30, 2003 by means of 156 million ILEC switched access lines, 27 million
CLEC switched access lines, and 148 million mobile wireless telephone service
subscriptions.
The FCC reported that total CLEC end-user switched access lines increased by 9%
during the first half of 2003, from 25 million to 27 million lines. By
comparison, total CLEC lines increased by 14% during the preceding six months,
from 22 to 25 million lines. For the full twelve month period ending June 30,
2003, CLEC end-user lines increased by 24%. Approximately 15% of the 183 million
total end-user switched access lines were reported by CLECs, compared to 11% a
year earlier.
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The FCC further reported that approximately 62% of reported CLEC switched access
lines serve residential and small business customers, compared to approximately
78% of ILEC lines. CLECs reported 12% of total residential and small business
switched access lines, compared to 8% a year earlier.
The FCC reported that CLECs reported providing about 18% (a decline from 43% in
December 1999) of their switched access lines by reselling the services of other
carriers, about 58% (an increase from 24% in December 1999) by means of UNE
loops leased from other carriers, and about 23% of switched access lines over
their own local loop facilities.
The FCC reports that since December 1999, the percentage of nationwide CLEC
switched access lines reported to be provisioned by reselling services has
declined steadily, to 18% at the end of June 2003, and the percentage
provisioned over UNE loops has grown steadily, to 58% at June 30, 2003. The FCC
reported that ILECs provided about 2.2 million switched access lines to
unaffiliated carriers on a resale basis at the end of June 2003, down from 2.7
million six months earlier. The FCC reported that ILECS provided 17.2 million
unbundled loops (with or without unbundled switching) to unaffiliated carriers
at June 30, 2003, up from 14.5 million six months earlier.
UNE loops provided with ILEC switching (UNE-Platform) have increased faster than
UNE loops provided without switching. The FCC reported that ILECs provided
approximately 27% more UNE loops with switching to unaffiliated carriers at the
end of June 2003 than they reported six months earlier (13.0 million compared to
10.2 million) and about 1% fewer UNE loops without switching (about 4.2 million
compared to 4.3 million).
The FCC reports that during the first half of 2003, cable-telephony lines
increased by 1% to 3 million lines, which constituted approximately 11% of
switched access lines provided by CLECs and approximately 2% of total switched
access lines. Cable telephony deployments in the U. S. continue to expand using
proprietary, circuit switched technology. More hardware has become available
that is DOCSIS 1.1 qualified, which provides quality of service necessary for
voice services. Cable telephony services continue to expand as cable television
operators expand their video, data, and voice service offerings. Industry
analysts estimate that worldwide cable telephony subscribers reached 10 million
in 2003 and are forecast to rise to over 19 million in 2007, with revenues
estimated at $4 billion in 2003 and to rise to over $6 billion in 2007. A
significant driver for cable telephony is the bundling of telephony services
with existing digital video and high speed data services. We expect to begin
deploying a cable telephony solution in the second quarter of 2004 that meets
our needs and the needs of our customers.
The communications industry has been weighed down by regulatory uncertainty as a
result of successive court reversals of the FCC's core local competition rules.
These court actions have left providers with little guidance about the network
elements that will be available at regulated cost-based rates and have put at
risk current plans of some businesses that were developed based on the
challenged rules.
See "Part I -- Item I -- Business, Regulation, Franchise Authorizations and
Tariffs -- Local Access Services" for more information.
General. Our local exchange and exchange access services ("local access
services") segment entered the local services market in Anchorage in 1997,
providing services to residential, commercial, and government users. At December
31, 2003 we could access approximately 92%, 71%, and 48% of Anchorage,
Fairbanks, and Juneau area local loops, respectively, from our collocated remote
facilities and DLC installations.
Products. Our collocated remote facilities access the ILEC's unbundled network
element loops, allowing us to offer full featured, switched-based local service
products to both residential and commercial customers, and provide Private Line
service products to commercial customers. In areas where we do not have access
to ILEC loop facilities, we offer service using total service resale of the
ILEC's local service in Anchorage, and either total service resale or UNE
platform in Fairbanks and Juneau.
35
Our package offerings are competitively priced and include popular features,
such as the following.
o Enhanced call waiting o Caller ID
o Caller ID on call waiting o Free caller ID box
o Anonymous call rejection o Call forwarding
o Call forward busy o Call forward no answer
o Enhanced call waiting o Fixed call forwarding
o Follow me call o Intercom service forwarding
o Multi-distinctive ring o Per line blocking
o Selective call forwarding o Selective call acceptance
o Selective call rejection o Selective distinctive alert
o Speed calling o Three way calling
o Voice mail o Inside wire repair plan
o Non-listed number o Non-published number
Facilities. In Anchorage we utilize a centrally located Lucent 5ESS host
switching system, have collocated six remote facilities adjacent to or within
the ILEC's local switching offices to access unbundled loop network elements,
and have installed a DLC system adjacent to a smaller, seventh ILEC wire center
for access to unbundled loop network elements. Remote and DLC facilities are
interconnected to the host switch via our diversely routed fiber optic links.
Additionally, we provided our own facilities-based services to many of
Anchorage's larger business customers through further expansion and deployment
of SONET fiber transmission facilities, DLC facilities, and leased HDSL and T-1
facilities.
In Fairbanks and Juneau we employ Lucent Distinctive Remote Module switching
systems (5ESS) and have collocated DLC systems adjacent to the ILEC's local
switching office and within the ILEC's wire center to access unbundled loop
network elements.
Customers. We had approximately 106,100, 96,100 and 79,200 local lines in
service from Anchorage, Fairbanks, and Juneau, Alaska subscribers at December
31, 2003, 2002 and 2001, respectively. We began providing local access services
in Fairbanks in 2001 and in Juneau in 2002. The 2003 line count consists of
approximately 61,900 residential access lines and 36,900 business access lines,
including 7,300 Internet service provider access lines. We ended 2003 with
market share gains in substantially all market segments.
Revenues derived from local access services in 2003, 2002 and 2001 totaled $39.0
million, $32.1 million and $25.2 million, respectively, representing
approximately 10.0%, 8.7% and 7.1% of our total revenues in 2003, 2002 and 2001,
respectively.
Competition. In the local access services market the 1996 Telecom Act, judicial
decisions, and state legislative and regulatory developments have increased the
likelihood that barriers to local telephone competition will be reduced or
removed. These initiatives include requirements that ILECs negotiate with
entities, including us, to provide interconnection to the existing local
telephone network, to allow the purchase, at cost-based rates, of access to
unbundled network elements, to establish dialing parity, to obtain access to
rights-of-way and to resell services offered by the ILEC.
The 1996 Telecom Act also provides ILECs with new competitive opportunities. We
believe that we have certain advantages over these companies in providing
communications services, including awareness by Alaskan customers of the GCI
brand-name, our facilities-based communications network, and our prior
experience in, and knowledge of, the Alaskan market.
Data obtained from the RCA indicates that there are 23 ILECs and six CLECs
certified to operate in the State of Alaska. We compete against ACS, the ILEC in
Anchorage, Juneau and Fairbanks, and with AT&T Corp. in the Anchorage service
area. AT&T Corp. offers local exchange service only to residential customers
through total service resale. We also compete in the business market against
TelAlaska Long Distance, Inc. ("TelAlaska") in the Anchorage service area.
36
ACS, through subsidiary companies, provides local telephone services in
Fairbanks and Juneau, Alaska. These ACS subsidiaries are classified as Rural
Telephone Companies under the 1996 Telecom Act, which entitles them to an
exemption of certain material interconnection terms of the 1996 Telecom Act,
until and unless such "rural exemption" is examined and discontinued by the RCA.
On October 11, 1999, the RCA issued an order terminating rural exemptions for
the ACS subsidiaries operating in the Fairbanks and Juneau markets so that we
could compete with these companies in the provision of local telephone service
pursuant to the terms of Section 251(c) of the 1996 Telecom Act. These rural
exemptions limited the obligation of the ILECs in these markets to provide us
access to UNEs at rates under the pricing standard established by the FCC.
Upon appeal by ACS, on December 12, 2003, the Alaska Supreme Court issued a
decision in which it reversed the RCA's rural exemption decision on the
procedural ground that the competitor, not the incumbent, must shoulder the
burden of proof. The Court remanded the matter to the RCA for reconsideration
with the burden of proof assigned to us. Additionally, the Court left it to the
RCA to decide as a matter of discretion whether to change the state of
competition during the remand period. In accordance with the Court's ruling, the
RCA has re-opened the rural exemption dockets and scheduled a hearing to
commence on April 19, 2004. Additionally, the RCA issued a ruling on January 16,
2004, in which the Commission determined that we can continue to rely on UNEs
from ACS to serve our existing customers in Juneau and Fairbanks but that we may
not serve new customers through purchase of UNEs pending the completion of the
remand proceeding. Until this matter is resolved, we may serve new customers
using wholesale resale. The outcome of this proceeding could result in a change
in our cost of serving these markets via the facilities of ACS or via wholesale
offerings and could adversely impact our ability to offer local telephone
service in these markets. We believe it is unlikely that the rural exemptions
will be restored in these markets; however, if they are restored, we could be
forced to discontinue providing service to residential customers and perhaps to
commercial customers in these locations.
We expect further competition in the marketplaces we serve as other companies
may receive certifications. The Company expects competition in business customer
telephone access, Internet access, DSL and Private Line markets.
We continue to offer local exchange services to substantially all consumers in
the Anchorage, Juneau and Fairbanks service areas, primarily through our own
facilities and unbundled local loops leased from ACS.
Our local services sales efforts continue to focus on increasing the number of
subscribers we serve, selling bundled services, and generating incremental
revenues through product and feature up-sale opportunities. We sell our local
services through telemarketing, direct mail advertising, up selling by our
customer service personnel, and door-to-door selling.
You should see "Part I -- Item 1 -- Business, Regulation, Franchise
Authorizations and Tariffs -- Communications Operations" for more information.
Internet Services
Industry. The Internet continues to expand at a significant rate. The Internet
Systems Consortium reports that approximately 233 million web sites were hosted
at the end of January 2004, an increase of 35% from 172 million at the end of
January 2003. The FCC reports that the percent of U. S. households with a
computer grew from 39% in 1997 to 56% in 2001, and that the percent of
households with Internet access increased from 19% to 50% during the same
period.
Dial-up Internet service continues to be the most widely used method to access
the Internet. As of year-end 2003, an estimated 57% of U. S. Internet connected
households were reported by Nielsen//NetRatings to access the Internet using
dial-up modems. Growth in the proportion of households accessing the Internet
with broadband connections has accelerated and is expected to exceed dial-up
modem access within several years. We believe high-speed Internet access will
likely become the dominant access method for residential Internet users as
broadband becomes more widely available, more flexibly priced, and as new kinds
of
37
entertainment, content and services emerge. Jupiter Research estimate that 50%
of all United States Internet homes are forecast to use broadband connections by
2008.
The FCC reported that high-speed lines (those that provide services at speeds
exceeding 200 kbps in at least one direction) connecting homes and businesses to
the Internet increased by 23% during the second half of 2002, from 16.2 million
to 19.9 million lines, compared to a 27% increase, from 12.8 million to 16.2
million lines, during the first half of 2002. Approximately 17.4 million of the
19.9 million total lines served residential and small business subscribers, a
24% increase from the 14.0 million lines reported six months earlier.
The FCC further reported that of the 19.9 million high-speed lines, 13.0 million
provided advanced services, i.e., services at speeds exceeding 200 kbps in both
directions. Advanced services lines increased 24% from 10.4 million lines to
13.0 million lines during the second half of 2002. Advanced services lines
increased 41% from 7.4 million to 10.4 million lines during the first half of
2002. Approximately 10.8 million of the 13.0 million advanced services lines
served residential and small business subscribers.
Cable modem Internet access continues to be the primary means of accessing the
Internet in the United States over broadband networks. Industry analysts believe
that a cable network upgrade is more efficient than is a DSL network upgrade,
largely because of the individual local loops that must be provisioned for DSL,
with central office proximity a severe mitigating factor. In contrast, cable
networks are upgraded into smaller discrete nodes. Less costly and more
efficient upgrades required for cable modem usage lead to greater scalability.
Analysts believe that cable operators have more incentive to upgrade networks
and have potentially higher returns due to the potential for new sources of
revenue from digital cable, telephony and other products that are made possible
from such upgrades.
DSL is the most significant broadband competitor to cable modem service, with an
estimated 7 million United States subscribers through June 2003 according to FCC
reports. Despite intense competition from DSL service providers, cable's
offering of high-speed Internet access was reported by the FCC to have
experienced customer growth of almost 19% during the first six months of 2003.
The FCC reports that United States cable modem subscribers totaled an estimated
13.8 million through June 2003 as compared to 3.7 million in 2000. The FCC
reported that high-speed asymmetric DSL lines in service increased by 19% during
the first half of 2003, from 6.5 million to 7.7 million lines, compared to a 27%
increase, from nearly 5.1 million to 6.5 million lines, during the preceding six
months.
Satellite technologies currently have less than one percent of the market and
are not expected to appreciably increase market share over the next several
years.
Industry analysts believe that broadband deployment will continue to bring
valuable new services to consumers and advance many other objectives, such as
improving education advancing economic opportunities. With an estimated 73
million cable households in the United States and an estimated 57 million
households owning a computer, broadband cable Internet access growth is expected
to continue as new advanced services are deployed.
As state and local governments attempt to increase funding sources for their
programs, taxes on Internet access continue to be debated and proposed. The
Internet Tax Freedom Act was enacted in 1998 but expired in October 2001. A
similar bill extended the moratorium until November 2003. A new bill (H.R. 49)
is under review by the House of Representatives to permanently extend the tax
moratorium. A similar bill (S. 52) is under review by the Senate Committee on
Commerce, Science, and Transportation. The bills would make permanent the
moratorium on taxes on Internet access, regardless of the speed of that access,
and on multiple or discriminatory taxes on electronic commerce. Analysts believe
that keeping the Internet free of such taxes will create an environment for
innovation and will ensure that electronic commerce will remain a vital and
growing part of the economy of the United States.
See "Part I -- Item I -- Business, Regulation, Franchise Authorizations and
Tariffs -- Internet Services" for more information.
38
General. Our Internet services division entered the Internet services market in
1998, providing retail services to residential, commercial, and government users
and providing wholesale carrier services to other ISPs. We were the first
provider in Anchorage to offer commercially available DSL products.
Products. We primarily offer three types of Internet access for residential use:
dial-up, fixed wireless and high-speed cable modem Internet access. Our
residential high-speed cable modem Internet service offers up to 2.4 Mbps access
speeds as compared with up to 56 kbps access through standard copper wire
dial-up modem access. Our fixed wireless offers low speed 64 kbps and higher
speed 256 kbps versions. We provide 24-hour customer service and technical
support via telephone or online. The entry-level cable modem service also offers
free data transfer up to one gigabyte per month at a rate of 64 Kbps and can be
connected 24-hours-a-day, 365-days-a-year, allowing for real-time information
and e-mail access. This product acts as a dialup replacement and upgrade since
it is always connected and provides more efficient data transfer. Cable modems
use our coaxial cable plant that provides cable television service, instead of
the traditional ILEC copper wire. Coaxial cable has a much greater carrying
capacity than telephone wire and can be used to simultaneously deliver both
cable television (analog or digital) and Internet access services.
At the end of 2003 we launched a plan to increase the speed of our entry level
broadband cable modem level service from 384 kbps to 512 kbps for new and
current customers. The project was completed in January 2004. We also adjusted
the speed including data transfer for all of our cable modem packages to meet
the demand for higher speed access. Additional cable modem service packages
tailored to both heavy residential and commercial Internet users are also
available.
We currently offer several Internet service packages for commercial use: dial-up
access, DSL, T-1 and fractional T-1 leased line, frame relay, multi-megabit and
high-speed cable modem Internet access. Our business high-speed cable modem
Internet service offers access speeds ranging from 512 kbps to 2.4 Mbps, free
monthly data transfers of up to 30 gigabytes and free 24-hour customer service
and technical support. Our DSL offering can support speeds of up to 768 kbps
over the same copper line used for phone service. Business services also include
a personalized web page, domain name services, and e-mail addressing.
We also provide dedicated access Internet service to commercial and public
organizations in Alaska. We offer a premium service and currently support many
of the largest organizations in the state such as Conoco Phillips Alaska, the
State of Alaska and the Anchorage School District. We have hundreds of other
enterprise customers, both large and small, using this service.
Bandwidth is made available to our Internet segment through our AULP undersea
fiber cable system and our Galaxy XR transponders. Our Internet offerings are
coupled with our long-distance, cable television, and local services offerings
and provide free basic Internet services (both dialup and cable modem access) if
certain plans are selected. Value-added Internet features are available for
additional charges.
We provide Internet access for schools and health organizations using a platform
including many of the latest advancements in technology. Services are delivered
through a locally available circuit, our existing lines, and/or satellite earth
stations.
Facilities. The Internet is an interconnected global public computer network of
tens of thousands of packet-switched networks using the Internet protocol. The
Internet is effectively a network of networks routing data throughout the world.
We provide access to the Internet using a platform that includes many of the
latest advancements in technology. The physical platform is concentrated in
Anchorage and is extended into many remote areas of the state. Our Internet
platform includes the following:
o Our Anchorage facilities are connected to multiple Internet access points
in Seattle through multiple, diversely routed networks.
o We use multiple routers on each end of the circuits to control the flow
of data and to provide resiliency.
o Our Anchorage facility consists of routers, a bank of servers that
perform support and application functions, database servers providing
authentication and user demographic data, layer 2 gigabit
39
switch fabrics for intercommunications and broadband services (cable
modem and DSL), and access servers for dial-in users.
o SchoolAccess(TM) Internet service delivery to over 210 schools in rural
Alaska and 30 schools in Montana, New Mexico and Arizona is accomplished
by three variations on primary delivery systems:
o In communities where we have terrestrial interconnects or provide
existing service over regional earth stations, we have configured
intermediate distribution facilities. Schools that are within
these service boundaries are connected locally to one of those
facilities.
o In communities where we have extended communications services via
our DAMA earth station program, SchoolAccessTM is provided via a
satellite circuit to an intermediate distribution facility at the
Eagle River Earth Station.
o In communities or remote locations where we have not extended
communications services, SchoolAccessTM is provided via a
dedicated (usually on premise) DAMA VSAT satellite station. The
DAMA connects to an intermediate distribution facility located in
Anchorage.
Dedicated Internet access is delivered to a router located at the service point.
Our Internet management platform constantly monitors this router; continual
communications are maintained with all of the routers in the network. The
availability and quality of service, as well as statistical information on
traffic loading, are continuously monitored for quality assurance. The
management platform has the capability to remotely access routers, permitting
changes in router configuration without the need to physically be at the service
point. This management platform allows us to offer outsourced network monitoring
and management services to commercial businesses. Many of the largest commercial
networks in the State of Alaska use this service, including the state
government.
GCI.net offers a unique combination of innovative network design and aggressive
performance management. Our Internet platform has received a certification that
places it in the top one percent of all service providers worldwide and is the
only ISP in Alaska with such a designation. We operate and maintain what we
believe is the largest, most reliable, and highest performance Internet network
in the State of Alaska.
Customers. We had approximately 95,700, 89,500 and 72,700 total active
residential and commercial Internet subscribers at December 31, 2003, 2002 and
2001, respectively. Included in these totals were approximately 46,000, 36,200
and 26,500 active residential and commercial cable modem Internet subscribers at
December 31, 2003, 2002 and 2001, respectively. Revenues derived from Internet
services totaled $19.8 million, $15.6 million and $12.0 million, in 2003, 2002
and 2001, respectively, representing approximately 5.1%, 4.2% and 3.4% of our
total revenues in 2003, 2002 and 2001, respectively.
Our Internet services sales efforts are primarily directed toward increasing the
number of subscribers we serve, selling bundled services, and generating
incremental revenues through product and feature upsale opportunities. We sell
our Internet services through telemarketing, direct mail advertising,
door-to-door selling, up selling by our customer service and technical support
personnel, and local media advertising.
Competition. The Internet industry is highly competitive, rapidly evolving and
subject to constant technological change. Competition is based upon price and
pricing plans, service packages, the types of services offered, the technologies
used, customer service, billing services, perceived quality, reliability and
availability. As of December 31, 2003, we competed with more than seven Alaska
based Internet providers, and competed with other domestic, non-Alaska based
providers that provide national service coverage. Several of the providers have
substantially greater financial, technical and marketing resources than we do.
ACS and other Alaska telephone service providers are providing competitive
high-speed DSL services over their telephone lines in direct competition with
our high-speed cable modem service. DBS providers and others provide wireless
high speed Internet service in competition with our high-speed cable modem
services. Competitive local fixed wireless providers are providing service in
certain of our markets.
Niche providers in the industry, both local and national, compete with certain
of our Internet service products, such as web hosting, list services and email.
40
Marketing and Sales
Our marketing and sales strategy hinges on our ability to leverage (i) our
unique position as an integrated provider of multiple communications, Internet
and cable services, (ii) our well-recognized and respected brand name in the
Alaskan marketplace and (iii) our leading market positions in long-distance,
Internet and cable television services. By continuing to pursue a marketing
strategy that takes advantage of these characteristics, we believe we can
increase our residential and commercial customer market penetration and
retention rates, increase our share of our customers' aggregate voice, video and
data services expenditures and achieve continued growth in revenues and
operating cash flow.
Environmental Regulations
We may undertake activities that, under certain circumstances may affect the
environment. Accordingly, they are subject to federal, state, and local
regulations designed to preserve or protect the environment. The FCC, the Bureau
of Land Management, the United States Forest Service, and the National Park
Service are required by the National Environmental Policy Act of 1969 to
consider the environmental impact before the commencement of facility
construction.
We believe that compliance with such regulations has no material effect on our
consolidated operations. The principal effect of our facilities on the
environment would be in the form of construction of facilities and networks at
various locations in Alaska and between Alaska, Seattle, Washington, and
Warrenton, Oregon. Our facilities have been constructed in accordance with
federal, state and local building codes and zoning regulations whenever and
wherever applicable. Some facilities may be on lands that may be subject to
state and federal wetland regulation.
Uncertainty as to the applicability of environmental regulations is caused in
major part by the federal government's decision to consider a change in the
definition of wetlands. Most of our facilities are on leased property, and, with
respect to all of these facilities, we are unaware of any violations of lease
terms or federal, state or local regulations pertaining to preservation or
protection of the environment.
Our Alaska United projects consist, in part, of deploying land-based and
undersea fiber optic cable facilities between Anchorage, Juneau, Seward, Valdez,
and Whittier, Alaska, Seattle, Washington, and Warrenton, Oregon. The engineered
routes pass over wetlands and other environmentally sensitive areas. We believe
our construction methods used for buried cable have a minimal impact on the
environment. The agencies, among others, that are involved in permitting and
oversight of our cable deployment efforts are the United States Army Corps of
Engineers, The National Marine Fisheries Service, United States Fish & Wildlife,
United States Coast Guard, National Oceanic and Atmospheric Administration,
Alaska Department of Natural Resources, and the Alaska Office of the
Governor-Governmental Coordination. We are unaware of any violations of federal,
state or local regulations or permits pertaining to preservation or protection
of the environment.
In the course of operating the cable television and communications systems, we
have used various materials defined as hazardous by applicable governmental
regulations. These materials have been used for insect repellent, locate paint
and pole treatment, and as heating fuel, transformer oil, cable cleaner,
batteries, diesel fuel, and in various other ways in the operation of those
systems. We do not believe that these materials, when used in accordance with
manufacturer instructions, pose an unreasonable hazard to those who use them or
to the environment.
Patents, Trademarks and Licenses
We do not hold patents, franchises or concessions for communications services or
local access services. We do hold registered service marks for the DigistarTM
logo and letters GCITM, and for the term SchoolAccessTM. The Communications Act
of 1934 gives the FCC the authority to license and regulate the use of the
electromagnetic spectrum for radio communications. We hold licenses through our
long-distance services industry segment for our satellite and microwave
transmission facilities for provision of long-distance services.
41
We acquired a license for use of a 30-MHz block of spectrum for providing PCS
services in Alaska. We are required by the FCC to provide adequate broadband PCS
service to at least two-thirds of the population in our licensed areas within 10
years of being licensed. The PCS license has an initial duration of 10 years. At
the end of the license period, a renewal application must be filed. We believe
renewal will generally be granted on a routine basis upon showing of compliance
with FCC regulations and continuing service to the public. Licenses may be
revoked and license renewal applications may be denied for cause. We expect to
renew the PCS license for an additional 10-year term under FCC rules.
We acquired a LMDS license in 1998 for use of a 150-MHz block of spectrum in the
28 GHz Ka-band for providing wireless services. The LMDS license has an initial
duration of 10 years. Within 10 years, licensees will be required to provide
"substantial service" in their service regions. Our operations may require
additional licenses in the future.
Earth stations are licensed generally for 15 years. The FCC also issues a single
blanket license for a large number of technically identical earth stations
(e.g., VSATs).
Regulation, Franchise Authorizations and Tariffs
The following summary of regulatory developments and legislation does not
purport to describe all present and proposed federal, state, and local
regulation and legislation affecting our businesses. Other existing federal and
state regulations are currently the subject of judicial proceedings, legislative
hearings and administrative proposals that could change, in varying degrees, the
manner in which these industries operate. We cannot predict at this time the
outcome of these proceedings and legislation, their impact on the industries in
which we operate, or their impact on us.
Communications Operations
General. We are subject to regulation by the FCC and by the RCA as a
non-dominant provider of long-distance services. We file tariffs with the FCC
for interstate access and operator services, and limited international
long-distance services, subject to the FCC's mandatory detariffing policies, and
with the RCA for intrastate service. Such tariffs routinely become effective
without intervention by the FCC, RCA or other third parties since we are a
non-dominant carrier. Military franchise requirements also affect our ability to
provide communications and cable television services to military bases.
The 1996 Telecom Act preempts state statutes and regulations that restrict the
provision of competitive local communications services. State commissions can,
however, impose reasonable terms and conditions upon the provision of
communications services within their respective states. Because we are
authorized to offer local access services, we are regulated as a CLEC by the
RCA. In addition, we are subject to other regulatory requirements, including
certain requirements imposed by the 1996 Telecom Act on all LECs, which
requirements include permitting resale of LEC services, local number
portability, dialing parity, and reciprocal compensation.
As a PCS and LMDS licensee, we are subject to regulation by the FCC, and must
comply with certain build-out and other conditions of the license, as well as
with the FCC's regulations governing the PCS and LMDS services (described
above). On a more limited basis, we may be subject to certain regulatory
oversight by the RCA (e.g., in the areas of consumer protection), although
states are not permitted to regulate the rates or entry of PCS, LMDS and other
commercial wireless service providers. PCS and LMDS licensees may also be
subject to regulatory requirements of local jurisdictions pertaining to, among
other things, the location of tower facilities.
Rural Exemption. ACS, through subsidiary companies, provides local telephone
services in Fairbanks and Juneau, Alaska. These ACS subsidiaries are classified
as Rural Telephone Companies under the 1996 Telecom Act, which entitles them to
an exemption of certain material interconnection terms of the 1996 Telecom Act,
until and unless such "rural exemption" is examined and discontinued by the RCA.
On October 11, 1999, the RCA issued an order terminating rural exemptions for
the ACS subsidiaries operating in the Fairbanks and
42
Juneau markets so that we could compete with these companies in the provision of
local telephone service pursuant to the terms of Section 251(c) of the 1996
Telecom Act. These rural exemptions limited the obligation of the ILECs in these
markets to provide us with access to unbundled network elements at rates under
the pricing standard established by the FCC. Upon appeal by ACS, on December 12,
2003, the Alaska Supreme Court issued a decision in which it reversed the RCA's
rural exemption decision on the procedural ground that the competitor, not the
incumbent, must shoulder the burden of proof. The Court remanded the matter to
the RCA for reconsideration with the burden of proof assigned to us.
Additionally, the Court left it to the RCA to decide as a matter of discretion
whether to change the state of competition during the remand period. In
accordance with the Court's ruling, the RCA has re-opened the rural exemption
dockets and scheduled a hearing to commence on April 19, 2004. Additionally, the
RCA issued a ruling on January 16, 2004, in which the Commission determined that
we can continue to rely on unbundled network elements from ACS to serve our
existing customers in Juneau and Fairbanks but that we may not serve new
customers through purchase of unbundled network elements pending the completion
of the remand proceeding. Until this matter is resolved, we may serve new
customers using wholesale resale. The outcome of this proceeding could result in
a change in our cost of serving these markets via the facilities of the ILEC or
via wholesale offerings and could adversely impact our ability to offer local
telephone service in these markets. We believe it is unlikely that the rural
exemptions will be restored in these markets; however, if they are restored, we
could be forced to discontinue providing service to residential customers and
perhaps to commercial customers in these locations.
Access Fees. The FCC regulates the fees that local telephone companies charge
long-distance companies for access to their local networks. In 2001, the FCC
adopted a plan to restructure access charges for rate-of-return regulated
carriers, which has the effect of shifting certain charges from IXCs to end
users. The FCC is continuing to monitor the access charge regime and could
consider other proposals that would restructure and could reduce access charges.
Changes in the access charge structure or the introduction of new technologies
that are not subject to the access charge structure could fundamentally change
the economics of some aspects of our business.
Access to Unbundled Network Elements. The United States Court of Appeals for the
Circuit of the District of Columbia heard argument on January 28, 2004 on appeal
of the FCC's Triennial Review Order, in which the FCC reviewed its regulations
governing access that ILECs must make available to competitors to unbundled
network elements pursuant to Section 251(c) of the 1996 Telecom Act. On March 2,
2004, the Court issued a decision affirming in part, vacating in part, and
remanding in part the FCC's Order. In addition, the RCA is in the process of
reviewing in a separate proceeding the extent to which ACS may not be required
to continue offering access to certain unbundled network elements, in accordance
with guidelines established by the FCC in the Triennial Review Order. This RCA
decision is expected by July 2, 2004. We cannot predict the extent to which
further appeals of the March 2, 2004 decision or the decision itself will affect
the pending RCA proceeding. In addition, the outcome of either further court
appeals or the regulatory proceeding could result in a change in our cost of
serving new and existing markets via the facilities of the ILEC or via wholesale
offerings. The ability to obtain unbundled network elements is an important
element of our local access services business, and we believe that the FCC's
actions in this area have generally been positive. However, we cannot predict
the extent to which the existing rules will be sustained in the face of
additional legal action and the scope of the rules that are yet to be determined
by the FCC.
The FCC has pending a notice of proposed rulemaking in which it is currently
reviewing its pricing standard that governs the rates ILECs may charge
competitors for access to unbundled network elements. The outcome of this
regulatory proceeding could result in a change in our cost of serving new and
existing markets via the facilities of the ILEC or via wholesale offerings.
Recurring and non-recurring charges for telephone lines and other unbundled
network elements may increase based on the rates proposed by the ILECs and
approved by the RCA from time to time, which could have an adverse effect on our
financial position, results of operations or liquidity.
We are currently involved in arbitration to revise the rates, terms, and
conditions that govern GCI's access to unbundled network elements in Anchorage,
and a RCA decision is pending. In addition, the proceeding to arbitrate revised
rates, terms, and conditions to govern GCI's access to unbundled network
elements in
43
Fairbanks and Juneau is being held in abeyance, pending the RCA's decision in
the Anchorage arbitration. We have been largely successful in the prior
arbitration proceedings as to the material terms, including prices and technical
issues; however, the RCA's decisions in these proceedings could result in a
change in our costs of serving new and existing markets via the facilities of
the ILEC or via wholesale offerings.
Critics continue to ask Congress to modify, if not altogether rework, the 1996
Telecom Act, citing the level of competition in the local phone and broadband
sectors. There is a lack of consensus on what changes are needed, however, or
who is to blame for the 1996 Telecom Act's perceived failures. Loosened
regulations on ILECs that control bottleneck facilities could diminish CLEC
local phone competition.
Universal Service. We have qualified under FCC regulations as a competitive
"eligible telecom carrier," or ETC, with respect to our provision of local
telephone service in Anchorage, Fairbanks, and Juneau. ETCs are entitled to
receive subsidies paid by the Universal Service Fund. If we do not continue to
qualify for this status in Anchorage, Fairbanks and/or Juneau, or if we do not
qualify for this status in other rural areas where we propose to offer new
services, we would not receive this subsidy and our net cost of providing local
telephone services in these areas would be materially adversely affected.
In addition, the FCC has referred issues concerning the designation of ETCs,
portability of support, and the basis for calculating support to a Federal-State
Joint Board on Universal Service. On February 27, 2004, the Joint Board issued a
recommendation on which the FCC will have 12 months to act. The FCC's decision
in this proceeding could affect the subsidy and result in a change in our net
costs of providing local telephone services in new and existing markets.
Local Regulation. We may be required to obtain local permits for street opening
and construction permits to install and expand our networks. Local zoning
authorities often regulate our use of towers for microwave and other
communications sites. We also are subject to general regulations concerning
building codes and local licensing. The 1996 Telecom Act requires that fees
charged to communications carriers be applied in a competitively neutral manner,
but there can be no assurance that ILECs and others with whom we will be
competing will bear costs similar to those we will bear in this regard.
Cable Services Operations
General. The FCC has adopted rules that will require cable operators to carry
the digital signals of broadcast television stations. However, the FCC has
decided that cable operators should not be required to carry both the analog and
digital services of broadcast television stations while broadcasters are
transitioning from analog to digital transmission. Carrying both the analog and
digital services of broadcast television stations would consume additional cable
capacity. As a result, a requirement to carry both analog and digital services
of broadcast television stations could require the removal of popular
programming services with materially adverse results for cable operators,
including us. Should the FCC mandate dual carriage, we will carry the broadcast
signals in both analog and digital formats.
Subscriber Rates. In Alaska, the RCA is the local franchising authority
certified to regulate basic cable rates. Under state law, however, the cable
television service is exempt from regulation unless subscribers petition the
state commission for regulation under the procedures set forth in AS 42.05.712.
At present, the only community where regulation of the basic rate occurs is in
Juneau.
FCC regulations govern rates that may be charged to subscribers for regulated
services. The FCC uses a benchmark methodology as the principal method of
regulating rates. Cable operators are also permitted to justify rates using a
cost-of-service methodology, which contains a rebuttable presumption of an
industry-wide 11.25% rate of return on an operator's allowable rate base.
Cost-of-service regulation is a traditional form of rate regulation, under which
a company is allowed to recover its costs of providing the regulated service,
plus a reasonable profit. Franchising authorities are empowered to regulate the
rates charged for monthly basic service, for additional outlets and for the
installation, lease and sale of equipment used by subscribers to receive the
basic cable service tier, such as converter boxes and remote control units. The
FCC's rules require franchising authorities to regulate these rates based on
actual cost plus a reasonable profit, as defined by the
44
FCC. Cable operators required to reduce rates may also be required to refund
overcharges with interest. The FCC has also adopted comprehensive and
restrictive regulations allowing operators to modify their regulated rates on a
quarterly or annual basis using various methodologies that account for changes
in the number of regulated channels, inflation and increases in certain external
costs, such as franchise and other governmental fees, copyright and
retransmission consent fees, taxes, programming fees and franchise-related
obligations. We cannot predict whether the FCC will modify these "going forward"
regulations in the future.
Cable System Delivery of Internet Service. Although there is at present no
significant federal regulation of cable system delivery of Internet services,
and the FCC has issued several reports finding no immediate need to impose such
regulation, this situation may change as cable systems expand their broadband
delivery of Internet services and as a result of legislative, regulatory and
judicial developments.
In particular, proposals have been advanced at the FCC and Congress that would
require cable operators to provide access to unaffiliated Internet service
providers and online service providers.
Recently, in an October 6, 2003 decision, the United States Court of Appeals for
the Ninth Circuit reversed an FCC decision defining high-speed Internet over
cable as an "information service" not subject to local cable-franchise fees,
like cable service is, or any explicit requirements for "open access," as
communications service is. Rehearing by the full panel has been requested. If
Internet access requirements are imposed on cable operators, it could burden the
capacity of cable systems and complicate our own plans for providing expanded
Internet access services. These access obligations could adversely affect our
financial position, results of operations or liquidity.
Must Carry/Retransmission Consent. The 1992 Cable Act contains broadcast signal
carriage requirements that allow local commercial television broadcast stations
to elect once every three years to require a cable system to carry the station,
subject to certain exceptions, or to negotiate for "retransmission consent" to
carry the station.
The FCC decided against imposition of dual digital and analog must carry in a
January 2001 ruling. The ruling resolved a number of technical and legal
matters, and clarified that a digital-only television station, commercial or
non-commercial, can immediately assert its right to carriage on a local cable
system. The FCC also said that a television station that returns its analog
spectrum and converts to digital operations must be carried by local cable
systems. At the same time, however, it initiated further fact gathering that
ultimately could lead to a reconsideration of the conclusion.
Satellite Home Viewer Improvement Act of 1999. A major change introduced by the
SHVIA was a "local into local" provision allowing satellite carriers, for the
first time, to retransmit the signals of local television stations by satellite
back to viewers in their local markets. The intent was to promote multichannel
video competition by removing the prohibition on satellite retransmission of
local signals, which cable operators already offered to their subscribers under
the must-carry/retransmission consent scheme of regulation described above.
Congress is considering reauthorization of this act, including possible changes
to its requirements. We cannot predict at this time the outcome of this review,
its impact on the industries in which we operate, or its impact on us.
Access to Programming. To spur the development of independent cable programmers
and competition to incumbent cable operators, the 1992 Cable Act imposed
restrictions on the dealings between cable operators and cable programmers. The
Act precludes video programmers affiliated with cable companies from favoring
their cable operators over new competitors and requires such programmers to sell
their programming to other multichannel video distributors. The current
prohibition extends until October 5, 2007.
Franchise Procedures. The 1984 Cable Act contains renewal procedures designed to
protect incumbent franchisees against arbitrary denials of renewal. The 1992
Cable Act made several changes to the renewal process that could make it easier
for a franchising authority to deny renewal. Moreover, even if the franchise is
renewed, the franchising authority may seek to impose new and more onerous
requirements such as significant upgrades in facilities and services or
increased franchise fees as a condition of renewal. Similarly, if
45
a franchising authority's consent is required for the purchase or sale of a
cable system or franchise, such authority may attempt to impose more burdensome
or onerous franchise requirements in connection with a request for such consent.
Historically, franchises have been renewed for cable operators that have
provided satisfactory services and have complied with the terms of their
franchises. We believe that we have generally met the terms of our franchises
and have provided quality levels of service. Furthermore, our franchises are
issued by the state public utility commission (the RCA) and do not require
periodic renewal.
Various courts have considered whether franchising authorities have the legal
right to limit the number of franchises awarded within a community and to impose
certain substantive franchise requirements (e.g. access channels, universal
service and other technical requirements). These decisions have been
inconsistent and, until the United States Supreme Court rules definitively on
the scope of cable operators' First Amendment protections, the legality of the
franchising process generally and of various specific franchise requirements is
likely to be in a state of flux.
Pole Attachment. The Communications Act requires the FCC to regulate the rates,
terms and conditions imposed by public utilities for cable systems' use of
utility pole and conduit space unless state authorities can demonstrate that
they adequately regulate pole attachment rates. In the absence of state
regulation, the FCC administers pole attachment rates on a formula basis. This
formula governs the maximum rate certain utilities may charge for attachments to
their poles and conduit by companies providing communications services,
including cable operators.
The RCA has largely retained the existing pole attachment formula that has been
in state regulation since 1987. This formula could be subject to further
revisions upon petition to the RCA. We cannot predict at this time the outcome
of any such proceedings.
Copyright. Cable television systems are subject to federal copyright licensing
covering carriage of television and radio broadcast signals. In exchange for
filing certain reports and contributing a percentage of their revenues to a
federal copyright royalty pool that varies depending on the size of the system,
the number of distant broadcast television signals carried, and the location of
the cable system, cable operators can obtain blanket permission to retransmit
copyrighted material included in broadcast signals. The United States Copyright
Office adopted an industry agreement providing for an increase in the copyright
royalty rates. The possible modification or elimination of this compulsory
copyright license is the subject of continuing legislative review and could
adversely affect our ability to obtain desired broadcast programming. We cannot
predict the outcome of this legislative activity. Copyright clearances for
nonbroadcast programming services are arranged through private negotiations.
Cable operators distribute locally originated programming and advertising that
use music controlled by the two principal major music performing rights
organizations, the American Society of Composers, Authors and Publishers and
Broadcast Music, Inc. The cable industry has had a long series of negotiations
and adjudications with both organizations. A prior voluntarily negotiated
agreement with Broadcast Music has now expired, and is subject to further
proceedings. The governing rate court recently set retroactive and prospective
cable industry rates for American Society of Composers music based on the
previously negotiated Broadcast Music rate. Although we cannot predict the
ultimate outcome of these industry proceedings or the amount of any license fees
we may be required to pay for past and future use of association-controlled
music, we do not believe such license fees will be significant to our business
and operations.
Other Statutory and FCC Provisions. The Communications Act includes provisions,
among others, concerning customer service, subscriber privacy, marketing
practices, equal employment opportunity, regulation of technical standards and
equipment compatibility.
The FCC has various rulemaking proceedings pending implementing the 1996 Telecom
Act; it also has adopted regulations implementing various provisions of the 1992
Cable Act and the 1996 Telecom Act that are the subject of petitions requesting
reconsideration of various aspects of its rulemaking proceedings. The FCC has
the authority to enforce its regulations through the imposition of substantial
fines, the issuance of
46
cease and desist orders and/or the imposition of other administrative sanctions,
such as the revocation of FCC licenses needed to operate certain transmission
facilities often used in connection with cable operations.
Other Regulations of the FCC. The FCC has previously initiated an inquiry to
determine whether the cable industry's future provision of interactive services
should be subject to regulations ensuring equal access and competition among
service vendors. The inquiry is another indication of regulatory concern
regarding control over cable capacity. In addition, other bills and
administrative proposals pertaining to cable communications are introduced in
Congress from time to time or have been considered by other governmental bodies
over the past several years. It is possible that Congress and other governmental
bodies will make further attempts to regulate cable communications services.
State and Local Regulation. Because our cable communications systems use local
streets and rights-of-way, our systems are subject to state and local
regulation. Cable communications systems generally are operated pursuant to
franchises, permits or licenses granted by a municipality or other state or
local government entity. In Alaska, the RCA is the franchising authority for the
state. We provide cable television service throughout Alaska pursuant to various
certificates of authority issued by the RCA. These certificates are not subject
to terms of renewal and continue in effect until and unless the state commission
were to seek to modify or revoke them for good cause.
Internet Operations
General. With significant growth in Internet activity and commerce over the past
several years the FCC and other regulatory bodies have been challenged to
develop new models that allow them to achieve the public policy goals of
competition and universal service. Many aspects of regulation and coordination
of Internet activities and traffic are evolving and are facing unclear
regulatory futures. Changes in regulations and in the regulatory environment,
including changes that affect communications costs or increase competition from
ILECs or other communications services providers, could adversely affect the
prices at which we sell ISP services.
Internet Governance and Standards. There is no one entity or organization that
governs the Internet. Each facilities-based network provider that is
interconnected with the global Internet controls operational aspects of their
own network. Certain functions, such as domain name routing and the definition
of the TCP/IP protocol, are coordinated by an array of quasi-governmental,
intergovernmental, and non-governmental bodies.
The legal authority of any of these bodies is unclear. Most of the underlying
architecture of the Internet was developed under the auspices, directly or
indirectly, of the United States government. The government has not, however,
defined whether it retains authority over Internet management functions, or
whether these responsibilities have been delegated to the private sector.
1996 Telecom Act. The 1996 Telecom Act provides little direct guidance as to
whether the FCC has authority to regulate Internet-based services.
Given the absence of clear statutory guidance, the FCC must determine whether it
has the authority or the obligation to exercise regulatory jurisdiction over
specific Internet-based activities, or to decline from doing so under the
appropriate standards.
FCC Regulations. The FCC does not regulate the prices charged by ISPs or
Internet backbone providers. However, the vast majority of users connect to the
Internet over facilities of existing communications carriers. Those
communications carriers are subject to varying levels of regulation at both the
federal and the state level. Thus, regulatory decisions exercise a significant
influence over the economics of the Internet market. There are pending
complaints and proceedings at the FCC that may affect access charges,
compensation and other aspects of Internet service, and we cannot predict the
effect or outcome of such proceedings.
47
Financial Information about our Foreign and Domestic Operations and Export Sales
Although we have several agreements to help originate and terminate
international toll traffic, we do not have foreign operations or export sales.
We conduct our operations throughout the western contiguous United States and
Alaska and believe that any subdivision of our operations into distinct
geographic areas would not be meaningful. Revenues associated with international
toll traffic were $2.9 million, $3.5 million and $4.9 million for the years
ended December 31, 2003, 2002 and 2001, respectively.
Seasonality
Our long-distance revenues 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. Our cable television revenues, on the other hand, are higher in
the winter months because consumers tend to watch more television, and spend
more time at home, during these months. Our local service and Internet
operations are not expected to exhibit significant seasonality, with the
exception of SchoolAccess(TM) Internet services that are reduced during the
summer months. Our ability to implement construction projects is also reduced
during the winter months because of cold temperatures, snow and short daylight
hours.
Customer-Sponsored Research
We have not expended material amounts during the last three fiscal years on
customer-sponsored research activities.
Backlog of Orders and Inventory
As of December 31, 2003 and 2002, our long-distance services segment had a
backlog of Private Line orders of approximately $271,000 and $318,000,
respectively, which represents recurring monthly charges for Private Line and
broadband services. As of December 31, 2003 and 2002, we had a backlog of
equipment sales orders of approximately $745,000 and $601,000, respectively for
services included in the All Other category described in note 13 to the "Notes
to Consolidated Financial Statements" included in Part II of this Report. The
increase in backlog as of December 31, 2003 can be attributed to increased
outstanding sales orders at December 31, 2003 as compared to 2002. We expect
that all of the Private Line orders and equipment sales in backlog at the end of
2003 will be delivered during 2004.
Geographic Concentration and Alaska Economy
We offer voice and data communications and video services to customers primarily
in the State of Alaska. Because of this geographic concentration, growth of our
business and operations depend upon economic conditions in Alaska. The economy
of the State of Alaska is dependent upon natural resource industries, in
particular oil production, as well as investment earnings (including earnings
from the State of Alaska Permanent Fund), tourism, government, and United States
military spending. Any deterioration in these markets could have an adverse
impact on us. Oil revenues are now the second largest source of state revenues,
following funds from federal sources. The economic stagnation in the Lower 48
States appears to have dampened demand for services provided by our large common
carrier customers. To the extent that these customers experience reduced demand
for traffic destined for and originating in Alaska, it could adversely affect
our common carrier traffic and associated revenues. See "Part I -- Item 1 --
Business -- Risks Relating to Our Business and Operations -- Our business is
currently geographically concentrated in Alaska," and "Part II -- Item 7 --
Management's Discussion and Analysis of Financial Condition and Results of
Operations" for more information about the effect of geographic concentration
and the Alaska economy on us.
48
Factors That May Affect Our Business and Future Results
Additional risks and uncertainties not currently known to us or that we
currently deem to be immaterial may also materially and adversely affect our
business operations. Any of the following risks could materially and adversely
affect our business, financial position, results of operations or liquidity.
Risks Relating to Our Business and Operations
We face competition that may reduce our market share and harm our financial
performance.
There is substantial competition in the communications industry. The traditional
dividing lines between long-distance telephone, local telephone, wireless
telephone, Internet, and video services are increasingly becoming blurred.
Through mergers and various service integration and product bundling strategies,
major providers are striving to provide integrated communications services
offerings within and across geographic markets.
We expect competition to increase as a result of the rapid development of new
technologies, products and services. We cannot predict which of many possible
future technologies, products or services will be important to maintain our
competitive position or what expenditures will be required to develop and
provide these technologies, products or services. Our ability to compete
successfully will depend on marketing and on our ability to anticipate and
respond to various competitive factors affecting the industry, including new
services that may be introduced, changes in consumer preferences, economic
conditions and pricing strategies by competitors. To the extent we do not keep
pace with technological advances or fail to timely respond to changes in
competitive factors in our industry and in our markets, we could lose market
share or experience a decline in our revenue and net income. Competitive
conditions create a risk of market share loss and the risk that customers shift
to less profitable lower margin services. Competitive pressures also create
challenges for our ability to grow new businesses or introduce new services
successfully and execute our business plan. Each of our business segments also
faces the risk of potential price cuts by our competitors that could materially
adversely affect our market share and gross margins.
Long-distance services. The long-distance industry is intensely competitive and
subject to constant technological change. Competition is based upon price and
pricing plans, the type of services offered, customer service, billing services,
performance, perceived quality, reliability and availability. Current or future
competitors could be substantially larger than we are, or have greater
financial, technical and marketing resources than we do.
In the long-distance market, we compete against AT&T Alascom, ACS, the Matanuska
Telephone Association and certain smaller rural local telephone carrier
affiliates. There is also the possibility that new competitors will enter the
Alaska market. In addition, wireless services continue to grow as an alternative
to wireline services as a means of reaching customers.
Historically, we have competed in the long-distance market by offering discounts
from rates charged by our competitors and by providing desirable packages of
services. Discounts have been eroded in recent years due to lowering of prices
by AT&T Alascom and entry of other competitors into the long-distance markets we
serve. In addition, our competitors offer their own packages of services. If
competitors lower their rates further or develop more attractive packages of
services, we may be forced to reduce our rates or add additional services, which
would have a material adverse effect on our financial position, results of
operations or liquidity.
Cable Services. Our cable television systems face competition from alternative
methods of receiving and distributing television signals, including DBS and
digital video over telephone lines, and from other sources of news, information
and entertainment such as off-air television broadcast programming, newspapers,
movie theaters, live sporting events, interactive computer services, Internet
services and home video products, including videotape cassettes and video disks.
Our cable television systems also face competition from potential overbuilds of
our existing cable systems by other cable television operators and alternative
methods of receiving and distributing television signals. The extent to which
our cable television systems are
49
competitive depends, in part, upon our ability to provide quality programming
and other services at competitive prices.
Our greatest source of competition for video services comes from the DBS
industry. We also are subject to digital video over telephone line competition
in the Mat-Su Valley. With the addition of Anchorage local broadcast stations,
increased marketing, ILEC and DBS alliances, and emerging technologies creating
new opportunities, competition from these sources has increased and will likely
continue to increase. The resulting increase in competition may adversely affect
our market share and results of operations from our cable television segment.
Local Telephone Services. In the local telephone market, we compete against ACS,
the ILEC, in Anchorage, Juneau and Fairbanks. We also complete against AT&T
Alascom and TelAlaska in Anchorage. We may provide local telephone service in
other locations in the future where we would face other competitors. In the
local telephone services market, the 1996 Telecom Act, judicial decisions and
state legislative and regulatory developments have increased the likelihood that
barriers to local telephone competition will be substantially reduced or
removed. These initiatives include requirements that LECs negotiate with
entities, including us, to provide interconnection to the existing local
telephone network, to allow the purchase, at cost-based rates, of access to
unbundled network elements, to establish dialing parity, to obtain access to
rights-of-way and to resell services offered by the ILEC. We have been able to
obtain interconnection, access and related services from the LECs at rates that
allow us to offer competitive services. However, if we are unable to continue to
obtain these services and access at acceptable rates, our ability to offer local
telephone services, and our revenues and net income, could be materially
adversely affected. To date, we have been successful in capturing a significant
portion of the local telephone market in the locations where we are offering
these services. However, there can be no assurance that we will continue to be
successful in attracting or retaining these customers.
Internet Services. The Internet industry is highly competitive, rapidly evolving
and subject to constant technological change. Competition is based upon price
and pricing plans, service packages, the types of services offered, the
technologies used, customer service, billing services, perceived quality,
reliability and availability. We compete with several Alaska-based Internet
providers and other domestic, non-Alaska based providers. Several of the
providers have substantially greater financial, technical and marketing
resources than we do.
ACS and other Alaska telephone service providers are providing competitive
high-speed Internet access over their telephone lines in direct competition with
our high-speed cable modem service. DBS providers and others also provide
wireless high-speed Internet service in competition with our high-speed cable
modem services. Competitive local fixed wireless providers are providing service
in certain of our markets.
Niche providers in the industry, both local and national, compete with certain
of our Internet service products, such as web hosting, list services and email.
The regulatory and legislative environment creates challenges for our business
segments.
Local Telephone Services. Our success in the local telephone market depends on
our continued ability to obtain interconnection, access and related services
from ILECs on terms that are just and reasonable and that are based on the cost
of providing these services. Our local telephone services business faces the
risk of the impact of implementing current regulations and legislation,
unfavorable changes in regulation or legislation or the introduction of new
regulations. Our ability to enter into the local telephone market depends on our
negotiation or arbitration with ILECs to allow interconnection to the carrier's
existing local telephone network, to allow the purchase, at cost-based rates, of
access to unbundled network elements, to establish dialing parity, to obtain
access to rights-of-way and to resell services offered by the ILEC. In most
Alaska markets, it also depends on our ability to have the rural exemption for
certain carriers terminated, so these carriers are obligated to provide access
to unbundled network elements at economic costs. Future arbitration and rural
exemption proceedings with respect to new or existing markets could result in a
change in our cost of serving these markets through the facilities of the ILEC
or via wholesale offerings.
50
ACS, through subsidiary companies, provides local telephone services in
Fairbanks and Juneau, Alaska. These ACS subsidiaries are classified as Rural
Telephone Companies under the 1996 Telecom Act, which entitles them to an
exemption of certain material interconnection terms of the 1996 Telecom Act,
until and unless such rural exemption is examined and discontinued by the RCA.
On October 11, 1999, the RCA issued an order terminating rural exemptions for
the ACS subsidiaries operating in the Fairbanks and Juneau markets so that we
could compete with these companies in the provision of local telephone service
pursuant to the terms of Section 251(c) of the 1996 Telecom Act. These rural
exemptions limited the obligation of the ILECs in these markets to provide us
access to unbundled network elements at rates under the pricing standard
established by the FCC. Upon appeal by ACS, on December 12, 2003, the Alaska
Supreme Court issued a decision in which it reversed the RCA's rural exemption
decision on the procedural ground that the competitor, not the incumbent, must
shoulder the burden of proof. The Court remanded the matter to the RCA for
reconsideration with the burden of proof assigned to us. Additionally, the Court
left it to the RCA to decide as a matter of discretion whether to change the
state of competition during the remand period. In accordance with the Court's
ruling, the RCA has re-opened the rural exemption dockets and scheduled a
hearing to commence on April 19, 2004. Additionally, the RCA issued a ruling on
January 16, 2004, in which the Commission determined that we can continue to
rely on unbundled network elements from ACS to serve our existing customers in
Juneau and Fairbanks but that we may not serve new customers through purchase of
unbundled network elements pending the completion of the remand proceeding.
Until this matter is resolved, we may serve new customers using wholesale
resale. The outcome of this proceeding could result in a change in our cost of
serving these markets via the facilities of ACS or via wholesale offerings and
could adversely impact our ability to offer local telephone service in these
markets. We believe it is unlikely that the rural exemptions will be restored in
these markets; however, if they are restored, we could be forced to discontinue
providing service to residential customers and perhaps to commercial customers
in these locations.
Cable Services. The cable television industry is subject to extensive regulation
at various levels, and many aspects of such regulation are currently the subject
of judicial proceedings and administrative or legislative proposals. The law
permits certified local franchising authorities to order refunds of rates paid
in the previous 12-month period determined to be in excess of the reasonable
rates. It is possible that rate reductions or refunds of previously collected
fees may be required of us in the future by state or federal regulators.
Currently, pursuant to Alaska law, the basic cable rates in Juneau are the only
rates in Alaska subject to regulation by the local franchising authority, and
the rates in Juneau were reviewed and approved by the RCA in October 2000.
Other existing federal regulations, including copyright licensing rules, are
currently the subject of judicial, legislative, and administrative review that
could change, in varying degrees, the manner in which cable television systems
operate. Neither the outcome of these proceedings nor their impact upon the
cable television industry in general, or on our activities and prospects in the
cable television business in particular, can be predicted at this time. There
can be no assurance that future regulatory actions taken by Congress, the FCC or
other federal, state or local government authorities will not have a material
adverse effect on our business, financial position, results of operations or
liquidity.
Proposals may be made before Congress and the FCC to mandate cable operators
provide "open access" over their cable systems to Internet service providers.
The FCC has declined to impose such requirements through the date of this
report. If the FCC or other authorities mandate additional access to our cable
systems, we cannot predict the effect that this would have on our Internet
service offerings.
Internet Services. Changes in the regulatory environment relating to the
Internet access market, including changes in legislation, FCC regulation,
judicial action or local regulation that affect communications costs or increase
competition from the ILEC or other communications services providers, could
adversely affect the prices at which we sell Internet services.
51
We depend on a small number of customers for a substantial portion of our
revenue and business.
For the year ended December 31, 2003, we provided long-distance services
(excluding Private Lines and other revenue) to MCI and to Sprint, which
generated combined revenues of approximately 19.5% of our total revenues for
that year. These two customers are free to seek out long-distance communications
services from our competitors upon expiration of their contracts (in July 2008
in the case of MCI, and in March 2007 in the case of Sprint) or earlier upon a
default or the occurrence of a force majeure event or a substantial change in
applicable law or regulation under the applicable contract.
Mergers and acquisitions in the communications industry are relatively common.
If a change in control of MCI or Sprint were to occur, it would not permit them
to terminate their existing contracts with us, but could in the future result in
the termination of or a material adverse change in our relationships with them.
In addition, MCI's and Sprint's need for our long-distance services depends
directly upon their ability to obtain and retain their own long-distance
customers and upon the needs of those customers for long-distance services.
The loss of one or both of MCI or Sprint as customers, a material adverse change
in our relationships with either of them, or a material loss of or reduction in
their long-distance customers would have a material adverse effect on our
financial position, results of operations or liquidity.
Our major customer, MCI, is in bankruptcy.
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. Chapter
11 allows a company to continue operating in the ordinary course of business in
order to maximize recovery for the company's creditors and shareholders. On July
22, 2003, the Bankruptcy Court affirmed all of our existing contracts with MCI
and allowed us the right to, in lieu of collecting our pre-petition claim of
approximately $12.9 million, set-off certain of our pre-petition accounts
receivable from MCI against amounts payable for future services purchased by us
from MCI. The amount of the set-off right was initially approximately $11.1
million on July 22, 2003 and as of December 31, 2003, we have set-off rights
remaining totaling approximately $7.9 million.
On October 31, 2003, MCI's reorganization plan was approved by the United States
Bankruptcy Court. MCI requested in February 2004 that the United States
Bankruptcy Court for the Southern District of New York approve a 60-day
extension to the February 28, 2004 deadline to emerge from bankruptcy. An
extension to the deadline would give MCI time to complete financial filings with
the SEC. The financial filings are reported to be the last major task left for
MCI to emerge from bankruptcy. We cannot predict what effect MCI's bankruptcy
and reorganization process may have on MCI's demand for our services.
Our businesses are currently geographically concentrated in Alaska.
We offer voice and data communication and video services to customers primarily
in the State of Alaska. Because of this geographic concentration, our growth and
operations depend upon economic conditions in Alaska. The economy of Alaska is
dependent upon natural resource industries, in particular oil production, as
well as tourism, government spending and United States military spending. Any
deterioration in these markets could have an adverse impact on the demand for
communication and cable television services and on our results of operations and
financial condition. In addition, the customer base in Alaska is limited. Alaska
has a population of approximately 644,000 people, approximately 42% of whom are
located in the Anchorage area.
We have already achieved significant market penetration with respect to our
service offerings in Anchorage and in other locations in Alaska. We may not be
able to continue to increase our market share of the existing markets for our
services and no assurance can be given that the Alaskan economy will continue to
grow and increase the size of the markets we serve or increase the demand for
the services we offer. As a result, the best opportunities for expanding our
business may arise in other geographic areas such as the Lower 48 States. There
can be no assurance that we will find attractive opportunities to grow our
businesses outside the
52
State of Alaska or that we will have the necessary expertise to take advantage
of such opportunities. The markets in Alaska for voice and data communications
and video services are unique and distinct within the United States due to
Alaska's large geographical size and its distance from the rest of the United
States. The expertise we have developed in operating our businesses in the State
of Alaska may not provide us with the necessary expertise to successfully enter
other geographic markets.
We may not develop our wireless services.
We offer wireless mobile services by reselling other providers' wireless mobile
services. We offer wireless local telephone services over our own facilities,
and have purchased PCS and LMDS wireless broadband licenses in FCC auctions
covering markets in Alaska. We have fewer subscribers to our wireless services
than to our other service offerings. The geographic coverage of our wireless
services is also smaller than the geographic coverage of our other services.
Some of our competitors offer or propose to offer an integrated bundle of
communications, entertainment and information services, including wireless
services. If we are unable to expand and further develop our wireless services,
we may not be able to meet the needs of customers who desire packaged services,
and our competitors who offer these services would have an advantage. This could
result in the loss of market share for our other service offerings.
As a PCS and LMDS licensee, we are subject to regulation by the FCC, and must
comply with certain build-out and other conditions of the licenses, as well as
with the FCC's regulations governing the PCS and LMDS services. The conditions
of our PCS licenses require us to meet certain build-out requirements on or
before July, 2005. We may not meet these build-out requirements and, as a
result, we could lose our PCS license.
Our efforts to deploy DLPS may be unsuccessful.
An element of our business strategy is to deploy voice telephone service
utilizing our hybrid fiber coax cable facilities. If we are able to deploy this
service, we will be able to utilize our own cable facilities to provide local
access to our customers and avoid paying local loop charges to the ILEC. To
successfully deploy this service, we must integrate new technology with our
existing facilities. The viability of this service depends on the adoption of
industry-wide standards for the sending and receiving of voice communications
over cable facilities and the availability of the equipment necessary to provide
the service at a cost-effective price. The deployment of this service may
require additional substantial capital investment by us. If we are unable to
successfully deploy DLPS, we will not be able to recover any capital investment
we may make and the margins on our local telephone services business will not
improve.
Prolonged service interruptions could affect our business.
We rely heavily on our network equipment, communications providers, data and
software, to support all of our functions. We rely on our networks and the
networks of others for substantially all of our revenues. We are able to deliver
services only to the extent that we can protect our network systems against
damage from power or communication failures, computer viruses, natural
disasters, unauthorized access and other disruptions. While we endeavor to
provide for failures in the network by providing back-up systems and procedures,
we cannot guarantee that these back-up systems and procedures will operate
satisfactorily in an emergency. Should we experience a prolonged failure, it
could seriously jeopardize our ability to continue operations. In particular,
should a significant service interruption occur, our ongoing customers may
choose a different provider, and our reputation may be damaged, reducing our
attractiveness to new customers.
To the extent that any disruption or security breach results in a loss or damage
to our customers' data or applications, or inappropriate disclosure of
confidential information, we may incur liability and suffer from adverse
publicity. In addition, we may incur additional costs to remedy the damage
caused by these disruptions or security breaches.
53
If a failure occurs in our undersea fiber optic cable, our ability to
immediately restore the entirety of our service may be limited.
Our communications facilities include an undersea fiber optic cable that carries
a large portion of our Internet voice and data traffic to and from the Lower 48
States. We are currently constructing alternative communications facilities as
backup facilities. If a failure of our undersea fiber optic facilities occurs
before we are able to complete construction of backup facilities and we are not
able to secure alternative facilities, some of the communications services we
offer to our customers could be interrupted, which could have a material adverse
effect on our business, financial position, results of operations or liquidity.
If a failure occurs in our satellite communications systems, our ability to
immediately restore the entirety of our service may be limited.
We serve many rural and remote Alaska locations solely via satellite
communications. Each of our C- and Ku-band satellite transponders is backed up
on the same spacecraft with multiple backup transponders. Our primary spacecraft
is PanAmSat's Galaxy 10R ("G-10R"), but we also lease capacity on two other
spacecraft for services we provide, SES Americom's AMC-7 and AMC-8. On G-10R, we
use 7 C-band transponders. We have arranged for backup C-band satellite capacity
on another PanAmSat spacecraft, Galaxy 13 ("G-13"), for all of those satellite
transponders in the unlikely event of a total primary spacecraft failure. If
such a failure occurs, service may not be fully restored for up to a week or
longer due to the time necessary to redirect earth station antennae. We also own
one Ku-band satellite transponder on the same primary spacecraft (G-10R) that
provides our C-band service. In the event of total primary spacecraft failure,
we believe we would be able to restore our Ku-band transponder traffic on G-13,
although no pre-arrangement for its backup is currently in place. We also lease
approximately 11 MHz of protected and backed-up C-band capacity on SES
Americom's AMC-8 spacecraft. SES Americom's AMC-7 is the backup spacecraft for
AMC-8. We also lease certain C-band transponder capacity on AMC-7that can be
preempted in the case of a satellite failure. The services that are preempted
would not be immediately restored should AMC-7 fail or be called up to provide
restoration of another of SES Americom's spacecraft.
We depend on a limited number of third-party vendors to supply communications
equipment.
We depend on a limited number of third-party vendors to supply cable, Internet,
DLPS, and telephony-related equipment. If our providers of this equipment are
unable to timely supply the equipment necessary to meet our needs or provide
them at an acceptable cost, we may not be able to satisfy demand for our
services and competitors may fulfill this demand.
We do not have insurance to cover certain risks to which we are subject.
We are self-insured for damage or loss to certain of our transmission
facilities, including our buried, under sea, and above-ground transmission
lines. If we become subject to substantial uninsured liabilities due to damage
or loss to such facilities, our financial position, results of operations or
liquidity may be adversely affected.
A significant percentage of our voting securities are owned by a small number of
shareholders and these shareholders can control stockholder decisions on very
important matters.
As of December 31, 2003, our executive officers and directors and their
affiliates owned approximately 16.5% of our combined outstanding Class A and
class B common stock, representing approximately 34.4% of the combined voting
power of that stock (including outstanding Series B preferred stock voting with
Class A common stock on an as-converted basis). These shareholders can
significantly influence, if not control, our management policy and all
fundamental corporate actions, including mergers, substantial acquisitions and
dispositions, and election of directors to the Board.
54
Terrorist attacks, such as the attacks that occurred on September 11, 2001, and
other attacks or acts of war may adversely affect us.
The attacks of September 11, 2001, and subsequent events have caused instability
in the local, national and international economies and markets and have led, and
may continue to lead, to further armed hostilities or to further acts of
terrorism in the United States or elsewhere, which could cause further
instability in such economies and markets. In addition, armed hostilities and
further acts of terrorism may directly impact our physical facilities and
operations or those of our customers. Furthermore, terrorist attacks, subsequent
events and future developments may adversely affect our customers or their
facilities or otherwise result in reduced demand from our customers for our
services. Any of the foregoing could subject our operations to increased risks
and, depending on their magnitude, could have a material adverse effect on our
financial position, results of operations or liquidity.
We have and will continue to have a significant amount of debt.
On December 31, 2003, we had total debt, including capital lease obligations, of
approximately $389.8 million. Our high level of debt could have important
consequences, including the following:
o Use of a large portion of our cash flow to pay principal and interest on
the New Senior Notes, the Senior Credit Facility and our other debt,
which will reduce the availability of our cash flow to fund working
capital, capital expenditures, and other business activities;
o Increase our vulnerability to general adverse economic and industry
conditions;
o Limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate;
o Restrict us from making strategic acquisitions or exploiting business
opportunities;
o Make it more difficult for us to satisfy our obligations with respect to
our debt;
o Place us at a competitive disadvantage compared to our competitors that
have less debt; and
o Limit, along with the financial and other restrictive covenants in our
debt, among other things, our ability to borrow additional funds, dispose
of assets or pay cash dividends.
In addition, a substantial portion of our debt bears interest at variable rates.
If market interest rates increase, variable-rate debt will create higher debt
service requirements, which would adversely affect our financial position,
results of operations or liquidity.
We will require a significant amount of cash to service our debt. Our ability to
generate cash depends on many factors beyond our control.
Our ability to make payments on and to refinance our debt, and to fund planned
capital expenditures and business development efforts, will depend on our
ability to generate cash in the future. This is subject to general economic,
financial, competitive, legislative, regulatory and other factors that may be
beyond our control.
We cannot provide assurance that our business will generate sufficient cash flow
from operations or that future borrowings will be available to us under our
Senior Credit Facility or otherwise in an amount sufficient to enable us to pay
our debt or to fund our other liquidity needs. We may need to refinance all or a
portion of our debt on or before maturity. We cannot provide assurance that we
will be able to refinance any of our debt on commercially reasonable terms or at
all.
Despite our current significant level of debt, we may still be able to incur
substantially more debt. This could further exacerbate the risks associated with
our substantial debt.
We may be able to incur substantial debt in the future. Although our debt
agreements contain restrictions on the incurrence of additional debt, these
restrictions are subject to a number of qualifications and exceptions and, under
certain circumstances, debt incurred in compliance with these restrictions could
be substantial. If new debt is added to our current debt levels, the substantial
risks described above would intensify.
55
The terms of our debt impose, or will impose, restrictions on us that may affect
our ability to successfully operate our business.
Our debt agreements contain covenants that, among other things, limit our
ability to:
o Incur additional debt and issue preferred stock;
o Pay dividends or make other restricted payments;
o Make certain investments;
o Create liens;
o Allow restrictions on the ability of certain of our subsidiaries to pay
dividends or make other payments to us;
o Sell assets;
o Merge or consolidate with other entities; and
o Enter into transactions with affiliates.
The Senior Credit Facility also requires us to comply with specified financial
ratios and tests, including, but not limited to, minimum interest coverage
ratio, maximum leverage ratio and maximum annual capital expenditures.
These covenants could materially and adversely affect our ability to finance our
future operations or capital needs and to engage in other business activities
that may be in our best interest.
All of these covenants may restrict our ability to expand or to pursue our
business strategies. Our ability to comply with these covenants may be affected
by events beyond our control, such as prevailing economic conditions and changes
in regulations, and if such events occur, we cannot be sure that we will be able
to comply. A breach of these covenants could result in a default under our debt
agreements.
Employees
We employed 1,255 persons as of January 31, 2004, and are not parties to union
contracts with our employees. We believe our future success will depend upon our
continued ability to attract and retain highly skilled and qualified employees.
We believe that relations with our employees are satisfactory.
Other
No material portion of our businesses is subject to renegotiation of profits or
termination of contracts at the election of the federal government.
Item 2. Properties
General. Our properties do not lend themselves to description by character or
location of principal units. Our investment in property, plant and equipment in
our consolidated operations consisted of the following at December 31:
2003 2002
------------------------
Telephone distribution systems 53.5% 56.4%
Cable television distribution systems 24.9% 24.4%
Support equipment 7.1% 6.5%
Property and equipment under capital leases 7.9% 8.5%
Construction in progress 5.2% 2.8%
Transportation equipment 0.9% 0.9%
Land and buildings 0.5% 0.5%
------------------------
Total 100.0% 100.0%
========================
56
These properties are divided among our operating segments at December 31, 2003
as follows: long-distance services, 48.7%; cable services, 26.2%; local access
services, 7.8%; Internet services, 5.8%; and all other, 11.5%.
These properties consist primarily of switching equipment, satellite earth
stations, fiber-optic networks, microwave radio and cable and wire facilities,
cable head-end equipment, coaxial distribution networks, routers, servers,
transportation equipment, computer equipment and general office equipment.
Substantially all of our properties secure our new Senior Credit Facility. You
should see note 8 to the "Notes to Consolidated Financial Statements" included
in Part II of this Report for more information.
Our construction in progress totaled $33.6 million at December 31, 2003,
consisting of $16.5 million for AULP West with the remainder consisting of
long-distance, cable, local and Internet services, and support systems projects
that were incomplete at December 31, 2003. Our construction in progress totaled
$17.0 million at December 31, 2002, consisting of long-distance, cable and local
services, and support systems projects that were incomplete at December 31,
2002.
Long-Distance Services. We operate a modern, competitive communications network
employing the latest digital transmission technology based upon fiber optic and
digital microwave facilities within and between Anchorage, Fairbanks and Juneau,
Alaska. Our network includes digital fiber optic cables linking Alaska to the
Lower 48 States and providing access to other carriers' networks for
communications around the world. We use satellite transmission to remote areas
of Alaska and for certain interstate and intrastate traffic, and to provide
backup facilities for certain portions of our long-haul fiber networks.
Our long-distance services segment owns properties and facilities including
satellite earth stations, and distribution, transportation and office equipment.
Additionally, in December 1992 we acquired capacity on an undersea fiber optic
cable from Seward, Alaska to Pacific City, Oregon which was taken out of service
in January 2004. See "Part I -- Item 1 -- Business -- Historical Development of
our Business During the Past Fiscal Year -- Fiber System Taken out of Service"
for more information. We completed construction of AULP East linking Alaska to
Seattle, Washington in February 1999. In June 2003, we began the construction of
AULP West connecting Seward, Alaska and Warrenton, Oregon, with leased backhaul
facilities to connect it to our switching and distribution centers in Anchorage,
Alaska and Seattle, Washington. We expect to complete this project by May 2004.
We entered into a purchase and lease-purchase option agreement in August 1995
for the acquisition of satellite transponders on the PanAmSat Galaxy XR
satellite to meet our long-term satellite capacity requirements. We use the
satellite transponders pursuant to a long-term capital lease arrangement with a
leasing company. The purchase and lease-purchase option agreement provided for
the interim lease of transponder capacity on the PanAmSat Galaxy IX satellite
through the delivery of the purchased transponders on Galaxy XR in March 2000.
Effective June 30, 2001, we acquired, through the issuance of preferred stock, a
controlling interest in the corporation owning the 800-mile fiber optic cable
system that extends from Prudhoe Bay, Alaska to Valdez, Alaska via Fairbanks.
We lease our long-distance services industry segment's executive, corporate and
administrative facilities in Anchorage, Fairbanks and Juneau, Alaska. Our
operating, executive, corporate and administrative properties are in good
condition. We consider our properties suitable and adequate for our present
needs and they are being fully utilized.
Cable Services. The cable systems serve 35 communities and areas in Alaska
including Anchorage, Fairbanks, the Mat-Su Valley, and Juneau, the state's four
largest urban areas. As of December 31, 2003, the Cable Systems consisted of
approximately 2,300 miles of installed cable plant having between 330 to 625 MHz
of channel capacity. Our principal physical assets consist of cable television
distribution plant and equipment, including signal receiving, encoding and
decoding devices, headend reception facilities, distribution systems and
customer drop equipment for each of our cable television systems.
57
Our cable television plant and related equipment are generally attached to
utility poles under pole rental agreements with local public utilities and
telephone companies, and in certain locations are buried in underground ducts or
trenches. We own or lease real property for signal reception sites and business
offices in many of the communities served by our systems and for our principal
executive offices.
We own the receiving and distribution equipment of each system. In order to keep
pace with technological advances, we are maintaining, periodically upgrading and
rebuilding the physical components of our cable communications systems. Such
properties are in good condition. We own all of our service vehicles. We
consider our properties suitable and adequate for our present and anticipated
future needs.
Local Access Services. We operate a modern, competitive local access
communications network employing analog and the latest digital transmission
technology based upon fiber optic facilities within Anchorage, Fairbanks and
Juneau, Alaska. Our outside plant consists of connecting lines (aerial,
underground and buried cable), the majority of which is on or under public
roads, highways or streets, while the remainder is on or under private property.
Central office equipment primarily consists of digital electronic switching
equipment and circuit carrier transmission equipment. Operating equipment
consists of motor vehicles and other equipment.
Substantially all of our local access services' central office equipment,
administrative and business offices, and customer service centers are in leased
facilities. Such properties are in good condition. We consider our properties
suitable and adequate for our present and anticipated future needs.
Internet Services. We operate a modern, competitive Internet network employing
the latest available technology. We provide access to the Internet using a
platform that includes many of the latest advancements in technology. The
physical platform is concentrated in Anchorage and is extended into many remote
areas of Alaska. Our Internet platform includes trunks connecting our Anchorage,
Fairbanks, and Juneau facilities to Internet access points in Seattle through
multiple, diversely routed upstream Internet networks, and various other
routers, servers and support equipment.
We lease our Internet services industry segment's operating facilities, located
primarily in Anchorage. Such properties are in good condition. We consider our
properties suitable and adequate for our present and anticipated future needs.
Capital Expenditures
Capital expenditures consist primarily of (a) gross additions to property, plant
and equipment having an estimated service life of one year or more, plus the
incidental costs of preparing the asset for its intended use, and (b) gross
additions to capitalized software.
The total investment in property, plant and equipment has increased from $417.5
million at January 1, 1999 to $646.7 million at December 31, 2003, including
construction in progress and not including deductions of accumulated
depreciation. Significant additions to property, plant and equipment will be
required in the future to meet the growing demand for communications, Internet
and entertainment services and to continually modernize and improve such
services to meet competitive demands.
Our capital expenditures for 1999 through 2003 were as follows (in millions):
1999 $ 36.6
2000 $ 50.9
2001 $ 65.6
2002 $ 65.1
2003 $ 62.5
58
We project capital expenditures of $90 million to $100 million for 2004,
including approximately $34 million additional for AULP West. We have made
purchase commitments totaling approximately $40 million at December 31, 2003,
including approximately $25 million for AULP West. A majority of the
expenditures are expected to expand, enhance and modernize our current networks,
facilities and operating systems, to develop other businesses, and to complete
the construction of AULP West. You should see note 16 to the accompanying "Notes
to Consolidated Financial Statements" included in Part II of this Report for
more information.
During 2003, we funded our normal business capital requirements substantially
through internal sources and, to the extent necessary, from external financing
sources. We expect expenditures for 2004, including amounts necessary to
construct the AULP West undersea fiber optic cable system, to be financed in the
same manner.
Insurance
We have insurance to cover risks incurred in the ordinary course of business,
including general liability, property coverage, director and officers and
employment practices liability, auto, crime, fiduciary, aviation, and business
interruption insurance in amounts typical of similar operators in our industry
and with reputable insurance providers. Central office equipment, buildings,
furniture and fixtures and certain operating and other equipment are insured
under a blanket property insurance program. This program provides substantial
limits of coverage against "all risks" of loss including fire, windstorm, flood,
earthquake and other perils not specifically excluded by the terms of the
policies. As is typical in the communications industry, we are self-insured for
damage or loss to certain of our transmission facilities, including our buried,
under sea, and above-ground transmission lines. We self-insure with respect to
employee health insurance and workers compensation, subject to stop-loss
insurance with other parties that caps our liability at specified limits. We
believe our insurance coverage is adequate, however if we become subject to
substantial uninsured liabilities due to damage or loss to such facilities, our
financial results may be adversely affected.
Item 3. Legal Proceedings
Except as set forth in this item, neither the Company, its property nor any of
its subsidiaries or their property is a party to or subject to any material
pending legal proceedings. We are parties to various claims and pending
litigation as part of the normal course of business. We are also involved in
several administrative proceedings and filings with the FCC, Department of Labor
and state regulatory authorities. In the opinion of management, the nature and
disposition of these matters are considered routine and arising in the ordinary
course of business. Except as previously disclosed concerning rural exemption
proceedings (see "Part I -- Item 1 -- Regulation, Franchise Authorizations and
Tariffs"), even if resolved unfavorably to us, management believes these matters
would not have a materially adverse affect on our business or financial
position, results of operations or liquidity.
Item 4. Submissions of Matters to a Vote of Security Holders
No matters were submitted during the fourth quarter of 2003 to a vote of
security holders, through the solicitation of proxies or otherwise.
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Market Information for Common Stock
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
59
market. Each share of Class B common stock is convertible, at the option of the
holder, into one share of Class A common stock. The following table sets forth
the high and low sales price for the above-mentioned common stock for the
periods indicated. Market price data for Class A shares were obtained from the
Nasdaq Stock Market quotation system. Market price data for Class B shares were
obtained from reported Over-the-Counter market transactions. The prices
represent prices between dealers, do not include retail markups, markdowns, or
commissions, and do not necessarily represent actual transactions.
Class A Class B
---------------------------------------------------
High Low High Low
---- --- ---- ---
2002:
First Quarter $ 9.70 7.05 9.00 7.30
Second Quarter $ 10.26 6.40 12.00 7.00
Third Quarter $ 7.25 2.60 7.00 3.50
Fourth Quarter $ 7.80 2.99 7.00 3.10
2003:
First Quarter $ 7.49 4.98 7.20 5.20
Second Quarter $ 8.85 5.44 8.70 5.70
Third Quarter $ 9.10 7.59 9.40 7.25
Fourth Quarter $ 10.44 8.32 10.01 8.60
Holders
As of December 31, 2003 there were 1,992 holders of record of GCI's Class A
common stock and 443 holders of record of GCI's Class B common stock (amounts do
not include the number of shareholders whose shares are held of record by
brokers, but do include the brokerage house as one shareholder).
Dividends
GCI has never paid cash dividends on its common stock and has no present
intention of doing so. Payment of cash dividends in the future, if any, will be
determined by GCI's Board of Directors in light of our earnings, financial
condition and other relevant considerations. Our existing bank loan agreements
contain provisions that prohibit payment of dividends on common stock, other
than stock dividends (you should see note 8 to the "Consolidated Financial
Statements" included in Part II of this Report for more information).
Stock Transfer Agent and Registrar
Mellon is our stock transfer agent and registrar.
60
Item 6. Selected Financial Data
The following table presents selected historical information relating to
financial condition and results of operations over the past five years.
Years ended December 31,
----------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(Amounts in thousands except per share amounts)
Revenues $ 390,797 367,842 357,258 292,605 279,179
Net income (loss) before income taxes and
cumulative effect of a change in accounting
principle $ 26,160 12,322 8,659 (21,649) (14,866)
Cumulative effect of a change in accounting
principal, net of income tax benefit of $367 in
2003 and $245 in 1999 $ (544) 0 0 0 (344)
Net income (loss) $ 15,542 6,663 4,589 (13,234) (9,527)
Basic and diluted net income (loss) per common
share $ 0.24 0.08 0.05 (0.29) (0.21)
Total assets $ 763,020 738,782 734,679 679,007 643,151
Long-term debt, including current portion $ 345,000 357,700 351,700 334,400 339,400
Obligations under capital leases, including
current portion $ 44,775 46,632 47,282 48,696 1,674
Redeemable preferred stock:
Series B $ 15,664 16,907 16,907 22,589 19,912
Series C $ 10,000 10,000 10,000 0 0
Total stockholders' equity $ 226,642 208,220 202,392 183,480 192,548
Dividends declared per common share $ 0.00 0.00 0.00 0.00 0.00
The Selected Financial Data should be read in conjunction with "Part II --
Item 7 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations."
61
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
In the following discussion, General Communication, Inc. and its direct and
indirect subsidiaries are referred to as "we," "us" and "our."
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and assumptions that affect the reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. On an on-going basis, we evaluate our
estimates and judgments, including those related to unbilled revenues, cost of
sales and services accruals, allowance for doubtful accounts, depreciation,
amortization and accretion periods, intangible assets, income taxes, and
contingencies and litigation. We base our estimates and judgments on historical
experience and on various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions. See also our "Cautionary Statement
Regarding Forward-Looking Statements."
General Overview
Through our focus on long-term results, acquisitions, and strategic capital
investments, we have consistently grown our revenues and expanded 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. We are funding the construction of a new fiber optic
cable system through our operating cash flows and, to the extent necessary, with
draws on our new Senior Credit Facility, as further discussed in Liquidity and
Capital Resources in this report.
Results of Operations
The following table sets forth selected Statement of Operations data as a
percentage of total revenues for the periods indicated (underlying data rounded
to the nearest thousands):
Year Ended December 31, Percentage Change (1)
----------------------- ---------------------
2003 2002
vs. vs.
2003 2002 2001 2002 2001
---- ---- ---- ---- ----
Statement of Operations Data:
Revenues:
Long-distance services 52.3% 55.7% 56.2% (0.2%) 2.1%
Cable services 24.6% 24.1% 21.4% 8.2% 15.9%
Local access services 10.0% 8.7% 7.1% 21.6% 27.1%
Internet services 5.1% 4.3% 3.3% 27.3% 29.9%
All other services 8.0% 7.2% 12.0% 18.1% (37.9%)
-----------------------------------------------------------------
Total revenues 100.0% 100.0% 100.0% 6.2% 3.0%
62
Year Ended December 31, Percentage Change (1)
----------------------- ---------------------
2003 2002
vs. vs.
2003 2002 2001 2002 2001
---- ---- ---- ---- ----
Cost of sales and services 32.1% 33.6% 39.1% 1.5% (11.6%)
Selling, general and administrative expenses 35.5% 35.1% 32.6% 7.5% 10.7%
Bad debt expense 0.0% 3.6% 1.2% (101.4%) 206.7%
Impairment charge 1.4% 0.0% 0.0% NA 0.0%
Depreciation and amortization 13.6% 15.3% 15.6% (5.6%) 1.3%
-----------------------------------------------------------------
Operating income 17.4% 12.4% 11.5% 49.2% 11.6%
Net income before income taxes and
cumulative effect of a change in
accounting principle 6.7% 3.3% 2.4% 112.3% 42.3%
Net income before cumulative effect of a
change in accounting principle 4.1% 3.3% 2.4% 141.4% 42.3%
Net income 4.0% 1.8% 1.3% 133.3% 45.2%
Other Operating Data:
Long-distance services operating income (2) 40.8% 38.6% 34.0% 9.6% 16.0%
Cable services operating income (3) 28.6% 28.8% 18.1% 7.5% 84.2%
Local access services operating income (loss) (4) 3.8% (2.3%) 5.8% 301.5% (150.2%)
Internet services operating loss (5) (2.2%) (117.2%) (125.2%) 97.6% (21.6%)
- --------------------------
(1) Percentage change in underlying data.
(2) Computed as a percentage of total external long-distance services revenues.
(3) Computed as a percentage of total external cable services revenues.
(4) Computed as a percentage of total external local access services revenues.
(5) Computed as a percentage of total external Internet services revenues.
NA - Not applicable
- --------------------------
Year Ended December 31, 2003 ("2003") Compared To Year Ended December 31, 2002
("2002")
Overview of Revenues and Cost of Sales and Services
Total revenues increased 6.2% from $367.8 million in 2002 to $390.8 million in
2003. The cable services, local access services and Internet services segments
and All Other Services contributed to the increase in total revenues, partially
off-set by decreased revenues in the long-distance services segment. See the
discussion below for more information by segment.
Total cost of sales and services increased 1.5% to $125.4 million in 2003. As a
percentage of total revenues, total cost of sales and services decreased from
33.6% in 2002 to 32.1% in 2003. The cable services, local access services and
Internet services segments and All Other Services contributed to the increase in
total cost of sales and services, partially off-set by decreased cost of sales
and services in the long-distance services segment. See the discussion below for
more information by segment.
Long-Distance Services Overview
Long-distance services revenue in 2003 represented 52.3% of consolidated
revenues. Our provision of interstate and intrastate long-distance services,
Private Line and leased dedicated capacity services, and broadband services
accounted for 94.7% of our total long-distance services revenues during 2003.
63
Factors that have the greatest impact on year-to-year changes in long-distance
services revenues include the rate per minute charged to customers, usage
volumes expressed as minutes of use, and the number of Private Line, leased
dedicated service and broadband products 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.
Our contract to provide interstate and intrastate long-distance services to
Sprint was replaced in March 2002 extending its term to March 2007 with two
one-year automatic extensions to March 2009. Beginning in April 2002 the new
contract reduced the rate to be charged by us for certain Sprint traffic over
the extended term of the contract. Additional contractual rate reductions occur
annually through the end of the initial term of the contract.
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. Chapter
11 allows a company to continue operating in the ordinary course of business in
order to maximize recovery for the company's creditors and shareholders. 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. On July 24, 2003, our contract to provide interstate and
intrastate long-distance services to MCI was extended for a minimum of five
years to July 2008. The agreement sets the terms and conditions under which we
originate and terminate certain types of long distance and data services in
Alaska on MCI's behalf. In exchange for extending the term of this exclusive
contract, MCI will receive a series of rate reductions implemented in phases
over the life of the contract.
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, general economic deterioration, 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. Additionally, a protracted economic malaise
in the Lower 48 States or a further 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.
At the time of MCI's petition for bankruptcy, we had approximately $12.9 million
in receivables outstanding from MCI. At December 31, 2002 the bad debt reserve
for uncollected amounts due from MCI ("MCI reserve") totaled $11.6 million and
consisted of all billings for services rendered prior to July 21, 2002 that were
not paid or deemed recoverable as of December 31, 2002.
The settlement agreement approved by the United States Bankruptcy Court on July
22, 2003 settled unpaid balances due from MCI for services rendered prior to
their bankruptcy filing date, settled billing disputes between us, and
established a right to set-off certain of our pre-petition accounts payable to
MCI. Under the terms of the agreement, we reduced the pre-petition amounts
receivable from MCI by $800,000 and off-set our pre-petition accounts payable by
$1.0 million. The majority of the difference reduced the MCI reserve with the
remainder recorded as bad debt expense.
The remaining pre-petition accounts receivable balance owed by MCI to us after
this settlement was $11.1 million ("MCI credit") which we have and will use as a
credit against amounts payable for services purchased
64
from MCI. At settlement, all of the remaining pre-petition amounts receivable
due from MCI, which were fully reserved, were removed from accounts receivable
in our Consolidated Balance Sheets.
After settlement, we began reducing the MCI credit as we utilized it for
services otherwise payable to MCI. The use of the credit is recorded as a
reduction of bad debt expense. During 2003 we utilized approximately $2.8
million of the MCI credit against amounts payable for services received from
MCI.
The remaining unused MCI credit totaled $7.9 million at December 31, 2003. The
credit balance is not recorded on the Consolidated Balance Sheets as we are
recognizing recovery of bad debt expense as the credit is utilized.
On October 31, 2003, MCI's reorganization plan was approved by the United States
Bankruptcy Court. The court order provided for a February 28, 2004 deadline for
MCI to emerge from bankruptcy. In February 2004 MCI asked the Court for a 60-day
extension to the February 28 deadline to allow it to complete financial filings
with the SEC. The financial filings are reported to be the last major task left
for MCI to emerge from bankruptcy. We expect to evaluate the likelihood that we
will receive full recovery of bad debt expense for our remaining credit balance
when MCI exits bankruptcy proceedings and may change our recognition method at
that time.
Long-distance Services Segment Revenues
Total long-distance services segment revenues decreased 0.2% to $204.6 million
in 2003. The components of long-distance services segment revenues are as
follows (amounts in thousands):
Percentage
2003 2002 Change
-------------- ------------- ----------------
Common carrier message telephone services $ 91,700 95,947 (4.4%)
Residential, commercial and governmental message
telephone services 39,701 46,169 (14.0%)
Private line and Private Network services 37,123 36,157 2.7%
Broadband services 25,167 18,432 36.5%
Lease of fiber optic cable system capacity 10,876 8,225 32.2%
-------------- ------------- ----------------
Total long-distance services segment revenue $ 204,567 204,930 (0.2%)
============== ============= ================
Common Carrier Message Telephone Services Revenue
The 2003 decrease in message telephone service revenues from other common
carriers (principally MCI and Sprint) results from the following:
o A 10.0% 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 July 24, 2003 extension of our contract to
provide interstate and intrastate long-distance services to MCI,
o A discount given to a certain other common carrier customer starting in
2003, and
o Revenue earned due to a 2002 increase in the rate per minute of certain
other common carrier minutes retroactive to April 2002 which did not
recur in 2003.
The decrease in message telephone service revenues from other common carriers in
2003 was off-set by a 6.7% increase in wholesale minutes carried to 875.0
million minutes.
65
Residential, Commercial and Governmental Message Telephone Services Revenue
Selected key performance indicators for our offering of message telephone
service to residential, commercial and governmental customers follow:
Percentage
2003 2002 Change
------------------ ------------------ ----------------
Retail minutes carried 284.3 million 309.2 million (8.1%)
Average rate per minute $0.138 $0.142 (2.8%)
Number of active residential,
commercial and governmental
customers (1) 85,600 88,200 (2.9%)
-------------
(1) All current subscribers who have had calling activity during December of
2003 and 2002, respectively.
The decrease in message telephone service revenues from residential, commercial,
and governmental customers in 2003 is primarily due to the following:
o A decrease in minutes carried for these customers primarily due to the
effect of customers substituting cellular phone, prepaid calling card and
email usage for direct dial minutes,
o A decrease in the average rate per minute primarily due to our promotion
of and customers' enrollment in calling plans offering a certain number
of minutes for a flat monthly fee, and
o A decrease in the number of active residential, commercial, and
governmental customers billed primarily due to the effect of customers
substituting cellular phone, prepaid calling card, and email usage for
direct dial minutes.
Broadband Services Revenue
The increase in revenues from our packaged telecommunications offering to rural
hospitals and health clinics and our SchoolAccess(TM) offering to rural school
districts in 2003 is primarily due to the following:
o Our new SchoolAccess(TM) offering called Distance Learning Service that
started in late 2002. Distance Learning Service is a video-conference
based service that enables eight school districts in Alaska to provide
additional educational opportunities for their students, and
o An increased number of circuits leased to rural hospitals and health
clinics in Alaska.
Long-distance Services Segment Cost of Sales and Services
Long-distance services segment cost of sales and services decreased 11.1% to
$53.4 million in 2003. Long-distance services segment cost of sales and services
as a percentage of long-distance services segment revenues decreased from 29.3%
in 2002 to 26.1% in 2003 primarily due to the following:
o Reductions in 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 $.011 and $.061 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,
o The FCC Multi-Association Group ("MAG") reform order reducing the
interstate access rates paid by interexchange carriers to LECs beginning
July 2002,
o A $2.3 million refund ($1.9 million after deducting certain direct costs)
in 2003 from a local exchange carrier in respect of its earnings that
exceeded regulatory requirements, and
o A $1.7 million refund in 2003 from an intrastate access cost pool that
previously overcharged us for access services.
66
The decrease in the long-distance services segment cost of sales and services as
a percentage of long-distance services segment revenues is partially off-set by
the following:
o Increased costs associated with additional transponder and network
back-up capacity in 2003 as compared to 2002,
o A discount given to a certain other common carrier customer starting in
the third quarter of 2003 without a corresponding decrease in the cost of
sales and services, and
o The decreased average rate per minute on minutes carried for other common
carriers as agreed to in the July 24, 2003 extension of our contract to
provide interstate and intrastate long-distance services to MCI.
Cable Services Overview
Cable television revenues in 2003 represented 24.6% of consolidated revenues.
Our cable systems serve 35 communities and areas in Alaska, including the
state's four largest population centers, Anchorage, Fairbanks, the
Matanuska-Susitna Valley and Juneau.
We generate cable services 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 2003 programming
services generated 76.3% of total cable services revenues, cable services'
allocable share of cable modem services accounted for 11.4% of such revenues,
equipment rental and installation fees accounted for 8.1% 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 revenues.
Effective February 2003, we increased rates charged for certain cable services
and premium packages in six communities, including three of the state's four
largest population centers, Anchorage, Fairbanks and Juneau. Rates increased
approximately 4% for those customers who experienced an adjustment.
The primary factors that contribute to year-to-year changes in cable services
revenues include average monthly subscription and pay-per-view rates, the mix
among basic, premium and pay-per-view services and digital and analog services,
the average number of cable television and cable modem subscribers during a
given reporting period, and revenues generated from new product offerings.
In the second quarter of 2002 we signed seven-year retransmission agreements
with the five local Anchorage broadcasters and began up-linking and distributing
the local Anchorage programming to all of our cable systems. This local
programming provides additional value to our cable subscribers that not all our
DBS competitors can provide. In 2003 DBS service provider Dish Network (EchoStar
Communications Corporation) began providing, for an additional fee, Anchorage
based broadcaster programming in Anchorage and in other Alaska communities where
there is not a similar local broadcast affiliate.
Cable Services Segment Revenues and Cost of Sales and Services
Selected key performance indicators for our cable services segment follow:
Percentage
2003 2002 Change
------------- ------------- ---------------
Basic subscribers 134,400 136,100 (1.2%)
Digital special interest subscribers 34,900 30,500 14.4%
Cable modem subscribers 46,000 36,200 27.1%
Homes passed 202,200 196,900 2.7%
Total cable services segment revenues increased 8.2% to $96.0 million and
average gross revenue per average basic subscriber per month increased $4.35 or
7.8% in 2003.
67
Programming services revenues increased 7.4% to $73.2 million in 2003 resulting
from the following:
o An increase in the number of digital subscribers, and
o The February 2003 rate increase of approximately 4% for those customers
who experienced an adjustment.
The increase in programming services revenue is partially off-set by a decrease
in basic subscribers due to increased competition from DBS.
The cable services segment's share of cable modem revenue (offered through our
Internet services segment) increased 37.2% to $11.0 million in 2003 due to an
increased number of cable modems deployed. Approximately 99% of our cable homes
passed are able to subscribe to our cable modem service. In the second quarter
of 2003 we completed our upgrade of the Ketchikan cable system. Customers in
this system are now able to subscribe to cable modem service.
We now offer digital programming service in Anchorage, the Matanuska-Susitna
Valley, Fairbanks, Juneau, Ketchikan, Kenai, and Soldotna, representing
approximately 89% of our total homes passed at December 31, 2003. We launched
digital programming services in the Matanuska-Susitna Valley and Ketchikan cable
systems in 2003.
Cable services cost of sales and services increased 9.9% to $26.0 million in
2003 due to programming cost increases for most of our cable programming
services offerings. Cable services cost of sales and services as a percentage of
cable services revenues increased from 26.7% in 2002 to 27.1% in 2003 primarily
due to rate increases by programming vendors exceeding our rate adjustments.
Cost of sales increases are partially off-set by increasing amounts of cable
modem services sold that generally have higher margins than do cable programming
services.
Multiple System Operator ("MSO") Operating Statistics
In October 2002 we, along with the other largest publicly traded MSOs, signed a
pledge to support and adhere to new voluntary reporting guidelines on common
operating statistics to provide investors and others with a better understanding
of our operations. 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' facilities.
Our capital expenditures by standard reporting category for the year ending
December 31, 2003 and 2002 follows (amounts in thousands):
2003 2002
----------- -----------
Customer premise equipment $ 10,713 10,609
Commercial 705 597
Scalable infrastructure 2,221 3,082
Line extensions 1,270 866
Upgrade/rebuild 3,800 4,567
Support capital 503 5,413
----------- -----------
Sub-total 19,212 25,134
Remaining reportable segments and
All Other capital expenditures 43,267 40,006
----------- -----------
$ 62,479 65,140
=========== ===========
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The standardized definition of a customer relationship is the number of
customers that receive at least one level of service, encompassing voice, video,
and data services, without regard to which services customers purchase. At
December 31, 2003 and 2002 we had 121,900 and 124,400 customer relationships,
respectively.
The standardized definition of a revenue generating unit is the sum of all
primary analog video, digital video, high-speed data, and telephony customers,
not counting additional outlets. At December 31, 2003 and 2002 we had 180,400
and 172,200 revenue generating units, respectively.
Local Access Services Overview
We generate local access services 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. During 2003 local access services revenues represented
10.0% of consolidated revenues.
The primary factors that contribute to year-to-year changes in local access
services 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, and the traffic sensitive access rates
charged to carriers and the Universal Service Program.
Our local access services segment faces significant competition in Anchorage,
Fairbanks, and Juneau from ACS , which is the largest ILEC in Alaska, and from
AT&T Alascom, Inc. We began providing service in the Juneau market in the first
quarter of 2002. 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.
We have been testing the deployment of voice telephone service utilizing our
coaxial cable facilities. If we are able to deploy this service, we will be able
to utilize our own cable facilities to provide local access to our customers and
avoid paying local loop charges to the ILEC. To successfully deploy this
service, we must integrate new technology with our existing facilities and the
industry must adopt standards for the sending and receiving of voice
communications over cable facilities. To ensure the necessary equipment is
available to us we have committed to purchase a certain number of outdoor,
network powered multi-media adapters, as further disclosed below in "Liquidity
and Capital Resources." We expect to begin implementing this service delivery
method in the second quarter of 2004.
At December 31, 2003, 106,100 lines were in service as compared to approximately
96,100 lines in service at December 31, 2002. At December 31, 2003 approximately
1,940 additional lines were awaiting connection. We estimate that our 2003 lines
in service total represents a statewide market share of approximately 22%.
Our access line mix at December 31, 2003 follows:
o Residential lines represent approximately 58% of our lines,
o Business customers represent approximately 35% of our lines, and
o Internet access customers represent approximately 7% of our lines.
Approximately 86% of our lines are provided on our own facilities and leased
local loops. Approximately 5% of our lines are provided using UNE platform.
In December 2003 we distributed our new phone directory and began recognizing
revenue and costs of sales and service in the local access services segment. We
recognized one month of revenue and cost of sales and service in the fourth
quarter of 2003 and we plan to recognize the remaining eleven months in 2004.
Operating expenses incurred and recognized throughout 2003 to prepare our new
phone directory are reported in the local access services segment.
69
Local Access Services Segment Revenues and Cost of Sales and Services
Local access services segment revenues increased 21.6% in 2003 to $39.0 million
primarily due to the following:
o Growth in the average lines in service,
o $1.9 million of support from the Universal Service Program, and
o A change in how we provision local access lines in Fairbanks and Juneau.
In 2002 we primarily resold service purchased from ACS. In 2003 we are
benefiting from our facilities build-out with an increased number of
access lines provisioned on our own facilities using UNEs, allowing us
to collect interstate and intrastate access revenues.
Local access services segment cost of sales and services increased 17.6% to
$23.8 million in 2003. Local access services segment cost of sales and services
as a percentage of local access services segment revenues decreased from 63.0%
in 2002 to 60.9% in 2003, primarily due to the $1.9 million of support from the
Universal Service Program and reductions in access costs attributed to our
conversion of service provided on a wholesale basis to service provided through
our own facilities.
The local access services segment operating results are negatively affected by
the allocation 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 results would have improved by
approximately $6.9 million and the long distance services segment operating
results would have been reduced by an equal amount in 2003. Avoided access
charges totaled approximately $7.0 million in 2002.
The local access services segment operating results are affected by our
continued evaluation and testing of digital local phone service and Internet
protocol-based technology to deliver phone service through our cable facilities.
Internet Services Overview
We generate Internet services 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'
allocable share of cable modem revenue (a portion of cable modem revenue is also
recognized by our cable services segment). During 2003 Internet services segment
revenues represented 5.1% of consolidated revenues.
The primary factors that contribute to year-to-year changes in Internet services
revenues include the average number of subscribers to our services during a
given reporting period, the average monthly subscription rates, the amount of
bandwidth purchased by large commercial customers, and the number and type of
additional premium features selected.
Marketing campaigns continue to be deployed targeting residential and commercial
customers featuring bundled products. Our Internet offerings are bundled with
our long-distance and/or local access services offerings and provide free basic
Internet services or discounted premium Internet services if certain
long-distance and local access services plans are selected. In 2004 we have
added cable service to our bundled offering. 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.
During 2003 we upgraded the download speeds of all of our cable modem Internet
service offerings. These enhancements have proven to be popular with our
customers which we believe is helping to further solidify our customer
relationships.
70
Internet Services Segment Revenues and Cost of Sales and Services
Selected key performance indicators for our Internet services segment follow:
Percentage
2003 2002 Change
------------ ------------ ----------------
Total Internet subscribers 95,700 89,500 6.9%
Cable modem subscribers 46,000 36,200 27.1%
Dial-up subscribers 49,600 53,300 (6.9%)
Total Internet services segment revenues increased 27.3% to $19.8 million in
2003 primarily due to the 39.1% increase in its allocable share of cable modem
revenues to $9.1 million in 2003 as compared to 2002. The increase in cable
modem revenues is primarily due to growth in cable modem subscribers and the
termination in the first quarter of 2003 of our offering in which customers
received up to two months of free cable modem service. Additionally, the growth
in cable modem revenues is affected by the level of service our subscribers
select. In 2003 and 2002, 8.1% and 6.0%, respectively, of our subscribers
selected our highest level of cable modem service resulting in increased revenue
of approximately $897,000 in 2003 as compared to 2002.
We previously reported a total of 71,700 Internet subscribers at December 31,
2002. This subscriber count was based upon the total number of active dial-up
subscribers at December 31, 2002. Not all cable modem subscribers paying for a
dial-up plan have activated their dial-up service. When we first started selling
cable modem service it was packaged in a way that almost all cable modem
subscribers were also dial up subscribers. As we introduced new packages and
plans and started promoting our cable modem LiteSpeed service the number of
cable modem subscribers without a dial up plan increased substantially. An
internal review during the second quarter of 2003 revealed that these subscriber
counts had risen substantially enough that they are now being reported
separately.
Internet services cost of sales and services increased 22.3% to $5.9 million in
2003, and as a percentage of Internet services revenues, totaled 29.6% and 30.8%
in 2003 and 2002, respectively. The 2003 decrease as a percentage of Internet
services revenues is primarily due to the increase in Internet's portion of
cable modem revenue which generally has higher margins than do other Internet
services products. As Internet services revenues increase, economies of scale
and more efficient network utilization continue to result in reduced Internet
cost of sales and services as a percentage of revenues.
All Other Services Overview
Revenues reported in the All Other category as described in note 13 in the
accompanying Notes to Consolidated Financial Statements include our managed
services, product sales, and cellular telephone services.
Revenues included in the All Other category represented 8.0% of total revenues
in 2003.
All Other Revenues and Costs of Sales and Services
All Other revenues increased 18.1% to $31.4 million in 2003. The increase in
revenues is primarily due to the following:
o Increased monthly revenue earned from our GCI Fiber system that transits
the Trans Alaska oil pipeline corridor, and
o $2.0 million in special project revenue earned from our GCI Fiber system
in 2003.
71
All Other costs of sales and services increased 10.3% to $16.4 million in 2003,
and as a percentage of All Other revenues, totaled 52.2% and 56.0% in 2003 and
2002, respectively. The decrease in All Other costs of sales and services as a
percentage of All Other revenues is primarily due to the following:
o Increased monthly revenue earned from our recurring service contracts in
2003 which exceeds the corresponding increase in costs of sales or
services, and
o The recognition of $2.0 million in special project revenue earned in 2003
which exceeds the corresponding increase in costs of sales or services.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 7.5% to $138.7 million in
2003 and, as a percentage of total revenues, increased to 35.5% in 2003 from
35.1% in 2002. The 2003 increase in selling, general and administrative expenses
is primarily due to a $4.9 million increase in labor and health insurance costs
and a $4.3 million increase in the accrual for company-wide success sharing
bonus costs.
Marketing and advertising expenses as a percentage of total revenues decreased
from 3.3% in 2002 to 2.5% in 2003.
Bad Debt Expense (Recovery)
Bad debt expense (recovery) decreased 101.4% to ($178,000) in 2003. The 2003
decrease is primarily due to the following:
o Utilization of approximately $2.8 million of the MCI credit as a
reduction to bad debt expense in 2003, as further discussed in the "Long
Distance Service Overview" above, and
o Provision in 2002 of a $11.0 million bad debt reserve for uncollected
amounts due from MCI, as further discussed in the "Long Distance Service
Overview" above.
Impairment Charge
In 2003, we reported an impairment charge of $5.4 million which equaled the
remaining net book value recorded for our North Pacific Cable asset. In 1991 we
purchased one DS-3 of capacity on a fiber optic cable system owned by AT&T. This
fiber optic cable system is a spur off of a trans-Pacific fiber optic cable
system owned by another group. We used our owned capacity to carry traffic to
and from Alaska and the Lower 48 States. The section of the North Pacific Cable
in which we own capacity was taken out of service in January 2004 due to a
billing dispute between AT&T and the owner of the trans-Pacific cable system
causing us to re-route certain of our traffic. We believe it is probable that we
will not return our traffic to the North Pacific Cable even if it is placed back
into service. We have requested in writing to be relieved of all future
obligations required by our purchase agreement. Should our request be accepted,
we expect to cease payment of maintenance and vessel standby costs totaling
approximately $324,000 per year that would otherwise be payable over the
remaining life of the system. The fiber optic cable system we are building is
scheduled for completion in May 2004 and will provide us with route diversity
and redundancy far in excess of that previously provided by the North Pacific
Cable.
Depreciation, Amortization and Accretion Expense
Depreciation, amortization and accretion expense decreased 5.6% to $53.4 million
in 2003. The decrease is primarily attributed to a reduction in the depreciable
value of Property and Equipment due to a basis adjustment of $18.5 million which
was recorded in 2002 associated with the Kanas Telecom, Inc. acquisition, and a
2003 reduction of $1.3 million in depreciation expense which was also associated
with the acquisition.
The decrease in depreciation, amortization and accretion expense described above
was partially off-set by an increase in depreciation expense due to our $59.2
million investment in equipment and facilities placed into service during 2002
for which a full year of depreciation was recorded in 2003, and the $45.8
million investment in equipment and facilities placed into service during 2003
for which a partial year of depreciation was recorded in 2003.
72
Other Expense, Net
Other expense, net of other income, increased 25.5% to $41.9 million in 2003.
The increase is primarily due to the following:
o As described further in "Liquidity and Capital Resources" below, we
recognized approximately $5.0 million in Amortization of Loan and Senior
Notes Fees in 2003 because a portion of the new Senior Credit Facility
was a substantial modification of the April 22, 2003 amended Senior
Credit Facility,
o Increased interest expense due to increased interest rates on our amended
Senior Credit Facility from October 2002 through October 2003, when the
amended Senior Credit Facility was replaced with the new Senior Credit
Facility,
o Increased amortization of loan fees due to additional loan fees incurred
to amend our Senior Credit Facility, and
o A $1.2 million interest benefit earned in 2002 from an interest rate swap
agreement which was called at no cost by the counter party and terminated
on August 1, 2002.
Partially offsetting these increases was a decrease in the average outstanding
indebtedness in 2003 and decreased interest expense in November and December
2003 due to the decreased interest rate paid on our new Senior Credit Facility.
Income Tax Expense
Income tax expense was $10.1 million in 2003 and $5.7 million in 2002. The
change was due to increased net income before income taxes and cumulative effect
of a change in accounting principle in 2003 as compared to 2002. Our effective
income tax rate decreased from 45.9% in 2002 to 38.5% in 2003 due to the effect
of items that are nondeductible for income tax purposes and adjustments made to
ending temporary difference balances in 2003.
At December 31, 2003, we have (1) tax net operating loss carryforwards of
approximately $188.6 million that will begin expiring in 2005 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. 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 income tax rate
for financial statement purposes will be 40% to 43% in 2004.
Cumulative Effect of a Change in Accounting Principle
On January 1, 2003 we adopted SFAS No. 143, "Accounting for Asset Retirement
Obligations," and recorded the cumulative effect of accretion and depreciation
expense as a cumulative effect of a change in accounting principle of
approximately $544,000, net of income tax benefit of $367,000.
Year Ended December 31, 2002 ("2002") Compared To Year Ended December 31,
2001 ("2001").
Overview of Revenues and Cost of Sales and Services
Total revenues increased 3.0% from $357.3 million in 2001 to $367.8 million in
2002. Excluding revenues from the fiber optic cable system capacity sale of
$19.5 million in 2001 as described in note 1(r) in the accompanying "Notes to
Consolidated Financial Statements," total revenues increased 8.9% in 2002. The
long-distance services, cable services, local access services and Internet
services segments contributed to the increase in total revenues, partially
off-set by decreased revenues from All Other Services. See the discussions below
for more information by segment.
73
Total cost of sales and services decreased 11.6% to $123.6 million in 2002. As a
percentage of total revenues, total cost of sales and services decreased from
39.1% in 2001 to 33.6% in 2002. Excluding the 2001 fiber optic cable system
capacity sale, total cost of sales and services as a percentage of total
revenues totaled 38.2% in 2001 as compared to 33.6% in 2002. The long-distance
services segment and All Other Services contributed to the decrease in total
cost of sales and services, partially off-set by increases in cost of sales and
services in the cable services, local access services and Internet services
segments. See the discussions below for more information by segment.
Long-distance Services Segment Revenues
Long-distance services segment revenues increased 2.1% to $204.9 million in
2002. The components of long-distance services segment revenues are as follows
(amounts in thousands):
Percentage
2002 2001 Change
------------- ------------- ---------------
Common carrier message telephone services $ 95,947 86,577 10.8%
Residential, commercial and governmental message
telephone services 46,169 54,225 (14.9%)
Private line and Private Network services 36,157 34,694 4.2%
Broadband services 18,432 15,696 17.4%
Lease of fiber optic cable system capacity 8,225 9,502 (13.4%)
------------- ------------- ---------------
Total long-distance services segment revenue $ 204,930 200,694 2.1%
============= ============= ===============
Common Carrier Message Telephone Service Revenue
Message telephone service revenues from other common carriers (principally MCI
and Sprint) increased 10.9% to $88.8 million in 2002 resulting from a 14.7%
increase in wholesale minutes carried to 819.8 million minutes. After excluding
certain 2001 low-margin wholesale minutes no longer carried for other common
carriers, comparable wholesale minutes carried for other common carriers
increased 19.5% over the prior year. Revenue increases resulting from increased
wholesale minutes carried for other common carriers was partially off-set by a
3.5% decrease in the average rate per minute on minutes carried for other common
carriers. The increase is also due to the reclassification of approximately 12.0
million minutes of traffic generated by a certain customer from retail in 2001
to wholesale in 2002. The average rate per minute decrease is primarily due to a
reduced rate charged by us for certain Sprint traffic due to a new contract
commencing April 2002. After excluding certain 2001 low-margin wholesale minutes
not carried in 2002 for other common carriers, the comparable average rate per
minute decreased 6.5% from the prior year.
Residential, Commercial and Governmental Message Telephone Services Revenue
Selected key performance indicators for our offering of message telephone
service to residential, commercial and governmental customers follow:
Percentage
2002 2001 Change
------------------- ----------------- -----------------
Retail minutes carried 309.2 million 344.2 million (10.2%)
Average rate per minute $0.142 $0.151 (6.0%)
Number of active residential,
commercial and governmental
customers (1) 88,200 87,900 0.3%
------------------
(1) All current subscribers who have had calling activity during December of
2002 and 2001, respectively.
Message telephone service revenues from residential, commercial, and
governmental customers decreased 12.2% to $53.3 million in 2002 primarily due to
the following:
o A decrease in retail minutes carried for these customers primarily due to
the loss of approximately 8.0 million to 10.0 million minutes earned
annually from a certain retail customer and the reclassification of
approximately 12.0 million minutes of traffic generated by a certain
customer from retail in 2001 to
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wholesale in 2002, and
o A decrease in the average rate per minute paid by these customers due to
our promotion of and customers' enrollment in calling plans offering a
certain number of minutes for a flat monthly fee.
Through May 2001 discounts recognized on revenue from certain Private Line and
Private Network customers totaling $2.8 million off-set 2001 message telephone
service revenue from residential, commercial and governmental customers.
Beginning June 2001 these discounts off-set revenue earned from Private Line and
Private Network customers. If these discounts had not been recognized in the
2001 message telephone service revenue from residential, commercial and
governmental customers through May 2001, revenues would have decreased 16.1% to
$53.3 million in 2002 as compared to 2001.
Private Line and Private Network Service Revenue
Private line and Private Network transmission services revenues increased 4.2%
to $36.2 million in 2002. The increase is partially off-set by the effect of a
reclassification of discounts recognized on revenue from certain Private Line
and Private Network customers, discussed above in "Residential, Commercial and
Governmental Message Telephone Services Revenue". If the discounts had been
recognized in revenue from Private Line and Private Network customers during all
of 2001 the increase in revenue would be 13.4% to $36.2 million. The increase in
revenue from Private Line and Private Network customers in 2002 is primarily due
to an increased number of circuits leased by governmental customers.
Broadband Services Revenue
Revenues from our packaged telecommunications offering to rural hospital and
health clinic service and our SchoolAccess(TM) offering to rural school
districts increased 17.4% in 2002 to $18.4 million. The increase is primarily
due to the addition in the second quarter of 2001 of two new subscribers to our
rural hospital and health clinic service for which we recognized a full year of
revenue in 2002, and our new SchoolAccess(TM) product offering called Distance
Learning that started in late 2002. Distance Learning is a video-conference
based service and is used by six school districts in Alaska in 2002.
Long-distances Services Segment Cost of Sales and Services
Long-distance services segment cost of sales and services decreased 18.0% to
$60.1 million in 2002. Long-distance services segment cost of sales and services
as a percentage of long-distance services segment revenues decreased from 36.5%
in 2001 to 29.3% in 2002 primarily due to the following:
o Reductions in 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 $.056 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,
o The FCC MAG reform order reducing the interstate access rates paid by
interexchange carriers to LECs in January and again in July 2002, and
o In the course of business we estimate unbilled long-distance services
cost of sales and services based upon minutes of use processed through
our network and established rates. Such estimates are revised when
subsequent billings are received, payments are made, billing matters are
researched and resolved, tariffed billing periods lapse, or when disputed
charges are resolved. In 2002 and 2001, we had favorable and
(unfavorable) adjustments of $4.7 million and ($2.8) million,
respectively. Excluding the adjustments, long-distance services cost of
sales and services as a percentage of long-distance services revenues was
35.1% and 31.6% in 2001 and 2002, respectively.
Long-distance services cost of sales and services in 2001 included a reversal of
$2.0 million in accrued costs upon the conclusion of a dispute with ACS and a
$450,000 non-recurring refund from ACS in respect of its earnings that exceeded
regulatory requirements.
75
Cable Services Segment Revenues and Cost of Sales and Services
Selected key performance indicators for our cable services segment follow:
Percentage
2002 2001 Change
------------- -------------- --------------
Basic subscribers 136,100 132,000 3.1%
Digital special interest subscribers 30,500 24,600 24.0%
Cable modem subscribers 36,200 26,500 36.6%
Homes passed 196,900 192,200 2.4%
Cable services segment revenues increased 15.9% to $88.7 million and average
gross revenue per average basic subscriber per month increased $3.38 or 6.4% in
2002. The increases in revenues and rates per subscriber were accomplished
without any meaningful rate increases during 2002 and are due primarily to
continued deployment of our high value services including digital cable
television and cable modems.
Programming services revenues increased 11.9% to $68.2 million in 2002 due to an
increase in basic and digital subscribers.
The cable services segment's share of cable modem revenue (offered through our
Internet services segment) increased $3.1 million to $8.0 million in 2002 due to
an increased number of cable modems deployed. Approximately 96% of our cable
homes passed are able to subscribe to our cable modem service in 2002.
At December 31, 2002 we offered digital programming in Anchorage, Fairbanks,
Juneau, Kenai, and Soldotna, which markets represented approximately 80% of our
homes passed.
Homes passed increased at December 31, 2002 as compared to December 31, 2001 due
to new facility construction efforts.
In the second quarter of 2002 we signed new seven-year retransmission agreements
with the five local Anchorage broadcasters and began up linking and distributing
the local Anchorage programming to all of our cable systems. This was done to
provide additional value to our cable subscribers and to allow us to
differentiate our programming from that of our DBS competitors.
Cable services cost of sales and services increased 13.5% to $23.6 million in
2002. Cable services cost of sales and services as a percentage of cable
services revenues, which is less as a percentage of revenues than are
long-distance, local access and Internet services cost of sales and services,
decreased from 27.2% in 2001 to 26.7% in 2002.
Revenues earned from equipment rental and installation, cable services'
allocable share of cable modem services and advertising sales do not have
significant corresponding costs of sales and services. The decrease in cable
services cost of sales and services as a percentage of cable services revenues
is primarily due to an increase in the percentage of cable services revenues
earned from equipment rental and installation, cable services' allocable share
of cable modem services and advertising sales from 20.4% in 2001 to 23.1% in
2002.
The decrease in cable services cost of sales and services as a percentage of
cable services revenues described above is off-set by an increase in cable
programming services cost of sales and services as a percentage of cable
programming services revenue from 34.2% in 2001 to 34.7% in 2002. Cable services
rate increases did not keep pace with programming cost increases in 2002.
Programming costs increased for most of our cable services offerings, and we
incurred additional costs on new programming introduced in 2001 and 2002.
Local Access Services Segment Revenues and Cost of Sales and Services
Local access services segment revenues increased 27.1% in 2002 to $32.1 million
primarily due to growth in the average lines in service. At December 31, 2002 an
estimated 96,100 lines were in service as compared
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to approximately 79,200 lines in service at December 31, 2001. At December 31,
2002 approximately 1,700 additional lines were awaiting connection. The increase
in local access services revenues described above was partially off-set by the
following:
o The FCC MAG reform order reducing the interstate access rates paid by
interexchange carriers to LECs in January and again in July 2002, and
o A reduction in interstate access rates charged by us to interexchange
carriers in response to an FCC order forcing a competitor to reduce their
interstate access rates.
We estimate that our 2002 lines in service total represented a statewide market
share of approximately 20%.
Our access line mix continued to hold steady in 2002, with residential lines
representing approximately 55% of our lines, business customers representing
approximately 37%, and Internet access customers representing approximately 8%.
Approximately 86% of our lines are provided on our own facilities or using
leased local loops.
Local access services cost of sales and services increased 43.9% to $20.2
million in 2002. Local access services cost of sales and services as a
percentage of local access services revenues increased from 55.6% in 2001 to
63.0% in 2002, primarily due to the following:
o The effect of offering one to two months of free service to significant
numbers of new local access services customers acquired in 2002 while
continuing to incur cost of sales and services for such new customers,
o The lease of wholesale circuits from ACS in Fairbanks and Juneau pending
completion of our facilities enabling service transition to UNE
facilities and pricing, and
o An increase in the Anchorage loop lease rates. ACS requested and received
permission for a 7.7% increase in the UNE loop rate to $14.92 per month
and a 24% increase in their retail residential rates, both effective in
November 2001. The wholesale service rate we pay is tied to the retail
residential rate and increased approximately $2.25 per line per month.
Additionally, the cost of most residential features increased 24.0% to
approximately $1.35 per line per month. The increased rates resulted in
an approximately $1.2 million increase in our local access services cost
of sales and services in 2002 without a corresponding increase in our
revenue.
The increases in local access services cost of sales and services as a
percentage of local access services revenues described above are partially
offset by further economies of scale and more efficient network utilization as
the number of local access services subscribers and resulting revenues increase.
The size of the local access services segment operating loss is exacerbated by
the allocation 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 decreased by
approximately $7.0 million and the long distance services segment would be
reduced by an equal amount in 2002. Avoided access charges totaled approximately
$6.3 million in 2001.
The local access services segment operating loss was affected by the expected
start-up losses we experienced in the new Fairbanks and Juneau markets and our
continued evaluation and testing of DLPS technology.
77
Internet Services Segment Revenues and Cost of Sales and Services
Selected key performance indicators for our Internet services segment follow:
Percentage
2002 2001 Change
------------- ------------ ---------------
Total Internet subscribers 89,500 72,700 23.1%
Cable modem subscribers 36,200 26,500 36.6%
Dial-up subscribers 53,300 46,000 15.9%
Internet services segment revenues increased 29.9% to $15.6 million in 2002
primarily due to growth in the number of customers served and the 60.3% increase
in its allocable share of cable modem revenues in 2002 as compared to 2001. The
increase in cable modem revenue is primarily due to growth in the number of
cable modem subscribers from 2001 to 2002 and our subscribers' more frequent
selection of our highest level of cable modem service.
Internet services cost of sales and services increased 0.9% to $4.8 million in
2002, and as a percentage of Internet services revenues, totaled 30.8% and 39.6%
in 2002 and 2001, respectively. The decrease as a percentage of Internet
services revenues is primarily due to the increase in Internet's portion of
cable modem revenue which generally has higher margins than do other Internet
services products. As Internet services revenues increase, economies of scale
and more efficient network utilization continue to result in reduced Internet
cost of sales and services as a percentage of revenues.
We enhanced the value of our Internet offerings in 2002 through the addition of
electronic billing and presentment capabilities and the rollout of a product
called e-mail guard, which filters out e-mail spam and viruses. In 2002 we
upgraded the download speeds of all of our cable modem Internet service
offerings. These new services and enhancements have proven to be very popular
with our customers and are helping to further solidify our customer
relationships.
All Other Revenues and Cost of Sales and Services
The 37.9% decrease in All Other revenues to $26.6 million in 2002 is primarily
due to the $19.5 million fiber optic cable system capacity sale in 2001, as
described in note 1(r) in the accompanying "Notes to Consolidated Financial
Statements." The decrease in revenues is partially offset by a $3.0 million
increase in managed services revenue to $22.0 million in 2002 primarily due to
the provision of additional services to and increased revenues from a certain
customer as performance criteria was met.
All Other costs of sales and services decreased 44.8% to $14.9 million in 2002
primarily due to $10.9 million in costs of sale for the fiber optic cable system
capacity sale in 2001.
As a percentage of All Other revenues, All Other costs of sales and services
totaled 56.0% and 62.9% in 2002 and 2001, respectively. Excluding revenues from
the 2001 fiber optic cable system capacity sale, cost of sales and services as a
percentage of revenues totaled 56.0% and 68.9% in 2002 and 2001, respectively.
The decrease is primarily due to the provision of additional services to and
increased revenues from a certain customer as performance criteria was met
without a corresponding increase in cost of sales and services.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 10.7% to $129.0 million
in 2002 and, as a percentage of total revenues, increased to 35.1% in 2002 from
32.6% in 2001. Excluding the fiber optic cable system capacity sale in 2001,
selling, general and administrative expenses, as a percentage of total revenues,
increased from 34.1% in 2001 to 35.1% in 2002. The 2002 increase in selling,
general and administrative expenses is primarily due to increased labor and
health insurance costs, incremental new costs to operate GFCC and Rogers, and
costs incurred for our unsuccessful bid to purchase certain of the assets of WCI
Cable, Inc., partially offset by a decreased accrual for company-wide success
sharing bonus costs.
78
Marketing and advertising expenses as a percentage of total revenues decreased
from 3.4% in 2001 to 3.3% in 2002. Excluding revenues from the fiber optic cable
system capacity sale in 2001, marketing and advertising expenses as a percentage
of total revenues were 3.6% in 2001.
Bad Debt Expense
Bad debt expense increased 206.7% to $13.1 million in 2002 and, as a percentage
of total revenues, increased to 3.6% in 2002 from 1.2% in 2001. Excluding
revenues from the fiber optic cable system capacity sale in 2001, bad debt
expense as a percentage of total revenues was 1.3% in 2001. The 2002 increase is
primarily due to the $11.0 million bad debt expense for uncollected accounts due
from MCI.
Depreciation and Amortization
Depreciation and amortization expense increased 1.3% to $56.4 million in 2002.
The increase is primarily attributable to an increase of 15.1% to $55.6 million
in depreciation expense due to our $68.0 million investment in equipment and
facilities placed into service during 2001 for which a full year of depreciation
was recorded in 2002, and the $59.2 million investment in equipment and
facilities placed into service during 2002 for which a partial year of
depreciation will be recorded in 2002.
Partially offsetting the depreciation expense increase described above is the
discontinuation of amortization of Goodwill and Cable Certificates upon the
adoption of SFAS 142, "Goodwill and Other Intangible Assets" on January 1, 2002,
resulting in a decrease in 2002 amortization expense of approximately $6.5
million as compared to 2001.
Other Expense, Net
Other expense, net of other income, increased 3.4% to $33.4 million in 2002. The
increase is primarily due to the following:
o A $3.2 million increase in deferred loan fee expense to $4.6 million
primarily due to the recognition of $2.3 million in unamortized deferred
loan fees upon refinancing our Senior Credit Facility and Fiber Facility,
and
o Increased interest expense in November and December 2002 due to the
increased interest rate paid on our amended Senior Credit Facility
starting November 1, 2002.
Partially offsetting these increases were decreased 2002 interest rates on our
Senior Credit Facility and Fiber Facility through November 1, 2002.
Income Tax Expense
Income tax expense was $5.7 million in 2002 and $4.1 million in 2001. The
increase was due to increased net income before income taxes in 2002 as compared
to 2001. Our effective income tax rate decreased from 47.0% in 2001 to 45.9% in
2002 due to the effect of items that are nondeductible for income tax purposes.
79
Fluctuations in Fourth Quarter Results of Operations
The following is a summary of unaudited quarterly results of operations for the
years ended December 31, 2003 and 2002 (amounts in thousands, except per share
amounts):
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
------------ ----------- ------------ ----------- ------------
2003
----
Total revenues $ 92,777 95,939 98,327 103,754 390,797
Gross profit $ 62,529 65,868 66,457 70,560 265,414
Net income before cumulative effect of a $
change in accounting principle 3,095 4,810 4,529 3,652 16,086
Net income $ 2,551 4,810 4,529 3,652 15,542
------------ ----------- ------------ ----------- ------------
Basic and diluted net income per common
share:
Net income before cumulative effect of a $
change in accounting principle (1) 0.05 0.08 0.07 0.06 0.25
Cumulative effect of a change in
accounting principle, net of income
tax benefit of $367 (0.01) --- --- --- (0.01)
------------ ----------- ------------ ----------- ------------
Net income (1) $ 0.04 0.08 0.07 0.06 0.24
============ =========== ============ =========== ============
2002
----
Total revenues $ 88,210 92,740 94,550 92,342 367,842
Gross profit $ 56,973 61,879 64,175 61,251 244,278
Net income (loss) $ 2,212 (1,103) 5,063 491 6,663
Basic and diluted net income (loss) per
common share $ 0.03 (0.03) 0.08 0.00 0.08
-------------
(1) Due to rounding, the sum of quarterly net income per common share
amounts does not agree to total year net income per common share.
The following describes unusual or infrequently occurring items recognized in
the following quarters of 2002 and 2003:
o In the fourth quarter of 2003 we reported an impairment charge of $5.4
million which equaled the remaining net book value recorded for our North
Pacific Cable asset, as discussed in "Impairment Charge" above,
o In the fourth quarter of 2003 we recognized approximately $5.0 million in
Amortization of Loan and Senior Notes Fees due to classifying a portion
of the new Senior Credit Facility described further in "Liquidity and
Capital Resources" below as a substantial modification of the April 22,
2003 amended Senior Credit Facility, and
o In the second and third quarters of 2002 we recognized $9.7 million and
$1.2 million, respectively, in bad debt expense for uncollected accounts
due from MCI. In the third and fourth quarters of 2003 we recognized
approximately $647,000 and $2.2 million, respectively, in recoveries of
bad debt expense for uncollected accounts due from MCI.
Liquidity and Capital Resources
Cash flows from operating activities totaled $85.7 million in 2003 as compared
to $74.5 million in 2002. The 2003 increase is primarily due to increased cash
flow from all of our reportable segments, a $2.3 million refund from a local
exchange carrier in respect of its earnings that exceeded regulatory
requirements, receipt
80
of $2.0 million in payments of notes receivable from related parties issued upon
stock option exercise, and a $1.7 million refund from an intrastate access cost
pool that previously overcharged us for access services. Uses of cash during
2003 included expenditures of $62.5 million for property and equipment,
including construction in progress, principal payments on long-term debt and
capital lease obligations of $14.6 million, payment of $6.2 million to purchase
other assets and intangible assets, payment of $3.5 million in fees associated
with the amended and new Senior Credit Facility, and payment of preferred stock
dividends of $2.0 million.
Net receivables increased $15.7 million from December 31, 2002 to December 31,
2003 primarily due to increases in the following:
o Trade receivables for broadband services provided to hospitals and health
clinics,
o Trade receivables for special project revenue earned from a certain
customer,
o Trade receivables for telecommunication services provided to a certain
customer,
o Trade receivable for estimated support from the Universal Service
Program, and
o Trade receivable for directory advertising services associated with our
new phone directory.
Working capital totaled $8.9 million at December 31, 2003, a $4.7 million
increase as compared to $4.2 million at December 31, 2002. The increase is
primarily attributed to the following:
o $13.7 million of the $15.7 million increase in net receivables at
December 31, 2003. The remaining increase in trade receivables does not
result in a significant change in working capital due to an off-set
reported in current liabilities,
o A $2.3 million decrease in accounts payable primarily due to the timing
of payments for cost of sales and service and the bankruptcy settlement
with MCI in July 2003 (as further discussed in Long Distance Services
Overview above), partially off-set by increased accounts payable
associated with the construction of our new fiber optic cable system, and
o A $2.0 million increase in the current portion of notes receivable from
related parties at December 31, 2003 as compared to December 31, 2002.
The increase in working capital was partially off-set by the following:
o A $5.7 million increase in accrued payroll primarily due to an increased
accrual for company-wide success sharing bonus costs, and
o An increase of $3.4 million in the current maturity of our satellite
transponder lease obligation.
In February 2004 GCI's wholly owned subsidiary GCI, Inc. sold $250 million in
aggregate principal amount of senior debt securities due February 15, 2014 ("new
Senior Notes"). The new Senior Notes are an unsecured senior obligation. We will
pay interest of 7.25% on the new Senior Notes, which were sold at a discount of
$4.3 million. The new Senior Notes will be carried on our balance sheet net of
the unamortized portion of the discount, which will be amortized to interest
expense over the life of the new Senior Notes.
The net proceeds of the offering were primarily used to repay our existing $180
million 9.75% Senior Notes ("old Senior Notes") and to repay approximately $43.8
million of the term portion and $10.0 million of the revolving portion of our
new Senior Credit Facility. Semi-annual interest payments of approximately $9.1
million will be due beginning August 15, 2004. In connection with the issuance,
we paid fees and other expenses of approximately $6.3 million which will be
amortized over the life of the new Senior Notes.
The new Senior Notes were offered only to qualified institutional buyers
pursuant to Rule 144A and non-United States persons pursuant to Regulation S.
The new Senior Notes have not been registered under the Securities Act and,
unless so registered, may not be offered or sold except pursuant to an exemption
from, or in a transaction not subject to, the registration requirements of the
Securities Act and applicable state securities laws. We plan to register our new
Senior Notes by June 16, 2004.
81
The new Senior Notes are not redeemable prior to February 15, 2009. At any time
on or after February 15, 2009, the new Senior Notes are redeemable at our
option, in whole or in part, on not less than thirty days nor more than sixty
days notice, at the following redemption prices, plus accrued and unpaid
interest (if any) to the date of redemption:
If redeemed during the twelve month period
commencing February 1 of the year indicated: Redemption Price
---------------------------------------------------- ---------------------
2009 103.625%
2010 102.417%
2011 101.208%
2012 and thereafter 100.000%
We may, on or prior to February 17, 2007, at our option, use the net cash
proceeds of one or more underwritten public offerings of our qualified stock to
redeem up to a maximum of 35% of the initially outstanding aggregate principal
amount of our new Senior Notes at a redemption price equal to 107.25% of the
principal amount of the new Senior Notes, together with accrued and unpaid
interest, if any, thereon to the date of redemption, provided that not less than
65% of the principal amount of the new Senior Notes originally issued remain
outstanding following such a redemption.
The new Senior Notes restrict GCI, Inc. and certain of its subsidiaries from
incurring debt in most circumstances unless the result of incurring debt does
not cause our leverage ratio to exceed 6.0 to one. The new Senior Notes do not
allow debt under the new Senior Credit Facility to exceed the greater of (and
reduced by certain stated items):
o $250 million, reduced by the amount of any prepayments, or
o 3.0 times earnings before interest, taxes, depreciation and amortization
for the last four full fiscal quarters of GCI, Inc. and certain of its
subsidiaries.
The new Senior Notes limit our ability to make cash dividend payments.
We are conducting a Consent Solicitation and Tender Offer for the old Senior
Notes. Through February 13, 2004 we accepted for payment $114.6 million
principal amount of notes which were validly tendered. Such notes accepted for
payment received additional consideration as follows:
o $4.0 million based upon a payment of $1,035 per $1,000 principal amount,
consisting of the purchase price of $1,025 per $1,000 principal amount
and the consent payment of $10 per $1,000 principal amount, and
o $497,000 in accrued and unpaid interest through February 16, 2004.
The remaining principal amount of $65.4 million will be redeemed by March 18,
2004 for additional consideration as follows:
o $2.1 million based upon a payment of $1032.50 per $1,000 principal
amount, and
o $815,000 in estimated accrued and unpaid interest through the expected
date of redemption March 17, 2004.
The total estimated redemption cost is expected to be $186.1 million. The
premium to redeem our old Senior Notes is expected to be $6.1 million (excluding
estimated interest cost of $1.3 million), which will be recognized as a
component of Other Income (Expense) during the three months ended March 31,
2004.
Compliance with the redemption notice requirements in the Indenture will result
in a delay of up to sixty days before final redemption of some of the old Senior
Notes. As a result of such delay, our total debt will increase during the
overlap period between the redemption of the outstanding old Senior Notes and
the issuance of the new Senior Notes making us out of compliance with Section
6.11 of our Credit, Guaranty, Security and Pledge
82
Agreement, dated as of October 30, 2003. We have received a waiver from
compliance with Section 6.11 until April 30, 2004.
On April 22, 2003 we amended our $225.0 million Senior Credit Facility. On
October 30, 2003 we closed a new $220.0 million Senior Credit Facility to
replace the April 22, 2003 amended Senior Credit Facility. The new Senior Credit
Facility reduced the interest rate from LIBOR plus 6.50% to LIBOR plus 3.25%.
The new Senior Credit Facility includes a term loan of $170.0 million and a
revolving credit facility of $50.0 million.
The repayment schedule for the term loan portion of the new Senior Credit
Facility, after considering repayments from our new Senior Notes offering
proceeds, is as follows (amounts in thousands):
Date Amount
----------------------------------------------------- ------------
Quarter ended December 31, 2005 $ 170
Quarterly from March 31, 2006 to December 31, 2006 $ 8,000
Quarterly from March 31, 2007 to September 30, 2007 $ 10,000
The remaining balance of the new Senior Credit Facility will be payable in full
on October 31, 2007.
We are required to pay a commitment fee on the unused portion of the commitment.
We may not permit the Total Leverage Ratio (as defined), the Senior Secured
Leverage Ratio (as defined), and the Interest Coverage Ratio (as defined) to
exceed certain amounts over the life of the new Senior Credit Facility.
Capital expenditures, excluding up to $58.0 million incurred to build or acquire
additional fiber optic cable system capacity between Alaska and the Lower 48
States, in any of the years ended December 31, 2004, 2005 and 2006 may not
exceed:
o $25.0 million, plus
o 100% of any Excess Cash Flow (as defined) during the applicable period
less certain permitted investments during the applicable period.
If the revolving credit facility exceeds $25.0 million, we may not incur capital
expenditures, other than those incurred to build or acquire additional fiber
optic cable system capacity, in excess of $25.0 million.
The new Senior Credit Facility requirement that we must either have repaid in
full or successfully refinanced our old Senior Notes by February 1, 2007 was met
with the refinancing of our old Senior Notes, as previously discussed.
$3.5 million of the new Senior Credit Facility has been used to provide a letter
of credit to secure payment for our contract for the design, engineering,
manufacture and installation of the new undersea fiber optic cable system. The
letter of credit will be reduced to $1.8 million after a contract payment
estimated to be made in March 2004. The letter of credit will be cancelled after
the final contract payment date estimated to be in April 2004.
In connection with the April 22, 2003 amended Senior Credit Facility, we paid
bank fees and other expenses of approximately $2.6 million during the year ended
December 31, 2003. In connection with the new Senior Credit Facility, we paid
bank fees and other expenses of $912,000 during the three months ended December
31, 2003 which will be amortized over the life of the new Senior Credit
Facility.
Because a portion of the new Senior Credit Facility was a substantial
modification of the April 22, 2003 amended Senior Credit Facility, we recognized
approximately $5.0 million in Amortization of Loan and Senior Notes Fees during
the three months ended December 31, 2003. The remaining $2.2 million in amended
Senior Credit Facility Deferred Loan Costs will continue to be amortized over
the life of the new Senior Credit Facility.
83
The term loan is fully drawn and we have letters of credit totaling $6.5
million, which left $43.5 million available at December 31, 2003 to draw under
the revolving credit facility if needed. In January 2004 we drew $10.0 million
under the revolving credit facility. Our ability to draw down on the revolver
portion of our new Senior Credit Facility could be diminished if we are not in
compliance with all new Senior Credit Facility covenants or have a material
adverse change at the date of the request for the draw. In September and
December 2003 we made scheduled principal payments on our term loan totaling
$10.0 million. In April 2003, we made a $2.7 million principal payment on the
revolving credit facility. As described above, we issued new Senior Notes in
February 2004 and used a portion of the proceeds to repay approximately $43.8
million of the term portion and $10.0 million of the revolving portion of our
new Senior Credit Facility.
We were in compliance with all loan covenants at December 31, 2003.
Our expenditures for property and equipment, including construction in progress,
totaled $62.5 million and $65.1 million during 2003 and 2002, 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 2004 expenditures for property and equipment
for our core operations, including construction in progress and excluding the
new fiber system construction costs and other special projects described below,
to total $45 million to $55 million, depending on available opportunities and
the amount of cash flow we generate during 2004.
We are constructing a fiber optic cable system connecting Seward, Alaska and
Warrenton, Oregon, with leased backhaul facilities to connect it to our
switching and distribution centers in Anchorage, Alaska and Seattle, Washington.
The 1,544-statute mile cable system has a total design capacity of 960 Gigabits
per second access speed and is planned to be operational by May 2004. The cable
will complement our existing fiber optic cable system between Whittier, Alaska
and Seattle, Washington. The two cables will provide physically diverse backup
to each other in the event of an outage. We expect to fund construction costs
that are expected to total $50 million through our operating cash flows and, to
the extent necessary, with draws on our new Senior Credit Facility. During 2003
our capital expenditures for this project have totaled approximately $16.5
million, all of which has been funded through our operating cash flows.
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
development of our PCS network to meet the requirements of our license, digital
local phone service, and upgrades to our cable television plant.
We are testing the deployment of DLPS. We expect to begin implementing this
service delivery method in the second quarter of 2004. To ensure the necessary
equipment is available to us we have entered into an agreement to purchase a
certain number of outdoor, network powered multi-media adapters. The agreement
has a remaining outstanding commitment at December 31, 2003 of $18.3 million.
We believe that payment for services provided to MCI subsequent to their
bankruptcy filing date will continue to be made timely, consistent with our
status in MCI's filing as a key service provider or utility to MCI. See "Long
Distance Services Overview" for a discussion of the settlement of the
uncollected amounts due from MCI.
A migration of MCI's traffic off 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 accrued on our Series B preferred stock are payable in cash at the
semi-annual payment dates of April 30 and October 31 of each year. We paid
dividends of $722,000 and $713,000 on April 30, 2003 and October 31, 2003,
respectively. Redemption is required on April 30, 2011.
Our next Series B preferred stock dividend is due April 30, 2004. In October
2003, 1,250 shares of our Series B preferred stock was converted to
approximately 225,000 shares of our Class A common stock at the stated
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conversion price of $5.55 per share. In January 2004 an additional 3,108 shares
of our Series B preferred stock was converted to 560,000 shares of our Class A
common stock at the stated conversion price of $5.55 per share. The conversions
will reduce our future semi-annual cash dividends.
Dividends accrued on our Series C preferred stock are payable quarterly in cash.
Our next Series C preferred stock dividend of approximately $150,000 is due
March 31, 2004. We may redeem the Series C preferred stock at any time in whole
but not in part. Mandatory redemption is required at any time after June 30,
2005 at the option of holders of 80% of the outstanding shares of the Series C
preferred stock. The redemption price is $1,000 per share plus the amount of all
accrued and unpaid dividends, whether earned or declared, through the redemption
date.
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.
The telecommunications industry in general has been depressed due to high levels
of competition in the long-distance market resulting in pressures to reduce
prices, an oversupply of long-haul capacity, excessive debt loads, several
high-profile company failures and potentially fraudulent accounting practices by
some companies. Our ability to obtain new debt under acceptable terms and
conditions in the future may be diminished as a result.
We believe that we will be able to meet our current and long-term liquidity and
capital requirements, fixed charges and preferred stock dividends 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.
Critical Accounting Policies
Our accounting and reporting policies comply with accounting principles
generally accepted in the United States of America. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions. The financial position and results
of operations can be affected by these estimates and assumptions, which are
integral to understanding reported results. Critical accounting policies are
those policies that management believes are the most important to the portrayal
of the Company's 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 the Company's Audit Committee.
Those policies considered to be critical accounting policies for the year ended
December 31, 2003 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 base our estimates on the aging of our accounts receivable balances,
financial health of specific customers, and our historical write-off
experience, net of
85
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 141. Goodwill and indefinite-lived assets such as our cable segment
franchise agreements are no longer amortized but are subject, at a
minimum, to annual tests for impairment. 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. The initial goodwill
and other intangibles recorded and subsequent impairment analysis
requires management to make subjective judgments concerning estimates of
the applicability of quoted market prices in active markets and, if
quoted market prices are not available and/or are not applicable, how the
acquired asset will perform in the future using a discounted cash flow
analysis. Estimated cash flows may extend beyond ten years and, by their
nature, are difficult to determine over an extended timeframe. Events and
factors that may significantly affect the estimates include, among
others, competitive forces, customer behaviors and attrition, changes in
revenue growth trends, cost structures and technology, and changes in
discount rates, performance compared to peers, material and ongoing
negative economic trends, and specific industry or market sector
conditions. In determining the reasonableness of cash flow estimates, we
review historical performance of the underlying asset or similar assets
in an effort to improve assumptions utilized in our estimates. In
assessing the fair value of goodwill and other intangibles, we may
consider other information to validate the reasonableness of our
valuations including third-party assessments. These evaluations could
result in a change in useful lives in future periods and could result in
write-down of the value of intangible assets. Because of the significance
of the identified intangible assets and goodwill to our consolidated
balance sheet, the annual impairment analysis will be critical. Any
changes in key assumptions about the business and its prospects, or
changes in market conditions or other externalities, could result in an
impairment charge and such a charge could have a material adverse effect
on our consolidated financial position, results of operations or
liquidity. Refer to Note 6 in the accompanying "Notes to Consolidated
Financial Statements" for additional information regarding intangible
assets.
o We estimate unbilled long-distance segment cost of sales and services
based upon minutes of use carried through our network and established
rates. We estimate unbilled costs for new circuits and services, and when
network changes occur that result in traffic routing changes or a change
in carriers. Carriers that provide service to us regularly change their
networks which can lead to new, revised or corrected billings. Such
estimates are revised or removed when subsequent billings are received,
payments are made, billing matters are researched and resolved, tariffed
billing periods lapse, or when disputed charges are resolved. Revisions
to previous estimates could either increase or decrease costs in the year
in which the estimate is revised which could have a material effect on
our consolidated financial condition and results of operations.
o Our income tax policy provides for deferred income taxes to show the
effect of temporary differences between the recognition of revenue and
expenses for financial and income tax reporting purposes and between the
tax basis of assets and liabilities and their reported amounts in the
financial statements in accordance with SFAS No. 109, "Accounting for
Income Taxes." We have recorded deferred tax assets of approximately
$77.5 million associated with income tax net operating losses that were
generated from 1990 to 2003, and that expire from 2005 to 2022.
Pre-acquisition income tax net operating losses associated with acquired
companies are subject to additional deductibility limits. We have
recorded deferred tax assets of approximately $1.9 million associated
with alternative minimum tax credits that do not expire. Significant
management judgment is required in developing our provision for income
taxes, including the determination of deferred tax assets and liabilities
and any valuation allowances that may be required against the deferred
tax assets. In conjunction with certain 1996 acquisitions, we determined
that approximately $20 million of the acquired net operating losses would
86
not be utilized for income tax purposes, and elected with our December
31, 1996 income tax returns to forego utilization of such acquired
losses. Deferred tax assets were not recorded associated with the
foregone losses and, accordingly, no valuation allowance was provided. We
have not recorded a valuation allowance on the deferred tax assets as of
December 31, 2003 based on management's belief that future reversals of
existing taxable temporary differences and estimated future taxable
income exclusive of reversing temporary differences and carryforwards,
will, more likely than not, be sufficient to realize the benefit of these
assets over time. In the event that actual results differ from these
estimates or if our historical trends change, we may be required to
record a valuation allowance on deferred tax assets, which could have a
material adverse effect on our consolidated financial position, results
of operations or liquidity.
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. Polices 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, including but not limited to the requirement to
account for the market value of stock options as compensation expense, are among
topics currently under reexamination by accounting standards setters and
regulators. Although no specific conclusions reached by these standard setters
appear likely to cause a material change in our accounting policies, outcomes
cannot be predicted with confidence. A complete discussion of our significant
accounting policies can be found in Note 1 in the accompanying "Notes to
Consolidated Financial Statements."
New Accounting Standards
In December 2003, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. ("FIN") 46 (revised December 2003), Consolidation of Variable
Interest Entities, which addresses how a business enterprise should evaluate
whether it has a controlling financial interest in an entity through means other
than voting rights and accordingly should consolidate the entity. FIN 46R
replaces FIN 46, Consolidation of Variable Interest Entities, which was issued
in January 2003. We will be required to apply FIN 46R to variable interests in
Variable Interest Entities ("VIEs") created after December 31, 2003. For
variable interests in VIEs created before January 1, 2004, the Interpretation
will be applied beginning on January 1, 2005. For any VIEs that must be
consolidated under FIN 46R that were created before January 1, 2004, the assets,
liabilities and non-controlling interests of the VIE initially would be measured
at their carrying amounts with any difference between the net amount added to
the balance sheet and any previously recognized interest being recognized as the
cumulative effect of an accounting change. If determining the carrying amounts
is not practicable, fair value at the date FIN 46R first applies may be used to
measure the assets, liabilities and non-controlling interest of the VIE. At
December 31, 2003, we do not have VIEs. We will adopt this statement January 1,
2004 and do not expect it to have a material effect on our results of
operations, financial position and cash flows.
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 2003 the State's
actual results indicate that Alaska's oil revenues, federal funding and
investment revenues supplied 36%, 31% and 20%, respectively, of the state's
total revenues. In fiscal 2004 state economists forecast that Alaska's oil
revenues, federal funding and investment revenues will supply 28%, 32% and 30%,
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
87
an average of 0.990 million barrels produced per day in fiscal 2003. The state
forecasts the production rate to decline from 0.996 million barrels produced per
day in fiscal 2004 to 0.844 million barrels produced per day in fiscal 2015. The
state reports that its forecast has been adjusted since the last forecast
reported in April 2003 due to the reexamination of field reservoir performance
and potential.
Market prices for North Slope oil averaged $28.15 in fiscal 2003 and are
forecasted to average $27.70 in fiscal 2004. The closing price per barrel was
$31.53 on February 6, 2004. To the extent that actual oil prices vary materially
from the state's projected prices the state's projected revenues and deficits
will change. Every $1 change in the price per barrel of oil is forecasted to
result in a $50.0 to $60.0 million change in the state's fiscal 2004 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 2007. 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 pursue cost cutting and revenue enhancing measures.
Should new oil discoveries or developments not materialize or the price of oil
become depressed, the long term trend of continued decline in oil production
from the Prudhoe Bay area is inevitable with a corresponding adverse impact on
the economy of the state, in general, and on demand for telecommunications and
cable television services, and, therefore, on us, in particular. Periodically
there are renewed efforts to allow exploration and development in the Arctic
National Wildlife Refuge ("ANWR"). The United States Energy Information Agency
estimates it could take nine years to begin oil field drilling after approval of
ANWR exploration.
Deployment of a natural gas pipeline from the State of Alaska's North Slope to
the Lower 48 States has been proposed to supplement natural gas supplies. A
competing natural gas pipeline through Canada 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 the Alaska economy. In January 2004, two competing
groups submitted applications to the State of Alaska to negotiate tax and other
financial terms for the construction of a natural gas pipeline. The governor of
the State of Alaska and certain natural gas transportation companies continue to
support a natural gas pipeline from Alaska's North Slope by trying to reduce the
project's costs and by advocating for federal tax incentives to further reduce
the project's costs.
Development of the ballistic missile defense system project may have a
significant impact on Alaskan telecommunication requirements and the Alaska
economy. The proposed system would be 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 preferred alternative is deployment of a system with 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. Site preparation has
been underway at Fort Greely since August of 2001 and construction began on the
Fort Greely test bed shortly after the June 15, 2002 groundbreaking. The test
bed is due to be operational by September 30, 2004, though it may be operational
in the summer of 2004.
In 2003 the Alaska Legislature passed and the Governor signed legislation that
extended the life of the RCA until 2007.
88
Tourism, air cargo, and service sectors have helped offset the prevailing
pattern of oil industry downsizing that has occurred during much of the last
several years.
We have, since our entry into the telecommunication marketplace, aggressively
marketed our services to seek a larger share of the available market. The
customer base in Alaska is limited, however, with a population of approximately
644,000 people. The State of Alaska's population is distributed as follows:
o 42% are located in the Municipality of Anchorage,
o 13% are located in the Fairbanks North Star Borough,
o 10% are located in the Matanuska-Susitna Borough,
o 5% are located in the City and Borough of Juneau, and
o The remaining 30% are located in other communities across the State of
Alaska.
No assurance can be given that the driving forces in the Alaska economy, and in
particular, oil production, will continue at appropriate levels to provide an
environment for expanded economic activity.
No assurance can be given that oil companies doing business in Alaska will be
successful in discovering new fields or further developing existing fields which
are economic to develop and produce oil with access to the pipeline or other
means of transport to market, even with a reduced level of royalties. We 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 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 television revenues, on the other hand, are higher in the
winter months because consumers spend more time at home and tend to watch more
television during these months. Local access and Internet services 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.
Off-Balance Sheet Arrangements
We have not created, and are not party to, any special-purpose or off-balance
sheet entities for the purpose of raising capital, incurring debt or operating
parts of our business that are not consolidated into our financial statements.
We do not have any arrangements or relationships with entities that are not
consolidated into our financial statements that are reasonably likely to
materially affect our liquidity or the availability of our capital resources.
89
Schedule of Certain Known Contractual Obligations
The following table details future projected payments associated with our
certain known contractual obligations as of December 31, 2003.
Payments Due by Period
Less than 1 1 to 3 4 to 5 More Than 5
Total Year Years Years Years
------------- ----------- ---------- ------------ -------------
(Amounts in thousands)
Long-term debt $ 345,000 20,000 56,000 269,000 ---
Interest on long-term debt 70,200 17,550 35,100 17,550 ---
Capital lease obligations, including
interest 61,902 8,448 19,201 15,775 18,478
Operating lease commitments 69,473 12,357 20,787 13,230 23,099
Redeemable preferred stock 25,664 --- 10,000 --- 15,664
Purchase obligations 71,038 45,024 20,303 5,711 ---
------------- ----------- ---------- ------------ -------------
Total contractual obligations $ 643,277 103,379 161,391 321,266 57,241
============= =========== ========== ============ =============
For long-term debt included in the above table, we have included principal
payments on our new Senior Credit Facility and on our old Senior Notes. Interest
on amounts outstanding under our new Senior Credit Facility is based on variable
rates and therefore the amount is not determinable. Our old Senior Notes require
semi-annual interest payments of approximately $8.8 million through August 2007.
For a discussion of our long-term debt, including the redemption of our old
Senior Notes, issuance of new Senior Notes and the use of proceeds from the
issuance of new Senior Notes to pay down our new Senior Credit Facility, see
notes 8 and 17 to the accompanying "Notes to Consolidated Financial Statements."
For a discussion of our capital and operating leases, see note 16 to the
accompanying "Notes to Consolidated Financial Statements."
We have included only the maturity redemption amount on our Series B and C
preferred stock (cash dividends are excluded). Our Series B preferred stock is
convertible at $5.55 per share into GCI Class A common stock. 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. In
January 2004, a Series B preferred stockholder converted 3,108 shares of Series
B preferred stock to GCI Class A common stock. Our Series C preferred stock is
convertible at $12 per share into GCI Class A common stock, is non-voting, and
pays a 6% per annum quarterly cash dividend. We may redeem the Series C
preferred stock at any time in whole but not in part. Mandatory redemption is
required at any time after the fourth anniversary date at the option of holders
of 80% of the outstanding shares of the Series C preferred stock. For more
information about our redeemable preferred stock, see notes 1(e) and 17to the
accompanying "Notes to Consolidated Financial Statements."
Purchase obligations include the remaining construction commitment for our fiber
optic cable system of $24.6 million, the remaining DLPS equipment purchase
commitment of $18.3 million and the remaining $16.0 million commitment for our
Alaska Airlines agreement as further described in note 16 to the accompanying
"Notes to Consolidated Financial Statements." The contracts associated with
these commitments are non-cancelable. Purchase obligations also include other
commitments for goods and services for capital projects and normal operations
which are not included in our Consolidated Balance Sheets at December 31, 2003,
because the goods had not been received or the services had not been performed
at December 31, 2003.
Regulatory Developments
You should see "Part I -- Item 1 -- Business, Regulation, Franchise
Authorizations and Tariffs" for more information about regulatory developments
affecting us.
90
Inflation
We do not believe that inflation has a significant effect on our operations.
Audit Committee
The Audit Committee, composed entirely of independent directors, meets
periodically with our independent auditors and management to review the
Company's financial statements and the results of audit activities. The Audit
Committee, in turn, reports to the Board of Directors on the results of its
review and recommends the selection of independent auditors.
The Audit Committee has approved the independent auditor to provide the
following services:
o Audit (audit of financial statements filed with the SEC, quarterly
reviews, comfort letters, consents, review of registration statements,
accounting consultations); and
o Audit-related (employee benefit plan audits and accounting consultation
on proposed transactions).
Item 7A. 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 new Senior Credit Facility 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. On September
21, 2001, we entered into an interest rate swap agreement to convert $25.0
million of variable interest rate debt to 3.98% fixed rate debt plus applicable
margin. As of December 31, 2003, we have borrowed $165.0 million of which $140.0
million is subject to interest rate risk. On this amount, a 1% increase in the
interest rate would result in $1,400,000 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 December 31, 2003, we have borrowed $43.5 million subject to interest rate
risk. On this amount, a 1% increase in the interest rate would result in
$435,000 in additional gross interest cost on an annualized basis.
Item 8. Consolidated Financial Statements and Supplementary Data
Our consolidated financial statements are filed under this Item, beginning on
Page 93. The financial statement schedules required under Regulation S-X are
filed pursuant to Item 14 of this Report.
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report on Form 10-K, we
carried out an evaluation of the effectiveness of the design and operation of
our "disclosure controls and procedures" (as defined in the Securities Exchange
Act of 1934 ("Exchange Act") Rules 13a-14(c) and 15d-14(c)) 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.
91
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 significant changes in our internal controls or, to our knowledge,
in other factors that could significantly affect our disclosure controls and
procedures subsequent to the date we carried out this evaluation.
We may enhance, modify, and supplement internal controls and disclosure controls
and procedures based on experience.
Part III
Items 10, 11, 12, 13 and 14 are incorporated herein by reference from our Proxy
Statement for our 2004 Annual Shareholders' meeting.
92
Part IV
Item 15. Exhibits, Consolidated Financial Statement Schedules, and Reports on
Form 8-K
(a)(l) Consolidated Financial Statements Page No.
--------
Included in Part II of this Report:
Independent Auditors' Report..............................................................94
Consolidated Balance Sheets, December 31, 2003 and 2002...................................95 -- 96
Consolidated Statements of Operations,
Years ended December 31, 2003, 2002 and 2001...........................................97
Consolidated Statements of Stockholders' Equity,
Years ended December 31, 2003, 2002 and 2001...........................................98 -- 100
Consolidated Statements of Cash Flows,
Years ended December 31, 2003, 2002 and 2001...........................................101
Notes to Consolidated Financial Statements................................................102 -- 140
(a)(2) Consolidated Financial Statement Schedules
None
(b) Reports on Form 8-K.............................................................................141
(c) Exhibits........................................................................................141
Other schedules are omitted, as they are not required or are not
applicable, or the required information is shown in the applicable
financial statements or notes thereto.
93
INDEPENDENT AUDITORS' REPORT
The Board of Directors
General Communication, Inc.:
We have audited the accompanying consolidated balance sheets of General
Communication, Inc. and subsidiaries as of December 31, 2003 and 2002, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 2003.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of General
Communication, Inc. and subsidiaries as of December 31, 2003 and 2002, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2003 in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 1(p) to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards, No. 143, Accounting for
Asset Retirement Obligations, effective January 1, 2003.
/s/
KPMG LLP
Anchorage, Alaska
February 20, 2004
94
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands) December 31,
ASSETS 2003 2002
- ----------------------------------------------------------------------------------------- ------------- -------------
Current assets:
Cash and cash equivalents $ 10,435 11,940
------------- -------------
Receivables 70,235 66,595
Less allowance for doubtful receivables 1,954 14,010
------------- -------------
Net receivables 68,281 52,585
------------- -------------
Prepaid and other current assets 12,159 9,171
Deferred income taxes, net 7,195 8,509
Notes receivable from related parties 2,723 697
Property held for sale 2,173 1,037
Inventories 1,513 400
------------- -------------
Total current assets 104,479 84,339
------------- -------------
Property and equipment in service, net of depreciation 369,039 381,394
Construction in progress 33,618 16,958
------------- -------------
Net property and equipment 402,657 398,352
------------- -------------
Cable certificates, net of amortization of $26,775 and $26,884 at December 31, 2003
and 2002, respectively 191,241 191,132
Goodwill 41,972 41,972
Other intangible assets, net of amortization of $1,656 and $1,848 at December 31, 2003
and 2002, respectively 3,895 3,460
Deferred loan and senior notes costs, net of amortization of $5,308 and $4,110 at
December 31, 2003 and 2002, respectively 5,757 9,961
Notes receivable from related parties 3,443 5,142
Other assets 9,576 4,424
------------- -------------
Total other assets 255,884 256,091
------------- -------------
Total assets $ 763,020 738,782
============= =============
See accompanying notes to consolidated financial statements.
95 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
(Amounts in thousands) December 31,
LIABILITIES, REDEEMABLE PREFERRED STOCK, AND STOCKHOLDERS' EQUITY 2003 2002
- ------------------------------------------------------------------------------------------- ------------ -----------
Current liabilities:
Current maturities of obligations under capital leases $ 5,139 1,857
Accounts payable 34,133 33,605
Deferred revenue 21,275 18,290
Accrued payroll and payroll related obligations 17,545 11,821
Accrued interest 8,645 7,938
Accrued liabilities 8,156 5,763
Subscriber deposits 651 889
----------- -----------
Total current liabilities 95,544 80,163
Long-term debt 345,000 357,700
Obligations under capital leases, excluding current maturities 38,959 44,072
Obligation under capital lease due to related party, excluding current maturities 677 703
Deferred income taxes, net of deferred income tax benefit 24,168 16,061
Other liabilities 6,366 4,956
----------- -----------
Total liabilities 510,714 503,655
----------- -----------
Redeemable preferred stock 25,664 26,907
----------- -----------
Stockholders' equity:
Common stock (no par):
Class A. Authorized 100,000 shares; issued 52,589 and 51,795 shares at December 31,
2003 and 2002, respectively 202,362 199,903
Class B. Authorized 10,000 shares; issued 3,868 and 3,875 shares at
December 31, 2003 and 2002, respectively; convertible on a share-per-share basis
into Class A common stock 3,269 3,274
Less cost of 338 and 317 Class A common shares held in treasury at December 31, 2003
and 2002, respectively (1,917) (1,836)
Paid-in capital 12,836 11,222
Notes receivable with related parties issued upon stock option exercise (4,971) (5,650)
Retained earnings 15,371 1,847
Accumulated other comprehensive loss (308) (540)
----------- -----------
Total stockholders' equity 226,642 208,220
----------- -----------
Commitments and contingencies
Total liabilities, redeemable preferred stock, and stockholders' equity $ 763,020 738,782
=========== ===========
See accompanying notes to consolidated financial statements.
96
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2003, 2002 and 2001
2003 2002 2001
------------- ------------ -------------
(Amounts in thousands, except per share amounts)
Revenues $ 390,797 367,842 357,258
Cost of sales and services 125,383 123,564 139,793
Selling, general and administrative expenses 138,693 129,029 116,536
Bad debt expense (recovery) (178) 13,124 4,279
Impairment charge 5,434 --- ---
Depreciation, amortization and accretion expense 53,388 56,400 55,675
------------- ------------ -------------
Operating income 68,077 45,725 40,975
------------- ------------ -------------
Other income (expense):
Interest expense (34,745) (29,316) (31,208)
Amortization of loan and senior notes fees (7,732) (4,612) (1,402)
Interest income 560 525 294
------------- ------------ -------------
Other expense, net (41,917) (33,403) (32,316)
------------- ------------ -------------
Net income before income taxes and cumulative effect of a
change in accounting principle 26,160 12,322 8,659
Income tax expense 10,074 5,659 4,070
------------- ------------ -------------
Net income before cumulative effect of a change in
accounting principle 16,086 6,663 4,589
Cumulative effect of a change in accounting principle, net of
income tax benefit of $367 (544) --- ---
------------- ------------ -------------
Net income $ 15,542 6,663 4,589
============= ============ =============
Basic and diluted net income per common share:
Net income before cumulative effect of a change in accounting
principle $ 0.25 0.08 0.05
Cumulative effect of a change in accounting principle, net of
income tax benefit of $367 (0.01) --- ---
------------- ------------ -------------
Net income $ 0.24 0.08 0.05
============= ============ =============
See accompanying notes to consolidated financial statements.
97
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
Notes
Class A Receivable Accumulated
Class A Class B Shares Issued to Retained Other
Common Common Held in Paid-in Related Earnings Comprehensive
(Amounts in thousands) Stock Stock Treasury Capital Parties (Deficit) Income Total
------------------------------------------------------------------------------------------
Balances at December 31, 2000 $ 182,706 3,299 (1,659) 7,368 (2,976) (5,258) --- 183,480
Net income --- --- --- --- --- 4,589 --- 4,589
Change in fair value of cash flow
hedge, net of income tax effect of $5 --- --- --- --- --- --- 8 8
----------
Comprehensive income 4,597
Tax effect of excess stock compensation
expense for tax purposes over amounts
recognized for financial reporting
purposes --- --- --- 2,317 --- --- --- 2,317
Class B shares converted to Class A 18 (18) --- --- --- --- --- ---
Shares issued under stock option plan 4,182 --- --- --- (300) --- --- 3,882
Amortization of the excess of GCI stock
market value over stock option
exercise cost on date of stock option
grant --- --- --- 789 --- --- --- 789
Shares issued to Employee Stock
Purchase Plan 688 --- --- --- --- --- --- 688
Acquisition of G.C. Cablevision, Inc.
net assets and customer base 2,388 --- --- --- --- --- --- 2,388
Series B preferred stock converted to
Class A common stock 5,665 --- --- --- --- --- --- 5,665
Payment received on note issued upon
officer stock option exercise --- --- --- --- 688 --- --- 688
Preferred stock series B dividends --- --- --- --- --- (1,801) --- (1,801)
Preferred stock series C dividends --- --- --- --- --- (301) --- (301)
------------------------------------------------------------------------------------------
Balances at December 31, 2001 $ 195,647 3,281 (1,659) 10,474 (2,588) (2,771) 8 202,392
==========================================================================================
See accompanying notes to consolidated financial statements.
98 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(Continued)
Notes
Class A Receivable Accumulated
Class A Class B Shares Issued to Other
Common Common Held in Paid-in Related Retained Comprehensive
(Amounts in thousands) Stock Stock Treasury Capital Parties Earnings Income (Loss) Total
------------------------------------------------------------------------------------------
Balances at December 31, 2001 $ 195,647 3,281 (1,659) 10,474 (2,588) (2,771) 8 202,392
Net income --- --- --- --- --- 6,663 --- 6,663
Change in fair value of cash flow
hedge, net of income tax effect of
$459 --- --- --- --- --- --- (548) (548)
--------
Comprehensive income 6,115
Tax effect of excess stock compensation
expense for tax purposes over amounts
recognized for financial reporting
purposes --- --- --- 319 --- --- --- 319
Class B shares converted to Class A 7 (7) --- --- --- --- --- ---
Shares issued under stock option plan 3,372 --- --- --- (3,062) --- --- 310
Amortization of the excess of GCI stock
market value over stock option
exercise cost on date of stock option
grant --- --- --- 429 --- --- --- 429
Shares issued to Employee Stock
Purchase Plan 791 --- --- --- --- --- --- 791
Shares issued to acquire minority
shareholders' interest in GFCC 86 --- --- --- --- --- --- 86
Purchase of treasury stock --- --- (177) --- --- --- --- (177)
Preferred stock series B dividends --- --- --- --- --- (1,445) --- (1,445)
Preferred stock series C dividends --- --- --- --- --- (600) --- (600)
------------------------------------------------------------------------------------------
Balances at December 31, 2002 $ 199,903 3,274 (1,836) 11,222 (5,650) 1,847 (540) 208,220
==========================================================================================
See accompanying notes to consolidated financial statements.
99 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(Continued)
Notes
Class A Receivable Accumulated
Class A Class B Shares Issued to Other
Common Common Held in Paid-in Related Retained Comprehensive
(Amounts in thousands) Stock Stock Treasury Capital Parties Earnings Income (Loss) Total
------------------------------------------------------------------------------------------
Balances at December 31, 2002 $ 199,903 3,274 (1,836) 11,222 (5,650) 1,847 (540) 208,220
Net income --- --- --- --- --- 15,542 --- 15,542
Change in fair value of cash flow
hedge, net of change in income tax
effect of $252 --- --- --- --- --- --- 232 232
--------
Comprehensive income 15,774
Tax effect of excess stock compensation
expense for tax purposes over amounts
recognized for financial reporting
purposes --- --- --- 538 --- --- --- 538
Class B shares converted to Class A 5 (5) --- --- --- --- --- ---
Shares issued under stock option plan 1,836 --- --- --- --- --- --- 1,836
Shares issued upon exercise of warrants 125 --- --- --- --- --- --- 125
Payments received on notes receivable
issued to related parties upon stock
option exercise --- --- --- --- 679 --- --- 679
Amortization of the excess of GCI stock
market value over stock option
exercise cost on date of stock option
grant --- --- --- 1,076 --- --- --- 1,076
Shares purchased and retired (750) --- --- --- --- --- --- (750)
Conversion of Series B preferred stock
to Class A common stock 1,243 --- --- --- --- --- --- 1,243
Purchase of treasury stock --- --- (81) --- --- --- --- (81)
Preferred stock series B dividends --- --- --- --- --- (1,418) --- (1,418)
Preferred stock series C dividends --- --- --- --- --- (600) --- (600)
------------------------------------------------------------------------------------------
Balances at December 31, 2003 $ 202,362 3,269 (1,917) 12,836 (4,971) 15,371 (308) 226,642
==========================================================================================
See accompanying notes to consolidated financial statements
100
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(Amounts in thousands) 2003 2002 2001
----------- ----------- -----------
Cash flows from operating activities:
Net income $ 15,542 6,663 4,589
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation, amortization and accretion expense 53,388 56,400 55,675
Deferred income tax expense 9,673 5,754 3,958
Amortization of loan and senior notes fees 7,732 4,612 1,402
Impairment charge 5,434 --- ---
Compensatory stock options 1,076 548 404
Bad debt expense (recovery), net of write-offs (1,084) 9,844 1,294
Deferred compensation 689 430 787
Cumulative effect of a change in accounting principle, net 544 --- ---
Non-cash cost of sales --- --- 10,877
Employee Stock Purchase Plan expense funded with issuance of General
Communication, Inc. Class A common stock --- 791 ---
Write-off of capitalized interest --- --- 170
Other noncash income and expense items 99 90 (44)
Change in operating assets and liabilities (7,395) (10,654) 815
----------- ----------- ------------
Net cash provided by operating activities 85,698 74,478 79,927
----------- ----------- ------------
Cash flows from investing activities:
Purchases of property and equipment, including construction period interest (62,479) (65,140) (65,638)
Purchases of other assets and intangible assets (6,249) (1,657) (2,296)
Payments received on notes receivable from related parties 74 946 1,065
Notes receivable issued to related parties (99) (3,055) (959)
Purchases of and additions to property held for sale (138) (38) (101)
Acquisition of Rogers net of cash received --- --- (18,533)
Advances and billings to Kanas --- --- (5,404)
----------- ----------- ------------
Net cash used in investing activities (68,891) (68,944) (91,866)
----------- ----------- ------------
Cash flows from financing activities:
Long-term borrowings - bank debt --- 14,766 29,000
Repayments of long-term borrowings and capital lease obligations (14,557) (17,279) (13,667)
Payment of debt issuance costs (3,528) (352) (629)
Payment of preferred stock dividends (2,036) (2,045) (2,200)
Proceeds from common stock issuance, net of notes receivable from related
parties issued upon stock option exercise 1,961 396 3,882
Purchase and retirement of General Communication, Inc. Class A common stock (750) --- ---
Payment received on note receivable from related parties issued upon stock
option exercise 679 --- 688
Purchase of treasury stock (81) (177) ---
----------- ----------- ------------
Net cash provided by (used in) financing activities (18,312) (4,691) 17,074
----------- ----------- ------------
Net increase (decrease) in cash and cash equivalents (1,505) 843 5,135
Cash and cash equivalents at beginning of year 11,940 11,097 5,962
----------- ----------- ------------
Cash and cash equivalents at end of year $ 10,435 11,940 11,097
=========== =========== ============
See accompanying notes to consolidated financial statements.
101
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
(l) Business and Summary of Significant Accounting Principles
In the following discussion, General Communication, Inc. ("GCI") and its
direct and indirect subsidiaries are referred to as "we," "us" and
"our".
(a) Business
GCI, an Alaska corporation, was incorporated in 1979. We offer the
following services:
o Long-distance telephone service between Alaska and the
remaining United States and foreign countries
o Cable television services throughout Alaska
o Facilities-based competitive local access services in
Anchorage, Fairbanks and Juneau, Alaska
o Internet access services
o 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 an undersea fiber optic cable
system 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
(b) Principles of Consolidation
The consolidated financial statements include the consolidated
accounts of GCI and its wholly owned subsidiaries with all
significant intercompany transactions eliminated.
(c) Earnings per Common Share
Earnings per common share ("EPS") and common shares used to
calculate basic and diluted EPS consist of the following (amounts
in thousands, except per share amounts):
Year Ended December 31,
2003
--------------------------------
Income Shares
(Num- (Denom- Per-share
erator) inator) Amounts
---------- --------- -----------
Net income before cumulative effect of a change in accounting
principle, net of income tax benefit of $367 $16,086
Less preferred stock dividends:
Series B 1,418
Series C 600
----------
Basic EPS:
Net income before cumulative effect of a change in accounting
principle, net of income tax benefit of $367, available to common
stockholders 14,068 55,675 $ 0.25
Effect of Dilutive Securities:
Unexercised stock options --- 765 ---
---------- --------- -----------
Diluted EPS:
Net income before cumulative effect of a change in accounting
principle, net of income tax benefit of $367, available to
common stockholders $14,068 56,440 $ 0.25
========== ========= ===========
102 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
Years Ended December 31,
2002 2001
------------------------------ -------------------------------
Income Shares Income Shares
(Num- (Denom- Per-share (Num- (Denom- Per-share
erator) inator) Amounts erator) inator) Amounts
---------- -------- ---------- ---------- --------- ----------
Net income $ 6,663 $ 4,589
Less preferred stock dividends:
Series B 1,445 1,801
Series C 600 301
---------- ----------
Basic EPS:
Net income available to common
stockholders 4,618 55,081 $ 0.08 2,487 53,091 $ 0.05
Effect of Dilutive Securities:
Unexercised stock options --- 584 --- --- 1,381 ---
---------- -------- ---------- ---------- --------- ----------
Diluted EPS:
Net income available to common
stockholders $ 4,618 55,665 $ 0.08 $ 2,487 54,472 $ 0.05
========== ======== ========== ========== ========= ==========
Common equivalent shares outstanding which are anti-dilutive for
purposes of calculating EPS for the years ended December 31, 2003,
2002 and 2001, are not included in the diluted EPS calculations,
and consist of the following (shares, in thousands):
2003 2002 2001
----------- ---------- -----------
Series B redeemable preferred stock 2,837 3,062 3,832
Series C redeemable preferred stock 833 833 833
----------- ---------- -----------
Anti-dilutive common shares outstanding 3,670 3,895 4,665
=========== ========== ===========
Weighted average shares associated with outstanding stock options
for the years ended December 31, 2003, 2002 and 2001 which have
been excluded from the diluted EPS calculations because the
options' exercise price was greater than the average market price
of the common shares consist of the following (shares, in
thousands):
2003 2002 2001
----------- ---------- -----------
Weighted average shares associated with outstanding stock
options 380 2,545 36
=========== ========== ===========
103 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
(d) Common Stock
Following are the changes in common stock for the years ended
December 31, 2003, 2002 and 2001 (shares, in thousands):
Class A Class B
------------- --------------
Balances at December 31, 2000 48,643 3,904
Class B shares converted to Class A 21 (21)
Shares issued under stock option plan 1,044 ---
Conversion of preferred stock Series B to
Class A common stock 1,021 ---
Shares issued upon acquisition of G.C.
Cablevision, Inc. net assets and customer
base 238 ---
------------- --------------
Balances at December 31, 2001 50,967 3,883
Class B shares converted to Class A 8 (8)
Shares issued under stock option plan 584 ---
Shares issued to GCI Employee Stock Purchase
Plan 221 ---
Shares issued to acquire minority
shareholders' interests in GFCC 15 ---
------------- --------------
Balances at December 31, 2002 51,795 3,875
Class B shares converted to Class A 7 (7)
Shares issued under stock option plan 416 ---
Shares issued upon conversion of Series B
preferred stock to Class A common stock 225 ---
Shares issued per G.C. Cablevision, Inc.
acquisition agreement 223 ---
Shares purchased and retired (77) ---
------------- --------------
Balances at December 31, 2003 52,589 3,868
============= ==============
(e) Redeemable Preferred Stock
Redeemable preferred stock at December 31, 2003 and 2002 consist of
(amounts in thousands):
2003 2002
------------- --------------
Series B $ 15,664 16,907
Series C 10,000 10,000
------------- --------------
$ 25,664 26,907
============= ==============
We have 1,000,000 shares of preferred stock authorized with the
following shares issued at December 31, 2003, 2002 and 2001
(shares, in thousands):
Series B Series C
------------- -------------
Balance at December 31, 2000 20 ---
Shares issued in lieu of cash dividend payment 3 ---
Shares converted to GCI Class A common stock (6) ---
Shares issued upon acquisition of Kanas --- 10
------------- -------------
Balances at December 31, 2001 and 2002 17 10
Shares converted to GCI Class A common stock (1) ---
------------- -------------
Balance at December 31, 2003 16 10
============= =============
104 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
As of December 31, 2003, the combined aggregate amount of preferred
stock mandatory redemption requirements, including dividends,
follow (amounts in thousands):
Years ending
December 31:
------------
2004 $ ---
2005 10,150
2006 ---
2007 ---
2008 ---
--------
$ 10,150
========
Series B
We issued 20,000 shares of convertible redeemable accreting Series
B preferred stock on April 30, 1999. The Series B preferred stock
is convertible at $5.55 per share into GCI Class A common stock.
Through April 30, 2003, dividends were payable semi-annually at the
rate of 8.5%, plus accrued but unpaid dividends, at our option, in
cash or in additional fully-paid shares of Series B preferred
stock. Dividends earned after April 30, 2003, are payable
semi-annually in cash only. Mandatory redemption is required 12
years from the date of closing. The redemption amount of our
convertible redeemable accreting Series B preferred stock at
December 31, 2003 and 2002 was $15,887,000 and $17,148,000,
respectively. The difference between the carrying and redemption
amounts of approximately $223,000 or approximately $14 per share,
is due to accrued dividends which are included in Accrued
Liabilities until either paid in cash or through the issuance of
additional Series B preferred stock.
Series C
We issued 10,000 shares of convertible redeemable accreting Series
C preferred stock as of June 30, 2001 to acquire a controlling
interest in Kanas (see note 3). The Series C preferred stock is
convertible at $12 per share into GCI Class A common stock, is
non-voting, and pays a 6% per annum quarterly cash dividend. We may
redeem the Series C preferred stock at any time in whole but not in
part. Mandatory redemption is required at any time after the fourth
anniversary date at the option of holders of 80% of the outstanding
shares of the Series C preferred stock. The redemption price is
$1,000 per share plus the amount of all accrued and unpaid
dividends, whether earned or declared, through the redemption date.
In the event of a liquidation of GCI, the holders of Series C
preferred stock shall be entitled to be paid an amount equal to the
redemption price before any distribution or payment is made upon
our common stock and other shares of our capital stock hereafter
issued which by its terms is junior to the Series C preferred
stock. Series B preferred stock is senior to Series C preferred
stock. The redemption amount of our convertible redeemable
accreting Series C preferred stock on December 31, 2003 and 2002
was $10,000,000. There we no accrued dividends at December 31, 2003
and 2002.
(f) Cash Equivalents
Cash equivalents consist of repurchase interest investments which
are short-term and readily convertible into cash.
(g) Accounts Receivable and Allowance for Doubtful Receivables
Trade accounts receivable are recorded at the invoiced amount and
do not bear interest. The allowance for doubtful accounts is our
best estimate of the amount of probable credit losses in our
existing accounts receivable. We determine the allowance based on
historical write-off experience by industry and regional economic
data. We review our allowance for doubtful accounts monthly. Past
due balances over 90 days and over a specified amount are reviewed
individually for collectibility. All other balances are reviewed on
a pooled basis by type of receivable. Account
105 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
balances are charged off against the allowance when we feel it is
probable the receivable will not be recovered. We do not have any
off-balance-sheet credit exposure related to our customers.
(h) Inventories
Inventory of merchandise for resale and parts is stated at the
lower of cost or market. Cost is determined using the average cost
method.
(i) Property and Equipment
Property and equipment is stated at cost. Construction costs of
facilities are capitalized. Equipment financed under capital leases
is recorded at the lower of fair market value or the present value
of future minimum lease payments. Construction in progress
represents distribution systems and support equipment not placed in
service on December 31, 2003; management intends to place this
equipment in service during 2004.
Depreciation is computed on a straight-line basis based upon the
shorter of the estimated useful lives of the assets or the lease
term, if applicable, in the following ranges:
Asset Category Asset Lives
---------------------------------------------------- -----------
Telephony distribution and fiber optic cable systems 10-20 years
Cable television distribution systems 10 years
Support equipment 3-10 years
Transportation equipment 5-10 years
Property and equipment under capital leases 3-20 years
Repairs and maintenance are charged to expense as incurred.
Expenditures for major renewals and betterments are capitalized.
Gains or losses are recognized at the time of retirements, sales or
other dispositions of property.
(j) Intangible Assets
Effective January 1, 2002, we adopted Statement of Financial
Accounting Standard ("SFAS") No. 142, "Goodwill and Other
Intangible Assets." Since our adoption of SFAS No. 142, goodwill
and cable certificates (certificates of convenience and public
necessity) are no longer amortized. Cable certificates represent
certain perpetual operating rights to provide cable services and
were amortized on a straight-line basis over 20 to 40 years in the
year ended December 31, 2001. Goodwill represents the excess of
cost over fair value of net assets acquired and was amortized on a
straight-line basis over periods of 10 to 40 years in the year
ended December 31, 2001. Cable certificates are allocated to our
cable services reportable segment. Goodwill is primarily allocated
to the cable services segment and the remaining amount is not
allocated to a reportable segment, but is included in the All Other
Category in note 13.
The cost of our Personal Communication Services license and related
financing costs were capitalized as an amortizable intangible
asset. The associated assets were placed into service during 2000
and the recorded cost of the license and related financing costs
are being amortized over a 40-year period using the straight-line
method. All other amortizable intangible assets are being amortized
over 2-20 year periods using the straight-line method.
(k) Impairment of Long-lived Assets, Intangibles and Goodwill
Cable certificates are tested annually for impairment, and are
tested for impairment more frequently if events and circumstances
indicate that the asset might be impaired. The impairment test
consists of a comparison of the fair value of the asset with its
carrying amount. If the carrying amount of the cable certificates
asset exceeds its fair value, an impairment loss is recognized in
an amount equal to that excess. After an impairment loss is
recognized, the adjusted carrying amount of the asset is its new
accounting basis.
106 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
Goodwill is tested annually for impairment, and is tested for
impairment more frequently if events and circumstances indicate
that the asset might be impaired. An impairment loss is recognized
to the extent that the carrying amount exceeds the asset's fair
value. This determination is made at the reporting unit level and
consists of two steps. First, we determine the fair value of a
reporting unit and compare it to its carrying amount. Second, if
the carrying amount of a reporting unit exceeds its fair value, an
impairment loss is recognized for any excess of the carrying amount
of the reporting unit's goodwill over the implied fair value of
that goodwill. The implied fair value of goodwill is determined by
allocating the fair value of the reporting unit in a manner similar
to a purchase price allocation, in accordance with SFAS No. 141,
"Business Combinations." The residual fair value after this
allocation is the implied fair value of the reporting unit
goodwill.
Long-lived assets, such as property, plant, and equipment, and
purchased intangibles subject to amortization, are reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated
undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated
future cash flows, an impairment charge is recognized by the amount
by which the carrying amount of the asset exceeds the fair value of
the asset.
(l) Amortization of Loan and Senior Notes Fees
Debt issuance costs are deferred and amortized using the
straight-line method, which approximates the interest method, over
the term of the related debt and notes. Amortization costs are
reported as a component of Other Income (Expense) in the
Consolidated Statements of Operations.
(m) Other Assets
Other Assets primarily include long-term deposits and non-trade
accounts receivable.
(n) Accounting for Derivative Instruments and Hedging Activities
We record derivatives on the balance sheet as assets or
liabilities, measured at fair value consistent with SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as
amended.
On July 1, 2003 we adopted SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." SFAS No. 149
amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities."
Adoption of SFAS No. 149 did not have a material effect on our
results of operations, financial position and cash flows.
(o) Accounting for Certain Financial Instruments with Characteristics
of Both Liabilities and Equity
On July 1, 2003 we adopted SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity." SFAS No. 150 establishes standards for how an issuer
classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an
issuer classify a financial instrument that is within its scope as
a liability (or an asset in some circumstances). Many of those
instruments were previously classified as equity. Adoption of SFAS
No. 150 did not have a material effect on our results of
operations, financial position and cash flows.
(p) Asset Retirement Obligations
On January 1, 2003 we adopted SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 provides accounting and
reporting standards for costs associated with the
107 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
retirement of long-lived assets. This statement requires entities
to record the fair value of a liability for an asset retirement
obligation in the period in which it is incurred. When the
liability is initially recorded, the entity capitalizes a cost by
increasing the carrying amount of the related long-lived asset.
Over time, the liability is accreted to its present value each
period, and the capitalized cost is depreciated over the useful
life of the related asset. Upon settlement of the liability, an
entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. Upon adoption, we recorded
the cumulative effect of accretion and depreciation expense as a
cumulative effect of a change in accounting principle of
approximately $544,000, net of income tax benefit of $367,000.
Following is a reconciliation of the beginning and ending aggregate
carrying amount of our asset retirement obligations at December 31,
2003 (amounts in thousands):
Balance at December 31, 2002 $ ---
Liability recognized upon adoption of SFAS No. 143 1,565
Liability incurred during the year ended December 31, 2003 277
Accretion expense for the year ended December 31, 2003 163
--------
Balance at December 31, 2003 $ 2,005
========
Following is the amount of the liability for asset retirement
obligations as if SFAS No. 143 had been applied at December 31,
2001 (amounts in thousands):
Balance at December 31, 2001 $ 1,350
========
Balance at December 31, 2002 $ 1,565
========
At the date of adoption we recorded additional capitalized costs of
$654,000 in Property and Equipment in Service, Net of Depreciation.
During the year ended December 31, 2003 we recorded additional
capitalized costs of $278,000 in Property and Equipment in Service,
Net of Depreciation.
(q) Revenue Recognition
All revenues are recognized when the earnings process is complete
in accordance with Securities and Exchange Commission ("SEC") Staff
Accounting Bulletins No. 101 and No. 104, "Revenue Recognition."
Revenues generated from long-distance and managed services are
recognized when the services are provided. Cable television
service, local access service, Internet service and private line
telecommunication revenues are billed in advance, recorded as
Deferred Revenue on the balance sheet, and are recognized as the
associated service is provided. Revenues from the sale of equipment
are recognized at the time the equipment is delivered or installed.
Technical services revenues are derived primarily from maintenance
contracts on equipment and are recognized on a prorated basis over
the term of the contracts. Revenues from telephone and yellow-page
directories are recognized ratably during the period following
publication, which typically begins with distribution and is
complete in the month prior to publication of the next directory.
Other revenues are recognized when the service is provided. We
recognize unbilled revenues when the service is provided based upon
minutes of use processed or established rates, net of credits and
adjustments.
(r) Sale of Fiber Optic Cable System Capacity
During the first quarter of 2001 we completed a $19.5 million sale
of long-haul capacity in the Alaska United undersea fiber optic
cable system ("fiber capacity sale") in a cash transaction. The
sale included both capacity within Alaska, and between Alaska and
the contiguous 48 states. We used the proceeds from the fiber
capacity sale to repay $11.7 million of the debt and to fund
capital expenditures and working capital.
108 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
The fiber capacity sale was pursuant to a contract giving the
purchaser an indefeasible right to use a certain amount of fiber
system capacity expiring on February 4, 2024. The term may be
extended if the actual useful life of the fiber system capacity
extends beyond the estimated useful life of twenty-five years. The
fiber system capacity sold is integral equipment because it is
attached to real estate. Because all of the benefits and risks of
ownership have been transferred to the purchaser upon full receipt
of the purchase price and other terms of the contract meet the
requirements of SFAS No. 66, "Accounting for Sales of Real Estate"
we accounted for the fiber capacity sale as a sales-type lease. We
recognized $19.5 million in revenue from the fiber capacity sale.
We recognized $10.9 million as cost of sales during the year ended
December 31, 2001.
The accounting for the sale of fiber system capacity is currently
evolving and accounting guidance may become available in the future
which could require us to change our policy. If we are required to
change our policy, it is likely the effect would be to recognize
the gain from future sales of fiber capacity, if any, over the term
the capacity is provided.
(s) Payments Received from Suppliers
On March 20, 2003 the Financial Accounting Standards Board issued
Emerging Issues Task Force ("EITF") Issue No. 02-16, "Accounting by
a Reseller for Cash Consideration Received from a Vendor" ("EITF
No. 02-16"). We have applied EITF No. 02-16 prospectively for
arrangements entered into or modified after December 31, 2002. Our
cable services segment occasionally receives reimbursements for
costs to promote suppliers' services, called cooperative
advertising arrangements. The supplier payment is classified as a
reduction of selling, general and administrative expenses if it
reimburses specific, incremental and identifiable costs incurred to
resell the suppliers' services. Excess consideration, if any, is
classified as a reduction of cost of sales and services.
Occasionally our cable services segment enters into a binding
arrangement with a supplier in which we receive a rebate dependent
upon us meeting a specified goal. We recognize the rebate as a
reduction of cost of sales and services systematically as we make
progress toward the specified goal, provided the amounts are
probable and reasonably estimable. If earning the rebate is not
probable and reasonably estimable, it is recognized only when the
goal is met.
(t) Advertising Expense
We expense advertising costs in the fiscal year during which the
first advertisement appears. Advertising expenses were
approximately $3,727,000, $2,967,000 and $3,168,000 for the years
ended December 31, 2003, 2002 and 2001, respectively.
(u) Interest Expense
Interest costs incurred during the construction period of
significant capital projects, such as construction of an undersea
fiber optic cable system, are capitalized. During the year ended
December 31, 2003, $403,000 in interest cost was capitalized during
the construction of the fiber optic cable system discussed further
in note 16. No interest was capitalized during the years ended
December 31, 2002 and 2001.
(v) Income Taxes
Income taxes are accounted for using the asset and liability
method. Deferred tax assets and liabilities are recognized for
their future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply
to taxable earnings in the years in which those temporary
differences are expected to be
109 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
recovered or settled. Deferred tax assets are recognized to the
extent that the benefits are more likely to be realized than not.
(w) Costs Associated with Exit or Disposal Activities
On January 1, 2003 we adopted SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." Upon adoption of SFAS
No. 146, enterprises may only record exit or disposal costs when
they are incurred and can be measured at fair value. The recorded
liability will be subsequently adjusted for changes in estimated
cash flows. SFAS 146 revises accounting for specified employee and
contract terminations that are part of restructuring activities.
Adoption of SFAS No. 146 did not have a material effect on our
results of operations, financial position and cash flows.
(x) Incumbent Local Exchange Carrier ("ILEC") Over-earnings Refunds
We receive refunds from time to time from ILECs with which we do
business in respect of their earnings that exceed regulatory
requirements. Telephone companies that are rate regulated by the
Federal Communications Commission ("FCC") using the rate of return
method are required by the FCC to refund earnings from interstate
access charges assessed to long-distance carriers when their
earnings exceed their authorized rate of return. Such refunds are
computed based on the regulated carrier's earnings in several
access categories. Uncertainties exist with respect to the amount
of their earnings, the refunds (if any), their timing, and their
realization. We account for such refundable amounts as gain
contingencies, and, accordingly, do not recognize them until
realization is a certainty upon receipt.
(y) Stock Option Plan
At December 31, 2003, we had one stock-based employee compensation
plan, which is described more fully in note 12. 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 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
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
148.
110 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
Stock-based employee compensation cost is reflected over the
options' vesting period of generally five years and compensation
cost for options granted prior to January 1, 1996 is not
considered. The following table illustrates the effect on net
income and EPS for the years ended December 31, 2003, 2002 and
2001, if we had applied the fair-value recognition provisions of
SFAS 123 to stock-based employee compensation (amounts in
thousands, except per share amounts):
2003 2002 2001
------------ ------------ ----------
Net income, as reported $ 15,542 6,663 4,589
Total stock-based employee compensation expense
included in reported net income, net of related tax
effects 630 257 472
Total stock-based employee compensation expense
under the fair-value based method for all awards,
net of related tax effects (1,981) (2,504) (3,483)
------------ ------------ ----------
Pro forma net income $ 14,191 4,416 1,578
============ ============ ==========
Basic and diluted EPS after cumulative effect of a
change in accounting principle, as reported $ 0.24 0.08 0.05
============ ============ ==========
Basic and diluted EPS after cumulative effect of a
change in accounting principle, pro forma $ 0.22 0.04 (0.01)
============ ============ ==========
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.
(z) Stock Options and Stock Warrants Issued for Non-employee Services
We account for stock options and warrants issued in exchange for
non-employee services pursuant to the provisions of SFAS 123,
Emerging Issues Task Force ("EITF") 96-3 and EITF 96-18, wherein
such transactions are accounted for at the fair value of the
consideration or services received or the fair value of the equity
instruments issued, whichever is more reliably measurable.
When a stock option or warrant is issued for non-employee services
where the fair value of such services is not stated, we estimate
the value of the stock option or warrant issued using the Black
Scholes method.
The fair value determined using these principles is charged to
operating expense over the shorter of the term for which
non-employee services are provided, if stated, or the stock option
or warrant vesting period.
(aa) Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires us to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and 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. Significant items subject to estimates and assumptions
include allowance for doubtful receivables, valuation allowances
for deferred income tax assets, depreciable lives of assets, the
carrying value of long-lived assets including goodwill, and the
accrual of cost of sales and services. Actual results could differ
from those estimates.
111 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
(ab) Concentrations of Credit Risk
Financial instruments that potentially subject us to concentrations
of credit risk are primarily cash and cash equivalents and accounts
receivable. Excess cash is invested in high quality short-term
liquid money instruments issued by highly rated financial
institutions. At December 31, 2003 and 2002, substantially all of
our cash and cash equivalents were invested in short-term liquid
money instruments at one highly rated financial institution.
We have one major customer, MCI (see note 15). Additionally, Sprint
was a major customer during the year ended December 31, 2001 (see
note 13). There is increased risk associated with these customers'
accounts receivable balances. Our remaining customers are located
primarily throughout Alaska. Because of this geographic
concentration, our growth and operations depend upon economic
conditions in Alaska. The economy of Alaska is dependent upon the
natural resources industries, and in particular oil production, as
well as tourism, government, and United States military spending.
Though limited to one geographical area and except for MCI and
Sprint, the concentration of credit risk with respect to our
receivables is minimized due to the large number of customers,
individually small balances, and short payment terms.
(ac) Software Capitalization Policy
Internally used software, whether purchased or developed, is
capitalized and amortized using the straight-line method over an
estimated useful life of five years. In accordance with Statement
of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," we capitalize
certain costs associated with internally developed software such as
payroll costs of employees devoting time to the projects and
external direct costs for materials and services. Costs associated
with internally developed software to be used internally are
expensed until the point the project has reached the development
stage. Subsequent additions, modifications or upgrades to
internal-use software are capitalized only to the extent that they
allow the software to perform a task it previously did not perform.
Software maintenance and training costs are expensed in the period
in which they are incurred. The capitalization of software requires
judgment in determining when a project has reached the development
stage.
(ad) Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections
Effective January 1, 2003, we adopted SFAS No. 145, "Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No.
13, and Technical Corrections." Accordingly, unamortized bank fees
and other expenses totaling approximately $2.3 million associated
with the November 2002 refinancing of debt instruments were not
classified as an extraordinary item and were charged to
Amortization of Loan and Senior Notes Fees during the year ended
December 31, 2002.
(ae) Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others
On January 1, 2003 we adopted FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." This
Interpretation elaborates on the disclosures to be made by a
guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also
clarifies that a guarantor is required to recognize, at the
inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. This Interpretation
does not prescribe a specific approach for subsequently measuring
the guarantor's recognized liability over the term of the related
guarantee. This Interpretation also incorporates, without change,
the guidance in FIN No. 34, "Disclosure of Indirect Guarantees of
Indebtedness of Others," which is being superseded. Adoption of FIN
No. 45 did not have a material effect on our results of operations,
financial position and cash flows.
112 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
(af) Reclassifications
Reclassifications have been made to the 2001 and 2002 financial
statements to make them comparable with the 2003 presentation.
(2) Consolidated Statements of Cash Flows Supplemental Disclosures
Changes in operating assets and liabilities consist of (amounts in
thousands):
Year ended December 31, 2003 2002 2001
------------- ------------- ------------
Increase in accounts receivable $ (16,549) (5,476) (10,229)
Increase in prepaid and other current assets (2,988) (6,005) (487)
(Increase) decrease in inventories (1,113) 446 (88)
Increase (decrease) in accounts payable 2,465 (2,859) 5,701
Increase in deferred revenue 2,985 6,161 1,519
Increase (decrease) in accrued payroll and payroll
related obligations 5,724 (3,468) 4,872
Increase (decrease) in accrued interest 707 (111) (1,207)
Increase in accrued liabilities 1,909 825 1,091
Decrease in subscriber deposits (238) (232) (253)
Increase (decrease) in components of other long-term
liabilities (297) 65 (104)
------------- ------------- ------------
$ (7,395) (10,654) 815
============= ============= ============
We paid interest totaling approximately $34,441,000, $29,427,000 and
$32,415,000 during the years ended December 31, 2003, 2002 and 2001,
respectively.
We paid income taxes totaling $112,000 during the year ended December 31,
2001. We paid no income taxes during the years ended December 31, 2003
and 2002. Net income tax refunds received totaled $283,700 during the
year ended December 31, 2002. We received no income tax refunds during
the years ended December 31, 2003 and 2001.
We recorded $538,000, $319,000 and $2,317,000 during the years ended
December 31, 2003, 2002 and 2001, respectively, in paid-in capital in
recognition of the income tax effect of excess stock compensation expense
for tax purposes over amounts recognized for financial reporting
purposes.
Effective March 31, 2001 we acquired the assets and customer base of G.C.
Cablevision, Inc. Upon acquisition the seller received shares of GCI
Class A common stock with a future payment in additional shares
contingent upon the market price of our common stock on March 31, 2003.
At March 31, 2003 the market price condition was not met and
approximately 222,600 shares of GCI Class A common stock were issued.
During the year ended December 31, 2002 we funded the employer match
portion of Employee Stock Purchase Plan contributions by issuing GCI
Class A common stock valued at $791,000 and by purchasing GCI Class A
common stock on the open market. During the years ended December 31, 2003
and 2001 all employer match shares were purchased on the open market.
We financed the acquisition of approximately $1.0 million of telephony
distribution equipment pursuant to a long-term capital lease arrangement
with a leasing company during the year ended December 31, 2002.
We acquired all minority shareholders' ownership interests in GFCC by
issuing 15,000 shares of GCI Class A common stock in 2002.
113 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
Effective June 30, 2001 we issued $10.0 million of Series C preferred
stock in exchange for MCI's 85% controlling interest in Kanas (renamed
GFCC, see note 3).
(3) Acquisitions
Effective March 31, 2001 we acquired the assets and customer base of G.C.
Cablevision, Inc. of Fairbanks. The seller received 238,199 unregistered
shares of GCI Class A common stock with a future payment in additional
shares contingent upon certain conditions (see note 2). The property and
equipment was valued at $2,088,000 on the date of acquisition. The value
of the remaining assets and liabilities acquired was not material.
Effective June 30, 2001 we completed the acquisition of MCI's 85 percent
controlling interest in Kanas, which owns the 800-mile fiber optic cable
system that extends from Prudhoe Bay to Valdez via Fairbanks. The
corporation owning the fiber optic system was renamed and is now operated
as GFCC. The fiber optic cable system was valued at approximately
$21,198,000 on the date of acquisition. On June 30, 2001 we issued to
MCI, a related party, shares of Series C preferred stock (see note 1(e))
valued at $10.0 million. The balance of the carrying value consisted of
payments to and services performed on behalf of Kanas to maintain its
operations prior to June 30, 2001. The value of the remaining assets and
liabilities acquired was not material. We acquired the remaining 15
percent ownership interest of GFCC by issuing 15,000 shares of GCI Class
A common stock in 2002.
Effective November 19, 2001 we acquired all of the stock of Rogers, a
cable television service provider in Palmer and Wasilla, Alaska for $18.5
million in cash. Per the acquisition agreement $467,000 was withheld from
the original payment to account for the amount by which Rogers' current
liabilities exceeded current assets and for certain capital expenditures
incurred by the previous owners of Rogers through May 2001. The final
settlement of $345,000 was paid in the first quarter of 2003. This
acquisition was funded through a $19.0 million draw on our then existing
Senior Holdings Loan. The results of Roger's operations have been
included in the consolidated financial statements in the cable services
segment since the acquisition date. This acquisition added approximately
10,000 homes passed and approximately 7,000 subscribers to our cable
services segment in 2001.
The following table, updated to reflect refinements of original
estimates, summarizes the estimated fair values of assets acquired and
liabilities assumed at the date of the Rogers acquisition (amounts in
thousands):
Current assets $ 556
Property and equipment, net of accumulated depreciation 5,160
Franchise agreement 10,976
Goodwill 3,324
----------
Total assets 20,016
Current liabilities 642
Long-term deferred tax liability 374
----------
Net assets acquired $ 19,000
==========
(4) Receivables and Allowance for Doubtful Receivables
Receivables consist of the following at December 31, 2003 and 2002
(amounts in thousands):
2003 2002
------------ -------------
Trade $ 67,186 63,111
Employee 284 391
Other 2,765 3,093
------------ -------------
Total receivables $ 70,235 66,595
============ =============
114 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
Following are the changes in the allowance for doubtful receivables
during the years ended December 31, 2003, 2002 and 2001 (amounts in
thousands):
Additions Deductions
----------------------- ------------
Balance at Charged to Charged to Write-offs
beginning costs and Other net of Balance at
Description of year expenses Accounts recoveries end of year
------------------------------ ------------ ------------ ---------- ------------ -----------
December 31, 2003 $ 14,010 2,996 --- 15,052 1,954
============ ============ ========== =========== ===========
December 31, 2002 $ 4,166 13,124 --- 3,280 14,010
============ ============ ========== =========== ===========
December 31, 2001 $ 2,864 4,076 --- 2,774 4,166
============ ============ ========== =========== ===========
As further described in note 15, during the year ended December 31, 2003
we reached a settlement agreement for pre-petition amounts owed to us by
MCI. The remaining pre-petition accounts receivable balance owed by MCI
after this settlement was removed from our Consolidated Balance Sheets in
2003. During the year ended December 31, 2003 we utilized approximately
$2.8 million of the MCI credit against amounts otherwise payable for
services received from MCI.
As further described in note 15, the Allowance for Doubtful Receivables
at December 31, 2002 includes the provision of $11.6 million of bad debt
expense for estimated uncollectible accounts due from MCI.
(5) Net Property and Equipment in Service
Net property and equipment in service consists of the following at
December 31, 2003 and 2002 (amounts in thousands):
2003 2002
--------- ---------
Land and buildings $ 3,151 2,982
Telephony distribution systems 345,984 344,566
Cable television distribution systems 161,054 149,415
Support equipment 46,219 39,807
Transportation equipment 5,500 5,687
Property and equipment under capital leases 51,214 51,770
--------- ---------
613,122 594,227
Less accumulated depreciation and
amortization 244,083 212,833
--------- ---------
Net property and equipment in service $ 369,039 381,394
========= =========
115 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
(6) Intangible Assets
As of December 31, 2003 cable certificates and goodwill were tested for
impairment and the fair values were greater than the carrying amounts,
therefore these intangible assets were determined not to be impaired at
December 31, 2003. The remaining useful lives of our cable certificates
and goodwill were evaluated as of December 31, 2003 and events and
circumstances continue to support an indefinite useful life. The
following pro forma financial information reflects net income and basic
and diluted EPS as if goodwill and cable certificates were not subject to
amortization for the year ended December 31, 2001 (amounts in thousands,
except per share amounts):
Basic and
Net Income Diluted EPS
--------------- ------------------
Net income, as reported $ 4,589 0.05
Add cable certificate amortization, net of income taxes 3,113 0.06
Add goodwill amortization, net of income taxes 756 0.01
--------------- ------------------
Adjusted net income $ 8,458 0.12
=============== ==================
Amortization expense for amortizable intangible assets for the years
ended December 31, 2003, 2002 and 2001 follow:
Years Ended December 31,
2003 2002 2001
---------- ----------- ----------
Amortization expense for amortizable intangible assets $ 660 790 7,372
========== =========== ==========
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,
------------
2004 $ 646
2005 $ 515
2006 $ 510
2007 $ 449
2008 $ 198
No intangible assets have been impaired based upon impairment testing
performed as of December 31, 2003 (see note 1(k)) and no indicators of
impairment have occurred since the impairment testing was performed.
Following are the changes in Other Intangible Assets (amounts in
thousands):
Balance, December 31, 2001 $ 3,387
Asset additions 863
Less amortization expense 790
-------
Balance, December 31, 2002 3,460
Asset additions 1,095
Less amortization expense 660
-------
Balance, December 31, 2003 $ 3,895
=======
116 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
(7) Notes Receivable from Related Parties
Notes receivable from related parties consist of the following (amounts
in thousands):
December 31,
2003 2002
--------------- -------------
Notes receivable from officers bearing interest up to 6.5%
or at the rate paid by us on our senior indebtedness,
unsecured, due through February 8, 2007 $ 7,480 8,068
Notes receivable from officers bearing interest up to 9.0%
or at the rate paid by us on our senior indebtedness,
secured by GCI common stock and a personal residence, due
through August 26, 2004 919 919
Notes receivable from other related parties bearing
interest up to 8.4% or at the rate paid by us on our
senior indebtedness, unsecured and secured by property,
due through December 31, 2007 1,126 1,271
Interest receivable 1,612 1,231
--------------- -------------
Total notes receivable from related parties 11,137 11,489
Less notes receivable from related parties issued upon
stock option exercise, classified as a component of
stockholders' equity 4,971 5,650
Less current portion, including current interest receivable 2,723 697
--------------- -------------
Long-term portion, including long-term interest receivable $ 3,443 5,142
=============== =============
(8) Long-term Debt
Long-term debt consists of the following (amounts in thousands):
December 31,
2003 2002
--------------- -------------
Senior Notes (a) $ 180,000 180,000
Senior Credit Facility (b) 165,000 177,700
--------------- -------------
Long-term debt $ 345,000 357,700
=============== =============
(a) On August 1, 1997 GCI, Inc. issued $180.0 million of 9.75% senior
notes due 2007 ("Senior Notes"). The Senior Notes were issued at
face value. Net proceeds to GCI, Inc. after deducting
underwriting discounts and commissions totaled $174.6 million.
Issuance costs of $6.5 million were being charged to Amortization
of Loan and Senior Notes Fees over the term of the Senior Notes.
The unamortized portion of issuance costs at February 2004
totaled approximately $2.3 million and will be charged to
Amortization of Loan and Senior Notes Fees during the three
months ended March 31, 2004.
GCI, Inc. was in compliance with all Senior Notes covenants
during the year ending December 31, 2003.
(b) On April 22, 2003 we amended our $225.0 million Senior Credit
Facility ("amended Senior Credit Facility"). On October 30, 2003
we closed a $220.0 million Senior Credit Facility ("new Senior
Credit Facility") to replace the April 22, 2003 amended Senior
Credit Facility. The new Senior
117 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
Credit Facility reduced the interest rate from LIBOR plus 6.50%
to LIBOR plus 3.25%. The new Senior Credit Facility includes a
term loan of $170.0 million and a revolving credit facility of
$50.0 million.
The repayment schedule for the term loan portion of the new
Senior Credit Facility, after consideration of the $43.8 million
term loan prepayment from the new Senior Notes issuance proceeds
as described in note 17, is as follows (amounts in thousands):
Date Amount
----------------------------------------------------- -----------
Quarter ended December 31, 2005 $ 170
Quarterly from March 31, 2006 to December 31, 2006 $ 8,000
Quarterly from March 31, 2007 to September 30, 2007 $ 10,000
The remaining balance of the new Senior Credit Facility will be
payable in full on October 31, 2007.
We are required to pay a commitment fee on the unused portion of
the commitment as follows:
Commitment fee if the
outstanding revolving credit Commitment fee if the outstanding
facility is > 50% of the average revolving credit facility is less than
revolving credit facility or equal to 50% of the average
Total Leverage commitments by the lenders revolving credit commitments by the
Ratio (as defined) during such period lenders during such period
----------------------- ---------------------------------- ----------------------------------------
>3.75 1.00% 1.25%
-
>3.25 but <3.75 0.75% 1.00%
-
>2.75 but <3.25 0.50% 0.75%
-
< 2.75 0.50% 0.75%
We may not permit the Total Leverage Ratio (as defined) to
exceed:
Period Total Leverage Ratio
--------------------------------------------- --------------------
October 30, 2003 through December 30, 2003 4.25:1
December 31, 2003 through December 30, 2004 4.00:1
December 31, 2004 through December 30, 2005 3.75:1
December 31, 2005 through June 29, 2006 3.50:1
June 30, 2006 through June 29, 2007 3.25:1
June 30, 2007 through September 29, 2007 3.00:1
September 30, 2007 through October 31, 2007 2.75:1
We may not permit the Senior Secured Leverage Ratio (as defined)
to exceed:
Senior Secured
Period Leverage Ratio
--------------------------------------------- ----------------
October 30, 2003 through December 30, 2004 2.00:1
December 31, 2004 through September 29, 2006 1.75:1
September 30, 2006 through June 29, 2007 1.50:1
June 30, 2007 through September 29, 2007 1.25:1
September 30, 2007 through October 31, 2007 1.00:1
The Interest Coverage Ratio (as defined) may not be less than
2.50:1 at any time.
118 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
Capital expenditures, excluding up to $58.0 million incurred to
build or acquire additional fiber optic cable system capacity
between Alaska and the lower forty-eight states, in any of the
years ended December 31, 2004, 2005 and 2006 may not exceed:
o $25.0 million, plus
o 100% of any Excess Cash Flow (as defined) during the
applicable period less certain permitted investments during
the applicable period.
If the revolving credit facility exceeds $25.0 million, we may
not incur capital expenditures, other than those incurred to
build or acquire additional fiber optic cable system capacity, in
excess of $25.0 million.
The new Senior Credit Facility requirement that we must either
have repaid in full or successfully refinanced our Senior Notes
by February 1, 2007 was met with the refinancing of our Senior
Notes, as discussed in note 17.
We were in compliance with all new Senior Credit Facility
covenants through December 31, 2003.
Our ability to draw down the revolver portion of our new Senior
Credit Facility could be diminished if we are not in compliance
with all new Senior Credit Facility covenants or have a material
adverse change at the date of the request for the draw.
In connection with the new Senior Credit Facility, we paid bank
fees and other expenses of $912,000 during the year ended
December 31, 2003 which will be amortized over the life of the
new Senior Credit Facility.
In connection with the April 22, 2003 amended Senior Credit
Facility, we paid bank fees and other expenses of approximately
$2.6 million during the year ended December 31, 2003. Because a
portion of the new Senior Credit Facility was a substantial
modification of the April 22, 2003 amended Senior Credit Facility
we recognized approximately $5.0 million in Amortization of Loan
and Senior Notes Fees during the three months ended December 31,
2003. The remaining $2.2 million in amended Senior Credit
Facility deferred loan costs will continue to be amortized over
the life of the new Senior Credit Facility.
119 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
As of December 31, 2003 maturities of long-term debt, after
considering a $10.0 million draw on the revolving credit portion
of our new Senior Credit Facility in January 2004 and the new
Senior Notes issuance in February 2004, as discussed in note 17,
were as follows (amounts in thousands):
Years ending December 31,
2004 $ ---
2005 170
2006 32,000
2007 89,000
2008 ---
2009 and thereafter 250,000
---------
371,170
Additional principal portion after
issuance of our new Senior Notes (70,000)
Use of new Senior Notes proceeds to pay
down new Senior Credit Facility 53,830
Draw on the revolving credit portion
of our new Senior Credit Facility (10,000)
---------
Long-term debt, at December 31, 2003 $ 345,000
=========
(9) Impairment Charge
In 2003 we reported an impairment charge of $5.4 million which equaled
the remaining net book value recorded for our North Pacific Cable asset.
In 1991 we purchased one DS-3 of capacity on a fiber optic cable system
owned by AT&T. This fiber optic cable system is a spur off of a
trans-Pacific fiber optic cable system owned by another group. We used
our owned capacity to carry traffic to and from Alaska and the Lower 48
states. The section of the North Pacific Cable in which we own capacity
was taken out of service in January 2004 due to a billing dispute between
AT&T and the owner of the trans-Pacific cable system causing us to
re-route certain of our traffic. We believe it is probable that we will
not return our traffic to the North Pacific Cable even if it is placed
back into service. We have requested in writing to be relieved of all
future obligations required by our purchase agreement. Should our request
be accepted, we expect to cease payment of maintenance and vessel standby
costs totaling approximately $324,000 per year that would otherwise be
payable over the remaining life of the system. The fiber optic cable
system we are building (see note 16) is scheduled for completion in May
2004 and will provide us with route diversity and redundancy far in
excess of that previously provided by the North Pacific Cable.
(10) Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income" requires us to report and
display comprehensive income and its components in a financial statement
that is displayed with the same prominence as other financial statements.
During the years ended December 31, 2003, 2002 and 2001 we had other
comprehensive income (loss) of approximately $232,000, ($548,000) and
$8,000, respectively. Total comprehensive income at December 31, 2003,
2002 and 2001 was $15,774,000, $6,115,000 and $4,597,000, respectively.
120 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
(11) Income Taxes
Total income tax (expense) benefit was allocated as follows (amounts in
thousands):
Years ended December 31,
2003 2002 2001
-------------- ------------- ------------
Net income before cumulative effect of a change in
accounting principle $ (10,074) (5,659) (4,070)
Cumulative effect of a change in accounting principle 367 --- ---
-------------- ------------- ------------
Net income from continuing operations (9,707) (5,659) (4,070)
Stockholders' equity, for stock option compensation
expense for tax purposes in excess of amounts
recognized for financial reporting purposes 538 317 2,317
-------------- ------------- ------------
$ (9,169) (5,342) (1,753)
============== ============= ============
Income tax expense consists of the following (amounts in thousands):
Years ended December 31,
2003 2002 2001
-------------- ------------- ------------
Current tax expense:
Federal taxes $ (297) (1,754) ---
State taxes (104) (536) ---
-------------- ------------- ------------
(401) (2,290) ---
-------------- ------------- ------------
Deferred tax expense:
Federal taxes (7,169) (2,580) (3,115)
State taxes (2,504) (789) (955)
-------------- ------------- ------------
(9,673) (3,369) (4,070)
-------------- ------------- ------------
$ (10,074) (5,659) (4,070)
============== ============= ============
Total income tax expense differed from the "expected" income tax expense
determined by applying the statutory federal income tax rate of 35% for
2003 and 34% for 2002 and 2001 as follows (amounts in thousands):
Years ended December 31,
2003 2002 2001
-------------- ------------- ------------
"Expected" statutory tax expense $ (9,156) (4,189) (2,944)
State income taxes, net of federal benefit (1,695) (873) (630)
Income tax effect of goodwill amortization,
nondeductible expenditures and other items, net (568) (597) (496)
Adjustments to ending temporary difference balances,
net 1,345 --- ---
-------------- ------------- ------------
$ (10,074) (5,659) (4,070)
============== ============= ============
121 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 2003 and 2002 are presented below (amounts in thousands):
December 31,
2003 2002
-------------- -------------
Current deferred tax assets:
Accounts receivable, principally due to allowance for
doubtful accounts $ 4,117 5,649
Compensated absences, accrued for financial reporting
purposes 2,062 1,914
Workers compensation and self insurance health reserves,
principally due to accrual for financial reporting
purposes 801 805
Other 215 141
-------------- -------------
Total current deferred tax assets $ 7,195 8,509
============== =============
December 31,
2003 2002
-------------- -------------
Long-term deferred tax assets:
Net operating loss carryforwards $ 77,534 76,855
Alternative minimum tax credits 1,892 1,892
Deferred compensation expense for financial reporting
purposes in excess of amounts recognized for tax
purposes 1,531 1,239
Employee stock option compensation expense for financial
reporting purposes in excess of amounts recognized for
tax purposes 727 411
Sweepstakes award in excess of amounts recognized for tax
purposes 179 184
State income taxes --- 1,555
Charitable contributions expense for financial reporting
in excess of amount recognized for tax purposes 672 586
Cost of sales and services for financial reporting in
excess of amounts recognized for tax purposes 185 181
Cash flow hedge expense for financial reporting
purposes in excess of amounts recognized for tax
purposes 212 464
Asset retirement obligations in excess of amounts
recognized for tax purposes 825 ---
Other --- 360
-------------- -------------
Total long-term deferred tax assets 83,757 83,727
-------------- -------------
122 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
December 31,
2003 2002
-------------- -------------
Long-term deferred tax liabilities:
Plant and equipment, principally due to differences in
depreciation 93,928 90,522
Amortizable assets 13,997 8,920
Other --- 346
-------------- -------------
Total gross long-term deferred tax liabilities 107,925 99,788
-------------- -------------
Net combined long-term deferred tax liabilities $ 24,168 16,061
============== =============
We recorded net deferred tax assets of $15.8 million in 2002 associated
with the Rogers and Kanas acquisitions (see note 3), resulting in
adjustments to the recorded financial statement cost basis of associated
goodwill and property and equipment.
In conjunction with the 1996 Cable Companies acquisition, the Company
incurred a net deferred income tax liability of $24.4 million and
acquired net operating losses totaling $57.6 million. The Company
determined that approximately $20 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 under Internal Revenue Code section 1.1502-32(b)(4).
Deferred tax assets were not recorded associated with the foregone losses
and, accordingly, no valuation allowance was provided. At December 31,
2003, the Company has (1) tax net operating loss carryforwards of
approximately $188.6 million that will begin expiring in 2005 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.
The following schedule shows our tax net operating loss carryforwards by
year of expiration (amounts in thousands):
Years ending December 31, Federal State
------------ ----------
2005 $ 292 ---
2006 393 ---
2007 4,017 3,006
2008 8,077 7,509
2009 11,767 11,482
2010 9,134 8,935
2011 6,919 6,685
2018 19,995 19,390
2019 27,910 27,905
2020 45,403 45,400
2021 30,973 31,922
2022 15,320 15,002
2023 8,361 8,187
------------ ----------
Total tax net operating loss carryforwards $ 188,561 185,423
============ ==========
Our utilization of remaining acquired net operating loss carryforwards is
subject to annual limitations pursuant to Internal Revenue Code section
382 which could reduce or defer the utilization of these losses.
Tax benefits associated with recorded deferred tax assets are considered
to be more likely than not realizable through taxable income earned in
carry back years, future reversals of existing taxable temporary
differences, and future taxable income exclusive of reversing temporary
differences and
123 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
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.
Our United States income tax return for 2000 was selected for examination
by the Internal Revenue Service during 2003. The examination began during
the fourth quarter of 2003. We believe this examination will not have a
material adverse effect on our financial position, results of operations
or our liquidity.
(12) Stockholders' Equity
Common Stock
GCI's Class A common stock and Class B common stock are identical in all
respects, except that each share of Class A common stock has one vote per
share and each share of Class B common stock has ten votes per share. In
addition, each share of Class B common stock outstanding is convertible,
at the option of the holder, into one share of Class A common stock.
MCI owned 3,751,509 shares of GCI's Class A common stock that represented
approximately 7 percent of the issued and outstanding Class A shares at
December 31, 2003 and 2002. MCI owned 1,275,791 shares of GCI's Class B
common stock that represented approximately 33 percent of the issued and
outstanding Class B shares at December 31, 2003 and 2002.
In October 2003, a Series B preferred stockholder converted 1,250 shares
of Series B preferred stock to GCI Class A common stock resulting in the
issuance of approximately 225,000 shares of GCI Class A common stock.
Stock Option Plan
In December 1986, GCI adopted a Stock Option Plan (the "Option Plan") in
order to provide a special incentive to our officers, non-employee
directors, and employees by offering them an opportunity to acquire an
equity interest in GCI. The Option Plan, as amended, provides for the
grant of options for a maximum of 10.7 million shares of GCI Class A
common stock, subject to adjustment upon the occurrence of stock
dividends, stock splits, mergers, consolidations or certain other changes
in corporate structure or capitalization. If an option expires or
terminates, the shares subject to the option will be available for
further grants of options under the Option Plan. The Option Committee of
GCI's Board of Directors administers the Option Plan.
The Option Plan provides that all options granted under the Option Plan
must expire not later than ten years after the date of grant. If at the
time an option is granted the exercise price is less than the market
value of the underlying common stock, the difference in these amounts at
the time of grant is expensed ratably over the vesting period of the
option. Options granted pursuant to the Option Plan are only exercisable
if at the time of exercise the option holder is our employee,
non-employee director, or a consultant or advisor working on our behalf.
124 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
Information for the years 2001, 2002 and 2003 with respect to the Option
Plan follows:
Weighted
Average
Exercise
Shares Price
------------ ----------
Outstanding at December 31, 2000 5,413,565 $5.54
Granted 755,277 $7.34
Exercised (1,044,511) $4.01
Forfeited (24,200) $6.53
------------
Outstanding at December 31, 2001 5,100,131 $6.11
Granted 1,995,700 $6.90
Exercised (583,888) $5.78
Forfeited (223,177) $7.42
------------
Outstanding at December 31, 2002 6,288,766 $6.34
Granted 963,200 $6.24
Exercised (377,487) $4.95
Forfeited (98,200) $5.93
------------
Outstanding at December 31, 2003 6,776,279 $6.41
============
Available for grant at December 31, 2003 22,757
============
Stock Warrants Not Pursuant to a Plan
We entered into a stock warrant agreement in exchange for services in
December 1998 with certain of our legal counsel which provides for the
purchase of 16,667 shares of GCI Class A common stock, vesting in
December 1999, with an exercise price of $3.00 per share, and expiring
December 2003. The fair value of the stock warrant when issued was
approximately $23,000. The warrant was exercised in November 2003 prior
to its expiration.
We entered into a stock warrant agreement in exchange for services in
June 1999 with certain of our legal counsel which provides for the
purchase of 25,000 shares of GCI Class A common stock, vesting through
December 2001, with an exercise price of $3.00 per share, and expiring
December 2003. The fair value of the stock warrant when issued was
approximately $94,000. The warrant was exercised in October 2003 prior to
its expiration.
SFAS 123 Disclosures
Our stock options and warrants expire at various dates through December
2013. At December 31, 2003, 2002, and 2001, the weighted-average
remaining contractual lives of options outstanding were 6.47, 6.93, and
6.95 years, respectively.
At December 31, 2003, 2002, and 2001, the number of exercisable shares
under option was 3,495,361, 3,187,618, and 2,837,361, respectively, and
the weighted-average exercise price of those options was $6.11, $5.87,
and $5.75, respectively.
The per share weighted-average fair value of stock options granted during
2003 was $4.30 per share for compensatory and $2.99 for non-compensatory
options; for 2002 was $3.05 per share for compensatory and $0.61 for
non-compensatory options; and for 2001 was $6.99 per share for
compensatory and $10.58 for non-compensatory options. The amounts were
determined as of the options' grant dates using a Black-Scholes
option-pricing model with the following weighted-average
125 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
assumptions: 2003 - risk-free interest rate of 3.45%, volatility of 0.53
and an expected life of 5.26 years; 2002 - risk-free interest rate of
3.08%, volatility of 0.68 and an expected life of 6.18 years; and 2001 -
risk-free interest rate of 4.67%, volatility of 0.62 and an expected life
of 6.67 years.
Summary information about our stock options outstanding at December 31,
2003 follows:
Options Outstanding Options Exercisable
-------------------------------------------------------------------------- --------------------------------------
Weighted
Average
Remaining Weighted
Range of Number Contractual Average Number Weighted Average
Exercise Prices outstanding Life Exercise Price Exercisable Exercise Price
-------------------------------------------------------------------------- --------------------------------------
$3.11-$5.00 902,198 5.12 $4.20 736,908 $4.06
$5.40-$5.77 136,667 7.89 $5.53 29,667 $5.61
$6.00-$6.00 1,321,449 7.29 $6.00 554,969 $6.00
$6.05-$6.35 59,500 7.32 $6.14 30,200 $6.13
$6.50-$6.50 2,035,550 6.31 $6.50 1,218,530 $6.50
$6.63-$6.99 81,000 4.14 $6.80 80,200 $6.80
$7.00-$7.00 732,022 4.62 $7.00 506,522 $7.00
$7.25-$7.25 1,150,000 8.11 $7.25 30,000 $7.25
$7.40-$10.98 568,893 6.21 $7.99 292,365 $7.77
$11.25-$11.25 40,000 7.50 $11.25 16,000 $11.25
-------------- --------------
$3.11-$11.25 7,027,279 6.47 $6.42 3,495,361 $6.11
============== ==============
Class A Common Shares Held in Treasury
In 2003 we acquired a total of 21,700 shares of GCI Class A common stock
for approximately $81,000 to fund a deferred compensation agreement for
an employee. In 2002 we acquired a total of 20,000 shares of GCI Class A
common stock for approximately $177,000 to fund a deferred compensation
agreement for an officer.
Employee Stock Purchase Plan
In December 1986, we adopted an Employee Stock Purchase Plan ("Plan")
qualified under Section 401 of the Internal Revenue Code of 1986
("Code"). The Plan provides for acquisition of GCI's Class A and Class B
common stock at market value. The Plan permits each employee who has
completed one year of service to elect to participate in the Plan.
Through December 31, 2003, eligible employees could elect to reduce their
compensation in any even dollar amount up to 50 percent of such
compensation (subject to certain limitations) up to a maximum of $12,000.
Beginning January 1, 2004, eligible employees can elect to reduce their
compensation in any even dollar amount up to 50 percent of such
compensation (subject to certain limitations) up to a maximum of $13,000.
Eligible employees may contribute up to 10 percent of their compensation
with after-tax dollars, or they may elect a combination of salary
reductions and after-tax contributions.
Eligible employees were allowed to make catch-up contributions of no more
than $2,000 during the year ended December 31, 2003 and will be able to
make such contributions limited to $3,000 during the year ended December
31, 2004. We do not match employee catch-up contributions.
We may match employee salary reductions and after tax contributions in
any amount, elected by our Board of Directors each year, but not more
than 10 percent of any one employee's compensation will be matched in any
year. Matching contributions vest over the initial six years of
employment. For the years
126 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
ended December 31, 2002 and 2003 the combination of salary reductions,
after tax contributions and matching contributions cannot exceed the
lesser of 100 percent of an employee's compensation or $40,000
(determined after salary reduction) for any year. For the year ended
December 31, 2004, the combination of salary reductions, after tax
contributions and matching contributions cannot exceed the lesser of 100
percent of an employee's compensation or $41,000 (determined after salary
reduction).
Employee contributions may be invested in GCI class A common stock, AT&T
common stock, Comcast Corporation common stock, AT&T Wireless Services
common stock, or various mutual funds.
Employee contributions invested in GCI common stock receive up to 100%
matching, as determined by our Board of Directors each year, in GCI
common stock. Employee contributions invested in other than GCI common
stock receive up to 50% matching, as determined by our Board of Directors
each year, in GCI common stock.
Our matching contributions allocated to participant accounts totaled
approximately $4,035,000, $3,665,000, and $3,194,000 for the years ended
December 31, 2003, 2002, and 2001, respectively. The Plan may, at its
discretion, purchase shares of GCI common stock from GCI at market value
or may purchase GCI's common stock on the open market. In 2002 we funded
a portion of our employer-matching contributions through the issuance of
new shares of GCI common stock rather than market purchases. In 2003 and
2001 we funded all of our employer-matching contributions through market
purchases.
Effective January 1, 2003 we allowed participating employees to diversify
100 percent of their holdings of GCI common stock at December 31, 2002 in
other investments offered by the Plan.
The Plan was amended in the first quarter of 2004 resulting in the
following changes beginning in the second quarter of 2004:
o We will match up to 100% of all participants' contributions with
GCI common stock, as determined by the Board of Directors each
year, and
o Participants will be able to reinvest up to 100% of their
existing and future GCI common stock holdings into other
investment choices offered by the Plan.
(13) 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.
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 and our SchoolAccess(TM)
offering to rural school districts and a similar offering to rural
hospitals and health clinics.
Cable services. We provide cable television services to residential,
commercial and government users in the State of Alaska. Our cable
systems serve 35 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 and Soldotna and retail cable modem service (through our Internet
services segment) in all of our locations in Alaska except Kotzebue.
127 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
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 new
phone directory are included in the local access services segment.
Internet services. We offer wholesale and retail Internet services to
both consumer and commercial customers. We offer cable modem service as
further described in Cable services above. Our undersea fiber optic
cable system allows us to offer enhanced services with high-bandwidth
requirements.
Included in the "All Other" category in the tables that follow are our
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. 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 72% of our undersea fiber optic
cable system which transits international waters.
Summarized financial information for our reportable segments for the
years ended December 31, 2003, 2002 and 2001 follows (amounts in
thousands):
Reportable Segments
----------------------------------------------------------
Long- Local Total
Distance Cable Access Internet Reportable All
Services Services Services Services Segments Other Total
--------------------------------------------------------------------------------
2003
----
Revenues:
Intersegment $ 13,648 2,504 9,763 2,423 28,338 744 29,082
External 204,567 96,004 38,998 19,842 359,411 31,386 390,797
--------------------------------------------------------------------------------
Total revenues 218,215 98,508 48,761 22,265 387,749 32,130 419,879
--------------------------------------------------------------------------------
Cost of sales and services:
Intersegment 19,242 1 2,121 4,484 25,848 860 26,708
External 53,377 25,988 23,761 5,862 108,988 16,395 125,383
--------------------------------------------------------------------------------
Total cost of sales and
services 72,619 25,989 25,882 10,346 134,836 17,255 152,091
--------------------------------------------------------------------------------
Contribution:
Intersegment (5,594) 2,503 7,642 (2,061) 2,490 (116) 2,374
External 151,190 70,016 15,237 13,980 250,423 14,991 265,414
--------------------------------------------------------------------------------
Total contribution 145,596 72,519 22,879 11,919 252,913 14,875 267,788
Selling, general and
administrative expenses 37,692 27,101 17,718 8,589 91,100 47,593 138,693
Bad debt expense (recovery) (1,104) 651 119 60 (274) 96 (178)
Impairment charge 5,434 --- --- --- 5,434 --- 5,434
--------------------------------------------------------------------------------
128 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
Reportable Segments
----------------------------------------------------------
Long- Local Total
Distance Cable Access Internet Reportable All
Services Services Services Services Segments Other Total
--------------------------------------------------------------------------------
Earnings (loss) from
operations before
depreciation, amortization,
net interest expense and
income taxes 103,574 44,767 5,042 3,270 156,653 (32,814) 123,839
Depreciation, amortization
and accretion expense 20,209 17,296 3,553 3,708 44,766 8,622 53,388
--------------------------------------------------------------------------------
Operating income (loss) $ 83,365 27,471 1,489 (438) 111,887 (41,436) 70,451
================================================================================
Total assets $ 274,519 326,435 40,763 26,262 667,979 95,041 763,020
================================================================================
Capital expenditures $ 30,331 15,223 3,608 2,993 52,155 10,324 62,479
================================================================================
2002
----
Revenues:
Intersegment $ 21,297 2,094 9,723 2,026 35,140 744 35,884
External 204,930 88,688 32,071 15,584 341,273 26,569 367,842
--------------------------------------------------------------------------------
Total revenues 226,227 90,782 41,794 17,610 376,413 27,313 403,726
--------------------------------------------------------------------------------
Cost of sales and services:
Intersegment 16,942 --- 2,100 14,988 34,030 752 34,782
External 60,053 23,649 20,205 4,792 108,699 14,865 123,564
--------------------------------------------------------------------------------
Total cost of sales and
services 76,995 23,649 22,305 19,780 142,729 15,617 158,346
--------------------------------------------------------------------------------
Contribution:
Intersegment 4,355 2,094 7,623 (12,962) 1,110 (8) 1,102
External 144,877 65,039 11,866 10,792 232,574 11,704 244,278
--------------------------------------------------------------------------------
Total contribution 149,232 67,133 19,489 (2,170) 233,684 11,696 245,380
Selling, general and
administrative expenses 36,378 25,264 16,600 8,855 87,097 41,932 129,029
Bad debt expense 12,388 428 162 54 13,032 92 13,124
--------------------------------------------------------------------------------
Earnings (loss) from
operations before
depreciation, amortization,
net interest expense and
income taxes 100,466 41,441 2,727 (11,079) 133,555 (30,328) 103,227
Depreciation and amortization 21,427 15,882 3,466 7,187 47,962 8,438 56,400
--------------------------------------------------------------------------------
Operating income (loss) $ 79,039 25,559 (739) (18,266) 85,593 (38,766) 46,827
================================================================================
Total assets $ 288,680 322,899 35,276 28,102 674,957 63,825 738,782
================================================================================
Capital expenditures $ 22,832 17,395 10,388 4,215 54,830 10,310 65,140
================================================================================
2001
----
Revenues:
Intersegment $ 18,539 1,650 8,716 1,203 30,108 355 30,463
External 200,694 76,554 25,229 11,996 314,473 42,785 357,258
--------------------------------------------------------------------------------
Total revenues 219,233 78,204 33,945 13,199 344,581 43,140 387,721
--------------------------------------------------------------------------------
129 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
Reportable Segments
----------------------------------------------------------
Long- Local Total
Distance Cable Access Internet Reportable All
Services Services Services Services Segments Other Total
--------------------------------------------------------------------------------
Cost of sales and services:
Intersegment 15,039 --- 1,586 12,438 29,063 461 29,524
External 73,257 20,829 14,037 4,749 112,872 26,921 139,793
--------------------------------------------------------------------------------
Total cost of sales and
services 88,296 20,829 15,623 17,187 141,935 27,382 169,317
--------------------------------------------------------------------------------
Contribution:
Intersegment 3,500 1,650 7,130 (11,235) 1,045 (106) 939
External 127,437 55,725 11,192 7,247 201,601 15,864 217,465
--------------------------------------------------------------------------------
Total contribution 130,937 57,375 18,322 (3,988) 202,646 15,758 218,404
Selling, general and
administrative expenses 38,102 21,740 13,138 8,066 81,046 35,490 116,536
Bad debt expense 2,790 1,053 181 86 4,110 169 4,279
--------------------------------------------------------------------------------
Earnings (loss) from
operations before
depreciation, amortization,
net interest expense and
income taxes 90,045 34,582 5,003 (12,140) 117,490 (19,901) 97,589
Depreciation and amortization 21,899 20,704 3,530 2,879 49,012 6,663 55,675
--------------------------------------------------------------------------------
Operating income (loss) $ 68,146 13,878 1,473 (15,019) 68,478 (26,564) 41,914
================================================================================
Total assets $ 294,175 321,722 30,040 27,363 673,300 61,379 734,679
================================================================================
Capital expenditures $ 24,497 16,433 8,085 6,516 55,531 10,107 65,638
================================================================================
Long-distance services, local access services and Internet services are
billed utilizing a unified accounts receivable system and are not
reported separately by business segment. All such accounts receivable are
included above in the long-distance services segment for all periods
presented.
A reconciliation of reportable segment revenues to consolidated revenues
follows (amounts in thousands):
Years ended December 31, 2003 2002 2001
--------------- --------------- --------------
Reportable segment revenues $ 387,749 376,413 344,581
Plus All Other revenues 32,130 27,313 43,140
Less intersegment revenues eliminated in consolidation 29,082 35,884 30,463
--------------- --------------- --------------
Consolidated revenues $ 390,797 367,842 357,258
=============== =============== ==============
130 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
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 and
cumulative effect of a change in accounting principle follows (amounts in
thousands):
Years ended December 31, 2003 2002 2001
-------------- ---------------- --------------
Reportable segment earnings from operations before
depreciation, amortization and accretion expense, net other
expense and income taxes $ 156,653 133,555 117,490
Less All Other loss from operations before depreciation,
amortization and accretion expense, net other expense and
income taxes 32,814 30,328 19,901
Less intersegment contribution eliminated in consolidation 2,374 1,102 939
-------------- ---------------- --------------
Consolidated earnings from operations before
depreciation, amortization and accretion expense, net
other expense and income taxes 121,465 102,125 96,650
Less depreciation, amortization and accretion expense 53,388 56,400 55,675
-------------- ---------------- --------------
Consolidated operating income 68,077 45,725 40,975
Less other expense, net 41,917 33,403 32,316
-------------- ---------------- --------------
Consolidated net income before income taxes and cumulative
effect of a change in accounting principle $ 26,160 12,322 8,659
============== ================ ==============
A reconciliation of reportable segment operating income to consolidated
net income before income taxes and cumulative effect of a change in
accounting principle follows (amounts in thousands):
Years ended December 31, 2003 2002 2001
--------------- --------------- --------------
Reportable segment operating income $ 111,887 85,593 68,478
Less All Other operating loss 41,436 38,766 26,564
Less intersegment contribution eliminated in consolidation 2,374 1,102 939
--------------- --------------- --------------
Consolidated operating income 68,077 45,725 40,975
Less other expense, net 41,917 33,403 32,316
--------------- --------------- --------------
Consolidated net income before income taxes and cumulative
effect of a change in accounting principle $ 26,160 12,322 8,659
=============== =============== ==============
We provide long-distance services to MCI (see note 15), a major customer,
and to Sprint. We earned revenues from Sprint, net of discounts, included
in the long-distance segment, totaling approximately $36,899,000 during
the year ended December 31, 2001. As a percentage of total revenues,
Sprint revenues totaled 10.3% for the year ended December 31, 2001.
Sprint was a major customer for segment disclosure purposes for the year
ended December 31, 2001, but was not a major customer for the years ended
December 31, 2003 and 2002.
131 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
(14) Financial Instruments
Fair Value of Financial Instruments
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing
parties. The carrying amounts and estimated fair values of our financial
instruments at December 31, 2003 and 2002 follows (amounts in thousands):
2003 2002
-------------------------- ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------------------- ---------------------------
Short-term assets $ 81,439 81,439 65,715 65,715
Notes receivable with related parties $ 3,443 3,443 5,142 5,142
Short-term liabilities $ 72,144 72,144 61,632 61,632
Long-term debt and capital lease obligations $ 384,636 401,987 402,475 419,305
Cash flow hedge liability $ 515 515 999 999
Other liabilities $ 5,931 5,931 4,442 4,442
The following methods and assumptions were used to estimate fair values:
Short-term assets: The fair values of cash and cash equivalents, net
receivables and current portion of notes receivable from related
parties approximate their carrying values due to the short-term
nature of these financial instruments.
Notes receivable from related parties: The carrying value of notes
receivable from related parties is estimated to approximate fair
values. Although there are no quoted market prices available for
these instruments, the fair value estimates were based on the change
in interest rates and risk related interest rate spreads since the
note origination dates.
Short-term liabilities: The fair values of current maturities of
capital lease obligations, accounts payable, payroll and payroll
related obligations, accrued interest, accrued liabilities, and
subscriber deposits approximate their carrying value due to the
short-term nature of these financial instruments.
Long-term debt and capital lease obligations: The fair value of
long-term debt is based primarily on discounting the future cash
flows of each instrument at rates currently offered to us for similar
debt instruments of comparable maturities by investment bankers.
Other Liabilities: Deferred compensation liabilities have no defined
maturity dates therefore the fair value is the amount payable on
demand as of the balance sheet date. Asset retirement obligations are
recorded at their fair value and, over time, the liability is
accreted to its present value each period.
Derivative Instruments and Hedging Activities
Effective January 3, 2001, we entered into an interest rate swap
agreement to convert $50 million of 9.75% fixed rate debt to a variable
interest rate equal to the 90 day LIBOR rate plus 334 basis points. This
interest rate swap was cancelled by the counterparty on August 1, 2002.
The differential paid to us was recorded as a decrease in Interest
Expense in the Consolidated Statements of Operations in the period in
which it was recognized. During the years ended December 31, 2002 and
2001 we recognized approximately $1.2 million and $1.1 million,
respectively, as a reduction of interest expense.
132 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
Effective September 21, 2001, we entered into an interest rate swap
agreement to convert $25 million of variable interest rate debt equal to
the 90 day LIBOR rate plus 334 basis points to 3.98% fixed rate debt plus
applicable margins. Terms of the interest rate swap mirror the underlying
variable rate debt, except the interest rate swap terminates on September
21, 2004. We entered into the transaction to help insulate us from future
increases in interest rates. Under SFAS No. 133, the interest rate swap
is accounted for as a cash flow hedge. The change in the fair value of
the interest rate swap net of income taxes is recorded as an increase or
decrease in Accumulated Other Comprehensive Loss in the Consolidated
Statements of Stockholders' Equity. The associated cost is recognized in
Interest Expense in the Consolidated Statements of Operations. During the
years ended December 31, 2003, 2002 and 2001 we recognized approximately
$681,000, $555,000 and $112,000, respectively, in incremental interest
expense resulting from this transaction.
(15) Related Party Transactions
MCI
We earned revenues from MCI, a major shareholder of GCI (see note 12),
net of discounts, of approximately $81,996,000, $84,641,000 and
$68,863,000 for the years ended December 31, 2003, 2002 and 2001,
respectively. Revenues earned from MCI include approximately $11,004,000
and $10,638,000 for the years ended December 31, 2002 and 2001,
respectively, earned from a certain MCI customer who considered itself to
be a third party obligor that was ultimately liable for services provided
by GCI to the third party under a contract that had been assigned to MCI.
Beginning January 1, 2003 we have billed this customer directly for
services provided. Revenues earned from MCI net of amounts earned from
the third party obligor were approximately $73,637,000 and $58,225,000
for the years ended December 31, 2002 and 2001, respectively. As a
percentage of total revenues, MCI revenues, net of amounts earned from
the third party obligor, totaled 21.0%, 20.0% and 16.3% for the years
ended December 31, 2003, 2002 and 2001, respectively.
Amounts receivable, net of accounts payable, from MCI totaled $25,585,000
and $21,677,000 at December 31, 2003 and 2002, respectively. We paid MCI
to distribute our traffic in the contiguous 48 states and Hawaii
approximately $5,100,000, $6,413,000 and $7,289,000 for the years ended
December 31, 2003, 2002 and 2001, respectively.
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. Chapter 11 allows a company to continue operating in the ordinary
course of business in order to maximize recovery for the company's
creditors and shareholders.
At the time of the petition for bankruptcy, we had approximately $12.9
million in receivables outstanding from MCI. At December 31, 2002 the bad
debt reserve for uncollected amounts due from MCI ("MCI reserve") totaled
$11.6 million and consisted of all billings for services rendered prior
to July 21, 2002 that were not paid or deemed recoverable as of December
31, 2002. During the year ended December 31, 2002 we recognized $11.0
million in bad debt expense for uncollected amounts due from MCI.
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. The agreement settled
unpaid balances due from MCI for services rendered prior to their
bankruptcy filing date, settled billing disputes between us, and
established a right to set-off certain of our pre-petition accounts
payable to MCI. Under the terms of the agreement, we reduced the
pre-petition amounts receivable from MCI by $800,000 and off-set our
pre-petition accounts payable by $1.0 million. The majority of the
difference reduced the MCI reserve with the remainder recorded as bad
debt expense.
133 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
The remaining pre-petition accounts receivable balance owed by MCI to us
after this settlement was $11.1 million ("MCI credit") which we have and
will use as a credit against amounts payable for services purchased from
MCI. At settlement, all of the remaining pre-petition amounts receivable
due from MCI, which were fully reserved, were removed from accounts
receivable in our Consolidated Balance Sheets.
After settlement, we began reducing the MCI credit as we utilized it for
services otherwise payable to MCI. The use of the credit is recorded as a
reduction of bad debt expense. During 2003 we utilized approximately $2.8
million of the MCI credit against amounts payable for services received
from MCI.
The remaining unused MCI credit totaled $7.9 million at December 31,
2003. The credit balance is not recorded on the Consolidated Balance
Sheet as we are recognizing recovery of bad debt expense as the credit is
utilized.
On October 31, 2003, MCI's reorganization plan was approved by the United
States Bankruptcy Court. The court order provided for a February 28, 2004
deadline for MCI to emerge from bankruptcy. In February 2004 MCI asked
the Court for a 60-day extension to the February 28 deadline to allow it
to complete financial filings with the SEC. The financial filings are
reported to be the last major task left for MCI to emerge from
bankruptcy. We expect to evaluate the likelihood that we will receive
full recovery of bad debt expense for our remaining credit balance when
MCI exits bankruptcy proceedings and may change our recognition method at
that time.
Other
We entered into a long-term capital lease agreement in 1991 with the wife
of our president for property occupied by us. The leased asset was
capitalized in 1991 at the owner's cost of $900,000 and the related
obligation was recorded in the accompanying financial statements. The
lease agreement was amended in September 2002. The amended lease
terminates on September 30, 2011. Through September 30, 2003 our monthly
payment was $20,000, increasing to $20,860 per month October 1, 2003
through September 30, 2006 and increasing to $21,532 per month October 1,
2006 through September 30, 2011. Since the property was not sold prior to
the tenth year of the lease, the owner was required to pay us the greater
of one-half of the appreciated value of the property over $900,000, or
$500,000. Accordingly, we received $500,000 in the form of a note in
2002. The owner paid us $135,000 in 2002 in the form of a note as
additional consideration for the execution of the September 2002
amendment.
During the six-month period ended June 30, 2001 we provided management
services to Kanas. Effective June 30, 2001 we completed the acquisition
of MCI's 85% controlling interest in Kanas (see note 3). During the
six-month period ended June 30, 2001 we earned revenues of approximately
$618,000 for management services and long-distance services provided to
Kanas. We paid approximately $372,000 to Kanas for the lease and
maintenance of fiber optic cable capacity during the six-month period
ended June 30, 2001. We advanced approximately $4.9 million to Kanas to
partially fund its operations during the six-month period ended June 30,
2001. During the year ended December 31, 2002, we acquired the remaining
15% interest in Kanas in exchange for a total of 15,000 shares of GCI
Class A common stock.
In January 2001 we entered into an aircraft operating lease agreement
with a company owned by GCI's president. The lease was amended effective
January 1, 2002. The lease is month-to-month and may be terminated at any
time upon one hundred and twenty days written notice. The monthly lease
rate is $50,000. Upon signing the lease, the lessor was granted an option
to purchase 250,000 shares of GCI Class A common stock at $6.50 per
share, all of which are exercisable. We paid a deposit of $1.5 million in
connection with the lease. The deposit will be repaid to us upon the
earlier of six months after the agreement terminates, or nine months
after the date of a termination notice. The lessor may sell to us the
stock arising from the exercise of the stock option or surrender the
right to purchase all or a
134 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
portion of the stock option to repay the deposit, if allowed by our debt
and preferred stock instruments in effect at such time.
(16) Commitments and Contingencies
Leases
Operating Leases as Lessee. We lease business offices, have entered into
site lease agreements and use satellite transponder capacity and certain
equipment pursuant to operating lease arrangements. Rental costs under
such arrangements amounted to approximately $14,788,000, $13,445,000 and
$9,292,000 for the years ended December 31, 2003, 2002 and 2001,
respectively.
Satellite Transponder Capacity Capital Lease
We lease satellite transponder capacity through a capital lease
arrangement with a leasing company. The capital lease was entered into in
March 2000. The effective term of the lease is nine years from the
closing date. The capital lease includes certain covenants requiring
maintenance of specific levels of operating cash flow to indebtedness and
limitations on additional indebtedness. We were in compliance with all
covenants during the year ending December 31, 2003.
We began operating the satellite transponders on April 1, 2000. The
satellite transponders are recorded at a cost of $48.0 million and are
being depreciated over twelve years. We have financed $43.5 million and
$44.9 million under this capital lease at December 31, 2003 and 2002,
respectively.
A summary of future minimum lease payments for all leases follows
(amounts in thousands):
Years ending December 31: Operating Capital
------------ -------------
2004 $ 12,384 8,448
2005 11,253 9,923
2006 9,599 9,278
2007 6,998 8,385
2008 6,270 7,390
2009 and thereafter 23,351 18,478
------------ -------------
Total minimum lease payments $ 69,855 61,902
============
Less amount representing interest (17,127)
Less current maturities of obligations under capital
leases (5,139)
-------------
Subtotal - long-term obligations under capital leases 39,636
Less long-term obligations under capital leases due to
related party, excluding current maturities (677)
-------------
Long-term obligations under capital leases, excluding
related party, excluding current maturities $ 38,959
=============
The leases generally provide that we pay the taxes, insurance and
maintenance expenses related to the leased assets. We expect that in the
normal course of business leases that expire will be renewed or replaced
by leases on other properties.
Telecommunication Services Agreement
We lease a portion of our 800-mile fiber optic system capacity that
extends from Prudhoe Bay to Valdez via Fairbanks, and provide management
and maintenance services for this capacity to a customer. The
135 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
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.
A summary of minimum future service revenues, assuming the agreement is
not terminated pursuant to contract provisions, follows (amounts in
thousands):
Years ending December 31,
2004 $ 7,620
2005 7,620
2006 7,620
2007 7,620
2008 7,620
2009 and thereafter 56,847
---------
Total minimum future service revenues $ 94,947
=========
In December 2001 we signed a letter of agreement with our customer in
which we agreed, amongst other things, to upgrade the 800-mile fiber
optic system, install multiple earth stations, and potentially provide
other services. We have completed the projects outlined in the letter of
agreement and expect testing and acceptance to be completed in the first
half of 2004. We expect the contract to be amended in 2004 consistent
with the terms of the letter of agreement. We expect the following
additional minimum future service revenues, assuming the agreement is
amended and is not terminated pursuant to contract provisions (amounts in
thousands):
Years ending December 31,
2004 $ 5,580
2005 5,580
2006 5,580
2007 5,580
2008 5,580
2009 and thereafter 41,628
---------
Total minimum future service revenues $ 69,528
=========
Letters of Credit
We have letters of credit totaling $6.5 million as follows:
o $3.0 million of the Senior Credit Facility has been used to
provide a letter of credit to secure payment of certain access
charges associated with our provision of telecommunications
services within the State of Alaska, and
o $3.5 million of the Senior Credit Facility has been used to
provide a letter of credit to secure payment for our contract
for the design, engineering, manufacture and installation of the
new undersea fiber optic cable system. The letter of credit will
be reduced to $1.8 million after a contract payment estimated to
be made in March 2004. The letter of credit will be cancelled
after the final contract payment date estimated to be in April
2004.
Fiber Optic Cable System Construction Commitment
In June 2003 we began work on the construction of a fiber optic cable
system connecting Seward, Alaska and Warrenton, Oregon, with leased
backhaul facilities to connect it to our switching and distribution
centers in Anchorage, Alaska and Seattle, Washington. A consortium of
companies has been selected to design, engineer, manufacture and install
the undersea fiber optic cable system and a contract has been signed at a
total cost to us of $35.2 million. We expect to fund construction of the
fiber optic cable system through our operating cash flows and, to the
extent necessary, with draws on our new Senior Credit Facility. During
the year ended December 31, 2003 our capital expenditures for
136 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
this project have totaled approximately $16.5 million, all of which has
been funded through our operating cash flows and are classified as
Construction in Progress in our Consolidated Balance Sheets.
Digital Local Phone Service ("DLPS") Equipment Purchase Commitment
We are testing the deployment of DLPS. We expect to begin implementing
this service delivery method in the second quarter of 2004. To ensure the
necessary equipment is available to us we have entered into an agreement
to purchase a certain number of outdoor, network powered multi-media
adapters. The agreement has a remaining commitment at December 31, 2003
totaling $18.3 million.
Alaska Airline Miles Agreement
In August 2003 we entered into an agreement with Alaska Airlines, Inc.
("Alaska Airlines") to offer our residential and business customers who
make qualifying purchases from us the opportunity to accrue mileage
awards in the Alaska Airlines Mileage Plan. The agreement requires the
purchase of Alaska Airlines miles during the year ended December 31, 2003
and in future years. The agreement has a remaining commitment at December
31, 2003 totaling $16.0 million.
Deferred Compensation Plan
During 1995, we adopted a non-qualified, unfunded deferred compensation
plan to provide a means by which certain employees may elect to defer
receipt of designated percentages or amounts of their compensation and to
provide a means for certain other deferrals of compensation. We may
contribute matching deferrals at a rate selected by us. Participants
immediately vest in all elective deferrals and all income and gain
attributable thereto. Matching contributions and all income and gain
attributable thereto vest over a six-year period. Participants may elect
to be paid in either a single lump sum payment or annual installments
over a period not to exceed 10 years. Vested balances are payable upon
termination of employment, unforeseen emergencies, death and total
disability. Participants are general creditors of us with respect to
deferred compensation plan benefits. Compensation deferred pursuant to
the plan totaled approximately $0, $82,000 and $39,000 for the years
ended December 31, 2003, 2002 and 2001, respectively.
Performance Based Incentive Compensation Plan
During 2002 we adopted a non-qualified, performance based incentive
compensation plan. The incentive compensation plan provides additional
compensation to certain officers and key employees based upon the
Company's achievement of specified financial performance goals. The
Compensation Committee of the Board of Directors establishes goals on
which executive officers are compensated, and management establishes the
goals for other covered employees. Awards may be payable in cash or GCI's
Class A common stock. Under this plan we recognized expenses of $672,000
and $0 during the years ended December 31, 2003 and 2002, respectively.
Guaranteed Service Levels
Certain customers have guaranteed levels of service. In the event we are
unable to provide the minimum service levels we may incur penalties or
issue credits to customers.
Self-Insurance
We are self-insured for losses and liabilities related primarily to
health and welfare claims up to predetermined amounts above which third
party insurance applies. A reserve of $1.7 million and $1.6 million was
recorded at December 31, 2003 and 2002, respectively, to cover estimated
reported losses, estimated unreported losses based on past experience
modified for current trends, and estimated expenses for investigating and
settling claims. Beginning January 1, 2003, we were self-insured for
losses and liabilities related to workers' compensation claims up to
predetermined amounts above which third party insurance applies. A
reserve of $141,000 was recorded at December 31, 2003 to cover estimated
reported losses and estimated expenses for investigating and settling
claims. Actual losses will vary from the recorded reserves. While we use
what we believe is pertinent information and
137 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
factors in determining the amount of reserves, future additions to the
reserves may be necessary due to changes in the information and factors
used.
We are self-insured for damage or loss to certain of our transmission
facilities, including our buried, under sea, and above-ground
transmission lines. If we become subject to substantial uninsured
liabilities due to damage or loss to such facilities, our financial
position, results of operations or liquidity may be adversely affected.
Litigation and Disputes
We are routinely involved in various lawsuits, billing disputes, legal
proceedings and regulatory matters that have arisen in the normal course
of business.
ACS, through subsidiary companies, provides local services in Fairbanks
and Juneau, Alaska. These ACS subsidiaries are classified as Rural
Telephone Companies under the 1996 Telecom Act, which entitles them to an
exemption of certain material interconnection terms of the 1996 Telecom
Act, until and unless such "rural exemption" is examined and discontinued
by the RCA. On October 11, 1999, the RCA issued an order terminating
rural exemptions for the ACS subsidiaries operating in the Fairbanks and
Juneau markets so that we could compete with the companies in the
provision of local services pursuant to the 1996 Telecom Act. These rural
exemptions limited the obligation of the ILECs in these markets to
provide us access to unbundled network elements at rates under the
pricing standard established by the Federal Communication Commission.
Upon appeal by ACS on December 12, 2003, the Alaska Supreme Court issued
a decision in which it reversed the RCA's rural exemption decision on the
procedural ground that the competitor, not the incumbent, must shoulder
the burden of proof. The Court remanded the matter to the RCA for
reconsideration with the burden of proof assigned to us. Additionally,
the Court left it to the RCA to decide as a matter of discretion whether
to change the state of competition during the remand period. In
accordance with the Court's ruling, the RCA has re-opened the rural
exemption dockets and scheduled a hearing to take place on April 19,
2004. Additionally, the RCA issued a ruling on January 16, 2004, in which
they determined that we can continue to rely on unbundled network
elements from ACS to serve our existing customers in Juneau and Fairbanks
but that we may not serve new customers through purchase of unbundled
network elements pending the completion of the remand proceeding. Until
this matter is resolved, we may serve new customers using wholesale
resale. The outcome of this proceeding could result in a change in our
cost of serving these markets via the facilities of ACS or via wholesale
offerings and could adversely impact our ability to offer local service
in these markets. We believe it is unlikely that the rural exemptions
will be restored in these markets; however, if they are restored, we
could be forced to discontinue providing service to residential customers
and perhaps to commercial customers in these locations.
While the ultimate results of these items cannot be predicted with
certainty, except for the rural exemption proceedings described above, 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.
Cable Service Rate Reregulation
Federal law permits regulation of basic cable programming services rates.
However, Alaska law provides that cable television service is exempt from
regulation by the RCA unless 25% of a system's subscribers request such
regulation by filing a petition with the RCA. At December 31, 2002, only
the Juneau system is subject to RCA regulation of its basic service
rates. No petition requesting regulation has been filed for any other
system. (The Juneau system serves 7.1% of our total basic service
subscribers at December 31, 2003.) A cable rate increase in the Juneau
system effective February 1, 2003, did not affect basic programming
service and therefore did not require RCA approval.
138 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
(17) Subsequent Events
Conversion of Series B Preferred Stock
In January 2004, a Series B preferred stockholder converted 3,108 shares
of Series B preferred stock to GCI Class A common stock resulting in the
issuance of 560,000 shares of GCI Class A common stock.
Draw on New Senior Credit Facility
In January 2004 we drew $10.0 million under the revolving credit portion
of our new Senior Credit Facility. The draw was re-paid in February 2004
from our new Senior Notes offering proceeds.
Senior Notes Refinancing
In February 2004 GCI's wholly owned subsidiary GCI, Inc. sold $250
million in aggregate principal amount of senior debt securities due in
2014 ("new Senior Notes"). The new Senior Notes are an unsecured senior
obligation. We will pay interest of 7.25% on the new Senior Notes. The
new Senior Notes were sold at a discount of $4.3 million. The Senior
Notes will be carried on our balance sheet net of the unamortized portion
of the discount, which will be amortized to Interest Expense over the
life of the new Senior Notes.
The net proceeds of the offering were primarily used to repay our
existing $180.0 million 9.75% Senior Notes and to repay approximately
$43.8 million of the term portion and $10.0 million of the revolving
portion of our new Senior Credit Facility. Semi-annual interest payments
of approximately $9.1 million will be due beginning August 15, 2004. In
connection with the issuance, we paid fees and other expenses of
approximately $6.3 million which will be amortized over the life of the
new Senior Notes.
The new Senior Notes were offered only to qualified institutional buyers
pursuant to Rule 144A and non- United States persons pursuant to
Regulation S. The new Senior Notes have not been registered under the
Securities Act and, unless so registered, may not be offered or sold
except pursuant to an exemption from, or in a transaction not subject to,
the registration requirements of the Securities Act and applicable state
securities laws. We plan to register our new Senior Notes by May 14,
2004.
The new Senior Notes are not redeemable prior to February 15, 2009. At
any time on or after February 15, 2009, the new Senior Notes are
redeemable at our option, in whole or in part, on not less than thirty
days nor more than sixty days notice, at the following redemption prices,
plus accrued and unpaid interest (if any) to the date of redemption:
If redeemed during the twelve month period
commencing February 1 of the year indicated: Redemption Price
------------------------------------------------- --------------------
2009 103.625%
2010 102.417%
2011 101.208%
2012 and thereafter 100.000%
We may, on or prior to February 17, 2007, at our option, use the net
cash proceeds of one or more underwritten public offerings of our
qualified stock to redeem up to a maximum of 35% of the initially
outstanding aggregate principal amount of our new Senior Notes at a
redemption price equal to 107.25% of the principal amount of the new
Senior Notes, together with accrued and unpaid interest, if any, thereon
to the date of redemption, provided that not less than 65% of the
principal amount of the new Senior Notes originally issued remain
outstanding following such a redemption.
139 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
The new Senior Notes restrict GCI, Inc. and certain of its subsidiaries
from incurring debt in most circumstances unless the result of incurring
debt does not cause our leverage ratio to exceed 6.0 to one. The new
Senior Notes do not allow debt under the new Senior Credit Facility to
exceed the greater of (and reduced by certain stated items):
o $250 million, reduced by the amount of any prepayments, or
o 3.0 times earnings before interest, taxes, depreciation and
amortization for the last four full fiscal quarters of GCI, Inc.
and certain of its subsidiaries.
The new Senior Notes limit our ability to make cash dividend payments.
We are conducting a Consent Solicitation and Tender Offer for the Senior
Notes. Through February 13, 2004 we accepted for payment $114.6 million
principal amount of notes which were validly tendered. Such notes
accepted for payment received additional consideration as follows:
o $4.0 million based upon a payment of $1,035 per $1,000 principal
amount, consisting of the purchase price of $1,025 per $1,000
principal amount and the consent payment of $10 per $1,000
principal amount, and
o $497,000 in accrued and unpaid interest through February 16, 2004.
The remaining principal amount of $65.4 million will be redeemed by March
18, 2004 for additional consideration as follows:
o $2.1 million based upon a payment of $1032.50 per $1,000 principal
amount, and
o $815,000 in estimated accrued and unpaid interest through the date
of redemption and no later than March 17, 2004.
The total estimated redemption cost is expected to be $186.1 million. The
premium to redeem our Senior Notes is expected to be $6.1 million
(excluding estimated interest cost of $1.3 million), which will be
recognized as a component of Other Income (Expense) during the three
months ended March 31, 2004.
Compliance with the redemption notice requirements in the Indenture will
result in a delay of up to sixty days before final payment of some of the
Senior Notes. As a result of such delay, our total debt will increase
during the overlap period between the redemption of the outstanding
Senior Notes and the issuance of the new Senior Notes making us out of
compliance with Section 6.11 of our Credit, Guaranty, Security and Pledge
Agreement, dated as of October 30, 2003. We have received a waiver from
compliance with Section 6.11 until April 30, 2004.
140
Item 15(b). Reports on Form 8-K.
The following Forms 8-K were filed or furnished during the quarter ended
December 31, 2003:
o On October 27, 2003, we furnished a report on Form 8-K dated October
24, 2003 under Item 12 and 7 which included a copy of our press
release dated that same day reporting a summary description of our
results of operations for the three and nine month periods ended
September 30, 2003.
o On November 6, 2003, we furnished a report on Form 8-K dated November
5, 2003 under Item 12 and 7 which included a copy of our press
release dated that same day reporting a detailed description of our
results of operations for the three and nine month periods ended
September 30, 2003.
o On December 15, 2003, we filed a report on Form 8-K dated December
12, 2003 under Item 5 and Item 7 which included a copy of our press
release dated that same day reporting that the Alaska Supreme Court
issued a decision that requires the Regulatory Commission of Alaska
(RCA) to reexamine its order that allows full local telephone
competition in Fairbanks and Juneau, Alaska.
o On December 18, 2003, we filed a report on Form 8-K dated December
18, 2003 under Item 5 and Item 7 which included a copy of our press
release dated that same day reporting that we had been awarded an
agreement with the State of Alaska to provide a variety of
telecommunication services for the next 18 months.
Item 15(c). Exhibits
Listed below are the exhibits that are filed as a part of this Report
(according to the number assigned to them in Item 601 of Regulation S-K):
Exhibit No. Description
--------------------------------------------------------------------------------------------------------------------
3.1 Restated Articles of Incorporation of the Company dated December 18, 2000 (30)
3.2 Amended and Restated Bylaws of the Company dated January 28, 2000 (28)
10.3 Westin Building Lease (5)
10.4 Duncan and Hughes Deferred Bonus Agreements (6)
10.5 Compensation Agreement between General Communication, Inc. and William C. Behnke dated
January 1, 1997 (19)
10.6 Order approving Application for a Certificate of Public Convenience and Necessity to operate
as a Telecommunications (Intrastate Interexchange Carrier) Public Utility within Alaska
(3)
10.7 1986 Stock Option Plan, as amended (21)
10.13 MCI Carrier Agreement between MCI Telecommunications Corporation and General Communication,
Inc. dated January 1, 1993 (8)
10.14 Contract for Alaska Access Services Agreement between MCI Telecommunications Corporation and
General Communication, Inc. dated January 1, 1993 (8)
10.15 Promissory Note Agreement between General Communication, Inc. and Ronald A. Duncan, dated
August 13, 1993 (9)
10.16 Deferred Compensation Agreement between General Communication, Inc. and Ronald A. Duncan,
dated August 13, 1993 (9)
10.17 Pledge Agreement between General Communication, Inc. and Ronald A. Duncan, dated August 13,
1993 (9)
10.19 Summary Plan Description pertaining to Qualified Employee Stock Purchase Plan of General
Communication, Inc., as amended and restated January 1, 2003 (37)
141 (Continued)
Exhibit No. Description
--------------------------------------------------------------------------------------------------------------------
10.20 The GCI Special Non-Qualified Deferred Compensation Plan (11)
10.21 Transponder Purchase Agreement for Galaxy X between Hughes Communications Galaxy, Inc. and
GCI Communication Corp. (11)
10.25 Licenses: (5)
10.25.1 214 Authorization
10.25.2 International Resale Authorization
10.25.3 Digital Electronic Message Service Authorization
10.25.4 Fairbanks Earth Station License
10.25.5 Fairbanks (Esro) Construction Permit for P-T-P Microwave Service
10.25.6 Fairbanks (Polaris) Construction Permit for P-T-P Microwave Service
10.25.7 Anchorage Earth Station Construction Permit
10.25.8 License for Eagle River P-T-P Microwave Service
10.25.9 License for Juneau Earth Station
10.25.10 Issaquah Earth Station Construction Permit
10.26 ATU Interconnection Agreement between GCI Communication Corp. and Municipality of Anchorage,
executed January 15, 1997 (18)
10.29 Asset Purchase Agreement, dated April 15, 1996, among General Communication, Inc., ACNFI,
ACNJI and ACNKSI (12)
10.30 Asset Purchase Agreement, dated May 10, 1996, among General Communication, Inc., and Alaska
Cablevision, Inc. (12)
10.31 Asset Purchase Agreement, dated May 10, 1996, among General Communication, Inc., and
McCaw/Rock Homer Cable System, J.V. (12)
10.32 Asset Purchase Agreement, dated May 10, 1996, between General Communication, Inc., and
McCaw/Rock Seward Cable System, J.V. (12)
10.33 Amendment No. 1 to Securities Purchase and Sale Agreement, dated October 31, 1996, among
General Communication, Inc., and the Prime Sellers Agent (13)
10.34 First Amendment to Asset Purchase Agreement, dated October 30, 1996, among General
Communication, Inc., ACNFI, ACNJI and ACNKSI (13)
10.36 Order Approving Arbitrated Interconnection Agreement as Resolved and Modified by Order
U-96-89(8) dated January 14, 1997 (18)
10.37 Amendment to the MCI Carrier Agreement executed April 20, 1994 (18)
10.38 Amendment No. 1 to MCI Carrier Agreement executed July 26, 1994 (16)
10.39 MCI Carrier Addendum--MCI 800 DAL Service effective February 1, 1994 (16)
10.40 Third Amendment to MCI Carrier Agreement dated as of October 1, 1994 (16)
10.41 Fourth Amendment to MCI Carrier Agreement dated as of September 25, 1995 (16)
10.42 Fifth Amendment to the MCI Carrier Agreement executed April 19, 1996 (18)
10.43 Sixth Amendment to MCI Carrier Agreement dated as of March 1, 1996 (16)
10.44 Seventh Amendment to MCI Carrier Agreement dated November 27, 1996 (20)
10.45 First Amendment to Contract for Alaska Access Services between General Communication, Inc.
and MCI Telecommunications Corporation dated April 1, 1996 (20)
10.46 Service Mark License Agreement between MCI Communications Corporation and General
Communication, Inc. dated April 13, 1994 (19)
10.47 Radio Station Authorization (Personal Communications Service License), Issue Date June 23,
1995 (19)
10.50 Contract No. 92MR067A Telecommunications Services between BP Exploration (Alaska), Inc.
and GCI Network Systems dated April 1, 1992 (20)
10.51 Amendment No. 03 to BP Exploration (Alaska) Inc. Contract No. 92MRO67A effective August 1,
1996 (20)
10.52 Lease Agreement dated September 30, 1991 between RDB Company and General Communication,
Inc. (3)
10.54 Order Approving Transfer Upon Closing, Subject to Conditions, and Requiring Filings dated
September 23, 1996 (19)
10.55 Order Granting Extension of Time and Clarifying Order dated October 21, 1996 (19)
142 (Continued)
Exhibit No. Description
--------------------------------------------------------------------------------------------------------------------
10.58 Employment and Deferred Compensation Agreement between General Communication, Inc. and
John M. Lowber dated July 1992 (19)
10.59 Deferred Compensation Agreement between GCI Communication Corp. and Dana L. Tindall dated
August 15, 1994 (19)
10.60 Transponder Lease Agreement between General Communication Incorporated and Hughes
Communications Satellite Services, Inc., executed August 8, 1989 (9)
10.61 Addendum to Galaxy X Transponder Purchase Agreement between GCI Communication Corp. and
Hughes Communications Galaxy, Inc. dated August 24, 1995 (19)
10.62 Order Approving Application, Subject to Conditions; Requiring Filing; and Approving
Proposed Tariff on an Inception Basis, dated February 4, 1997 (19)
10.66 Supply Contract Between Submarine Systems International Ltd. And GCI Communication Corp.
dated as of July 11, 1997. (23)
10.67 Supply Contract Between Tyco Submarine Systems Ltd. And Alaska United Fiber System
Partnership Contract Variation No. 1 dated as of December 1, 1997. (23)
10.71 Third Amendment to Contract for Alaska Access Services between General Communication, Inc.
and MCI Telecommunications Corporation dated February 27, 1998 (25)
10.77 General Communication, Inc. Preferred Stock Purchase Agreement (26)
10.78 Qualified Employee Stock Purchase Plan of General Communication, Inc., as amended and restated
January 01, 2003 (37)
10.79 Statement of Stock Designation (Series B) (26)
10.80 Fourth Amendment to Contract for Alaska Access Services between General Communication,
Inc. and its wholly owned subsidiary GCI Communication Corp., and MCI WorldCom. (27)
10.82 Lease Intended for Security between GCI Satellite Co., Inc. and General Electric Capital
Corporation (29)
10.89 Fifth Amendment to Contract for Alaska Access Services between General Communication, Inc.
and its wholly owned subsidiary GCI Communication Corp., and MCI WorldCom Network
Services, Inc., formerly known as MCI Telecommunications Corporation dated August 7, 2000
# (31)
10.90 Sixth Amendment to Contract for Alaska Access Services between General Communication, Inc.
and its wholly owned subsidiary GCI Communication Corp., and MCI WorldCom Network
Services, Inc., formerly known as MCI Telecommunications Corporation dated February 14,
2001 # (31)
10.91 Seventh Amendment to Contract for Alaska Access Services between General Communication,
Inc. and its wholly owned subsidiary GCI Communication Corp., and MCI WorldCom Network
Services, Inc., formerly known as MCI Telecommunications Corporation dated March 8, 2001
# (31)
10.99 Statement of Stock Designation (Series C) (34)
10.100 Contract for Alaska Access Services between Sprint Communications Company L.P. and General
Communication, Inc. and its wholly owned subsidiary GCI Communication Corp. dated March
12, 2002 # (35)
10.101 Credit, Guaranty, Security and Pledge Agreement between GCI Holdings, Inc. and Credit
Lyonnais New York Branch as Administrative Agent, Issuing Bank, Co-Bookrunner and
Co-Arranger, General Electric Capital Corporation as Documentation Agent, Co-Arranger
and Co-Bookrunner and CIT Lending Services Corporation as Syndication Agent, dated as
of November 1, 2002. (36)
10.102 First Amendment to Lease Agreement dated as of September 2002 between RDB Company and GCI
Communication Corp. as successor in interest to General Communication, Inc. (37)
10.103 Agreement and plan of merger of GCI American Cablesystems, Inc. a Delaware
143 (Continued)
Exhibit No. Description
--------------------------------------------------------------------------------------------------------------------
corporation and GCI Cablesystems of Alaska, Inc. an Alaska corporation each with and into GCI
Cable, Inc. an Alaska corporation, adopted as of December 10, 2002 (37)
10.104 Articles of merger between GCI Cablesystems of Alaska, Inc. and GCI Cable, Inc., adopted
as of December 10, 2002 (37)
10.105 Aircraft lease agreement between GCI Communication Corp., and Alaska corporation and 560
Company, Inc., an Alaska corporation, dated as of January 22, 2001 (37)
10.106 First amendment to aircraft lease agreement between GCI Communication Corp., and Alaska
corporation and 560 Company, Inc., an Alaska corporation, dated as of February 8, 2002
(37)
10.107 Amendment No. 1 to Credit, Guaranty, Security and Pledge Agreement between GCI Holdings,
Inc. and Credit Lyonnais New York Branch as Administrative Agent, Issuing Bank,
Co-Bookrunner and Co-Arranger, General Electric Capital Corporation as Documentation
Agent, Co-Arranger and Co-Bookrunner and CIT Lending Services Corporation as
Syndication Agent, dated as of November 1, 2002 (38)
10.108 Bonus Agreement between General Communication, Inc. and Wilson Hughes (39)
10.109 Eighth Amendment to Contract for Alaska Access Services between General Communication,
Inc. and its wholly owned subsidiary GCI Communication Corp., and MCI WorldCom Network
Services, Inc. # (39)
10.110 Settlement and Release Agreement between General Communication, Inc. and WorldCom, Inc.
(39)
10.111 Credit, Guaranty, Security and Pledge Agreement between GCI Holdings, Inc. and Credit
Lyonnais New York Branch as Administrative Agent, Issuing Bank, Co-Bookrunner and
Co-Arranger, General Electric Capital Corporation as Documentation Agent, Co-Arranger
and Co-Bookrunner and CIT Lending Services Corporation as Syndication Agent, dated as
of October 30, 2003 (40)
10.112 Waiver letter agreement dated as of February 13, 2004 for Credit, Guaranty, Security and
Pledge Agreement *
10.113 Indenture dated as of February 17, 2004 between GCI, Inc. and The Bank of New York, as
trustee *
10.114 Registration Rights Agreement dated as of February 17, 2004, among GCI, Inc., and
Deutsche Bank Securities Inc., Jefferies & Company, Inc., Credit Lyonnais Securities
(USA), Inc., Blaylock & Partners, L.P., Ferris, Baker Watts, Incorporated, and TD
Securities (USA), Inc., as Initial Purchasers *
21.1 Subsidiaries of the Registrant *
23.1 Consent of KPMG LLP (Accountant for Company) *
31 Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 *
32 Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 *
99 Additional Exhibits:
99.1 The Articles of Incorporation of GCI Communication Corp. (2)
99.2 The Bylaws of GCI Communication Corp. (2)
99.7 The Bylaws of GCI Cable, Inc. (14)
99.8 The Articles of Incorporation of GCI Cable, Inc. (14)
99.15 The Bylaws of GCI Holdings, Inc. (19)
99.16 The Articles of Incorporation of GCI Holdings, Inc. (19)
99.17 The Articles of Incorporation of GCI, Inc. (18)
99.18 The Bylaws of GCI, Inc. (18)
99.19 The Bylaws of GCI Transport, Inc. (23)
99.20 The Articles of Incorporation of GCI Transport, Inc. (23)
144 (Continued)
Exhibit No. Description
--------------------------------------------------------------------------------------------------------------------
99.21 The Bylaws of Fiber Hold Co., Inc. (23)
99.22 The Articles of Incorporation of Fiber Hold Co., Inc. (23)
99.23 The Bylaws of GCI Fiber Co., Inc. (23)
99.24 The Articles of Incorporation of GCI Fiber Co., Inc. (23)
99.25 The Bylaws of GCI Satellite Co., Inc. (23)
99.26 The Articles of Incorporation of GCI Satellite Co., Inc. (23)
99.27 The Partnership Agreement of Alaska United Fiber System (23)
99.28 The Bylaws of Potter View Development Co., Inc. (32)
99.29 The Articles of Incorporation of Potter View Development Co., Inc. (32)
99.30 The Bylaws of GCI American Cablesystems, Inc. (34)
99.31 The Articles of Incorporation of GCI American Cablesystems, Inc. (34)
99.32 The Bylaws of GCI Cablesystems of Alaska, Inc. (34)
99.33 The Articles of Incorporation of GCI Cablesystems of Alaska, Inc. (34)
99.34 The Bylaws of GCI Fiber Communication, Co., Inc. (34)
99.35 The Articles of Incorporation of GCI Fiber Communication, Co., Inc. (34)
99.37 The Articles of Incorporation of Wok 1, Inc. (38)
99.38 The Bylaws of Wok 1, Inc. (38)
99.39 The Articles of Incorporation of Wok 2, Inc. (38)
99.40 The Bylaws of Wok 2, Inc. (38)
-------------------------
# Certain information has been redacted from this
document which we desire to keep undisclosed.
* Filed herewith.
-------------------------
Exhibit
Reference Description
------------------------------------------------------------------------------------------------------------------
2 Incorporated by reference to The Company's Annual Report on Form 10-K for the year ended
December 31, 1990
3 Incorporated by reference to The Company's Annual Report on Form 10-K for the year ended
December 31, 1991
5 Incorporated by reference to The Company's Registration Statement on Form 10 (File No.
0-15279), mailed to the Securities and Exchange Commission on December 30, 1986
6 Incorporated by reference to The Company's Annual Report on Form 10-K for the year ended
December 31, 1989.
8 Incorporated by reference to The Company's Current Report on Form 8-K dated June 4, 1993.
9 Incorporated by reference to The Company's Annual Report on Form 10-K for the year ended
December 31, 1993.
10 Incorporated by reference to The Company's Annual Report on Form 10-K for the year ended
December 31, 1994.
11 Incorporated by reference to The Company's Annual Report on Form 10-K for the year ended
December 31, 1995.
12 Incorporated by reference to The Company's Form S-4 Registration Statement dated October
4, 1996.
13 Incorporated by reference to The Company's Current Report on Form 8-K dated November 13,
1996.
14 Incorporated by reference to The Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
16 Incorporated by reference to The Company's Current Report on Form 8-K dated March 14,
1996, filed March 28, 1996.
18 Incorporated by reference to The Company's Form S-3 Registration Statement
145 (Continued)
Exhibit
Reference Description
------------------------------------------------------------------------------------------------------------------
(File No. 333-28001) dated May 29, 1997.
19 Incorporated by reference to The Company's Amendment No. 1 to Form S-3/A Registration
Statement (File No. 333-28001) dated July 8, 1997.
20 Incorporated by reference to The Company's Amendment No. 2 to Form S-3/A Registration
Statement (File No. 333-28001) dated July 21, 1997.
21 Incorporated by reference to The Company's Amendment No. 3 to Form S-3/A Registration
Statement (File No. 333-28001) dated July 22, 1997.
23 Incorporated by reference to The Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
24 Incorporated by reference to The Company's Quarterly Report on Form 10-Q for the period
ended June 30, 1998.
25 Incorporated by reference to The Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
26 Incorporated by reference to The Company's Quarterly Report on Form 10-Q for the period
ended March 31, 1999.
27 Incorporated by reference to The Company's Quarterly Report on Form 10-Q for the period
ended June 30, 1999.
28 Incorporated by reference to The Company's Annual Report on Form 10-K for the year ended
December 31, 1999.
29 Incorporated by reference to The Company's Quarterly Report on Form 10-Q for the period
ended June 30, 2000.
30 Incorporated by reference to The Company's Annual Report on Form 10-K for the year ended
December 31, 2000.
31 Incorporated by reference to The Company's Quarterly Report on Form 10-Q for the period
ended March 31, 2001.
32 Incorporated by reference to The Company's Quarterly Report on Form 10-Q for the period
ended June 30, 2001.
33 Incorporated by reference to The Company's Quarterly Report on Form 10-Q for the period
ended September 30, 2001.
34 Incorporated by reference to The Company's Annual Report on Form 10-K for the year ended
December 31, 2001.
35 Incorporated by reference to The Company's Quarterly Report on Form 10-Q for the period
ended June 30, 2002.
36 Incorporated by reference to The Company's Quarterly Report on Form 10-Q for the period
ended September 30, 2002.
37 Incorporated by reference to The Company's Annual Report on Form 10-K for the year ended
December 31, 2002.
38 Incorporated by reference to The Company's Quarterly Report on Form 10-Q for the period
ended March 31, 2003.
39 Incorporated by reference to The Company's Quarterly Report on Form 10-Q for the period
ended June 30, 2003.
40 Incorporated by reference to The Company's Quarterly Report on Form 10-Q for the period
ended September 30, 2003.
146
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
GENERAL COMMUNICATION, INC.
By: /s/ Ronald A. Duncan
Ronald A. Duncan, President
(Chief Executive Officer)
Date: March 9, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
Signatures Title Date
---------- ----- ----
/s/ Donne F. Fisher Chairman of Board and Director March 9, 2004
------------------------------- ------------------------------
Donne F. Fisher
/s/ Ronald A. Duncan President and Director March 9, 2004
------------------------------- (Principal Executive Officer) ------------------------------
Ronald A. Duncan
/s/ William P. Glasgow Director March 9, 2004
------------------------------- ------------------------------
William P. Glasgow
/s/ Stephen R. Mooney Director March 4, 2004
------------------------------- ------------------------------
Stephen R. Mooney
/s/ Stephen M. Brett Director March 9, 2004
------------------------------- ------------------------------
Stephen M. Brett
/s/ James M. Schneider Director March 9, 2004
------------------------------- ------------------------------
James M. Schneider
/s/ Stephen A. Reinstadtler Director March 9, 2004
------------------------------- ------------------------------
Stephen A. Reinstadtler
/s/ John M. Lowber Senior Vice President, March 9, 2004
------------------------------- Chief Financial Officer, ------------------------------
John M. Lowber Secretary and Treasurer
(Principal Financial Officer)
/s/ Alfred J. Walker Vice President, Chief March 9, 2004
------------------------------- Accounting Officer ------------------------------
Alfred J. Walker (Principal Accounting Officer)
147