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, 2008
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE
SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission File No. 0-15279
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GENERAL
COMMUNICATION, INC.
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(Exact name
of registrant as specified in its charter)
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State
of Alaska
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92-0072737
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(State or
other jurisdiction of
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(I.R.S
Employer
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incorporation
or organization)
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Identification
No.)
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2550
Denali Street
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Suite
1000
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Anchorage,
Alaska
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99503
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(Address of
principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code: (907) 868-5600
Securities
registered pursuant to Section 12(b) of the Exchange
Act: None
Securities
registered pursuant to Section 12(g) of the Exchange Act:
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Class A
common stock
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Class B
common stock
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(Title of
class)
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(Title of
class)
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Indicate by check
mark if the registrant is a well-known seasoned issuer, as defined in Rule 405
of the Securities Act.
Yes o No x
Indicate by check
mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Securities Act.
Yes o No x
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 o
Indicate by check mark if disclosure
of delinquent filers pursuant to Item 405 of Regulation S-K (section 229.405 of
this chapter) 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.o
1
Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” "accelerated filer" and "smaller reporting company"
in Rule 12b-2 of the Exchange Act.
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Large accelerated filer o
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Accelerated filer x
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Non-accelerated
filer o (Do not
check if a smaller reporting company)
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Smaller reporting company
o
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Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes
o No
x
The aggregate
market value of the voting stock held by non-affiliates of the registrant,
computed by reference to the average high and low prices of such stock as of the
close of trading as of the last business day of the registrant’s most recently
completed fiscal quarter of June 30, 2008 was $199,624,000. Shares of voting
stock held by each officer and director and by each person who owns 5% or more
of the outstanding voting stock (as publicly reported by such persons pursuant
to Section 13 and Section 16 of the Exchange Act) have been excluded in that
such persons may be deemed to be affiliates. This determination of affiliate
status is not necessarily a conclusive determination for other
purposes.
The number of
shares outstanding of the registrant’s common stock as of February 27, 2009,
was:
Class A common
stock – 49,846,000 shares; and,
Class B common
stock – 3,203,000 shares.
2
GENERAL
COMMUNICATION, INC.
2008
ANNUAL REPORT ON FORM 10-K
TABLE
OF CONTENTS
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Glossary
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4
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Cautionary
Statement Regarding Forward-Looking Statements
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8
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Part
I
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8
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Item 1.
Business
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8
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Item 1A. Risk
Factors
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38
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Item 1B.
Unresolved Staff Comments
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46
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Item 2.
Properties
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46
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Item 3. Legal
Proceedings
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47
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Item 4.
Submissions of Matters to a Vote of Security Holders
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48
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Part
II
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48
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Item 5.
Market for the Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
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48
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Item 6.
Selected Financial Data
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50
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Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
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51
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Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
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82
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Item 8.
Consolidated Financial Statements and Supplementary Data
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82
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Item 9.
Changes In and Disagreements With Accountants on Accounting and Financial
Disclosure
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82
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Item 9A.
Controls and Procedures
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82
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Item 9B.
Other Information
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85
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Part
III
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85
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Item 10.
Directors, Executive Officers and Corporate Governance
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85
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Item 11.
Executive Compensation
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86
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Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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86
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Item 13.
Certain Relationships and Related Transactions, and Director
Independence
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86
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Item 14.
Principal Accountant Fees and Services
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87
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Part
IV
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88
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Item 15.
Exhibits, Consolidated Financial Statement Schedules
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88
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149
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SIGNATURES
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This Annual Report
on Form 10-K is for the year ending December 31, 2008. 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.
3
Glossary
We
and our industry use many terms and acronyms that may not be familiar to you. To
assist you in reading this document, we have provided below definitions of some
of these terms.
Alaska DigiTel —
Alaska DigiTel, LLC — An Alaska based wireless communications company of which
we acquired an 81.9% equity interest on January 2, 2007 and the remaining 18.1%
equity interest on August 18, 2008. Prior to August 18, 2008, our
control over the operations of Alaska DigiTel was limited as required by the FCC
upon their approval of our initial acquisition completed in January
2007.
Alaska Wireless —
Alaska Wireless Communications, LLC — An Alaska based wireless communications
company based in Dutch Harbor, Alaska that we acquired on July 1,
2008.
Alaska United East
— An undersea fiber optic cable system connecting Whittier, Valdez and Juneau,
Alaska to Seattle, Washington, which was placed into service in February
1999.
Alaska United
Southeast — An undersea fiber optic cable system connecting Ketchikan, Wrangell,
Petersburg, Angoon and Sitka, Alaska to Alaska United West.
Alaska United North
— A terrestrial fiber optic cable system connecting Anchorage and Fairbanks,
Alaska along the Parks Highway corridor.
Alaska United West
— An undersea fiber optic cable system connecting Seward, Alaska to Warrenton,
Oregon which was placed into service in June 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 companies.
CDMA —Code Division
Multiple Access — A digital wireless phone technology offered under our Alaska
DigiTel brand name.
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.
Collocation — The
ability of a competitive access provider 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 competitive access provider or CLEC to connect its network to
the LEC’s central offices on comparable terms, even though the competitive
access provider’s or CLEC’s network connection equipment is not physically
located inside the central offices.
DAMA — Demand
Assigned Multiple Access — 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.
Data Network – A
communications network with restricted (controlled) access usually made up of
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).
DBS — Direct
Broadcast Satellite — Subscription television service obtained from satellite
transmissions using frequency bands that are internationally allocated to the
broadcast satellite services. The major providers of DBS are currently The
DirecTV Group, Inc. and EchoStar Communications Corporation (marketed as the
DISH Network).
DLC — Digital Loop
Carrier — A digital transmission system designed for subscriber loop plant. DLC
multiplexes a plurality of circuits onto very few wires or onto a single fiber
pair.
4
DLPS — Digital
Local Phone Service — A term we use referring to our deployment of voice
telephone service utilizing our hybrid-fiber coax cable facilities.
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.
DVR — Digital Video
Recorder — A service that allows digital cable subscribers to select, record and
store programs and play them at whatever time is convenient. DVR service also
provides the ability to pause and rewind “live” television.
Equal Access —
Connection provided by a LEC permitting a customer to be automatically connected
to the Interexchange carrier of the customer’s choice when the customer dials
“1.” Also refers to a generic concept under which the BOC must
provide access services to AT&T’s competitors that are equivalent to those
provided to AT&T.
ETC — Eligible
Telecommunications Carrier — A telephone service provider that has agreed to
hold out service to all customers (excluding those who fail to pay for service)
in the area for which the carrier is designated as an ETC. In return, the
carrier is eligible for state and federal USF.
EVDO Rev A
(Evolution – Data Optimized Revision A) — A digital wireless data technology
offered under both our Alaska DigiTel and GCI brands to allow third generation
("3G") data speeds on cellular phones and personal computers.
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. Frame Relay is data oriented and it is generally
not used for voice or video.
GCI — General
Communication, Inc. — An Alaska corporation and the Registrant.
GSM — Global System
for Mobile Communications — A digital wireless phone technology offered under
our GCI brand name.
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® 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 local access and transport areas 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.
IRU — Indefeasible
Rights to Use — The exclusive right to use a specified amount of capacity or
fiber for a specified term.
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.
5
ISP — Internet
Service Provider — A company providing retail and/or wholesale Internet
services.
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.
LEC — Local
Exchange Carrier — A company providing local telephone access services. Each BOC
is a LEC.
LMDS — Local
Multipoint Distribution System — LMDS uses microwave signals (millimeter wave
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 state regulatory body, 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 or wireless service
providers 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.
Matanuska-Susitna
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.
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 defines PCS as a “wide range of wireless mobile technologies,
chiefly cellular, paging, cordless, voice, personal communications networks,
mobile data, wireless private branch exchange, 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.”
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).
SchoolAccess® — Our
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 USAC 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.
SMATV — Satellite
Master Antenna Television — Multichannel video programming distribution systems
that serve residential, multiple-dwelling units, 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. Also known as "private cable
systems."
6
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.
T-1 — A data
communications circuit capable of transmitting data at 1.5 Mbps.
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.
UNE — Unbundled
Network Element — A discrete component of a telephone network. Unbundled network
elements are the basic network functions, i.e., the components 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.
Unicom — Unicom,
Inc. — An Alaska based provider of terrestrial broadband services, wireless
service, and long-distance telecommunications service that we acquired on June
1, 2008.
United-KUC —
United-KUC, Inc. — An Alaska based provider of local telephone service to rural
Alaska that we acquired on June 1, 2008. United-KUC is a wholly-owned
subsidiary of UUI.
USAC — Universal
Service Administrative Company — An independent not-for-profit corporation
designated as the administrator of the federal USF by the FCC.
USF — Universal
Service Fund — Programs administered by USAC for high-cost companies serving
rural areas, low-income consumers, rural health care providers, and schools and
libraries.
UUI — United
Utilities, Inc. — An Alaska based provider of local telephone service to rural
Alaska that we acquired on June 1, 2008.
VoIP — Voice over
Internet Protocol — Technology that allows voice telephone service over
broadband Internet connections via digital packets rather than traditional
protocols.
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.
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
eliminated 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 must
open up their networks.
7
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 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.
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 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 identified under “Risk Factors,” and elsewhere in this Annual
Report. Those factors may cause our actual results to differ materially from any
of our forward-looking statements. For these forward-looking statements, we
claim the protection of the safe harbor for forward-looking statements provided
by the Private Securities Litigation Reform Act of 1995.
You should not
place undue reliance on any such forward-looking statements. Further, any
forward-looking statement, and the related 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 update or revise any
forward-looking statement to reflect any change in our expectations with regard
to these statements or any other change in events, conditions or circumstances
on which any such statement is based. New factors emerge from time to time, and
it is not possible for us to predict what factors will arise or when. In
addition, we cannot assess the impact of each factor on our business or the
extent to which any factor, or combination of factors, may cause actual results
to differ materially from those contained in any forward-looking
statements.
Part
I
Item
1. Business
General
In
this Annual Report, “we,” “us,” “our” and “the Company” refer to GCI 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 in the state of 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/, http://www.unicom-alaska.com/,
http://www.alaskadigitel.com/, http://www.alaska-wireless.com/, and
http://www.alaskaunited.com/. The Company hosts Internet services at
http://www.gci.net/, broadband delivery of health services at
http://www.connectmd.com, and SchoolAccess® services at
http://www.schoolaccess.net/. Our online telephone directory and yellow pages
are hosted at http://www.gcidirectory.com/.
8
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
websites or the SEC’s website is not part of this document.
Financial
Information about Industry Segments
Our five reportable
segments are Consumer, Network Access, Commercial, Managed Broadband, and
Regulated Operations services.
For financial
information about our reportable segments, see “Part II — Item 7 — Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.” Also refer to note 10 included in “Part II — Item 8 —
Consolidated Financial Statements and Supplementary Data.”
Narrative
Description of our Business
General
We
are Alaska’s leading provider of long-distance, cable television, data and
Internet services, as measured by revenues, we are the second largest local
access provider, as measured by local access lines, and we are the third largest
wireless service provider as measured by lines in service. A pioneer in bundled
service offerings, we provide facilities-based local and long distance voice,
resale of local voice, cable video, Internet and data communication services,
consulting services, network and desktop computing outsourced services, and
facilities-based and resale wireless telephone services, to consumer, network
access, commercial and managed broadband customers under our GCI brand. We
provide wireless telephone services over our own facilities under the Alaska
DigiTel and Alaska Wireless brand names. We provide Internet services
under the Alaska Wireless Internet brand name. We provide
facilities-based local voice services and local exchange carrier services in the
Yukon-Kuskokwim Delta region under the brand names of United Utilities and
United-KUC. We also provide long-distance voice, wireless telephone
service, and Internet service in the Yukon-Kuskokwim Delta region under the
Unicom brand name. Over the next two years we plan to expand our CDMA
and GSM wireless facilities throughout the terrestrially served portions of
Alaska.
We
generated consolidated revenues of $575.4 million in 2008. We ended 2008 with
99,300 long-distance subscribers, 140,800 local access lines in service, 147,800
basic cable subscribers, 96,300 wireless lines in service, and 103,300 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 Alaska market. We believe our integrated
strategy of providing innovative bundles of voice, video, data and wireless
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 the local
access market against an incumbent provider. We are increasing our market share
in the wireless services market against the incumbent providers.
Through our focus
on long-term results and strategic capital investments, our revenues have grown.
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. We use our extensive communications networks to
provide our customers with integrated communication services packages that we
believe are unmatched by any other competitor in Alaska.
We
believe that the size and growth potential of the voice, video and data market,
and the increased convergence of telephony, wireless, and cable services
continue to offer us considerable opportunities to integrate our communications,
Internet and cable services and expand into communications markets within
Alaska.
9
Considerable
deregulation has already taken place in the United States with the barriers to
competition between long-distance, local access and cable providers lowered. We
believe our continued development of cable video service, local access service,
Internet services, broadband services, and wireless services leave us well
positioned to continue to take advantage of deregulated markets.
Development
of our Business During the Past Fiscal Year
Wireless
Business Strategy. During 2008 we expanded Alaska DigiTel’s
CDMA network and started constructing a state-wide GSM network. We
estimate we will spend approximately $165.0 million to construct wireless
facilities throughout Alaska. We have expended $80.0 million in 2008
and plan to spend $85.0 million over the next three
years.
Dobson
/AT&T Agreement. AT&T Mobility, LLC (“AT&T
Mobility”) acquired Dobson Communications Corporation (“Dobson”), including its
Alaska properties, on November 15, 2007. In December 2007 we signed an agreement
with AT&T Mobility that provides for an orderly transition of our wireless
customers from the Dobson/AT&T network in Alaska to our wireless facilities
that we began building in 2008 and are expected to be substantially completed in
2010 or 2011. The agreement requires our customers to be on our
wireless network by June 30, 2009, but allows our customers to use the AT&T
Mobility network for roaming during the transition period. The
four-year transition period, which expires June 30, 2012, provides us adequate
time to replace the Dobson/AT&T network in Alaska with our own wireless
facilities. Under the agreement, AT&T Mobility’s obligation to purchase
network services from us terminated as of July 1, 2008. AT&T Mobility
provided us with a large block of wireless network usage at no charge to
facilitate the transition of our customers to our facilities. We will
pay for usage in excess of that base transitional amount. Under the
previous agreement with Dobson, our margin was fixed. Under the new
agreement with AT&T Mobility, we will pay for usage in excess of the block
of free minutes on a per minute basis. The block of wireless network
usage at no charge is expected to substantially reduce our wireless product cost
of goods sold exclusive of depreciation and amortization (“Cost of Goods Sold”)
during the approximate four year period beginning June 4, 2008 and ending June
30, 2012.
UUI
and Unicom Acquisition. Effective June 1, 2008, we closed on our purchase
of 100% of the outstanding stock of UUI and Unicom, which were subsidiaries of
United Companies, Inc. ("UCI"). UUI, together with its subsidiary,
United-KUC, provides local telephone service to 60 rural communities in the
Bethel, Alaska area. Unicom operates DeltaNet, a long-haul broadband
microwave network ringing the Yukon-Kuskokwim Delta.
Alaska
Wireless Acquisition. Effective July 1, 2008, we closed on our purchase
of 100% of the ownership interests of Alaska Wireless, which provides wireless
and Internet services in the Dutch Harbor, Sand Point, Akutan, and Adak, Alaska
areas.
Acquisition
of Remaining Alaska DigiTel Interest. On August 18, 2008, we
exercised our option to acquire the remaining 18.1% of the equity interest and
voting control of Alaska DigiTel for $10.4 million. Prior to August
18, 2008, our control over the operations of Alaska DigiTel was limited as
required by the FCC upon their approval of our initial acquisition completed in
January 2007. Subsequent to the acquisition of the minority interest,
we own 100% of the outstanding common ownership units and voting control of
Alaska DigiTel.
Southeast
Alaska Fiber Optic Cable Network. We completed construction of a fiber
optic cable network in Southeast Alaska. The 802 miles of fiber optic
cable connect Ketchikan, Wrangell, Petersburg, Angoon and Sitka, Alaska to our
Alaska United West undersea fiber optic cable connecting Alaska to the Lower
48. This fiber optic cable provides a second fiber link to Juneau,
Alaska creating a SONET ring that provides alternative routing and overflow
traffic-handling capabilities.
Capital
Lease Obligation. On March 31, 2006, through our subsidiary GCI
Communication Corp., we entered into an agreement to lease transponder capacity
on Intelsat, Ltd.’s (“Intelsat”) Galaxy 18 spacecraft that successfully launched
May 21, 2008. We continue to lease capacity on the Horizons 1 satellite, which
is owned jointly by Intelsat and JSAT International, Inc. The leased capacity
replaced our existing transponder capacity on Intelsat’s Galaxy XR
satellite.
The Intelsat Galaxy
18 C-band and Ku-Band transponders are being leased over an expected term of 14
years. The present value of the lease payments, excluding telemetry,
tracking and command services and back-up protection, is $98.6
million. We have recorded a capital lease obligation and an addition
to our Property and Equipment at December 31, 2008.
10
IRU
Agreements. During 2008 we signed agreements to provide
long-haul fiber capacity IRU totaling $53.1 million. The capacity
will be used by our competitors to meet bandwidth requirements for their
customers. Substantially all of the cash for these capacity
arrangements was received in 2008.
Senior
Credit Facility. In May 2008 we signed an agreement to add an Additional
Incremental Term Loan of $145.0 million to our existing Senior Credit
Facility. The $145.0 million Additional Incremental Term Loan will
become due under the same terms and conditions as set forth in the existing
Senior Credit Facility.
You should see
“Part I — Item 1. Business — Regulation” for regulatory
developments.
Competition
in the Communications Industry
There is
substantial competition in the communications industry. The traditional dividing
lines between providers offering long-distance, local and wireless telephone
services, 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. The
converging communications industry is competing to deliver service bundles that
include voice, broadband Internet access, and video content. We maintain a
strong competitive position; however, there is active competition in the sale of
substantially all services and products we offer. For more information about
competition in each of our reportable segments, you should refer to each section
titled “Competition” in “Description of our Business by Reportable Segment”
below.
Competitive
Strengths
Market
Leader. We are Alaska’s leading provider of long-distance, cable
television and data and Internet services, as measured by revenues, we are the
second largest local access provider, as measured by local access lines, and we
are the third largest wireless service provider as measured by wireless revenues
and lines in service. 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 current satellite capacity requirements. In
our local access service markets, we offer services using our own facilities,
unbundled network elements and wholesale/resale of third party
facilities.
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, mobile wireless 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. Our United
Utilities, Inc. and United-KUC brand names have been in the Alaska marketplace
since 1984 and we believe our customers associate these brand names with quality
products. Our Alaska DigiTel brand name has been in the Alaska marketplace since
1998 and we believe our customers associate this brand name with quality
wireless products. Our Alaska Wireless brand name has been in the Dutch
Harbor/Unalaska, Alaska marketplace since 2003 and we believe our customers
associate this brand name with quality wireless
products.
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, 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 communication services.
According to the United States Census Bureau, the median household
11
income in Alaska was 27% higher than
the 2007 United States national average. See the “Geographic
Concentration and the Alaska Economy” section of “Part II — Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations” for a
discussion of Alaska’s economic outlook. We believe there is a positive outlook
for continued growth due to our planned facilities expansion and marketing
strategy.
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 29 years of experience in the
communications industry and more than 19 years with
GCI.
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 consumer and commercial customers. We believe that 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 revenue growth, provides operating cost
efficiencies that expand our margins and drives our overall business
performance. As a measure of success to date, over 55,600 of our consumer
customers subscribe to one of our service bundles.
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 suggest to our customers other services they
can purchase or enhanced versions of services they already purchase. Many calls
into our customer service centers result in sales of additional services and
products. We actively 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 have organized
our operations to effectively focus on our customers. We operate our own
customer service department 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
commercial customers. We believe our integrated approach to customer service,
including service set-up, 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 expect to continue to add new products to our
product portfolio. Management has a demonstrated history of new product
evaluation, development and deployment for our customers, and we continue to
assess revenue-enhancing opportunities that create value for our customers. In
addition to new services such as additional HDTV channels, video-on-demand,
on-line advertising placement, on-line content delivery such as streaming music,
and mobile high speed data, 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 are currently pursuing and expect to
pursue opportunities to increase the scale of our facilities, enhance our
ability to serve our existing customers’ needs and attract new
customers.
Description
of our Business by Reportable Segment
Overview
Our five reportable
segments are Consumer, Network Access, Commercial, Managed Broadband, and
Regulated Operations. Our reportable segments are business units that offer
different products, are each managed separately, and serve distinct types of
customers.
12
Following are
our segments and the services and products each offers to its
customers:
|
Reportable
Segments
|
||||||||||||||||||||
|
Services and
Products
|
Consumer
|
Network
Access
|
Commercial
|
Managed
Broadband
|
Regulated
Operations
|
|||||||||||||||
|
Voice:
|
||||||||||||||||||||
|
Long-distance
|
X
|
X
|
X
|
X
|
||||||||||||||||
|
Local
Access
|
X
|
X
|
X
|
X
|
||||||||||||||||
|
Directories
|
X
|
|||||||||||||||||||
|
Video
|
X
|
X
|
||||||||||||||||||
|
Data:
|
||||||||||||||||||||
|
Internet
|
X
|
X
|
X
|
X
|
X
|
|||||||||||||||
|
Data
Networks
|
X
|
X
|
X
|
|||||||||||||||||
|
Managed
Services
|
X
|
X
|
||||||||||||||||||
|
Managed
Broadband Services
|
X
|
|||||||||||||||||||
|
Wireless
|
X
|
X
|
X
|
X
|
||||||||||||||||
Our Consumer
segment customers are residential customers. Our Commercial segment
customers include small businesses, local, national and global businesses,
governmental entities, and public and private educational institutions. Our
Network Access segment customers are other common carriers. Our
Managed Broadband segment customers are rural school districts, hospitals and
health clinics. Effective June 1, 2008, we purchased 100% of the
outstanding stock of UUI and Unicom. The financial results of the
long-distance, local access and Internet services sold to consumer and
commercial customers of certain of these acquired companies are reported in the
Regulated Operations segment. The financial results of the
long-distance services sold to other common carrier customers and the managed
broadband services components of certain of these acquired companies are
included in the Network Access and Managed Broadband Services segments,
respectively. Effective July 1, 2008, we closed on our purchase of
100% of the ownership interests of Alaska Wireless whose results are included in
the Consumer segment. We distribute information about our services
and products to these customers through a variety of channels, including direct
sales, telemarketing and media advertising.
Many of our
networks and facilities are utilized by more than one segment to provide
services and products to our customers. The following description of our
business by reportable segment includes a comprehensive discussion within the
Consumer segment section with references to that section if such common network
and facility use exists in another segment. Similarly, many of the same services
and products are sold to our customers in different segments.
The following
discussion includes information about significant services and products, sales
and marketing, facilities, customers, competition and seasonality for each of
our five reportable segments. For a discussion and analysis of
financial condition and results of operations please see “Part II – Item 7 –
Management’s Discussion and Analysis of Financial Condition and Results of
Operations.”
13
Consumer
Segment
We
offer a full range of communications services and products to our consumer
customers. Consumer segment revenues for 2008, 2007 and 2006 are summarized as
follows:
|
|
Year
Ended December 31,
|
||||||
|
|
2008
|
|
2007
|
2006
|
|||
|
|
(in
thousands)
|
||||||
|
Total revenues 1
|
|
$
|
255,632
|
|
223,502
|
178,951
|
|
1 See
“Part II — Item 7 — Management’s Discussion and Analysis of Financial Condition
and Results of Operations” and note 10 included in “Part II — Item 8 —
Consolidated Financial Statements and Supplementary Data” for more information
regarding the financial performance of our Consumer
segment.
Services
and Products
Our Consumer
segment offers a full range of voice, video, data and wireless services and
products to residential customers.
Voice
Services and Products
Long-Distance
We
are engaged in the transmission of interstate and intrastate-switched message
telephone 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, and our calling card, operator and enhanced
conference calling.
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.
Local
Access
We
offer Local Access services in many communities and areas in Alaska, including
the state’s five largest population centers, Anchorage, Fairbanks, the
Matanuska-Susitna Valley, the Kenai Peninsula, and Juneau. Our own
DLPS facilities and collocated remote facilities that access the ILEC’s UNE
loops allow us to offer full featured local service products to consumer
customers. In areas where we do not have our own DLPS facilities or access to
ILEC loop facilities, we offer service using total service resale of the ILEC’s
local service or UNE platform.
Our package
offerings are competitively priced and include popular features, including
caller ID, voice messaging, call forwarding, and call waiting.
Video
Services and Products
Our cable
television systems serve 40 communities and areas in Alaska, including the
state’s five largest population centers, Anchorage, Fairbanks, the
Matanuska-Susitna Valley, the Kenai Peninsula, and Juneau.
We
offer a full range of video services over our broadband cable systems. We tailor
our channel offerings for each system serving a particular geographic area
according to applicable local and federal regulatory requirements, programming
preferences, demographics and the capabilities of our cable facilities in each
system. Our video service offerings include the following:
Basic
cable. Our basic cable service consists of digital Basic Service with
access to between 12 and 19 channels of programming and an expanded digital
Basic Service with access to between 36 and 59 additional channels of
programming. These services generally consist of programming provided by
national and local broadcast networks, national and regional cable networks, and
governmental and public access programming. We transmit an entirely
digital signal for all cable television channels in all markets we serve as of
December 31, 2008.
14
Digital
cable. Our digital cable service uses a digital set-top box to deliver up
to 52 channels of video programming, 47 music channels and an interactive
program guide.
High-Definition
Television. Our HDTV service provides our digital subscribers with
improved, high-resolution picture quality, improved audio quality and a
wide-screen, theater-like display. Our HDTV service offers a broad selection of
high-definition programming with access of up to 54 high-definition channels
including most major broadcast networks, leading national cable networks,
premium channels and national sports networks.
Digital
Video Recorder. Our advanced DVR service lets digital cable subscribers
select, record and store programs and play them at whatever time is convenient.
DVR service also provides the ability to pause and rewind “live”
television.
Premium
channel programming. Our premium channel programming service, which
includes cable networks such as Home Box Office, Showtime, Starz and Cinemax,
generally offers, without commercial interruption, feature motion pictures, live
and taped sporting events, concerts and other special
features.
Video
on Demand. Our Video on Demand service permits our cable
subscribers to order at their convenience, individual feature motion pictures
and special event programs, on an unedited, commercial-free
basis.
Pay-per-view
programming. Our pay-per-view service permits our cable subscribers to
order, for a separate fee, individual feature motion pictures and special event
programs, such as professional boxing, professional wrestling and concerts, on
an unedited, commercial-free basis.
Data
Services and Products
Internet
We
primarily offer four types of Internet access for consumer use: high-speed cable
modem, dial-up, mobile wireless and fixed wireless. Value-added Internet
features, such as email virus prevention, personal web site and domain hosting,
and additional email accounts, are available for additional charges. Our
consumer high-speed cable modem Internet service offers up to 10 Mbps download
and 2 Mbps upload speeds as compared with up to 56 Kbps upload and download
speeds through standard copper wire dial-up modem access. Our fixed wireless
Internet product is available in 126 communities. Three distinct products are
offered; 56 Kbps, 256 Kbps, and 256 Kbps for multiple computers. We provide
24-hour customer service and technical support via telephone or
online.
An
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
copper wire and can be used to simultaneously deliver both cable television
(analog or digital) and Internet access services.
Wireless
Services and Products
We
offer mobile wireless services by selling services over our own facilities and
reselling AT&T Mobility's services under the GCI brand name and by selling
services over our own facilities under the Alaska DigiTel and Alaska Wireless
brand names. We offer fixed wireless local access services over our own
facilities and have purchased PCS and LMDS wireless broadband licenses in FCC
auctions covering markets in Alaska. We offer mobile wireless service to our
customers in 76 Alaska communities, including the state’s five largest
population centers, Anchorage, Fairbanks, the Matanuska-Susitna Valley, the
Kenai Peninsula, and Juneau, Alaska.
In
December 2007 we signed an agreement with AT&T Mobility that provides for an
orderly transition of our wireless customers from the AT&T Mobility network
in Alaska to our wireless facilities. The agreement requires our customers to be
on our wireless network by June 30, 2009, but allows our customers to use the
AT&T Mobility network for roaming during the transition
period. The four-year transition period, which expires June 30, 2012,
provides us adequate time to replace the AT&T Mobility network in Alaska
with our own wireless facilities. We started transitioning our customers to
our wireless facilities in November 2008.
We
offer our customers a variety of rate plans so they can choose the plan that
best fits their expected calling needs. We focus our offers to take advantage of
the GSM network using the GCI and Alaska Wireless
15
brand names or the
CDMA network using the Alaska DigiTel brand name. Consumer voice service is
generally offered on a contract basis for one or two year periods. Under the
terms of these contracts, service is billed and provided on a monthly basis
according to the applicable rate plan chosen. Our offerings include regional and
national rate plans at a variety of pricing tiers. Our rate plans generally
combine a fixed monthly access charge, a designated number of minutes-of-use,
per minute usage charges for minutes in excess of the included amount and
additional charges for certain custom-calling features. Most of our plans
include basic features such as voice messaging, caller ID, call forwarding and
call waiting, and two-way text messaging.
We
sell a variety of handsets and personal computer wireless data cards
manufactured by various suppliers for use with our wireless services. We also
sell accessories, such as carrying cases, hands-free devices, batteries, battery
chargers and other items. We provide contract subscribers substantial equipment
subsidies to initiate or upgrade service.
Bundled
Services and Products
We
combine one or more of our individual service and product offerings into bundles
that we sell to our Consumer segment customers at attractive
prices. Our most popular bundled offering includes long-distance,
cable television, cable modem Internet access and local access
services. In addition to several other bundled offerings we also
offer a bundle of wireless services, cable television and cable modem Internet
access.
Sales
and Marketing
Our Consumer
segment 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-sell opportunities. We sell our Consumer
segment services through telemarketing, direct mail advertising, door-to-door
selling, up-selling by our customer service and call center personnel, local
media advertising, retail stores, and through our website.
Facilities
Voice
Facilities
We
operate a modern, competitive communications network employing digital
transmission technology based upon fiber optic facilities within and between
Anchorage, Fairbanks, Prudhoe Bay, and Juneau, Alaska. Our facilities include
two self-constructed digital undersea fiber optic cable systems linking our
Alaska terrestrial networks to the networks of other carriers in the Lower 49
States. Alaska United East was placed into service in February 1999 and connects
Whittier, Valdez and Juneau, Alaska and Seattle, Washington. Alaska United West
was placed into service in June 2004 and connects Seward, Alaska to Warrenton,
Oregon. The Seward cable landing station connects to our switching and
distribution center in Anchorage and the Warrenton cable landing station
connects to our switching and distribution center in Seattle via long-term
leased capacity. The combination of our Alaska United East and Alaska United
West systems provides us with the ability to provide fully protected
geographically diverse routing of service between Alaska and the Lower 48
States.
In
2008 we completed construction of an undersea fiber optic cable system in
Southeast Alaska that connects Ketchikan, Wrangell, Petersburg, Angoon and Sitka
to Alaska United West. In 2008, we also completed construction of a
terrestrial fiber optic cable system that connects Anchorage and Fairbanks,
Alaska along the Parks Highway corridor.
We
have IRU capacity in the Kodiak-Kenai Cable Company, LLC’s marine-based fiber
optic cable system linking Anchorage to Kenai, Homer, Kodiak, Narrow Cape on
Kodiak Island, and Seward, Alaska.
These undersea
fiber optic cable systems allow us to carry our military base traffic and our
Anchorage, Delta Junction, Eagle River, Fairbanks, Glenallen, Homer, Juneau,
Kenai, Kodiak, Palmer, Prudhoe Bay, Seward, Soldotna, Valdez, Wasilla, and
Whittier, Alaska traffic to and from the Lower 48 States and between these
instate locations over terrestrial circuits, eliminating the one-half second
round trip delay associated with satellite circuits.
Another carrier
completed construction of fiber optic cable 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, this fiber system also provides an alternative routing path for us for
a limited amount of traffic in case of a major fiber outage in our
systems. A competitor is constructing an undersea fiber optic cable
system between Homer, Alaska and Florence, Oregon expected to be placed in
service in early 2009.
We
use satellite transponders to transmit voice and data traffic to remote areas of
Alaska. We successfully transitioned our traffic from Galaxy XR to Galaxy 18 in
2008. We further augmented capacity with leased capacity on the
Horizons 1 satellite.
16
We
continue to develop and deploy new technology to further increase the efficiency
of bandwidth utilization for our satellite network. With a sparse population
spread over a large geographic area, neither terrestrial microwave nor fiber
optic transmission technology is considered to be economically feasible in rural
Alaska in the foreseeable future. For more information see “Part I — Item 1A —
Risk Factors — If a failure occurs in our satellite communications systems, our
ability to immediately restore the entirety of our service may be
limited.”
We
operate digital microwave systems to link Anchorage with the Kenai Peninsula,
our Prudhoe Bay Earth Station with Deadhorse, Alaska, and to link Bethel with 40
rural communities. Digital microwave facilities are also used between our
Fairbanks earth station and our Fairbanks distribution center. Virtually all
switched services are computer controlled, digitally switched, and
interconnected by a packet switched SS7 signaling network.
Other facilities
include major earth stations at Adak, Barrow, Bethel, Cordova, Dillingham, Dutch
Harbor, Eagle River, Galena, Juneau, Ketchikan, King Salmon, Kodiak, Kotzebue,
McGrath, Nome, Prudhoe Bay, Sitka, Unalakleet, and Yakutat, 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.
A
fiber optic cable system from our Anchorage distribution center connects to the
Matanuska Telephone Association (“MTA”), Eagle River central office and to our
major hub earth station in Eagle River. 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.
We
use our DAMA facilities to serve 69 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 addition, 54 (for a
total of 123) C-band facilities provide dedicated Internet access and private
network services to rural public schools, hospitals, health clinics, and natural
resource development industries throughout Alaska. Our network of 83 Ku-band
facilities provides dedicated Internet access and private network services to
rural public schools, hospitals, health clinics, and natural resource
development industries throughout Alaska, and in ten 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
other carriers to distribute our southbound traffic to the remaining 49 states
and international destinations. 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, collocation facilities for interconnecting and hosting
equipment for other carriers. We also maintain an operator and customer service
center in Wasilla, Alaska. Our operator services traffic is processed by an
integrated services platform that also hosts answering services, directory
assistance, and internal conferencing services.
We
continue our DLPS deployment utilizing our coaxial cable facilities. This
delivery method allows us to utilize our own cable facilities to provide local
access service to our customers and avoid paying local loop charges to the
ILEC.
Video
Facilities
Our statewide cable
systems consist of 2,853 miles of installed cable plant having 450 to 625 MHz of
channel capacity. Our cable television businesses are located throughout Alaska
and serve 40 communities and areas in Alaska, including the state’s five largest
population centers, Anchorage, Fairbanks, the Matanuska-Susitna Valley, the
Kenai Peninsula, and Juneau. Our facilities include cable plant and head-end
distribution equipment. Certain of our head-end distribution centers are
collocated with customer service, sales and administrative
offices. Some of our locations on the fiber routes are served from
the head-end distribution equipment in Anchorage. All of our cable
systems are completely digital.
17
Data
Facilities
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:
|
|
·
|
Our Anchorage
facilities are connected to multiple Internet access points in Seattle
through multiple, diversely routed
networks;
|
|
|
·
|
We use
multiple routers on each end of the circuits to control the flow of data
and to provide resiliency; and
|
|
|
·
|
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 switch networks for intercommunications
and broadband services (cable modem, wireless and DSL), and access servers
for dial-up users.
|
Our dedicated
Internet access and IP data services are delivered to a router located at the
service point. Our Internet management platform constantly monitors this router
and continual communications are maintained with all of the core and
distribution 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, servers and layer two switches, permitting changes in
configuration without the need to be physically located at the service
point.
Bandwidth is made
available for our Internet services through our Alaska United East, Alaska
United West and Alaska United Southeast undersea fiber cable systems, our Alaska
United North terrestrial fiber cable system and our Galaxy 18
transponders.
Our GCI.net product
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 Alaska.
Wireless
Facilities
We
had a distribution agreement with Dobson allowing us to resell Dobson wireless
services. In November 2007 AT&T Mobility acquired Dobson,
including its Alaska properties, and in December 2007 we signed an
agreement with AT&T Mobility that provides for an orderly transition of our
wireless customers from the Dobson/AT&T network in Alaska to our wireless
facilities that we began building in 2008 and are expected to be substantially
completed in 2010 or 2011. The agreement requires our customers to be on our
wireless network by June 30, 2009, but allows our customers to use the AT&T
Mobility network for roaming during the transition period. The
four-year transition period, which expires June 30, 2012, provides us adequate
time to replace the Dobson/AT&T network in Alaska with our own wireless
facilities. Commencing in 2008 we started expanding Alaska DigiTel’s
CDMA network to improve coverage and add the EVDO Rev A data platform and we
started constructing a GSM network throughout the terrestrially served portions
of Alaska including the cities of Anchorage, Fairbanks, and
Juneau. We extend our network coverage in Alaska, the Lower 49 States
and Canada through roaming arrangements with other GSM carriers.
We
provide limited wireless local access and Internet services using our own
facilities utilizing our 30-MHz PCS license and unlicensed 2.4 GHz spectrum. We
provide the service through 802.11 (a set of wireless standards) and wireless
DOCSIS (a data over cable service interface specification).
Our subsidiary,
Alaska DigiTel, holds the 30-MHz “A” Block PCS license in Major Trading Area 49,
the state of Alaska. The Alaska DigiTel network includes a Nortel wireless
switch located in Anchorage and more than 100 cell sites that cover more than
75% of the populated areas of Alaska, including Anchorage and Eagle River, the
Matanuska-Susitna Valley, Kenai Peninsula, Juneau and Fairbanks. Alaska DigiTel
extends its network coverage in Alaska, the Lower 49 States and Canada through
roaming arrangements with other CDMA carriers.
Through our
acquisition of Alaska Wireless, we hold a cellular A license (25MHz) for sites
located in the Bethel AK-2 B2 portion of RSA 316, serving Aleutians West Census
Area. Network coverage under Alaska Wireless is extended in Alaska
and the Lower 49 States through roaming arrangements with other GSM
carriers.
18
Customers
A
discussion of Consumer segment customers by product type follows.
Voice
Customers
Long-Distance
We
had 88,600, 89,900, and 89,800 Consumer segment long-distance subscribers at
December 31, 2008, 2007 and 2006, respectively. The decrease from 2007 to 2008
is primarily due to a decrease in the total number of long-distance services
subscribers in the markets we serve resulting from customers substituting
wireless phone, prepaid calling card, VoIP and email usage for direct dial
minutes.
Equal Access
conversions have been completed in all communities that we serve with owned
facilities. Equal Access is in progress in several small communities where we
are expanding our owned facilities. We estimate that we carry greater than 50%
of combined consumer and commercial traffic as a statewide average for both
originating interstate and intrastate message telephone service.
Revenues derived
from Consumer segment long-distance services in 2008, 2007 and 2006 totaled
$19.8 million, $20.3 million and $20.6 million, respectively, or 3.5%, 3.9% and
4.3% of our total revenues, respectively.
A
summary of our Consumer segment switched long-distance message telephone
service traffic (in minutes) follows:
|
|
Year
Ended December 31,
|
||||||||
|
|
2008
|
|
2007
|
|
2006
|
||||
|
Consumer long-distance
minutes: 1
|
(in
millions)
|
||||||||
|
Interstate
|
100.0
|
105.0
|
109.1
|
||||||
|
Intrastate
|
22.9
|
25.0
|
27.2
|
||||||
|
International
|
5.7
|
5.8
|
5.6
|
||||||
|
Total
|
|
128.6
|
135.8
|
141.9
|
|||||
1 All
minutes data were taken from our internal billing statistics
reports.
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.
Local
Access
We
had 80,700, 74,400 and 66,200 Consumer segment local access lines in
service at December 31, 2008, 2007 and 2006, respectively. We ended
2008 with market share gains in substantially all market segments.
Revenues derived
from Consumer segment local access services in 2008, 2007 and 2006 totaled $27.2
million, $25.9 million and $25.0 million, respectively, or 4.7%, 5.0% and 5.2%
of our total revenues, respectively.
Video
Customers
Our cable systems
passed 229,300, 224,700 and 219,900 homes at December 31, 2008, 2007 and 2006,
respectively, and served 132,500, 128,000 and 124,000 basic Consumer segment
subscribers at December 31, 2008, 2007 and 2006, respectively. Revenues derived
from Consumer segment video services totaled $105.2 million, $96.3 million and
$90.2 million in 2008, 2007 and 2006, respectively, or 18.3%, 18.5% and 18.9% of
our total revenues, respectively.
Data
Customers
We
had 94,400, 88,000 and 78,500 active Consumer segment cable modem Internet
subscribers at December 31, 2008, 2007 and 2006, respectively. Revenues derived
from Consumer segment Internet services totaled $42.7 million, $34.2 million and
$29.4 million, in 2008, 2007 and 2006, respectively, or 7.4%, 6.6% and 6.2% of
our total revenues, respectively.
19
Wireless
Customers
We
had 88,700, 70,000 and 24,400 total Consumer segment wireless lines in service
at December 31, 2008, 2007 and 2006, respectively. The total wireless
lines in service at December 31, 2008 include Alaska DigiTel and Alaska Wireless
lines in service. The total wireless lines in service at December 31, 2007
include Alaska DigiTel lines in service. Our Consumer segment wireless services
revenue totaled $60.7 million, $46.7 million and $13.7 million in the years
ended December 31, 2008, 2007 and 2006, respectively, or 10.5%, 9.0% and 2.9% of
total revenues, respectively. The total wireless revenue at December
31, 2008 includes Alaska DigiTel and Alaska Wireless revenue. The
total wireless revenue at December 31, 2007 includes Alaska DigiTel
revenue.
Competition
A
discussion of competition by product and service in our Consumer segment
follows. See “Item 1A. — Risk Factors — We face intense competition that may
reduce our market share and harm our financial performance.”
Voice
Services and Products Competition
Long-Distance
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 intrastate, interstate and international long-distance market, we compete
against AT&T Alascom, Inc. (“AT&T Alascom”), Alaska Communications
Systems Group, Inc. (“ACS”), MTA, long-distance resellers, and certain smaller
rural local telephone companies. AT&T Alascom, as a subsidiary of AT&T,
Inc., has access to greater financial, technical and marketing resources than we
have. There is also the possibility that new competitors will enter the Alaska
market. In addition, wireless and VoIP services continue to grow as an
alternative to wireline services as a means of reaching customers. Wireless
Local Number Portability allows consumers to retain the same phone number as
they change service providers allowing for interchangeable and portable
fixed-line and wireless numbers. Some consumers now use wireless service as
their primary voice phone service for local and long-distance
calling.
We
have competed in the long-distance market by offering discounts from rates
charged by our competitors and by providing desirable bundles 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 bundles of services.
Our ability to
compete successfully will depend 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, demographic trends, economic
conditions and pricing strategies.
Under the terms of
the acquisition of Alascom by AT&T Inc., which were retained in the
subsequent acquisition of AT&T by SBC Communications Inc., AT&T
Alascom's rates and services must mirror those offered by AT&T Inc., so
changes in AT&T Inc. prices indirectly affect our rates and services.
AT&T Inc.’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 Inc. 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 Inc. 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.
Local
Access
Data obtained from
the RCA indicates that there are 23 ILECs and 10 CLECs certified to operate in
the State of Alaska at December 31, 2008. We compete against ACS, the ILEC, and
AT&T Alascom in Anchorage, Juneau and Fairbanks. AT&T Alascom
offers local exchange service only to consumer customers through total service
resale. We compete against MTA, the ILEC, in the Matanuska-Susitna
Valley and ACS, the ILEC, in the Kenai-Soldotna area. We compete
against other smaller ILECs in certain smaller communities, including Cordova,
Homer, Ketchikan, Kodiak, Nome, Seward, Sitka, and Valdez. We plan to
provide local telephone service in other locations in the future where we would
face other competitors. We also can expect further competition in the
marketplaces we serve as other companies may receive certifications in the
future.
20
In
the local telephone services market, the 1996 Telecom Act, judicial decisions,
state and federal legislative and regulatory developments, and new technologies
have increased the overall likelihood that barriers to local telephone
competition will be substantially 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 UNEs, 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 ILECs, 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 access 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.
We
believe that we have certain advantages over ILECs 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.
See “Regulation —
Wireline Voice Services and Products” below for more information.
Video
Services and Products Competition
Our cable
television systems face competition from alternative methods of receiving and
distributing television signals, including DBS and digital video over telephone
lines, broadband IP-based services, wireless and SMATV systems, and from other
sources of news, information and entertainment such as Internet services,
off-air television broadcast programming, newspapers, movie theaters, live
sporting events, interactive computer services, and home video products,
including video disks. Our cable television systems also face competition from
potential overbuilds of our existing cable systems by other cable television
operators and municipally-owned cable systems, and alternative methods of
receiving and distributing television signals. The extent to which our cable
television systems are competitive depends, in part, upon our ability to provide
quality programming and other services at competitive prices.
We
believe that the greatest source of potential competition for video services
could come from the DBS industry. Two major companies, The DirecTV Group, Inc.
and EchoStar Communications Corporation are currently offering nationwide
high-power DBS services. We also are subject to competition from providers of
digital video over telephone lines in the Matanuska-Susitna Valley and in
Ketchikan. 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.
DBS is more
competitive with cable in the Alaska market than it once was because
technological advances have improved signal quality and reduced equipment costs
and local programming is more widely available than it once was.
In the
past, the majority of Alaska DBS subscribers were required to bear the cost of
and install larger satellite dishes (generally three to six feet in diameter)
because of the weaker satellite signals 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. Satellite placements have provided Alaska 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 with
high-definition programming. In addition to the dish and equipment cost
deterrents, DBS signals are subject to degradation from atmospheric conditions
such as rain and snow. The changing nature of technology and of the DBS business
may result in greater satellite coverage within Alaska.
The ILECs in the
Matanuska-Susitna Valley and Ketchikan offer 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. System upgrades have been completed
to make our systems reverse activated, providing the necessary infrastructure to
offer cable modem service to greater than 99% of our homes passed. Digital
delivery technology is being utilized in all of our systems. We have
retransmission agreements with Anchorage broadcasters some of which expire in
2009 and provide for the uplink/downlink of their signals into all our systems,
and local programming for our customers.
21
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.
We
expect to continue to provide, at reasonable prices and in competitive bundles,
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.
Increased competition, however, may adversely affect our market share and
results of operations from our cable services product offerings.
Data
Services and Products Competition
The Internet
industry is highly competitive, rapidly evolving and subject to constant
technological change. Competition is based upon price and pricing plans, service
bundles, the types of services offered, the technologies used, customer service,
billing services, perceived quality, reliability and availability. As of
December 31, 2008, we competed with more than eight Alaska based Internet
providers, and competed with other domestic, non-Alaska based providers that
provide national service coverage. Several of the providers headquartered
outside of Alaska have substantially greater financial, technical and marketing
resources than we do.
With respect to our
high-speed cable modem service, 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. Competitive local
fixed wireless providers are providing service in certain of our markets as is a
national WiMax-based provider in Anchorage with plans for Juneau and Fairbanks.
WiMax is a standards-based wireless technology that provides high-throughput
broadband connections over long distances. WiMax can be used for a number of
applications, including last mile broadband connections, hotspots and cellular
backhaul, and high-speed enterprise connectivity for business. DBS providers and
others provide wireless high speed Internet service in competition with our
high-speed cable modem services.
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.
Wireless
Services and Products Competition
We
compete against AT&T Mobility, ACS, MTA, and resellers of those services in
Anchorage and other markets. We competed against Dobson until its
acquisition by AT&T Mobility in November 2007. The GCI and Alaska
DigiTel brands compete against each other.
We
also compete, to a lesser extent, with mobile satellite service providers, as
well as from resellers of these services. The FCC has granted mobile satellite
service providers the flexibility to deploy an ancillary terrestrial component
to their satellite services. This added flexibility may enhance their ability to
offer more competitive mobile services.
Regulatory policies
favor robust competition in wireless markets. Wireless Local Number Portability,
which was implemented by the FCC late in 2003, has also increased the level of
competition in the industry. Number portability allows subscribers to switch
carriers without having to change their telephone numbers.
The communications
industry continues to experience significant technological changes, as evidenced
by the increasing pace of improvements in the capacity and quality of digital
technology, shorter cycles for new products and enhancements and changes in
consumer preferences and expectations. Accordingly, we expect competition in the
wireless communications industry to continue to be dynamic and intense as a
result
22
of
the development of new technologies, services and products.
We
compete for customers based principally upon price, bundled services, the
services and enhancements offered, network quality, customer service, network
coverage and capacity, and the availability of differentiated features and
services. Our ability to compete successfully will depend, in part, on our
marketing efforts and our ability to anticipate and respond to various
competitive factors affecting the industry.
Seasonality
Our Consumer
segment voice, video, and data services do not exhibit significant seasonality.
Our ability to implement construction projects is hampered during the winter
months because of cold temperatures, snow and short daylight hours.
Network
Access Segment
We
offer wholesale voice and data services and products to other common carrier
customers. Network Access segment revenues for 2008, 2007 and 2006 are
summarized as follows:
|
Year
Ended December 31,
|
||||||||||||||
|
2008
|
2007
|
2006
|
||||||||||||
|
(in
thousands)
|
||||||||||||||
|
Total revenues 1
|
$ | 153,821 | 163,377 | 166,471 | ||||||||||
1 See
“Part II — Item 7 — Management’s Discussion and Analysis of Financial Condition
and Results of Operations” and note 10 included in “Part II — Item 8 —
Consolidated Financial Statements and Supplementary Data” for more information
regarding the financial performance of our Network Access
segment.
Services
and Products
Our Network Access
segment offers wholesale voice and data services and products to other common
carrier customers. We provide network transport, billing services and access to
our network to other common carriers. These services allow other common carriers
to provide services to their customers that originate or terminate on our
network, or on the networks of other communication companies to which we
connect.
We
are engaged in the transmission of interstate and intrastate-switched message
telephone service, Internet service, and data network communications service
between the major communities in Alaska, and the remaining United States and
foreign countries. Our message toll services include intrastate and interstate
direct dial, toll-free 800, 888, 877 and 866 services, our calling card,
directory assistance, operator and enhanced conference calling, frame relay,
Multi-Protocol Label Switching (“MPLS”), IP, SDN, and ISDN technology based
services. MPLS is a data-carrying mechanism which emulates certain properties of
a circuit-switched network over a packet-switched network. We terminate
northbound message telephone service traffic for Verizon 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 Verizon and other Interexchange carriers. Services are generally
provided pursuant to contracts with terms of up to five years in length. Toll,
data network, and related services account for 26.7%, 31.4%, and 34.9% of our
2008, 2007 and 2006 revenues, respectively. Data 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 voice and data services is
generally designed to be equal to or greater than that for comparable services
provided by our competitors.
Sales
and Marketing
Our Network Access
segment sales and marketing efforts are primarily directed toward increasing the
number of other common carriers we serve, the number of billable minutes of
long-distance traffic we carry over our network and the number of voice and data
transmission circuits leased. We sell our voice and data services primarily
through direct contact marketing.
23
Facilities
Our Network Access
segment shares common facilities used for voice and data services by other
segments. You should refer to “Consumer Segment — Facilities” above for
additional information.
Customers
A
summary of our Network Access segment switched long-distance message telephone
service traffic (in minutes) follows:
|
|
Year
Ended December 31,
|
||||||||
|
|
2008
|
|
2007
|
|
2006
|
||||
|
Network Access long-distance
minutes: 1
|
(in
millions)
|
||||||||
|
South-bound
Interstate
|
545.9
|
690.2
|
662.0
|
||||||
|
North-bound
Interstate
|
502.6
|
476.5
|
574.6
|
||||||
|
Intrastate
|
24.9
|
63.2
|
60.9
|
||||||
|
Other
|
20.6
|
20.7
|
19.1
|
||||||
|
Total
|
|
1,094.0
|
1,250.6
|
1,316.6
|
|||||
1 All
minutes data were taken from our internal billing statistics
reports.
During the years
ended December 31, 2008, 2007 and 2006, we had one major customer. Revenues
attributed to our major customer during the years ended December 31, 2008, 2007
and 2006, totaled $65.0 million, $71.5 million and $93.4 million or 11.3%, 13.8%
and 19.6% of total revenues, respectively. Our contract with our major customer
has a term through December 2009, with five, one year automatic extensions
thereafter. We believe that our major customer will continue to make
use of our services during the extended term.
The loss of our
major customer or a material adverse change in our relationship with them could
have a material adverse effect on our financial position, results of operations
or liquidity. There are no other individual Network Access segment customers,
the loss of which would have a material impact on our revenues or operating
income.
Voice
Customers
Long-Distance
Revenues derived
from Network Access segment long-distance services totaled $74.8 million, $91.8
million and $105.1 million, respectively, or 13.0%, 17.6% and 22.0% of our total
revenues in 2008, 2007 and 2006, respectively.
Local
Access
Revenues derived
from Network Access segment local access services totaled $4.9 million, $5.1
million and $5.7 million, respectively, or 0.9%, 1.0% and 1.2% of our total
revenues in 2008, 2007 and 2006, respectively.
Data
Customers
Revenues derived
from Network Access segment data services, including Internet and data network
services, totaled $71.4 million, $61.2 million and $55.6 million, or 12.4%,
11.8% and 11.7% of our total revenues in 2008, 2007 and 2006,
respectively.
Wireless
Customers
Revenues derived
from Network Access segment wireless services totaled $2.7 million and $5.3
million or 0.5% and 1.0% of our total revenues in 2008 and 2007,
respectively. Alaska DigiTel provides roaming services to other CDMA
wireless carriers in Alaska.
Competition
Our Network Access
segment competes against AT&T Alascom, ACS, MTA, and certain smaller rural
local telephone carrier affiliates. There is also the possibility that new
competitors will enter the Alaska market. You should refer to “Consumer Segment
— Competition” above for additional information.
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,
24
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 will also
likely be reduced, and we may have to respond to competitive pressures,
consistent with federal law. We are unable to predict the effect of such changes
on our business.
Historically, we
have competed in the Network Access segment market by offering rates comparable
to or less than our competitors, by providing a comprehensive service model to
meet the complete needs of our carrier customers, and by providing responsive
customer service.
See “Item 1A. —
Risk Factors — We face intense competition that may reduce our market share and
harm our financial performance.”
Seasonality
Network Access
segment long-distance services revenues 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. Our Network Access segment data services do not exhibit significant
seasonality.
Commercial
Segment
We
offer a full range of communications services and products to commercial and
governmental customers. Commercial segment revenues for 2008, 2007 and 2006 are
summarized as follows:
|
Year
Ended December 31,
|
||||||||||||||
|
2008
|
2007
|
2006
|
||||||||||||
|
(in
thousands)
|
||||||||||||||
|
Total revenues 1
|
$ | 114,660 | 104,640 | 105,929 | ||||||||||
1 See
“Part II — Item 7 — Management’s Discussion and Analysis of Financial Condition
and Results of Operations” and note 10 included in “Part II — Item 8 —
Consolidated Financial Statements and Supplementary Data” for more information
regarding the financial performance of our Commercial
segment.
Services
and Products
Our Commercial
segment offers a full range of voice, video, data and wireless services and
products to commercial and governmental customers.
Voice
Services and Products
Long-Distance
We
are engaged in the transmission of interstate and intrastate-switched message
telephone 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, our calling card, operator and enhanced conference calling services.
Small business subscribers generally may cancel long-distance service at any
time. Certain small business and most large commercial and governmental
customers generally contract with us for service over one to five year
periods.
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.
Local
Access
We
offer full featured local access service to our Commercial segment customers
using our own fiber facilities and collocated remote facilities that access the
ILEC’s UNE loops. In areas where we do not have our own facilities or access to
ILEC loop facilities, we offer service using total service resale of the ILEC’s
local service or UNE platform.
25
Our package
offerings are competitively priced and include popular features, including
caller ID, voice messaging, call forwarding, and call waiting.
Directories
Services
We
sell advertising in our yellow pages directories to commercial customers,
distribute white and yellow pages directories to customers in certain markets we
serve, and offer an on-line directory. We offer three yellow pages
directories with each directory covering multiple locations and including custom
features for each area. Our directories cover the following
communities:
|
|
·
|
Anchorage,
Elmendorf Air Force Base, Fort Richardson, Bird, Girdwood, Hope, Indian,
Portage, Rainbow, Sunrise, Eagle River, Chugiak, Big Lake, Houston,
Palmer, Wasilla, Willow, Talkeetna, Anderson, Clear, Cantwell, Healy,
Denali National Park, Tyonek, Beluga, Kenai, North Kenai, Soldotna,
Kasilof, Clam Gulch, Sterling, Cooper Landing, Homer, Anchor Point,
Halibut Cove, Nanwalek, Ninilchik, Port Graham,
Seldovia;
|
|
|
·
|
Fairbanks,
North Pole, Eielson Air Force Base, Fort Wainwright, Delta Junction, Fort
Greeley, Nenana; and
|
|
|
·
|
Juneau, Auke
Bay, Douglas, Lemon Creek, Mendenhall
Valley
|
Video
Services and Products
Commercial segment
subscribers such as hospitals, hotels and motels are charged negotiated monthly
service fees. Programming services offered to our cable television systems
subscribers differ by system as described in the Consumer segment Video Services
and Products section above. You should refer to “Consumer Segment — Services and
Products” above for additional information.
Data
Services and Products
Internet
We
currently offer several Internet service packages for commercial use: dial-up
access, DSL, passive optical networking, fixed wireless, T-1 and fractional T-1
leased line, metro Ethernet, 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 1.5 Mbps over the same copper line used for
phone service. Business services also include a personalized web page, domain
name services, and e-mail.
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 BP Exploration (Alaska) Inc.
and the State of Alaska. We have hundreds of other enterprise customers, both
large and small, using this service. Additional cable modem service packages
tailored to high-use commercial Internet users are also available.
Data
Networks
Data 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. Private IP, data lines, metro Ethernet and frame relay offer a secure
solution for frequent communication of large amounts of data between
sites.
Managed
Services
We
design, sell, install, service and operate, on behalf of certain customers,
communications and computer networking equipment and provide field/depot, third
party, technical support, communications consulting and outsourcing services. We
supply integrated voice and data communications systems incorporating private
IP, interstate and intrastate digital data networks, point-to-point and
multipoint Private Network and small earth station services.
Wireless
Services and Products
Wireless services
and products offered to our Commercial segment customers are the same as those
described in the Consumer Wireless Services and Products section above. You
should refer to “Consumer Segment — Services and Products” above for additional
information.
Bundled
Services and Products
We
combine one or more of our individual service or product offerings into bundles
that we sell to our Commercial segment customers at attractive prices as
described further in the Consumer segment Services and Products section above.
You should refer to “Consumer Segment — Services and Products” above for
additional information.
26
Sales
and Marketing
Our Commercial
segment sales and marketing efforts focus on increasing the number of
subscribers we serve, selling bundled services, and generating incremental
revenues through product and feature up-sell opportunities. We sell our
Commercial segment services and products primarily through direct contact
marketing. We also use direct mail advertising, door-to-door selling, up-selling
by our customer service and call center personnel, local media advertising,
retail stores, and our website.
Facilities
Our Commercial
segment uses many facilities to provide services and products that are common to
the Consumer segment. You should refer to “Consumer Segment — Facilities” above
for additional information.
We
provide our own facilities-based local access services to many of Anchorage’s
larger business customers through expansion and deployment of SONET, Ethernet,
and Gigabit Passive Optical Network fiber transmission facilities, DLC
facilities, and leased T-1 facilities.
Our dedicated
Internet access and IP data services are delivered to an Ethernet port located
at the service point. Our management platform constantly monitors this port and
continual communications are maintained with all of the core and distribution
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, servers and layer two switches, permitting changes in
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 businesses and governmental entities. Many of the largest
commercial networks in Alaska use this service, including the state
government.
Customers
A
discussion of Commercial segment customers by product type follows.
Voice
Customers
Long-Distance
We
had 9,700, 10,500 and 11,100 active Commercial segment long-distance subscribers
at December 31, 2008, 2007 and 2006, respectively. The 2008 and 2007 decrease is
primarily due to a decrease in the total number of long-distance services
subscribers in the markets we serve resulting from customers substituting
wireless phone, prepaid calling card, VoIP and email usage for direct dial
minutes.
Commercial segment
long-distance services revenues totaled $10.5 million, $12.8 million and $12.9
million, or 1.8%, 2.5% and 2.7% of our total revenues in 2008, 2007 and 2006,
respectively.
Equal Access
conversions have been completed in all communities that we serve with owned
facilities. Equal Access is in progress in several small communities where we
are expanding our owned facilities. We estimate that we carry greater than 50%
of combined commercial and consumer traffic as a statewide average for both
originating interstate and intrastate message telephone service.
A
summary of our Commercial segment switched long-distance message telephone
service traffic (in minutes) follows:
|
|
Year
Ended December 31,
|
||||||||
|
|
2008
|
|
2007
|
|
2006
|
||||
|
Commercial long-distance
minutes: 1
|
(in
millions)
|
||||||||
|
Intrastate
|
78.2
|
79.4
|
79.7
|
||||||
|
Interstate
|
49.5
|
49.7
|
49.8
|
||||||
|
International
|
1.8
|
2.2
|
2.3
|
||||||
|
Total
|
|
129.5
|
131.3
|
131.8
|
|||||
1 All
minutes data were taken from our internal billing statistics
reports.
27
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.
Local
Access
We
had 46,200, 43,100 and 41,900 Commercial segment local access lines in service
at December 31, 2008, 2007 and 2006, respectively.
Commercial segment
local access services revenues totaled $18.0 million, $17.1 million and $16.6
million, or 3.1%, 3.3% and 3.5% of our total revenues in 2008, 2007 and 2006,
respectively.
Video
Customers
We
served 15,200, 15,300 and 15,200 basic Commercial segment video subscribers at
December 31, 2008, 2007 and 2006, respectively. Commercial segment video
services revenues totaled $9.6 million, $8.0 million and $8.0 million, or 1.7%,
1.5% and 1.7% of our total revenues in 2008, 2007 and 2006,
respectively.
Data
Customers
Internet
We
had 8,900, 8,500 and 7,800 active Commercial segment cable modem subscribers at
December 31, 2008, 2007 and 2006, respectively. Commercial segment Internet
services revenues totaled $17.2 million, $14.4 million and $16.3 million, or
3.0%, 2.8% and 3.4% of our total revenues in 2008, 2007 and 2006,
respectively.
Data
Networks
We
had 234, 230 and 237 total active Commercial segment data networks subscribers
at December 31, 2008, 2007 and 2006, respectively. Commercial segment data
networks services revenues totaled $16.6 million, $16.8 million and $16.9
million, or 2.9%, 3.2% and 3.5% of our total revenues in 2008, 2007 and 2006,
respectively.
Managed
Services
Our Managed
Services revenues totaled $36.3 million, $29.8 million and $30.0 million, or
6.3%, 5.7% and 6.3% of total revenues in 2008, 2007 and 2006,
respectively.
Wireless
Customers
We
had 7,600, 7,300 and 4,600 total Commercial segment wireless lines in service at
December 31, 2008, 2007 and 2006, respectively. The total wireless lines in
service at December 31, 2008 and 2007 include Alaska DigiTel lines in
service. Our Commercial segment wireless services revenue totaled
$5.6 million, $4.8 million and $2.5 million, respectively, or 1.0%, 0.9% and
0.5% of total revenues in 2008, 2007 and 2006, respectively. Total wireless
revenue at December 31, 2008 and 2007 includes Alaska DigiTel
revenue.
Competition
Many of our
Commercial segment voice, video, data and wireless services and products are
also common to the Consumer segment. You should refer to “Consumer Segment —
Competition” above for additional information.
We
expect further competition in commercial customer telephone access, Internet
access, DSL and data markets. Competition is based upon price and pricing plans,
the type of services offered, customer service, billing services, performance,
perceived quality, reliability and availability.
Presently, there
are a number of competing companies in Alaska that actively sell and maintain
data and voice communications systems. Our ability to integrate communications
networks and data communications equipment has allowed us to maintain our market
position based on “value added” support services rather than price competition.
These services are blended with other transport products into unique customer
solutions, including managed services and outsourcing.
We
compete with two other major yellow page directories and several local community
directories. We compete based on reduced advertising and listing prices, broad
circulation, and directory quality and features.
See “Item 1A. —
Risk Factors — We face intense competition that may reduce our market share and
harm our financial performance.”
28
Seasonality
Our Commercial
segment voice, video, and data services do not exhibit significant seasonality.
Our ability to implement construction projects is hampered during the winter
months because of cold temperatures, snow and short daylight hours.
Managed
Broadband Segment
We
offer Internet access and related services for rural schools and health
organizations using a platform including many of the latest advancements in
technology. Managed Broadband segment revenues for 2008, 2007 and 2006 are
summarized as follows:
|
|
Year
Ended December 31,
|
||||||||
|
|
2008
|
|
2007
|
|
2006
|
||||
|
|
(in
thousands)
|
||||||||
|
Total revenues 1
|
|
$
|
37,047
|
|
28,792
|
|
26,131
|
||
1 See
“Part II — Item 7 — Management’s Discussion and Analysis of Financial Condition
and Results of Operations” and note 10 included in “Part II — Item 8 —
Consolidated Financial Statements and Supplementary Data” for more information
regarding the financial performance of our Managed Broadband
segment.
Services
and Products
Our Managed
Broadband segment offers Internet access and related services to rural schools
and health organizations.
SchoolAccess® is a
suite of services designed to advance the educational opportunities of students
in underserved regions of the country. Our SchoolAccess® division
provides Internet and distance learning services designed exclusively for the
school environment. The Schools and Libraries Program of the USF makes discounts
available to eligible rural school districts for telecommunication services and
monthly Internet service charges. The program is intended to ensure that rural
school districts have access to affordable services.
Our network,
Internet and software application services provided through our Managed
Broadband segment’s Medical Services division are branded as ConnectMD®. Our
ConnectMD® services
are currently provided under contract to medical businesses in Alaska,
Washington and Montana. The Rural Health Care Program of the USF makes discounts
available to eligible rural health care providers for telecommunication services
and monthly Internet service charges. The program is intended to ensure that
rural health care providers pay no more for telecommunications services in the
provision of health care services than their urban counterparts. Customers
utilize ConnectMD® services
to securely move data, images, voice traffic, and real time multipoint
interactive video.
We
offer a managed video conferencing product for use in distance learning,
telemedicine and group communication and collaboration environments. The product
is designed to offer customers enhanced communication services that support
video, audio and data presentation. Our product benefits customers by reducing
travel costs, improving course equity in education and increasing the quality of
health services available to patients. The product bundles our data products,
video conferencing services and optional rental of video conferencing endpoint
equipment. Our video conferencing services include multipoint conferencing,
integrated services digital network gateway and transcoding services, online
scheduling and conference control, and videoconference recording, archiving and
streaming. We provide 24-hour technical support via telephone or
online.
Our
videoconferencing network is the largest in Alaska, and network coverage
includes parts of the state of Washington and Montana. The network supports all
H.323 IP videoconferencing standards including the newer H.264 standard, and
supports call data rates from 128 kilobits per second up to and including
multi-megabit high definition calls. In 2008 and 2007, we terminated over 30,000
and 37,000, respectively, videoconferencing endpoint connections amounting to
over 1.8 million and 2.8 million, respectively, videoconferencing minutes on our
network.
Sales
and Marketing
Our Managed
Broadband segment sales and marketing efforts focus on increasing the number of
subscribers we serve, selling bundled services, and generating incremental
revenues through product and feature up-sell opportunities. We sell our Managed
Broadband segment services and products primarily through direct contact
marketing.
29
Facilities
Our Managed
Broadband segment services and products are delivered using a platform including
many of the latest advancements in technology through a locally available
circuit, our existing lines, and/or satellite earth stations. Our Internet
services are partially provisioned over a satellite based digital video
broadcast carrier that reduces the requirement for new satellite transponder
bandwidth to support growth in rural health, SchoolAccess® and
other broadband services.
We
employ a packet data satellite transmission technology for the efficient
transport of broadband data in support of our rural health and SchoolAccess®
initiatives. Our SchoolAccess® Internet
service is delivered as follows:
|
|
·
|
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;
|
|
|
·
|
In
communities where we have extended communications services via our DAMA
earth station program, SchoolAccess® is
provided via a satellite circuit to an intermediate distribution facility
at the Eagle River Earth Station;
and
|
|
|
·
|
In
communities or remote locations where we have not extended communications
services, SchoolAccess® is
provided via a dedicated (usually on premise) VSAT satellite station. The
VSAT connects to an intermediate distribution facility located in
Anchorage.
|
Effective June 1,
2008, we purchased the stock of Unicom which operates DeltaNet, a long-haul
broadband microwave network ringing the Yukon-Kuskokwim Delta – a region of
approximately 50,000 square miles in western Alaska. DeltaNet links more than 30
villages to Bethel, the region’s hub. We utilize DeltaNet to support
growth in wireless and broadband services including Rural Health and
SchoolAccess®.
You should refer to
“Consumer Segment — Facilities” above for additional information.
Customers
Our Managed
Broadband segment revenue totaled $37.0 million, $28.8 million and $26.1
million, or 6.4%, 5.5% and 5.5% of total revenues in 2008, 2007 and 2006,
respectively. Our SchoolAccess® Internet
service was delivered to 54 customers at December 31, 2008 representing over 130
schools in rural Alaska and 16 schools in Montana, New Mexico and
Arizona. Our SchoolAccess® Internet
service was delivered to 51 customers at December 31, 2007 representing over 162
schools in rural Alaska and 9 schools in Montana, New Mexico and
Arizona. Our SchoolAccess® Internet
service was delivered to 48 customers at December 31, 2006 representing over 203
schools in rural Alaska and 9 schools in Montana, New Mexico and Arizona. Our
rural health service was delivered to 53 customers in Alaska, Washington and
Montana at December 31, 2008, 2007 and 2006.
Competition
There are several
competing companies in Alaska that actively sell broadband services. Our ability
to provide end-to-end broadband services solutions has allowed us to maintain
our market position based on “value added” services and products rather than
solely based on price competition. These services are blended with other
transport and software products into unique customer solutions, including
SchoolAccess® and
rural health applications such as video conferencing and unique web content
services.
See “Item 1A. —
Risk Factors — We face intense competition that may reduce our market share and
harm our financial performance.”
Seasonality
Our Managed
Broadband segment does not exhibit seasonality.
Regulated
Operations Segment
We
offer voice and data services and products to commercial and residential
customers in 60 rural communities in the Bethel, Alaska area. Regulated
Operations segment revenues from the June 1, 2008 date of acquisition of UUI and
United-KUC through December 31, 2008 were $14.3 million.
30
Services
and Products
Our Regulated
Operations segment offers wireline and wireless communications services to our
residential and commercial customers, including long-distance, voice and data
services and products.
Sales
and Marketing
Our Regulated
Operations segment sales efforts are primarily directed toward increasing the
number of subscribers we serve. We sell our Regulated Operations segment
services through local media advertising, retail stores, and through our
website.
Facilities
Our Regulated
Operations segment services are delivered by switching, outside plant,
terrestrial microwave, and satellite facilities. Our outside plant is
primarily aerial and buried copper and fiber optic cables.
Customers
We
had 900 long-distance subscribers and 12,100 total local access lines in service
as of December 31, 2008. We carried 843,700 long-distance minutes
between June 1, 2008 and December 31, 2008.
Competition
In
the intrastate, interstate and international long-distance market, we compete
against AT&T Alascom. AT&T Alascom, as a subsidiary of AT&T, Inc.,
has access to greater financial, technical and marketing resources than we
have. Our Regulated Operations segment has no competition for its
local access services.
Seasonality
Our Regulated
Operations segment services do not exhibit significant seasonality.
Sales
and Marketing – Company-wide
Our sales and
marketing 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 names in the Alaskan marketplace
and (iii) our leading market positions in long-distance, wireless, Internet and
cable television services. By continuing to pursue a marketing strategy that
takes advantage of these characteristics, we believe we can increase our
consumer 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 had 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, National Marine Fisheries Service, United States Fish and Wildlife
Service,
31
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 our 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, paint used to
mark the location of our facilities, 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 letters
GCI®, and for
the terms SchoolAccess®, Alaska
United Fiber Optic Cable System®, GCI
ConnectMD®,
ConnectMD®, GCI
Hypernet®, My
GCI®,
MyGCI®, Info
Anchorage GCI Internet Hot Spot®, Info
Fairbanks GCI Internet Hot Spot®, and
Info Juneau GCI Internet Hot Spot®. 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 subsidiary GCI Communication Corp. for our satellite and
microwave transmission facilities for provision of long-distance services
provided by our Consumer, Commercial and Network Access segments.
Our wholly-owned
subsidiary, Alaska DigiTel, holds registered service marks for the terms Keep
Talking Alaska® and
Digiminutes®.
We
acquired a license for use of a 30-MHz block of spectrum for providing PCS
services in Alaska. The PCS license was renewed in 2005 for an additional
10-year term. Licenses may be revoked and license renewal applications may be
denied for cause.
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 was renewed in
2008 for an additional 10-year term, following the grant of an extension until
June 1, 2012 of the requirement to provide “substantial service” in the service
region. Our operations may require additional licenses in the
future.
Alaska DigiTel
holds two licenses for use of a 30-MHz block of spectrum, which together
authorize its provision of PCS services in Alaska. Both licenses have an
expiration date of June 23, 2015. Licenses may be revoked and license
renewal applications may be denied for cause. We expect the PCS license will be
renewed in due course, when, at the end of the license period, a renewal
application will be filed.
Through our
acquisition of Alaska Wireless, we hold a cellular A license (25MHz) for sites
located in the Bethel AK-2 B2 portion of RSA 316, serving Aleutians West Census
Area.
Unicom holds
several cellular B licenses (25MHz) for sites located in the Wade Hampton AK-1
portion of CMA 315 and the Bethel AK-2 portion of CMA 316, throughout the
Yukon-Kuskokwim Delta.
Earth stations are
licensed generally for fifteen years. The FCC also issues a single blanket
license for a large number of technically identical earth stations (e.g.,
VSATs).
Regulation
Our businesses are
subject to substantial government regulation and oversight. The following
summary of regulatory issues does not purport to describe all existing and
proposed federal, state, and local laws and regulations, or judicial and
regulatory proceedings that affect our businesses. Existing laws and regulations
are reviewed frequently by legislative bodies, regulatory agencies, and the
courts and are subject to change. For example, critics continue to ask Congress
to modify, if not altogether rework, the 1996 Telecom Act. Any change in the Act
that loosened regulatory oversight of ILECs’ control of bottleneck facilities
could have an adverse impact on our businesses. We cannot predict at this time
the outcome of the debate over the 1996 Telecom Act or any other existing or
proposed laws and regulations.
32
Wireline
Voice Services and Products
General. As
an Interexchange carrier, we are subject to regulation by the FCC and RCA as a
non-dominant provider of interstate, international, and intrastate long-distance
services. As a state-certificated CLEC, we are subject to regulation by the RCA
and the FCC as a non-dominant provider of local communications services.
Military franchise requirements also affect our ability to provide
communications services to military bases.
Rural
Exemption and
Interconnection. A
Rural Telephone Company is exempt from compliance with certain material
interconnection requirements under Section 251(c) of the 1996 Telecom Act,
including the obligation to negotiate Section 251(b) and (c) interconnection
requirements in good faith, unless and until a state regulatory commission lifts
such “rural exemption” or otherwise finds it not to apply. All ILECs
in Alaska are Rural Telephone Companies except ACS in its Anchorage study
area. We have had to participate in numerous proceedings regarding
the rural exemptions of various ILECs, including ACS for its Fairbanks and
Juneau operating companies, MTA and Ketchikan, in order to achieve the necessary
Interconnection Agreements with the remaining ILECs. In other cases the
Interconnection Agreements were reached by negotiation without regard to the
implications of the ILEC’s rural exemption.
As
of December 31, 2008, we have completed negotiation and/or arbitration of the
necessary interconnection provisions and the RCA has approved current wireline
Interconnection Agreements between GCI and all of the ACS companies, MTA, the
City of Ketchikan d/b/a Ketchikan Public Utilities (“KPU”), Copper Valley
Telephone Cooperative (“CVTC”), TelAlaska Inc. d/b/a Mukluk Telephone Company,
Inc. (“Mukluk”) and TelAlaska Inc. d/b/a Interior Telephone Company,
Inc. (“Interior”), Alaska Telephone Company (“ATC”), Cordova
Telephone Cooperative (“CTC”), and Arctic Slope Telephone Association
Cooperative (“ASTAC”). We have entered the markets served by ACS,
KPU, CVTC, Mukluk, Interior and ASTAC with local access services. We
intend to enter the markets served by ATC and CTC in 2009.
See “Description of
Our Business by Reportable Segment — Consumer — Competition — Voice Services and
Products Competition” for more information.
Access
Charges and Other Regulated Fees. The
FCC regulates the fees that local telephone companies charge long-distance
companies for access to their local networks. The FCC is considering proposals
to restructure and possibly reduce interstate access charges. Changes to the
interstate access charge regime or introduction of new technologies not subject
to access charges could fundamentally change the economics of some aspects of
our business.
Carriers also pay
fees for switched wholesale transport services in and out of Alaska. The rates
for such services offered by and to any provider are currently governed by a
federal law that is effective through December 31, 2009. We cannot
predict at this time the effect of the expiration of the applicable federal law,
but a decrease in the rates for services would result in a reduction of
revenues.
Access
to Unbundled Network Elements. The
ability to obtain unbundled network elements is an important element of our
local access services business. We cannot predict the extent to which existing
FCC rules governing access to and pricing for unbundled network elements will be
sustained in the face of additional legal action and the impact of any further
rules that are yet to be determined by the FCC. Moreover, the future regulatory
classification of services that are transmitted over facilities may impact the
extent to which we will be permitted access to such
facilities. Changes to the applicable regulations could result in a
change in our cost of serving new and existing
markets.
Recurring and
non-recurring charges for UNE-loops and other unbundled network elements may
increase based on the rates adopted in RCA proceedings to establish new
Interconnection Agreements or renew existing agreements. These increases could
have an adverse effect on our financial position, results of operations or
liquidity.
On
September 30, 2005, the ACS subsidiary serving Anchorage filed a petition with
the FCC, seeking forbearance from the requirement that it provide access to
UNEs, and that to the extent it voluntarily did so, that the pricing provisions
of the Act would not apply. We filed our opposition on January 9, 2006 and our
reply on February 23, 2006. On December 28, 2006, the FCC granted ACS the
requested relief from the provision of unbundled loops and transport in five of
its eleven tariffed wire centers. The relief is conditioned on the requirement
that ACS make loops and certain subloops available in those wire centers where
relief was granted, by no later than a one-year transition period, at the same
rates, terms and conditions as those negotiated between GCI and ACS for
Fairbanks, until commercially negotiated rates were reached.
On
March 15, 2007, GCI and ACS entered into an agreement (the "Settlement
Agreement") to settle issues related to the FCC’s December 28, 2006 decision and
other matters. Under the Settlement Agreement, ACS and GCI entered
into a Global Interconnection Agreement that covers all ACS study areas,
including ACS’s Sitka-Bush and Glacier State study areas. The
Settlement Agreement also provides that ACS will
33
continue to provide
GCI with access to UNE loops in the Anchorage, Fairbanks, and Juneau study areas
at a rate of $23.00 per UNE loop per month. The per-loop price is
subject to an upward or downward adjustment depending on the aggregate number of
UNE and wholesale lines GCI is purchasing from ACS in all of ACS’s study
areas. The initial term of the Settlement Agreement is five
years.
On
March 21, 2007, GCI and ACS filed motions to withdraw their appeals of the FCC
decision, before United States Court of Appeals for the District of Columbia
Circuit and the United States Court of Appeals for the Ninth Circuit,
respectively, which motions have been granted. Additional appeals
that were filed by others have been dismissed and on June 28, 2007, the RCA
approved the Global Interconnection Agreement that incorporated the terms of the
settlement.
On
May 22, 2006, the ACS subsidiary serving Anchorage filed a petition with the
FCC, seeking forbearance from regulation of interstate broadband and access
services. On August 20, 2007, the FCC granted in part and denied in part the
requested relief, requiring that ACS comply with certain safeguards to ensure
the relief granted would not result in harm to consumers or
competition. On September 19, 2007, GCI and ACS both filed petitions
for reconsideration on discrete findings in the order. The petitions
are pending and we cannot predict the final outcome of the proceeding at this
time. On October 22, 2008, ACS filed a petition to convert to price
cap regulation the access services it provides in each of its operating
areas. We cannot predict at this time the outcome of the proceeding
or the effect on our cost of purchasing ACS access services.
Universal
Service. The
USF pays subsidies to ETCs to support the provision of facilities-based wireline
telephone service in high-cost areas. Under FCC regulations, we have qualified
as a competitive ETC in the Anchorage, Fairbanks, Juneau,
Matanuska-Susitna Valley,
Ketchikan, and Glacier State service areas. Without ETC status, we would
not qualify for USF subsidies in these areas or other rural areas where we
propose to offer facilities-based wireline telephone services, and
our net cost of providing local
telephone services in these areas would be materially adversely
affected.
On
May 1, 2008, the FCC issued an order adopting the recommendation of the Federal
State Joint Board on Universal Service (“Joint Board”) to impose a
state-by-state interim cap on high cost funds to be distributed to competitive
ETCs. As part of the revised policy, the FCC adopted a limited
exception from the cap for competitive ETCs serving tribal lands or Alaska
Native regions. While the operation of the cap will generally reduce
the high cost fund amounts available to competitive ETCs as new competitive ETCs
are designated and as existing competitive ETCs acquire new customers, providers
like us who serve tribal lands or Alaska Native regions were provided some
relief. On March 5, 2009, the FCC issued an additional order waiving
a previously adopted limitation to the exception, the result of which is to
provide uncapped support for all lines served by competitive ETCs for tribal
lands or Alaska Native regions during the time the interim cap is in
effect. The uncapped support for tribal lands or Alaska Native
regions and the cap for all other regions will be in place until the FCC takes
action on proposals for long term reform.
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.
Video
Services and Products
General. Because
cable communications systems use local streets and rights-of-way, they generally
are operated pursuant to franchises (which can take the form of certificates,
permits or licenses) granted by a municipality or other state or local
government entity. The RCA is the franchising authority for all of Alaska. We
believe that we have generally met the terms of our franchises, which do not
require periodic renewal, and have provided quality levels of service. On
December 20, 2006, the FCC adopted rules to ensure a reasonable franchising
process for new video market entrants; these rules have not had a material
effect on our operations. Military franchise requirements also affect our
ability to provide video services to military bases.
The RCA is also
certified under federal law to regulate rates for the Basic Service tier on our
cable systems. Under state law, however, cable television service is exempt from
regulation unless subscribers petition the RCA. At present, regulation of basic
cable rates takes place only in Juneau. The RCA does not regulate rates for
cable modem service.
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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 has adopted
rules to require cable operators to carry the digital programming streams of
broadcast television stations. The FCC requirement that cable operators carry
both the analog and digital programming streams of broadcast television stations
while broadcasters are transitioning from analog to digital transmission does
not apply to all-digital systems like ours. Further, the FCC has
declined to require any cable operator to carry multiple digital programming
streams from a single broadcast television station, but should the FCC change
this policy, we would be required to devote additional cable capacity to
carrying broadcast television programming streams, a step that could require the
removal of other programming services.
Cable
System Delivery of Internet Service. The
FCC has defined high-speed Internet over cable as an “information service” not
subject to local cable-franchise fees, as cable service may be, or any explicit
requirements for “open access.” The Supreme Court affirmed the FCC’s position in
a decision issued in 2005.
Although there is
at present no significant federal regulation of cable system delivery of
Internet services, this situation may change as cable systems expand their
broadband delivery of Internet services. Proposals have been advanced at the FCC
and Congress to require cable operators to provide access to unaffiliated
Internet service providers and online service providers and to govern the terms
under which content providers and applications are delivered by all broadband
network operators. If such requirements were imposed on cable operators, it
could burden the capacity of cable systems and frustrate our plans for providing
expanded Internet access services. These access obligations could adversely
affect our financial position, results of operations or liquidity.
Segregated
Security for Set-top Devices. The
FCC mandated, effective July 1, 2007, that all new set-top video navigation
devices must segregate the security function from the navigation function. The
new devices are more expensive than existing equipment, and compliance would
increase our cost of providing cable services. A waiver has been granted to one
small cable system conditioned upon, among other things, its commitment to fully
digitize analog signals throughout its cable network. The FCC has also indicated
that enforcement of the separate security requirement may be deferred with
respect to small cable operators that meet certain criteria and are unable to
receive compliant set-top devices in a timely manner from manufacturers. Subject
to a waiver granted by the FCC on May 4, 2007, we may continue providing
low-cost integrated set-top boxes to consumers to facilitate our transition to
all-digital cable networks, which has been completed.
Pole
Attachments. 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 and the FCC has initiated a rulemaking to consider
application of the federal formula. 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 possible modification or elimination
of this compulsory copyright license is the subject of continuing legislative
review. We cannot predict the outcome of this legislative review,
which could adversely affect our ability to obtain desired broadcast
programming. Copyright clearances for non-broadcast programming services
are arranged through private negotiations.
Internet-Based
Services and Products
General. 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 IP addressing, 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 these bodies is not
precisely defined.
35
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 on a case-by-case basis whether it has the authority or
the obligation to exercise regulatory jurisdiction over specific Internet-based
activities.
Although the FCC
does not regulate the prices charged by ISPs or Internet backbone providers, 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,
non-Internet-specific regulatory decisions exercise a significant influence over
the economics of the Internet market.
Many aspects of the
coordination and regulation of Internet activities and the underlying networks
over which those activities are conducted are evolving. Internet-specific and
non-Internet-specific changes 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 Internet-based services.
Wireless
Services and Products
General. The
FCC regulates the licensing, construction, interconnection, operation,
acquisition, and transfer of wireless network systems in the United States
pursuant to the Communications Act. As a licensee of PCS, LMDS, and
other wireless services, we are subject to regulation by the FCC, and must
comply with certain build-out and other license conditions, as well as with the
FCC’s specific regulations governing the PCS and LMDS services (described
above). The FCC does not currently regulate rates for services offered by
commercial mobile radio service providers.
Commercial mobile
radio service wireless systems are subject to Federal Aviation Administration
and FCC regulations governing the location, lighting and construction of antenna
structures on which our antennas and associated equipment are located and are
also subject to regulation under federal environmental laws and the FCC’s
environmental regulations, including limits on radio frequency radiation from
wireless handsets and antennas on towers.
Interconnection. As
of December 31, 2008, we have completed negotiation and the RCA has approved
current direct wireless Interconnection Agreements between GCI and all of the
ACS companies, Adak Eagle Enterprises, ASTAC, ATC, Bettles Telephone Company,
CTC, Interior, Mukluk, and North Country Telephone Cooperative. These
are in addition to indirect interconnection arrangements utilized
elsewhere.
Assignments
or Transfers of Control. The
FCC (and in some instances, the Department of Justice) must grant prior approval
to any assignment or transfer of control of an FCC spectrum license. In 2008 the
FCC approved the transfer of control of the AKD licenses and the Unicom cellular
licenses, as well as the assignment of the Alaska Wireless
licenses.
Universal
Service. The
USF pays subsidies to ETCs to support the provision of facilities-based wireless
telephone service in high-cost areas. A wireless carrier may seek ETC status so
that it can receive subsidies from the USF. Several wireless carriers, including
us, have successfully applied to the RCA for ETC status in
Alaska. Under FCC regulations, GCI has qualified as a competitive ETC
in the Mukluk, Ft. Wainwright/Eielson, and Adak service areas. Alaska DigiTel
has qualified as a wireless ETC in the Anchorage, Fairbanks, Juneau,
Matanuska-Susitna Valley, Ft. Wainwright/Eielson and Glacier State
service areas. Without ETC status, we would not qualify for USF
subsidies in these areas or other rural areas where we propose to offer
facilities-based wireless telephone services, and our net cost of providing
wireless telephone services in these areas would be materially adversely
affected.
On
May 1, 2008, the FCC issued an order adopting the recommendation of the Joint
Board to impose a state-by-state interim cap on high cost funds to be
distributed to competitive ETCs. As part of the revised policy, the
FCC adopted a limited exception from the cap for competitive ETCs serving tribal
lands or Alaska Native regions. While the operation of the cap will
generally reduce the high cost fund amounts available to competitive ETCs as new
competitive ETCs are designated and as existing competitive ETCs acquire new
customers, providers like us who serve tribal lands or Alaska Native regions
were provided some relief. On March 5, 2009, the FCC issued an
additional order waiving a previously adopted limitation to the exception, the
result of which is to provide uncapped support for all lines served by
competitive ETCs for tribal lands or Alaska Native regions during the time the
interim cap is in effect. The uncapped support for tribal lands or
Alaska Native regions and the cap for all other regions will be in place until
the FCC takes action on proposals for long term reform.
Emergency
911. The
FCC has imposed rules requiring carriers to provide emergency 911 services,
including enhanced 911 services that provide to local public safety dispatch
agencies the caller’s communications
36
number and approximate
location. Providers are required to transmit the geographic coordinates of
the customer’s location within accuracy parameters set forth by the FCC, either
by means of network-based or handset-based technologies. Providers may not
demand cost recovery as a condition of doing so, although they are permitted to
negotiate cost recovery if it is not mandated by the state or local
governments.
State
and Local Regulation. While
the Communications Act generally preempts state and local governments from
regulating the entry of, or the rates charged by, wireless carriers, it also
permits a state to petition the FCC to allow it to impose commercial mobile
radio service rate regulation when market conditions fail to adequately protect
customers and such service is a replacement for a substantial portion of the
telephone wireline exchange service within a state. No state currently has such
a petition on file, and all prior efforts have been rejected. In addition, the
Communications Act does not expressly preempt the states from regulating the
“terms and conditions” of wireless service.
Several states have
invoked this “terms and conditions” authority to impose or propose various
consumer protection regulations on the wireless industry. State attorneys
general have also become more active in enforcing state consumer protection laws
against sales practices and services of wireless carriers. States also may
impose their own universal service support requirements on wireless and other
communications carriers, similar to the contribution requirements that have been
established by the FCC.
States have become
more active in attempting to impose new taxes and fees on wireless carriers,
such as gross receipts taxes. Where successful, these taxes and fees are
generally passed through to our customers and result in higher costs to our
customers.
At
the local level, wireless facilities typically are subject to zoning and land
use regulation. Neither local nor state governments may categorically prohibit
the construction of wireless facilities in any community or take actions, such
as indefinite moratoria, which have the effect of prohibiting construction.
Nonetheless, securing state and local government approvals for new tower sites
has been and is likely to continue to be difficult, lengthy and
costly.
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.
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, 2008 and 2007, our Network Access segment had a backlog of data
network orders of $11,000 and $40,000, respectively, which represents recurring
monthly charges for data network services. As of December 31, 2008 and 2007, our
Commercial segment had a backlog of data network orders of $35,000 and $19,000,
respectively, which represents recurring monthly charges for data networks. We
expect that all of the data network orders in backlog at the end of 2008 will be
delivered during 2009.
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 depends 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 the second largest source of state revenues,
following funds from investment sources. To the extent that our large common
carrier 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 1A — Risk Factors — 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.
37
Employees
We
employed 1,628 persons as of January 2, 2009, and we are not party 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
1A. Risk Factors.
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.
We
depend on a small number of customers for a substantial portion of our revenue
and business. The loss of any of such customers would have a material adverse
effect on our financial position, results of operations or
liquidity.
For the year ended
December 31, 2008, we provided services to a major customer which generated
revenues of 11.3% of our total 2008 revenues. This customer is free to seek out
long-distance communications services from our competitors upon expiration of
its contracts in December 2009 or earlier upon the occurrence of certain
contractually stipulated events including a default, the occurrence of a force
majeure event, or a substantial change in applicable law or regulation under the
applicable contract. Additionally, the contracts provide for periodic reviews to
assure that the prices paid by our major customer for its services remain
competitive.
Mergers and
acquisitions in the communications industry are relatively common. If a change
in control of our major customer were to occur it would not permit it to
terminate its existing contracts with us without a negotiated settlement, but it
could in the future result in the termination of or a material adverse change in
our relationships with this customer.
In
addition, our major customer’s need for our long-distance services depends
directly upon its ability to obtain and retain its own long-distance and
wireless customers and upon the needs of those customers for long-distance
services.
The loss of our
major customer, a material adverse change in our relationships with it or a
material loss of or reduction in its long-distance customers would have a
material adverse effect on our financial position, results of operations and
liquidity.
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 service, local access
telephone service, wireless telephone service, Internet services and video
services are increasingly becoming blurred. Through mergers and various service
integration strategies, major providers are striving to provide integrated
communications services offerings within and across geographic markets. We face
increasing video services competition from DBS providers.
We
expect competition to increase as a result of the rapid development of new
technologies, services and products. 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.
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For more
information about competition by segment, see the sections titled “Competition”
included in “Item 1 — Business — Narrative Description of our Business —
Description of our Business by Reportable Segment.”
Our
business is subject to extensive governmental legislation and regulation.
Applicable legislation and regulations and changes to them could adversely
affect our business, financial position, results of operations or
liquidity.
Local
Access Services. Our success in the local telephone market depends on our
continued ability to obtain interconnection, access and related services from
local exchange carriers on terms that are reasonable and that are based on the
cost of providing these services. Our local telephone services business faces
the risk of the impact of the implementation of 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 local exchange carriers to
allow interconnection to the carrier’s existing local telephone network, to
establish dialing parity, to obtain access to rights-of-way, to resell
services offered by the local exchange carrier, and in some cases, to allow the
purchase, at cost-based rates, of access to unbundled network elements. In some
Alaska markets, it also depends on our ability to gain interconnection at
economic costs. Future arbitration proceedings with respect to new or existing
markets could result in a change in our cost of serving these markets via the
facilities of the ILEC or via wholesale offerings.
Video
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. 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 January 2007.
Other existing
federal regulations, currently the subject of judicial, legislative, and
administrative review, 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. As of the date
of this report, the FCC has declined to impose such requirements. 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. Legislative or regulatory
proposals under the banner of “net neutrality”, if adopted, could interfere with
our ability to reasonably manage and invest in our broadband network, and could
adversely affect the manner and price of providing
service.
Wireless
Services. The licensing, construction, operation, sale and
interconnection arrangements of wireless communications systems are regulated by
the FCC and, depending on the jurisdiction, state and local regulatory agencies.
In particular, the FCC imposes significant regulation on licensees of wireless
spectrum with respect to:
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How radio
spectrum is used by licensees;
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The nature of
the services that licensees may offer and how such services may be
offered; and
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Resolution of
issues of interference between spectrum
bands.
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The Communications
Act of 1934 preempts state and local regulation of market entry by, and the
rates charged by, commercial mobile radio service providers, except that states
may exercise authority over such things as certain billing practices and
consumer-related issues. These regulations could increase the costs of our
wireless operations. The FCC grants wireless licenses for terms of generally ten
years that are
39
subject to renewal
and revocation. FCC rules require all wireless licensees to meet certain
build-out requirements and substantially comply with applicable FCC rules and
policies and the Communications Act of 1934 in order to retain their licenses.
Failure to comply with FCC requirements in a given license area could result in
revocation of the license for that license area. There is no guarantee that our
licenses will be renewed. You should also see the risk factor below titled “We
may not fully develop our wireless services, in which case we could not meet the
needs of our customers who desire packaged services.”
The FCC has
initiated a number of proceedings to evaluate its rules and policies regarding
spectrum licensing and usage. New uses could adversely impact our utilization of
our licensed spectrum and our operational costs.
Commercial mobile
radio service providers must implement E911 capabilities in accordance with FCC
rules. Failure to deploy E911 service consistent with FCC requirements could
subject us to significant fines.
The FCC, together
with the FAA, also regulates tower marking and lighting. In addition, tower
construction is affected by federal, state and local statutes addressing zoning,
environmental protection and historic preservation. The FCC adopted significant changes
to its rules governing historic preservation review of projects, which makes it
more difficult and expensive to deploy antenna facilities. The FCC is also
considering changes to its rules regarding environmental protection as related
to tower construction, which, if adopted, could make it more difficult to deploy
facilities.
For more
information about Regulations affecting our operations, see “Competition”
contained in “Item 1 — Business — Regulation.”
Loss
of our ETC status would disqualify us for USF subsidies.
The USF pays
subsidies to ETCs to support the provision of facilities-based wireline and
wireless telephone service in high-cost areas. Under FCC regulations, GCI has
qualified as a competitive ETC in the Anchorage, Fairbanks, Juneau,
Matanuska-Susitna, Ketchikan, Fort Wainwright/Eielson, and Glacier State service
areas and as a wireless ETC in the Mukluk, Ft. Wainwright/Eielson and Adak
service areas. Alaska DigiTel has qualified as a wireless ETC in the Anchorage,
Fairbanks, Juneau, Matanuska-Susitna Valley, Ft. Wainwright/Eielson and Glacier
State service areas. Without ETC status, we would not qualify for USF
subsidies in these areas or other rural areas where we propose to offer
facilities-based wireline and wireless telephone services. Loss of our ETC
status could have an adverse effect on our business, financial position, results
of operations or liquidity.
Revenues
from universal service and access charges may be reduced or lost.
The USF pays
subsidies to ETCs to support the provision of local access service in high-cost
areas. Without ETC status, we would not qualify for USF subsidies in the areas
in which we qualify or other rural areas where we propose to offer local access
services, and our revenue for providing local access services in these areas
would be materially adversely affected.
On
May 1, 2008, the FCC issued an order adopting the recommendation of the Joint
Board to impose a state-by-state interim cap on high cost funds to be
distributed to competitive ETCs. As part of the revised policy, the
FCC adopted a limited exception from the cap for competitive ETCs serving tribal
lands or Alaska Native regions. While the operation of the cap will
generally reduce the high cost fund amounts available to competitive ETCs as new
competitive ETCs are designated and as existing competitive ETCs acquire new
customers, providers like us who serve tribal lands or Alaska Native regions
were provided some relief. On March 5, 2009, the FCC issued an
additional order waiving a previously adopted limitation to the exception, the
result of which is to provide uncapped support for all lines served by
competitive ETCs for tribal lands or Alaska Native regions during the time the
interim cap is in effect. The uncapped support for tribal lands or
Alaska Native regions and the cap for all other regions will be in place until
the FCC takes action on proposals for long term reform.
40
Failure
to complete development, testing and deployment of new technology that supports
new services could affect our ability to compete in the industry. In
addition, the technology we use may place us at a competitive
disadvantage.
We
develop, test and deploy various new technologies and support systems intended
to enhance our competitiveness by both supporting new services and features and
reducing the costs associated with providing those services or
features. Successful development and implementation of technology
upgrades depend, in part, on the willingness of third parties to develop new
applications in a timely manner. We may not successfully complete the
development and rollout of new technology and related features or services in a
timely manner, and they may not be widely accepted by our customers or may not
be profitable, in which case we could not recover our investment in the
technology. Deployment of technology supporting new service offerings
may also adversely affect the performance or reliability of our networks with
respect to both the new and existing services. Any resulting customer
dissatisfaction could affect our ability to retain customers and may have an
adverse effect on our financial position, results of operations, or
liquidity.
Unfavorable
general economic conditions in the United States could have a material adverse
effect on our financial position, results of operations and
liquidity.
Unfavorable general
economic conditions, including the current recession in the United States and
the recent financial crisis affecting the banking system and financial markets,
could negatively affect our business. While it is often difficult for
us to predict the impact of general economic conditions on our business, these
conditions could adversely affect the affordability of and consumer demand for
some of our products and services and could cause customers to shift to lower
priced products and services or to delay or forgo purchases of our products and
services. One or more of these circumstances could cause our revenue
to decline. Also, our customers may not be able to obtain adequate
access to credit, which could affect their ability to make timely payments to
us. If that were to occur, we could be required to increase our
allowance for doubtful accounts, and the number of days outstanding for our
accounts receivable could increase. For these reasons, among others,
if the current economic conditions persist or decline, this could adversely
affect our financial position, results of operations, or liquidity, as well as
our ability to service debt, pay other obligations and enhance shareholder
returns. Congress has approved a stimulus package to help improve the
economy, however, we are unable to predict the success or outcome of programs
created in the stimulus plan.
Our
businesses are currently geographically concentrated in Alaska. Any
deterioration in the economic conditions in Alaska could have a material adverse
effect on our financial position, results of operations and
liquidity.
We
offer voice, data and wireless communication and video services to customers
primarily in 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, and government spending, including substantial amounts for the
United States military. 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 670,000 people, 54%
of whom are located in the Anchorage and Matanuska-Susitna Borough region. 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 49
States. There can be no assurance that we will find attractive opportunities to
grow our businesses outside 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, its sparse population
located in a limited number of clusters, and its distance from the rest of the
United States. The expertise we have developed in operating our businesses in
Alaska may not provide us with the necessary expertise to successfully enter
other geographic markets.
41
We
may not fully develop our wireless services, in which case we could not meet the
needs of our customers who desire such services.
We
offer wireless mobile services over our own facilities and by distributing other
providers’ wireless mobile services. We offer wireless local telephone services
over our own facilities, and have purchased personal communications system, or
PCS, and local multipoint distribution system, or LMDS, wireless broadband
licenses in FCC auctions covering markets in Alaska. In 2007 we acquired a
substantial ownership interest in Alaska DigiTel and in 2008 we acquired the
remaining ownership interest in Alaska DigiTel (see “Part I — Item 1 — Business
— Development of our Business during the Past Fiscal Year — Alaska DigiTel
Acquisition” for more information.") Prior to August 18,
2008, our control over the operations of Alaska DigiTel was limited as required
by the FCC upon their approval of our initial acquisition completed in January
2007. We have fewer subscribers to our wireless services than to our
other service offerings. Currently the geographic coverage of our wireless
services is 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 continue to expand our wireless facilities and
further develop our wireless services, we may not be able to meet the needs of
customers who desire such 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 FCC renewed
our PCS Block B license in 2005 for an additional 10-year term. The
PCS Block A licenses held by Alaska DigiTel expire in 2015, and we expect their
renewal in the normal course. Our LMDS license was renewed in 2008
for an additional 10-year term, with a four-year extension of the initial
build-out period.
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.
If
failures occur in our undersea fiber optic cable systems, our ability to
immediately restore the entirety of our service may be limited and we could
incur significant costs, which could lead to a material adverse effect on our
business, financial position, results of operations or liquidity.
Our communications
facilities include two undersea fiber optic cable systems that carry a large
portion of our voice, data and Internet traffic to and from the contiguous Lower
48 States one of which provides an alternative geographically diverse backup
communication facility to the other. If a failure of both sides of the ring of
our undersea fiber optic facilities occurs 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. Damage to an undersea fiber optic cable system can result
in significant unplanned Cost of Goods Sold 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-band and Ku-band satellite transponders is backed
up on the same spacecraft with multiple backup transponders. The primary
spacecrafts we use to provide voice, data and Internet services to our rural
Alaska customers is Intelsat’s Galaxy 18 for C-band and Intelsat's Horizons 1
for Ku-band, but we also lease capacity on two other spacecraft for services we
provide, SES Americom’s AMC-7 and AMC-8.
42
We
also lease one 36 MHz transponder on SES Americom's AMC-7
spacecraft. We use this transponder to distribute multi-channel,
digitally encoded video programming and services to remote locations within
Alaska. We may use this transponder along with two others that we
reserve on AMC-7 to restore service during any fiber outage that may occur in
our network.
We
may not be able to successfully complete integration of the businesses we
acquired in 2008.
The continuing
process of integrating the operations of Alaska DigiTel, UUI, Unicom and Alaska
Wireless with ours may cause interruptions of or loss of momentum in our
business and financial performance. Prior to August 18,
2008, our control over the operations of Alaska DigiTel was limited as required
by the FCC upon their approval of our initial acquisition completed in January
2007. The diversion of management’s attention and any delays or
difficulties encountered in connection with the integration of the companies’
operations may have an adverse effect on our business, financial condition, or
results of operations. We may also incur additional and unforeseen
expenses in connection with the integration efforts. There
can be no assurance that the expense savings and synergies that we anticipate
from the acquisitions will be realized fully or will be realized within the
expected timeframe.
We
depend on a limited number of third-party vendors to supply communications
equipment. If we do not obtain the necessary communications equipment, we will
not be able to meet the needs of our customers.
We
depend on a limited number of third-party vendors to supply cable, Internet,
DLPS, wireless 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. Due to the unique
characteristics of the Alaska communications markets (i.e., remote locations,
rural, satellite-served, low density populations, and our leading edge services
and products), in many situations we deploy and utilize specialized, advanced
technology and equipment that may not have a large market or demand. Our vendors
may not succeed in developing sufficient market penetration to sustain
continuing production and may fail. Vendor bankruptcy (or acquisition without
continuing product support by the acquiring company) may require us to replace
technology before its otherwise useful end of life due to lack of on-going
vendor support and product development.
We
do not have insurance to cover certain risks to which we are subject, which
could lead to the incurrence of uninsured liabilities that adversely affect our
financial position, results of operations or liquidity.
We
are self-insured for damage or loss to certain of our transmission facilities,
including our buried, undersea 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.
We
must perform impairment tests of our goodwill, cable certificate and wireless
license assets on an annual basis. Impairment testing may result in a material,
non-cash write-down of our cable certificate, wireless license, or goodwill
assets and could have a material adverse impact on our results of
operations.
Under Statement of
Financial Accounting Standard (“SFAS”) No. 142, “Goodwill and Other Intangible
Assets,” we must test our goodwill and other intangible assets with indefinite
lives for impairment at least annually. Our cable certificate and wireless
license assets are our only indefinite-lived intangible assets other than
goodwill as of December 31, 2008. Our cable certificate and wireless license
assets are tested annually for impairment, and are tested for impairment more
frequently if events and circumstances such as, but not limited to an extended
decline in our stock price or a significant decrease in future expected cash
flows 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 assets exceeds its fair value, an impairment loss is
recognized in an amount equal to that excess. Our goodwill assets are
tested annually for impairment, and are tested for impairment more frequently if
events and circumstances such as, but not limited to an extended decline in our
stock price or a significant decrease in future expected cash flows indicate
that the assets might be impaired. An impairment loss is recognized to the
extent that the carrying amount exceeds the asset’s fair
value. Impairment testing of these assets in future periods may
result in a material, non-cash write-down of these assets and could have a
material adverse impact on our results of operations.
43
Our
significant debt could adversely affect our business and prevent us from
fulfilling our obligations under our senior notes.
We
have and will continue to have a significant amount of debt. On December 31,
2008, we had total debt of $817.2 million. Our high level of debt could have
important consequences, including the following:
|
|
·
|
Use of a
large portion of our cash flow to pay principal and interest on our senior
notes, the senior secured credit facility and our other debt, which will
reduce the availability of our cash flow to fund working capital, capital
expenditures, research and development expenditures and other business
activities;
|
|
|
·
|
Increase our
vulnerability to general adverse economic and industry
conditions;
|
|
|
·
|
Limit our
flexibility in planning for, or reacting to, changes in our business and
the industry in which we operate;
|
|
|
·
|
Restrict us
from making strategic acquisitions or exploiting business
opportunities;
|
|
|
·
|
Make it more
difficult for us to satisfy our obligations with respect to the senior
notes and our other debt;
|
|
|
·
|
Place us at a
competitive disadvantage compared to our competitors that have less debt;
and
|
|
|
·
|
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 amount 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, complete our
planned network expansion, complete acquisitions and to meet other obligations.
Our ability to generate cash depends on many factors beyond our control. If we
are unable to meet our future capital needs it may be necessary for us to
curtail, delay or abandon our business growth plans. If
we incur significant additional indebtedness to fund our plans, it could cause a
decline in our credit rating and could increase our borrowing costs or limit our
ability to raise additional capital.
We
will continue to require a significant amount of cash for our planned wireless
network expansion, to satisfy our debt service requirements and to meet other
obligations. To meet our capital needs we may incur additional debt
in the future. Our ability to make payments on and to refinance our
debt and to fund planned capital expenditures and acquisitions will depend on
our ability to generate cash and to arrange additional financing in the future.
These abilities are subject to, among other factors, our credit rating, our
financial performance, general economic conditions, prevailing market
conditions, the state of competition in our market, the outcome of certain
legislative and regulatory issues and other factors that may be beyond our
control. Our ability to obtain suitable financing when needed has become more
difficult due to the downturn in economic conditions in 2008 and 2009 and our
failure to obtain suitable financing could, among other things, result in our
inability to continue to expand our business and meet competitive
challenges. If we incur significant additional indebtedness, or if we
do not continue to generate sufficient cash from our operations, our credit
rating could be adversely affected, which would likely increase our future
borrowing costs and could affect our ability to access capital.
The
terms of our debt impose restrictions on us that may affect our ability to
successfully operate our business and our ability to make payments on the senior
notes.
The indenture
governing our senior notes contains and/or the credit agreement governing our
senior secured credit facility contains covenants that, among other things,
limit our ability to:
|
|
·
|
Incur
additional debt and issue preferred
stock;
|
|
|
·
|
Pay dividends
or make other restricted payments;
|
|
|
·
|
Make certain
investments;
|
|
|
·
|
Create
liens;
|
|
|
·
|
Allow
restrictions on the ability of certain of our subsidiaries to pay
dividends or make other payments to
us;
|
|
|
·
|
Sell
assets;
|
|
|
·
|
Merge or
consolidate with other entities;
and
|
|
|
·
|
Enter into
transactions with affiliates.
|
44
The senior secured
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 the
indenture governing our senior notes and/or the senior secured credit facility.
If there were an event of default under the indenture for the senior notes
and/or the senior secured credit facility, holders of such defaulted debt could
cause all amounts borrowed under these instruments to be due and payable
immediately. Additionally, if we fail to repay the debt under the senior secured
credit facility when it becomes due, the lenders under the senior secured credit
facility could proceed against certain of our assets and capital stock of our
subsidiaries that we have pledged to them as security. Our assets or cash flow
may not be sufficient to repay borrowings under our outstanding debt instruments
in the event of a default thereunder.
Concerns
about health risks associated with wireless equipment may reduce the demand for
our wireless services.
Portable
communications devices have been alleged to pose health risks, including cancer,
due to radio frequency emissions from these devices. Purported class
actions and other lawsuits have been filed against numerous other wireless
carriers seeking not only damages but also remedies that could increase the cost
of doing business. We cannot be sure of the outcome of those cases or
that the industry will not be adversely affected by litigation of this nature or
public perception about health risks. The actual or perceived risk of
mobile communications devices could adversely affect us through a reduction in
subscribers. Further research and studies are ongoing, and we cannot
be sure that additional studies will not demonstrate a link between radio
frequency emissions and health concerns.
Additionally, new
government regulations on the use of a wireless device while driving may affect
us through a reduction in subscribers. Studies have indicated that
using wireless devices while driving may impair a driver’s
attention. Many state and local legislative bodies have passed or
proposed legislation to restrict the use of wireless telephones while driving
vehicles. Concerns over safety and the effect of future legislation,
if adopted and enforced in the areas we serve, could limit our ability to market
and sell our wireless services and decrease our revenue from customers who now
use their wireless telephones while driving. Litigation relating to
accidents, deaths or serious bodily injuries allegedly incurred as a result of
wireless telephone use while driving could result in adverse publicity and
further governmental regulation. Any of these results could have a
material adverse effect on our financial position, results of operations or
liquidity.
A
significant percentage of our voting securities are owned by a small number of
shareholders and these shareholders can control shareholder decisions on very
important matters.
As
of December 31, 2008, our executive officers and directors and their affiliates
owned 4.7% of our combined outstanding Class A and class B common stock,
representing 17.1% of the combined voting power of that stock. 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.
Corporate
governance rules may impose increased costs and internal control assessment
requirements on us.
The Sarbanes-Oxley
Act of 2002 and rules subsequently implemented by the SEC, the Public Company
Accounting Oversight Board, and the Nasdaq National Market have required changes
in corporate governance practices of public companies. For example, Section 404
of the Sarbanes-Oxley Act of 2002 requires that we and our auditor evaluate and
report on our system of internal controls over financial reporting. We expect to
incur ongoing costs to comply with these rules and regulations and may incur
increased legal and financial compliance costs that may negatively affect our
results of operations.
45
If
we fail to maintain an effective system of internal control over financial
reporting, we may not be able to accurately report our financial results. As a
result, current and potential shareholders could lose confidence in our
financial reporting, which would harm our business and the trading price of our
stock.
Our management has
determined that as of December 31, 2008, we did not maintain effective internal
controls over financial reporting based on criteria set forth by the Committee
of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal
Control-Integrated Framework as a result of identified material weaknesses in
our internal control over financial reporting. A material weakness is
a deficiency, or a combination of deficiencies, in internal control over
financial reporting, such that there is a reasonable possibility that a material
misstatement of the company's annual or interim financial statements will not be
prevented or detected on a timely basis. For a detailed description
of these material weaknesses and our remediation efforts and plans, see “Part II
— Item 9A — Controls and Procedures.” If the result of our
remediation of the identified material weaknesses is not successful, or if
additional material weaknesses are identified in our internal control over
financial reporting, our management will be unable to report favorably as to the
effectiveness of our internal control over financial reporting and/or our
disclosure controls and procedures, and we could be required to further
implement expensive and time-consuming remedial measures and potentially lose
investor confidence in the accuracy and completeness of our financial reports
which could have an adverse effect on our stock price and potentially subject us
to litigation.
Item
1B. Unresolved Staff Comments.
None.
Item
2. Properties
General
Our properties do
not lend themselves to description by location of principal units. Our
investment in property and equipment in our consolidated operations consisted of
the following at December 31:
|
2008
|
2007 |
|
|||||||
|
Telephone distribution
systems
|
60.1 | % | 63.6 | % | |||||
|
Cable television distribution
systems
|
14.4 | % | 16.2 | % | |||||
|
Support
equipment
|
10.7 | % | 10.8 | % | |||||
|
Property and equipment under
capital leases
|
7.6 | % | 0.3 | % | |||||
|
Construction in
progress
|
4.0 | % | 6.9 | % | |||||
|
Land and
buildings
|
2.4 | % | 1.4 | % | |||||
|
Transportation
equipment
|
0.8 | % | 0.8 | % | |||||
|
Total
|
100.0 | % | 100.0 | % | |||||
It
is not practicable to allocate our properties to our operating segments since
many of our properties are employed by more than one segment to provide common
services and products. Additionally our properties are managed at the
consolidated company level rather than at the segment level.
These properties
consist primarily of undersea and land-based fiber-optic networks, switching
equipment, satellite transponders and earth stations, microwave radio and cable
and wire facilities, cable head-end equipment, coaxial distribution networks,
routers, servers, transportation equipment, computer equipment and general
office equipment. Land and buildings consist of land, land improvements and
landing stations and other buildings. Substantially all of our properties secure
our Senior Credit Facility. See note 6 included in “Part II — Item 8 —
Consolidated Financial Statements and Supplementary Data” for more
information.
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.
Our local access
services 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.
46
Our construction in
progress totaled $54.1 million at December 31, 2008, consisting of
long-distance, video, local, wireless and Internet services, and support systems
projects that were incomplete at December 31, 2008. Our construction in progress
totaled $69.4 million at December 31, 2007, consisting of long-distance, video,
local and Internet services, and support systems projects that were incomplete
at December 31, 2007. The property, plant and equipment included in construction
in progress at December 31, 2008 are expected to be placed in service in
2009.
We
lease our executive, corporate and administrative facilities and business
offices. 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.
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. 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.
Additions to
property and equipment and construction in progress including non-cash capital
expenditures for 2004 through 2008 were as follows (in millions):
|
2004
|
$ | 112.6 | ||
|
2005
|
$ | 81.2 | ||
|
2006
|
$ | 105.1 | ||
|
2007
|
$ | 154.5 | ||
|
2008
|
$ | 328.9 |
We
funded our normal business capital requirements through internal sources during
2008 and, to the extent necessary, from external financing sources. We expect
expenditures for 2009 to be financed through internal sources and, to the extent
necessary through external financing sources.
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,
undersea, 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 position, results of operations or liquidity 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 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. In addition,
the FCC's Office of Inspector General has initiated an investigation of our
compliance with program rules and requirements under certain USF
programs. The request covers the period beginning January 1, 2004
through August 31, 2008, and relates to amounts received by Alaska DigiTel and
its affiliates
47
during that
period. 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 2008 to a vote of security
holders, through the solicitation of proxies or otherwise.
Part
II
Item
5. Market for the Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
Market
Information for Common Stock
Shares of GCI’s
Class A common stock are traded on the Nasdaq Global Select MarketSM under
the symbol GNCMA.
Shares of GCI’s
Class B common stock are traded through the Over-The-Counter Bulletin Board
service offered by the National Association of Securities Dealers. 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 System quotation system. Market price data for Class B
shares were obtained from reported Over-the-Counter Bulletin Board service
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
|
|||||||||||||
|
2007:
|
||||||||||||||||
|
First
Quarter
|
$ | 16.10 | 13.64 | 15.10 | 14.20 | |||||||||||
|
Second
Quarter
|
$ | 15.20 | 12.42 | 14.80 | 12.00 | |||||||||||
|
Third
Quarter
|
$ | 14.00 | 11.03 | 14.05 | 12.10 | |||||||||||
|
Fourth
Quarter
|
$ | 12.47 | 7.51 | 11.85 | 8.00 | |||||||||||
|
2008:
|
||||||||||||||||
|
First
Quarter
|
$ | 8.44 | 5.09 | 8.75 | 4.50 | |||||||||||
|
Second
Quarter
|
$ | 8.31 | 6.03 | 8.00 | 3.00 | |||||||||||
|
Third
Quarter
|
$ | 10.78 | 6.82 | 10.60 | 5.70 | |||||||||||
|
Fourth
Quarter
|
$ | 8.87 | 5.32 | 8.60 | 3.00 | |||||||||||
Holders
As
of December 31, 2008 there were 2,176 holders of record of our Class A common
stock and 385 holders of record of our 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
We
have never paid cash dividends on our common stock, and we have no present
intention of doing so. Payment of cash dividends in the future, if any, will be
determined by our Board of Directors in light of our earnings, financial
condition and other relevant considerations. Our existing bank loan agreements
contain provisions that limit payment of dividends on common stock, other than
stock dividends (see note 6 included in “Part II — Item 8 — Consolidated
Financial Statements and Supplementary Data” for more information).
Stock
Transfer Agent and Registrar
BNY Mellon
Shareowner Services is our stock transfer agent and registrar.
48
Performance
Graph
The following graph
includes a line graph comparing the yearly percentage change in our cumulative
total shareholder return on our Class A common stock during the five-year period
2004 through 2008. This return is measured by dividing (1) the sum of (a) the
cumulative amount of dividends for the measurement period (assuming dividend
reinvestment, if any) and (b) the difference between our share price at the end
and the beginning of the measurement period, by (2) the share
price at the
beginning of that measurement period. This line graph is compared in the
following graph with two other line graphs during that five-year period, i.e., a
market index and a peer index.
The market index is
the Center for Research in Securities Price Index for the Nasdaq Stock Market
for United States companies. It presents cumulative total returns for a broad
based equity market assuming reinvestment of dividends and is based upon
companies whose equity securities are traded on the Nasdaq Stock Market. The
peer index is the Center for Research in Securities Price Index for Nasdaq
Telecommunications Stock. It presents cumulative total returns for the equity
market in the telecommunications industry segment assuming reinvestment of
dividends and is based upon companies whose equity securities are traded on the
Nasdaq Stock Market. The line graphs represent annual index levels derived from
compounding daily returns.
In
constructing each of the line graphs in the following graph, the closing price
at the beginning point of the five-year measurement period has been converted
into a fixed investment, stated in dollars, in our Class A common stock (or in
the stock represented by a given index, in the cases of the two comparison
indexes), with cumulative returns for each subsequent fiscal year measured as a
change from that investment. Data for each succeeding fiscal year during the
five-year measurement period are plotted with points showing the cumulative
total return as of that point. The value of a shareholder’s investment as of
each point plotted on a given line graph is the number of shares held at that
point multiplied by the then prevailing share price.
Our Class B common
stock is traded through the Over-The-Counter Bulletin Board service on a more
limited basis. Therefore, comparisons similar to those previously described for
the Class A common stock are not directly available. However, the performance of
Class B common stock may be analogized to that of the Class A common stock in
that the Class B common stock is readily convertible into Class A common stock
by request to us.
Comparison
of Five-Year Cumulative Return
Performance
Graph for General Communication, Inc.
Prepared by Zacks
Investment Research Inc. All indexes used with permission. All rights
reserved.
49
|
COMPARISON
OF FIVE-YEAR CUMULATIVE TOTAL RETURNS PERFORMANCE GRAPH FOR
GENERAL
COMMUNICATION,
INC., NASDAQ STOCK MARKET INDEX FOR
UNITED
STATES COMPANIES, AND NASDAQ TELECOMMUNICATIONS STOCK1,2,3,4
|
||||||||||||
|
Measurement
Period
(Fiscal Year
Covered)
|
Company
($)
|
Nasdaq Stock
Market
Index for
U.S.
Companies
($)
|
Nasdaq
Telecommunications
Stock
($)
|
|||||||||
|
FYE
12/31/03
|
100.0 | 100.0 | 100.0 | |||||||||
|
FYE
12/31/04
|
126.9 | 108.8 | 106.6 | |||||||||
|
FYE
12/31/05
|
118.7 | 111.2 | 101.3 | |||||||||
|
FYE
12/31/06
|
180.8 | 122.1 | 133.3 | |||||||||
|
FYE
12/31/07
|
100.6 | 132.4 | 118.5 | |||||||||
|
FYE
12/31/08
|
93.0 | 63.8 | 68.1 | |||||||||
|
|
1
|
The lines
represent annual index levels derived from compounded daily returns that
include all dividends.
|
|
|
2
|
The indexes
are reweighted daily, using the market capitalization on the previous
trading day.
|
|
|
3
|
If the annual
interval, based on the fiscal year-end, is not a trading day, the
preceding trading day is
used.
|
|
|
4
|
The index
level for all series was set to $100.00 on December 31,
2003.
|
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,
|
|||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||
|
(Amounts in
thousands except per share amounts)
|
|||||||
|
Revenues
|
$
|
575,442
|
520,311
|
477,482
|
443,026
|
424,826
|
|
|
Income (loss)
before income tax expense and cumulative effect of a change in accounting
principle
|
$
|
(792)
|
25,895
|
34,253
|
36,835
|
38,715
|
|
|
Cumulative
effect of a change in accounting principal, net of income tax expense of
$44 in 2006
|
$
|
---
|
---
|
64
|
---
|
---
|
|
|
Net income
(loss)
|
$
|
(1,869)
|
13,733
|
18,520
|
20,831
|
21,252
|
|
|
Net income
(loss) available to common shareholders
|
$
|
(1,869)
|
13,733
|
18,520
|
18,325
|
19,749
|
|
|
Basic net
income (loss) available to common shareholders per common
share
|
$
|
(0.04)
|
0.26
|
0.34
|
0.34
|
0.35
|
|
|
Diluted net
income (loss) available to common shareholders per common
share
|
$
|
(0.04)
|
0.23
|
0.33
|
0.33
|
0.34
|
|
|
Total
assets
|
$
|
1,335,301
|
984,233
|
914,659
|
873,775
|
849,191
|
|
|
Long-term
debt, including current portion and net of unamortized
discount
|
$
|
716,831
|
538,398
|
489,462
|
475,840
|
437,137
|
|
|
Obligations
under capital leases, including current portion
|
$
|
100,329
|
2,851
|
2,857
|
672
|
39,661
|
|
50
|
Redeemable
preferred stock:
|
|||||||
|
Series
B
|
$
|
---
|
---
|
---
|
4,249
|
4,249
|
|
|
Series
C
|
$
|
---
|
---
|
---
|
---
|
---
|
|
|
Total
stockholders’ equity
|
$
|
258,915
|
252,955
|
245,473
|
243,620
|
234,270
|
|
|
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.”
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 U.S. generally accepted accounting principles (“GAAP”). 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 the allowance for doubtful receivables, unbilled
revenues, accrual of the USF high-cost area program subsidy, share-based
compensation, reserve for future customer credits, valuation allowances for
deferred income tax assets, depreciable and amortizable lives of assets, the
carrying value of long-lived assets including goodwill, cable certificates and
wireless licenses, our effective tax rate, purchase price allocations, the
accrual of Cost of Goods Sold, depreciation, 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.”
We
reclassified $16.7 million and $12.7 million of network maintenance and
operations expense from selling, general and administrative expense to Cost of
Goods Sold for 2007 and 2006, respectively. We believe this change in
presentation more closely aligns our maintenance and operations components to
the nature of expenses included in our financial statement
captions.
The following
discussion and analysis of financial condition and results of operations should
be read in conjunction with our consolidated financial statements and
supplementary data as presented in Item 8 of this Form 10-K.
General
Overview
Through our focus
on long-term results, acquisitions, and strategic capital investments, we strive
to consistently grow our revenues and expand our margins. We have historically
met our cash needs for operations, regular capital expenditures and maintenance
capital expenditures through our cash flows from operating activities.
Historically, cash requirements for significant acquisitions and major capital
expenditures have been provided largely through our financing
activities. The ongoing weakness in the national economy and credit
market turmoil continue to negatively impact consumer confidence and spending.
If these trends continue, they could lead to reductions in consumer spending
which could impact our revenue growth. We believe the Alaska economy
continues to perform well compared to most other states at the current time.
Mortgage foreclosure rates in Alaska are the lowest in the nation and the
commercial real estate market is steady. Alaska appears to be relatively well
positioned to weather recessionary pressures despite the recent steep decline in
energy prices. The State of Alaska has large cash reserves that should enable it
to maintain its budget for at least the next two fiscal years. This is important
for Alaska’s economy as the State is the largest employer and second largest
source of gross state product. The majority of our revenue is driven by the
strength of the Alaska economy which appears relatively well positioned to
weather the recessionary pressures, nonetheless we cannot predict the impact the
economic crisis may have on us.
51
Our five reportable
segments are Consumer, Network Access, Commercial, Managed Broadband and
Regulated Operations. Our reportable segments are business units that
offer different products, are each managed separately, and serve distinct types
of customers. The Network Access segment provides services to other
common carrier customers and the Managed Broadband segment provides services to
rural school districts, hospitals and health clinics. Effective June
1, 2008, we purchased 100% of the outstanding stock of UUI and
Unicom. The financial results of the long-distance, local access and
Internet services sold to consumer and commercial customers of certain of these
acquired companies are reported in the Regulated Operations
segment. The financial results of the long-distance services sold to
other common carrier customers and the managed broadband services components of
certain of these acquired companies are included in the Network Access and
Managed Broadband Services segments, respectively. Effective July 1,
2008, we closed on our purchase of 100% of the ownership interests of Alaska
Wireless whose results are included in the Consumer segment.
Following are our
segments and the services and products each offers to its
customers:
|
Reportable
Segments
|
|||||||||||||||||||
|
Services and
Products
|
Consumer
|
Network
Access
|
Commercial
|
Managed
Broadband
|
Regulated
Operations
|
||||||||||||||
|
Voice:
|
|||||||||||||||||||
|
Long-distance
|
X
|
X
|
X
|
X
|
|||||||||||||||
|
Local
Access
|
X
|
X
|
X
|
X
|
|||||||||||||||
|
Directories
|
X
|
||||||||||||||||||
|
Video
|
X
|
X
|
|||||||||||||||||
|
Data:
|
|||||||||||||||||||
|
Internet
|
X
|
X
|
X
|
X
|
X
|
||||||||||||||
|
Data
Networks
|
X
|
X
|
X
|
||||||||||||||||
|
Managed
Services
|
X
|
X
|
|||||||||||||||||
|
Managed
Broadband Services
|
X
|
||||||||||||||||||
|
Wireless
|
X
|
X
|
X
|
X
|
|||||||||||||||
An
overview of our services and products follows.
Voice
Services and Products
Long-distance
We
generate long-distance services revenues from monthly plan fees and usage
charges.
Factors that have
the greatest impact on year-to-year changes in long-distance services revenues
include the rate per minute charged to customers and usage volumes expressed as
minutes of use.
Common carrier
traffic routed to us for termination in Alaska is largely dependent on traffic
routed to our common carrier customers by their customers. Pricing pressures,
new program offerings, and market and business consolidations continue to evolve
in the markets served by our other common carrier customers. If, as a result,
their traffic is reduced, or if their competitors’ costs to terminate or
originate traffic in Alaska are reduced, our traffic will also likely be
reduced, and our pricing may be reduced to respond to competitive pressures,
consistent with federal law. Additionally, disruption in the economy resulting
from terrorist attacks and other attacks or acts of war could affect our carrier
customers. We are unable to predict the effect on us of such changes. However,
given the materiality of other common carrier revenues to us, a significant
reduction in traffic or pricing could have a material adverse effect on our
financial position, results of operations and liquidity.
Due in large part
to the favorable synergistic effects of our bundling strategy focused on
consumer and commercial customers, long-distance services continue to be a
significant contributor to our overall performance, although the migration of
traffic from our voice products to our data and wireless products
continues.
52
Our long-distance
service faces significant competition from AT&T Alascom, ACS, MTA,
long-distance resellers, and certain smaller rural 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
services will continue to allow us to be competitive in providing those
services.
Local
Access
We
generate local access services revenues from four primary sources: (1) basic
dial tone services; (2) data network and special access services; (3)
origination and termination of long-distance calls for other common carriers;
and (4) features and other charges, including voice mail, caller ID, distinctive
ring, inside wiring and subscriber line charges.
The primary factors
that contribute to year-to-year changes in local access services revenues
include the average number of subscribers to our services during a given
reporting period, the average monthly rates charged for non-traffic sensitive
services, the number and type of additional premium features selected, the
traffic sensitive access rates charged to carriers and amounts received from the
USAC.
We
estimate that our December 31, 2008, 2007 and 2006 total lines in service
represent a statewide market share of 33%, 28% and 26%, respectively. At
December 31, 2008, 2007 and 2006 71.6%, 53.8% and 36.8%, respectively, of our
lines, including the lines of UUI at December 31, 2008, are provided on our own
facilities.
Our local access
service faces significant competition in Anchorage, Fairbanks, and Juneau from
ACS, which is the largest ILEC in Alaska, and from Alascom in Anchorage for
consumer services. Alascom has received certification from the RCA to provide
local access services in Fairbanks and Juneau. In the Matanuska-Susitna Valley
our local access service faces competition from MTA, the ILEC in this
area. In October 2007, we began offering local access service in the
Kenai-Soldotna area and face competition from ACS, the ILEC in this
area. We compete against other smaller ILECs in certain smaller
communities. We believe our approach to developing, pricing, and
providing local access services and bundling different services will allow us to
be competitive in providing those services.
We
are continuing to expand our local access service areas and will offer service
in these new areas using a combination of methods. To a large extent, we plan to
use our existing fiber and coaxial cable networks to deliver local access
services. Where we do not have our own facilities, we may resell other carriers’
services, lease portions of an existing carrier’s network or seek wholesale
discounts.
We
plan to continue to deploy DLPS lines which utilize our coaxial cable
facilities. This service delivery method allows us to utilize our own cable
facilities to provide local access service to our customers and avoid paying
local loop charges to the ILEC.
On
May 1, 2008, the FCC issued an order adopting the recommendation of the Joint
Board to impose a state-by-state interim cap on high cost funds to be
distributed to competitive ETCs. As part of the revised policy, the
FCC adopted a limited exception from the cap for competitive ETCs serving tribal
lands or Alaska Native regions. While the operation of the cap will
generally reduce the high cost fund amounts available to competitive ETCs as new
competitive ETCs are designated and as existing competitive ETCs acquire new
customers, providers like us who serve tribal lands or Alaska Native regions
were provided some relief. On March 5, 2009, the FCC issued an
additional order waiving a previously adopted limitation to the exception, the
result of which is to provide uncapped support for all lines served by
competitive ETCs for tribal lands or Alaska Native regions during the time the
interim cap is in effect. The uncapped support for tribal lands or
Alaska Native regions and the cap for all other regions will be in place until
the FCC takes action on proposals for long term reform.
The Joint Board has
recommended for FCC consideration long-term options for reforming USF support,
including establishing separate funds for mobility and broadband
support. Separately, the FCC has issued two reform proposals for
changing the basis for support amounts. We cannot predict at this
time the outcome of the FCC proceedings to consider USF reform proposals or
their respective impacts on us. Both these and any future regulatory,
legislative, or judicial actions could affect the operation of the USF and
result in a change in our revenue for providing local access services in new and
existing markets and facilities-based wireless services in new
markets.
UUI and its
subsidiary, United-KUC, which were acquired by us effective June 1, 2008, are
ILECs and therefore are subject to regulation by the RCA. UUI and
United-KUC do not face significant competition.
53
Directories
We
sell advertising in our yellow pages directories to commercial customers,
distribute white and yellow pages directories to customers in certain markets we
serve, and offer an on-line directory.
Video
Services and Products
We
generate cable services revenues from three primary sources: (1) digital
programming services, including monthly basic and premium subscriptions,
pay-per-view movies, video on demand and one-time events, such as sporting
events; (2) equipment rentals; and (3) advertising sales.
Our cable systems
serve 40 communities and areas in Alaska, including the state’s five largest
population centers, Anchorage, Fairbanks, the Matanuska-Susitna Valley, the
Kenai Peninsula, and Juneau. We transmit an entirely digital signal
for all cable television channels in all markets we serve as of December 31,
2008.
The primary factors
that contribute to period-to-period changes in cable services revenues include
average monthly subscription rates and pay-per-view buys, the mix among basic,
premium and digital tier services, the average number of cable television
subscribers during a given reporting period, set-top box utilization and related
rates, revenues generated from new product offerings, and sales of cable
advertising services.
Our cable service
offerings are bundled with various combinations of our long-distance, local
access, and Internet services. Value-added premium services are available for
additional charges.
Our cable
television systems face competition primarily from alternative methods of
receiving and distributing television signals, including DBS and digital video
over telephone lines, and other sources of news, information and entertainment,
including Internet services.
Data
Services and Products
Internet
We
generate Internet services revenues from three primary sources: (1) access
product services, including cable modem, dial-up, and dedicated access; (2)
network management services; and (3) wholesale access for other common
carriers.
The primary factors
that contribute to year-to-year changes in Internet services revenues include
the average number of subscribers to our services during a given reporting
period, the average monthly subscription rates, the amount of bandwidth
purchased by large commercial customers, and the number and type of additional
premium features selected.
Marketing campaigns
continue to be deployed featuring bundled products. Our Internet offerings are
bundled with various combinations of our long-distance, cable, and local access
services and provide free or discounted basic or premium Internet services.
Value-added premium Internet features are available for additional
charges.
We
compete with a number of Internet service providers in our markets. We believe
our approach to developing, pricing, and providing Internet services allows us
to be competitive in providing those services.
Data
Networks
We
generate data network services revenue from two primary sources: (1) leasing
capacity on our facilities that utilize voice and data transmission circuits,
dedicated to particular subscribers, which link a device in one location to
another in a different location and (2) through the sale of IP based data
services on a secured shared network to businesses linking multiple enterprise
locations. The factor that has the greatest impact on year-to-year changes in
data network services revenues is the number of data networks in use. We compete
against Alascom, ACS and other local telecommunication service
providers.
Managed
Services
We
design, sell, install, service and operate, on behalf of certain customers,
communications and computer networking equipment and provide field/depot, third
party, technical support, communications consulting and outsourcing services. We
also supply integrated voice and data communications systems incorporating
interstate and intrastate digital data networks, point-to-point and multipoint
private network and small earth station services. There are a number of
competing companies in Alaska that actively sell and maintain data and voice
communications systems.
54
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.
Managed
Broadband Services
We
generate managed broadband services revenue through our SchoolAccess®,
ConnectMD® and
managed video conferencing products. Our customers may purchase end-to-end
broadband services solutions blended with other transport and software products.
There are several competing companies in Alaska that actively sell broadband
services. Our ability to provide end-to-end broadband services solutions has
allowed us to maintain our market position based on “value added” products and
services rather than solely based on price competition.
SchoolAccess® is a suite of
services designed to advance the educational opportunities of students in
underserved regions of the country. Our SchoolAccess® division
provides Internet and distance learning services designed exclusively for the
school environment. The Schools and
Libraries Program of the USF makes discounts available to eligible rural school
districts for telecommunication services and monthly Internet service charges.
The program is intended to ensure that rural school districts have access to
affordable services.
Our network,
Internet and software application services provided through our Managed
Broadband segment’s Medical Services Division are branded as ConnectMD®. Our
ConnectMD® services
are currently provided under contract to medical businesses in Alaska,
Washington and Montana. The Rural Health Care Program of the USF makes discounts
available to eligible rural health care providers for telecommunication services
and monthly Internet service charges. The program is intended to ensure that
rural health care providers pay no more for telecommunications in the provision
of health care services than their urban counterparts. Customers utilize
ConnectMD® services
to securely move data, images, or voice traffic, to include real time multipoint
interactive video.
We
offer a managed video conferencing product for use in distance learning,
telemedicine and group communication and collaboration environments. The product
is designed to offer customers enhanced communication services that support
video, audio and data presentation. Our product benefits customers by reducing
travel costs, improving course equity in education and increasing the quality of
health services available to patients. The product bundles our data
products, video conferencing services and optional rental of video conferencing
endpoint equipment. Our video conferencing services include
multipoint conferencing, ISDN gateway and transcoding services, online
scheduling and conference control, and videoconference recording, archiving and
streaming. We provide 24-hour technical support via telephone or
online.
Wireless
Services and Products
We
generate wireless services and equipment revenues from four primary sources: (1)
monthly plan fees; (2) usage and roaming charges; (3) wireless Internet access;
and (4) handset and accessory sales.
We
offer wireless services by selling services over our own facilities and
reselling AT&T Mobility's services under the GCI brand name and by selling
services over our own facilities under the Alaska DigiTel and Alaska Wireless
brand names. We compete against AT&T Mobility, ACS, MTA, and resellers of
those services in Anchorage and other markets. The GCI and Alaska
DigiTel brands compete against each other.
In
December 2007 we signed an agreement with AT&T Mobility that provides for an
orderly transition of our wireless customers from the AT&T Mobility network
in Alaska to our wireless facilities. The agreement requires our customers to be
on our wireless network by June 30, 2009, but allows our customers to use the
AT&T Mobility network for roaming during the transition
period. The four-year transition period, which expires June 30, 2012,
provides us adequate time to replace the AT&T Mobility network in Alaska
with our own wireless facilities. We started transitioning our customers to our
wireless facilities in November 2008.
On
July 1, 2008, we completed the acquisition of all of the ownership interests in
Alaska Wireless for an initial acquisition payment of $14.3
million. In addition to the initial acquisition payment, we have
agreed to a contingent payment in 2010 if certain financial conditions are
met. Alaska Wireless is a GSM cellular provider and an Internet
service provider serving subscribers in the Dutch Harbor, Sand Point, and
Akutan, Alaska areas. In addition to the acquisition, we entered into
a management
agreement with the previous owners of Alaska Wireless. The business
continues to operate under the Alaska Wireless name and the previous owners
continue to manage its day-to-day operations. The results of
operations generated by Alaska Wireless are included in wireless services in our
Consumer segment.
55
We
acquired the remaining minority interest in Alaska DigiTel for a total
consideration of $10.4 million effective August 18, 2008. We now own
100% of Alaska DigiTel. Prior to August 18, 2008, our control over
the operations of Alaska DigiTel was limited as required by the FCC upon their
approval of our initial acquisition completed in January 2007. In
conjunction with this acquisition we paid $1.8 million to terminate the
management agreement entered into upon our acquisition of 82% of the equity
interest of Alaska DigiTel in January 2007. The termination cost is
recorded in selling, general and administrative expense during the year ended
December 31, 2008.
Results
of Operations
The following table
sets forth selected Statements of Operations data as a percentage of total
revenues for the periods indicated (underlying data rounded to the nearest
thousands):
|
Percentage
Change 1
|
Percentage
Change 1
|
|||||||||||||||||||
|
2008
|
2007
|
|||||||||||||||||||
|
Year
Ended December 31,
|
vs.
|
vs.
|
||||||||||||||||||
|
(Unaudited)
|
2008
|
2007
|
2006
|
2007
|
2006
|
|||||||||||||||
|
Statements
of Operations Data:
|
||||||||||||||||||||
|
Revenues:
|
||||||||||||||||||||
|
Consumer
segment
|
44.5 | % | 43.0 | % | 37.5 | % | 14.4 | % | 24.9 | % | ||||||||||
|
Network
Access segment
|
26.7 | % | 31.4 | % | 34.9 | % | (5.9 | %) | (1.9 | %) | ||||||||||
|
Commercial
segment
|
19.9 | % | 20.1 | % | 22.2 | % | 9.6 | % | (1.2 | %) | ||||||||||
|
Managed
Broadband segment
|
6.4 | % | 5.5 | % | 5.4 | % | 28.7 | % | 10.2 | % | ||||||||||
|
Regulated
Operations segment
|
2.5 | % | 0.0 | % | 0.0 | % |
NM
|
NM
|
||||||||||||
|
Total
revenues
|
100.0 | % | 100.0 | % | 100.0 | % | 10.6 | % | 9.0 | % | ||||||||||
|
Selling,
general and administrative expenses
|
36.6 | % | 33.8 | % | 33.3 | % | 19.7 | % | 10.6 | % | ||||||||||
|
Depreciation
and amortization expense
|
19.9 | % | 16.8 | % | 17.2 | % | 30.5 | % | 6.7 | % | ||||||||||
|
Operating
income
|
8.3 | % | 11.8 | % | 14.1 | % | (22.0 | %) | (9.2 | %) | ||||||||||
|
Other
expense, net
|
8.4 | % | 6.8 | % | 6.9 | % | 37.6 | % | 6.6 | % | ||||||||||
|
Income (loss)
before income taxes and cumulative effect of a change in accounting
principle in 2006
|
(0.1 | %) | 5.0 | % | 7.2 | % | (96.9 | %) | (24.4 | %) | ||||||||||
|
Income (loss)
before cumulative effect of a change in accounting principle in
2006
|
(0.3 | %) | 2.6 | % | 3.9 | % | (113.6 | %) | (25.6 | %) | ||||||||||
|
Net income
(loss)
|
(0.3 | %) | 2.6 | % | 3.9 | % | (113.6 | %) | (25.9 | %) | ||||||||||
________________________________
1 Percentage
change in underlying data.
NM
– Not meaningful.
________________________________
Year
Ended December 31, 2008 (“2008”) Compared to Year Ended December 31, 2007
(“2007”)
Overview
of Revenues and Cost of Goods Sold
Total revenues
increased 10.6% from $520.3 million in 2007 to $575.4 million in
2008. Revenue increases in our Consumer, Commercial, Managed
Broadband and Regulated Operations segments were partially off-set by decreases
in our Network Access segment. See the discussion below for more
information by segment.
Total Cost of Goods
Sold increased 3.7% from $195.8 million in 2007 to $203.1 million in 2008. Cost
of Goods Sold increases in our Consumer, Commercial, Managed Broadband and
Regulated Operations segments were partially off-set by decreases in our Network
Access segment. See the discussion below for more information by
segment.
56
Consumer
Segment Overview
Consumer segment
revenue represented 44.5% of 2008 consolidated revenues. The components of
Consumer segment revenue are as follow (amounts in thousands):
|
Percentage
|
||||||||||||
|
2008
|
2007
|
Change
|
||||||||||
|
Voice
|
$ | 47,042 | 46,212 | 1.8 | % | |||||||
|
Video
|
105,238 | 96,327 | 9.3 | % | ||||||||
|
Data
|
42,692 | 34,230 | 24.7 | % | ||||||||
|
Wireless
|
60,660 | 46,733 | 29.8 | % | ||||||||
|
Total
Consumer segment revenue
|
$ | 255,632 | 223,502 | 14.4 | % | |||||||
Consumer segment
Cost of Goods Sold represented 44.3% of 2008 consolidated Cost of Goods Sold.
The components of Consumer segment Cost of Goods Sold are as follows (amounts in
thousands):
|
Percentage
|
||||||||||||
|
2008
|
2007
|
Change
|
||||||||||
|
Voice
|
$ | 18,121 | 20,364 | (11.0 | %) | |||||||
|
Video
|
40,279 | 34,301 | 17.4 | % | ||||||||
|
Data
|
6,554 | 5,313 | 23.4 | % | ||||||||
|
Wireless
|
24,899 | 28,721 | (13.3 | %) | ||||||||
|
Total
Consumer segment Cost of Goods Sold
|
$ | 89,853 | 88,699 | 1.3 | % | |||||||
Consumer segment
adjusted EBITDA, representing 34.5% of 2008 consolidated adjusted EBITDA, is as
follows (amounts in thousands):
|
Percentage
|
||||||||||||
|
2008
|
2007
|
Change
|
||||||||||
|
Consumer
segment adjusted EBITDA
|
$ | 58,949 | 46,808 | 25.9 | % | |||||||
Selected key
performance indicators for our Consumer segment follow:
|
December
31,
|
Percentage
|
|||||||||||
|
2008
|
2007
|
Change
|
||||||||||
|
Voice:
|
||||||||||||
|
Long-distance subscribers1
|
88,600 | 89,900 | (1.5 | %) | ||||||||
|
Long-distance
minutes carried (in millions)
|
128.6 | 135.8 | (5.3 | %) | ||||||||
|
Total local access lines in
service2
|
80,700 | 74,400 | 8.5 | % | ||||||||
|
Local access lines in service
on GCI facilities2
|
68,700 | 50,700 | 35.5 | % | ||||||||
|
Video:
|
||||||||||||
|
Basic subscribers3
|
132,500 | 128,000 | 3.5 | % | ||||||||
|
Digital programming tier
subscribers4
|
71,900 | 65,800 | 9.3 | % | ||||||||
|
HD/DVR converter boxes5
|
67,800 | 50,200 | 35.1 | % | ||||||||
|
Homes
passed
|
229,300 | 224,700 | 2.1 | % | ||||||||
|
Average monthly gross revenue
per subscriber6
|
$ | 67.40 | $ | 64.01 | 5.3 | % | ||||||
|
Data:
|
||||||||||||
|
Cable modem subscribers7
|
94,400 | 88,000 | 7.3 | % | ||||||||
|
Wireless:
|
||||||||||||
|
Wireless lines in service8
|
88,700 | 70,000 | 26.7 | % | ||||||||
57
|
Average monthly gross revenue
per subscriber9
|
$ | 55.23 | $ | 58.29 | (5.3 | %) | ||||||
|
1 A
long-distance customer is defined as a customer account that is invoiced a
monthly long-distance plan fee or has made a long-distance call during the
month.
2 A
local access line in service is defined as a revenue generating circuit or
channel connecting a customer to the public switched telephone
network.
3 A
basic cable subscriber is defined as one basic tier of service delivered
to an address or separate subunits thereof regardless of the number of
outlets purchased.
4 A
digital programming tier subscriber is defined as one digital programming
tier of service delivered to an address or separate subunits thereof
regardless of the number of outlets or digital programming tiers
purchased. Digital programming tier subscribers are a subset of basic
subscribers.
5 A high
definition/digital video recorder (“HD/DVR”) converter box is defined as
one box rented by a digital programming or basic tier subscriber. A
digital programming or basic tier subscriber is not required to rent an
HD/DVR converter box to receive service.
6 Year-to-date
average monthly consumer video revenues divided by the average of consumer
video basic subscribers at the beginning and ending of the
period.
7 A
cable modem subscriber is defined by the purchase of cable modem service
regardless of the level of service purchased. If one entity purchases
multiple cable modem service access points, each access point is counted
as a subscriber. Cable modem subscribers may also be video basic
subscribers though basic cable service is not required to receive cable
modem service.
8 A
wireless line in service is defined as a revenue generating wireless
device.
9 Year-to-date
average monthly consumer wireless revenues divided by the average of
consumer wireless subscribers at the beginning and ending of the
period.
|
||||||||||||
Consumer
Segment Revenues
The increase in
voice revenue is primarily due to a $2.8 million or 14.9% increase in the
monthly local service network access fee and subscriber line charges as a result
of increased local access lines partially offset by a $854,000 or 16.0% decrease
in recognized support from the USAC primarily due to a change in our revenue
accrual estimation to more precisely consider changes in FCC reimbursement and
to consider uncertainties we believe may impact the amount of reimbursement we
will receive.
The increase in
video revenue is primarily due to the following:
|
|
·
|
A 7.4%
increase in programming services revenue to $84.5 million in 2008
primarily resulting from an increase in basic and digital programming tier
subscribers in 2008, and
|
|
|
·
|
A 19.1%
increase in equipment rental revenue to $19.4 million in 2008 primarily
resulting from our customers’ increased use of our HD/DVR converter
boxes.
|
The increase in
data revenue is primarily due to a 26.4% increase in cable modem revenue to
$36.4 million due to increased subscribers and their selection of more
value-added features.
The increase in
wireless revenue is primarily due to an increase in the number of wireless
subscribers and receipt of interstate common line support for prior
periods. Due to the uncertainty in our ability to retroactively claim
reimbursement under the program, we accounted for this payment as a gain
contingency and, accordingly, recognized revenue only upon receipt of payment
when realization was certain.
Consumer
Segment Cost of Goods Sold
The decrease in
voice Cost of Goods Sold is primarily due to cost savings resulting from the
increased deployment of local access services DLPS lines on our own facilities
during 2008 and decreased voice minutes carried.
The video Cost of
Goods Sold increase is primarily due to increased channels offered to our
subscribers, increased rates paid to programmers, increased costs associated
with delivery of digital services offered over our HD/DVR converter boxes due to
the increased number of boxes in service, and increased
subscribers.
The data Cost of
Goods Sold increase is primarily due to increased internet circuit costs due to
increased usage by customers and an increased number of cable modem
subscribers.
The decrease in
wireless Cost of Goods Sold is primarily due to decreased costs due to the June
4, 2008 implementation of the new distribution agreement with AT&T Mobility
as described in "Part I – Item 1 – Development of our Business During the Past
Fiscal Year." The decrease was partially off-set by costs associated
with the increased number of wireless subscribers described above.
58
Consumer
Segment Adjusted EBITDA
The increase in
adjusted EBITDA was primarily due to increased margin resulting from increased
subscribers for most product lines in 2008 and reduced wireless Cost of Goods
Sold as described in “Consumer Segment Cost of Goods Sold” above. The
increased margin was partially offset by an increase in the selling, general and
administrative expense that was allocated to our Consumer segment primarily due
to an increase in the 2007 segment margin upon which the allocation is
based.
See note 10 in the
"Notes to Consolidated Financial Statements" included in Part II of this annual
report on Form 10-K for a reconciliation of consolidated adjusted EBITDA, a
non-GAAP financial measure, to consolidated income (loss) before income
taxes.
Network
Access Segment Overview
Network access
segment revenue represented 26.7% of 2008 consolidated Revenues. The components
of Network Access segment revenue are as follows (amounts in
thousands):
|
Percentage
|
||||||||||||
|
2008
|
2007
|
Change
|
||||||||||
|
Voice
|
$ | 79,744 | 96,896 | (17.7 | %) | |||||||
|
Data
|
71,414 | 61,199 | 16.7 | % | ||||||||
|
Wireless
|
2,663 | 5,282 | (49.6 | %) | ||||||||
|
Total Network
Access segment revenue
|
$ | 153,821 | 163,377 | (5.9 | %) | |||||||
Network Access
segment Cost of Goods Sold represented 19.9% of 2008 consolidated Cost of Goods
Sold. The components of Network Access segment Cost of Goods Sold are as follows
(amounts in thousands):
|
Percentage
|
||||||||||||
|
2008
|
2007
|
Change
|
||||||||||
|
Voice
|
$ | 27,149 | 31,042 | (12.5 | %) | |||||||
|
Data
|
11,539 | 12,081 | (4.5 | %) | ||||||||
|
Wireless
|
1,638 | 745 | 119.9 | % | ||||||||
|
Total Network
Access segment Cost of Goods Sold
|
$ | 40,326 | 43,868 | (8.1 | %) | |||||||
Network Access
segment adjusted EBITDA, representing 43.0% of 2008 consolidated adjusted
EBITDA, is as follows (amounts in thousands):
|
Percentage
|
||||||||||||
|
2008
|
2007
|
Change
|
||||||||||
|
Network
Access segment adjusted EBITDA
|
$ | 73,647 | 82,441 | (10.7 | %) | |||||||
Selected key
performance indicators for our Network Access segment follow:
|
December
31,
|
Percentage
|
|||||||||||
|
2008
|
2007
|
Change
|
||||||||||
|
Voice:
|
||||||||||||
|
Long-distance
minutes carried (in millions)
|
1,094 | 1,251 | (12.5 | %) | ||||||||
|
Data:
|
||||||||||||
|
Total Internet service
provider access lines in service1
|
1,800 | 2,600 | (30.8 | %) | ||||||||
|
1 An
Internet service provider access line in service is defined as a revenue
generating circuit or channel connecting a customer to the public switched
telephone network.
|
||||||||||||
59
Network
Access Segment Revenues
The decrease in
voice revenue is primarily due to the June 4, 2008 implementation of the new
distribution agreement with AT&T Mobility as described in "Part I – Item 1 –
Development of our Business During the Past Fiscal Year." The voice
revenue decrease also resulted from an 8% decrease in our average rate per
minute on billable minutes carried for our common carrier customers and the
transition of voice traffic to dedicated networks. The average rate
per minute decrease is primarily due to a change in the composition of traffic
and a 3.0% rate decrease mandated by federal law which will result in annual
rate decreases of 3.0%.
The increase in
data revenue is primarily due to an increase in circuits sold and from other
common carriers moving switched voice services to data networks.
The decrease in
wireless revenue results primarily from a decrease in our rate per minute on
billable minutes carried for customers roaming on our network.
Network
Access Segment Cost of Goods Sold
The decrease in
voice Cost of Goods Sold is primarily due to decreased long-distance minutes
carried. Partially offsetting this decrease is the absence of an
$879,000 favorable adjustment based upon a refund for which negotiations were
completed in 2007. In the course of business, we estimate unbilled
long-distance services Cost of Goods Sold 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.
The decrease in
data Cost of Goods Sold is primarily due to the absence of $878,000 in costs to
repair breaks in our undersea and terrestrial fiber-optic cable systems in 2007
that did not recur in 2008.
Network
Access Segment Adjusted EBITDA
The adjusted EBITDA
decrease was primarily due to decreased margin resulting from the decreased rate
per minute on billable minutes carried for our common carrier
customers. The decreased margin was partially offset by an increase
in data circuits sold in 2008.
See note 10 in the
"Notes to Consolidated Financial Statements" included in Part II of this annual
report on Form 10-K for a reconciliation of consolidated adjusted EBITDA, a
non-GAAP financial measure, to consolidated income (loss) before income
taxes.
Commercial
Segment Overview
Commercial segment
revenue represented 19.9% of 2008 consolidated revenues. The components of
Commercial segment revenue are as follows (amounts in thousands):
|
Percentage
|
||||||||||||
|
2008
|
2007
|
Change
|
||||||||||
|
Voice
|
$ | 29,398 | 30,761 | (4.4 | %) | |||||||
|
Video
|
9,604 | 8,018 | 19.8 | % | ||||||||
|
Data
|
70,068 | 61,052 | 14.8 | % | ||||||||
|
Wireless
|
5,590 | 4,809 | 16.2 | % | ||||||||
|
Total
Commercial segment revenue
|
$ | 114,660 | 104,640 | 9.6 | % | |||||||
Commercial segment
Cost of Goods Sold represented 29.3% of 2008 consolidated Cost of Goods Sold.
The components of Commercial segment Cost of Goods Sold are as follows (amounts
in thousands):
|
Percentage
|
||||||||||||
|
2008
|
2007
|
Change
|
||||||||||
|
Voice
|
$ | 19,581 | 20,225 | (3.2 | %) | |||||||
|
Video
|
1,551 | 1,616 | (4.0 | %) | ||||||||
|
Data
|
34,391 | 27,469 | 25.2 | % | ||||||||
|
Wireless
|
3,957 | 4,182 | (5.4 | %) | ||||||||
|
Total
Commercial segment Cost of Goods Sold
|
$ | 59,480 | 53,492 | 11.2 | % | |||||||
60
Commercial segment
adjusted EBITDA, representing 12.1% of 2008 consolidated adjusted EBITDA, is as
follows (amounts in thousands):
|
Percentage
|
||||||||||||
|
2008
|
2007
|
Change
|
||||||||||
|
Commercial
segment adjusted EBITDA
|
$ | 20,710 | 16,164 | 28.1 | % | |||||||
|
|
Selected key
performance indicators for our Commercial segment
follow:
|
|
December
31,
|
Percentage
|
||||||||||||
|
2008
|
2007
|
Change
|
|||||||||||
|
Voice:
|
|||||||||||||
|
Long-distance subscribers1
|
9,700
|
10,500
|
(7.6%)
|
||||||||||
|
Total local access lines in
service2
|
46,200
|
43,100
|
7.2%
|
||||||||||
|
Local access lines in service
on GCI facilities
2
|
18,700
|
12,500
|
49.6%
|
||||||||||
|
Long-distance
minutes carried (in millions)
|
129.5
|
131.3
|
(1.3%)
|
||||||||||
|
Data:
|
|||||||||||||
|
Cable modem subscribers3
|
8,900
|
8,500
|
4.7%
|
||||||||||
|
Wireless:
|
|||||||||||||
|
Wireless lines in service4
|
7,600
|
7,300
|
4.1%
|
||||||||||
|
1 A
long-distance customer is defined as a customer account that is invoiced a
monthly long-distance plan fee or has made a long-distance call during the
month.
2 A
local access line in service is defined as a revenue generating circuit or
channel connecting a customer to the public switched telephone
network.
3 A
cable modem subscriber is defined by the purchase of cable modem service
regardless of the level of service purchased. If one entity purchases
multiple cable modem service access points, each access point is counted
as a subscriber.
4 A
wireless line in service is defined as a revenue generating wireless
device.
|
|||||||||||||
Commercial
Segment Revenues
The decrease in
voice revenue is primarily due to decreased long-distance subscribers and
decreased voice minutes carried partially off-set by increased local access
lines in service.
The increase in
video revenue is primarily due to an increase in sales of cable advertising
services due to the summer Olympics programming and state and federal political
advertising.
Commercial segment
data revenue is comprised of monthly recurring charges for data services and
charges billed on a time and materials basis largely for personnel providing
on-site customer support. This latter category can vary significantly based on
project activity. The increase in data revenue is primarily due to a
$6.8 million or 23.1% increase in managed services project revenue, and a $2.7
million or 18.6% increase in Internet revenue primarily due to increased
dedicated access service and enterprise data network service sales, and a
non-recurring $500,000 credit issued to a customer in June 2007.
Commercial
Segment Cost of Goods Sold
The decrease in
voice Cost of Goods Sold resulted primarily from an increase in local access
lines in service on GCI facilities.
The increase in
data Cost of Goods Sold resulted primarily from an increase in contract labor
and internal labor classified as Cost of Goods Sold due to the increase in
managed services project revenue discussed above under "Commercial Segment
Revenues."
61
Commercial
Segment Adjusted EBITDA
The adjusted EBITDA
increase was primarily due to increased margin resulting from increased
dedicated access service and enterprise data network service sales, additional
managed services projects and increased subscribers for most product lines in
2008.
See note 10 in the
"Notes to Consolidated Financial Statements" included in Part II of this annual
report on Form 10-K for a reconciliation of consolidated adjusted EBITDA, a
non-GAAP financial measure, to consolidated income (loss) before income
taxes.
Managed
Broadband Segment Overview
Managed Broadband
segment revenue, Cost of Goods sold and adjusted EBITDA represented 6.4%, 5.1%
and 8.3% of 2008 consolidated revenues, Cost of Goods Sold and adjusted EBITDA,
respectively.
Selected key
performance indicators for our Managed Broadband segment follow:
|
December
31,
|
Percentage
|
|||||||||||
|
2008
|
2007
|
Change
|
||||||||||
|
Managed
Broadband segment:
|
||||||||||||
|
SchoolAccess®
customers
|
54 | 51 | 5.9 | % | ||||||||
|
Rural health
customers
|
53 | 21 | 152.4 | % | ||||||||
Managed
Broadband Segment Revenues
Managed Broadband
segment revenue, which includes data products only, increased 28.7% to $37.0
million in 2008 as compared to 2007. The increase is primarily due to increased
circuits purchased by our Rural Health and SchoolAccess®
customers and revenue totaling $4.8 million from our acquisition of
Unicom effective June 1, 2008. The Rural Health customer increase
from 2007 to 2008 is primarily due to the addition of numerous customers with
low recurring revenues.
Managed
Broadband Segment Cost of Goods Sold
Managed Broadband
segment Cost of Goods Sold increased 5.4% to $10.3 million in 2008 primarily due
to costs associated with the increased revenue.
Managed
Broadband Segment Adjusted EBITDA
Managed Broadband
segment adjusted EBITDA increased 70.9% to $14.2 million in 2008 primarily due
to an increase in the margin resulting from increased circuits sold to our rural
health and SchoolAccess®
customers.
See note 10 in the
"Notes to Consolidated Financial Statements" included in Part II of this annual
report on Form 10-K for a reconciliation of consolidated adjusted EBITDA, a
non-GAAP financial measure, to consolidated income (loss) before income
taxes.
Regulated
Operations Segment Overview
Regulated
Operations segment revenue represented 2.5% of 2008 consolidated revenues, Cost
of Goods Sold represented 1.5% of 2008 consolidated Cost of Goods Sold and
adjusted EBITDA represented 2.1% of 2008 consolidated adjusted EBITDA. The
Regulated Operations segment includes voice, data and wireless
services.
Selected key
performance indicators for our Regulated Operations segment follow:
|
December
31,
|
Percentage
|
|||||||
|
2008
|
2007
|
Change
|
||||||
|
Voice:
|
||||||||
|
Long-distance subscribers1
|
900
|
NA
|
NA
|
|||||
|
Long-distance
minutes carried (in thousands)
|
844
|
NA
|
NA
|
|||||
|
Total local access lines in
service2
|
12,100
|
NA
|
NA
|
|||||
|
1 A
long-distance subscriber is defined as a customer account that is invoiced
a monthly long-distance plan fee or has made a long-distance call during
the month.
2 A
local access line in service is defined as a revenue generating circuit or
channel connecting a customer to the public switched telephone
network.
NA – Not
Applicable
|
||||||||
62
Regulated
Operations Segment Revenues
We
completed our acquisition of UUI and Unicom effective June 1,
2008. In connection with this acquisition, we recognized revenues of
$21.1 million from the acquired operations during 2008 with $14.3 million
recorded in the Regulated Operations segment and the remaining revenues recorded
in the Network Access and Managed Broadband segments.
Regulated
Operations Segment Cost of Goods Sold
In
connection with our acquisition of UUI and Unicom we recognized Cost of Goods
Sold of $4.2 million during 2008 with $3.1 million recorded in the Regulated
Operations segment and the remaining Cost of Goods Sold recorded in the Network
Access and Managed Broadband segments.
Regulated
Operations Segment Adjusted EBITDA
Regulated
Operations segment adjusted EBITDA was $3.6 million in 2008.
See note 10 in the
"Notes to Consolidated Financial Statements" included in Part II of this annual
report on Form 10-K for a reconciliation of consolidated adjusted EBITDA, a
non-GAAP financial measure, to consolidated income (loss) before income
taxes.
Selling,
General and Administrative Expenses
Selling, general
and administrative expenses increased 19.7% to $210.3 million in 2008 primarily
due to the following:
|
·
|
A $15.8
million increase in labor costs,
|
|
·
|
$7.5 million
in additional expense resulting from our June 1, 2008, acquisition of UUI
and Unicom,
|
|
·
|
A $2.3
million increase in our share-based compensation
expense,
|
|
·
|
Upon our
acquisition of the remaining 18% of Alaska DigiTel we paid $1.8 million to
terminate the management agreement entered into in January 2007, when we
acquired 82% of the outstanding shares of Alaska
DigiTel,
|
|
·
|
A $1.8
million increase in our company-wide success sharing bonus accrual in
2008,
|
|
·
|
A $1.4
million increase in our facilities lease expense,
and
|
|
·
|
$1.2 million
in additional expense incurred in 2008 for the conversion of our
customers' wireless phones to our
facilities.
|
The selling,
general and administrative expenses increase is partially off-set by a $1.4
million decrease in bad debt expense primarily due to improvements in our
collections of consumer accounts receivable.
As
a percentage of total revenues, selling, general and administrative expenses
increased to 36.6% in 2008 from 33.8% in 2007, primarily due to the net
increases described above without a proportional increase in
revenues.
Depreciation
and Amortization Expense
Depreciation and
amortization expense increased 30.5% to $114.4 million in 2008. The increase is
primarily due to our $112.7 million investment in equipment and facilities
placed into service during 2007 for which a full year of depreciation was
recorded in 2008, the $322.3 million investment in equipment and facilities
placed into service during the year ended December 31, 2008 for which a partial
year of depreciation was recorded in 2008, and a $12.0 million depreciation
charge in 2008 to reflect a decrease in the estimated useful life of certain
assets decommissioned in 2008.
Effective January
1, 2008, we prospectively changed our accounting policy for recording
depreciation on our property and equipment placed in service. For assets placed
in service on or after January 1, 2008, we are using a mid-month convention to
recognize depreciation expense. Previous to this change, we used the half-year
convention to recognize depreciation expense in the year an asset was placed in
service, regardless of the month the property and equipment was placed in
service. We believe the mid-month convention is preferable because it results in
more precise recognition of depreciation expense over the estimated useful life
of the asset. No retroactive adjustment has been made. As a result of this
accounting change, our reported amount of depreciation expense has decreased
$521,000, our reported operating income has increased $521,000, and our reported
net loss has decreased $214,000. Our change in accounting policy would not have
changed our reported basic or diluted EPS in 2008.
63
Other
Expense, Net
Other expense, net
of other income, increased 37.6% to $48.5 million in 2008 primarily due to the
following:
|
·
|
A $13.9
million increase in interest expense to $48.3 million in 2008 due to a
$6.4 million increase in interest expense on our Senior Credit Facility to
$17.7 million resulting from additional debt from the Additional
Incremental Term Loan agreement beginning in May 2008 and the increased
interest rate on our Senior Credit Facility beginning May
2008,
|
|
·
|
$3.9 million
in additional interest expense resulting from the Galaxy 18 capital lease
commencing in May 2008,
|
|
·
|
A loss of
$921,000 relating to the fair value change on derivative instruments was
reported in interest expense, and
|
|
·
|
$906,000 of
additional interest expense as a result of our acquisition of UUI in June
2008.
|
The increases
described above are partially offset by an increase in capitalized interest from
$3.3 million in 2007 to $4.2 million in 2008.
Income
Tax Expense
Income tax expense
totaled $1.1 million and $12.2 million in 2008 and 2007, respectively. Our
effective income tax rate increased from 47.0% in 2007 to 136.0% in 2008
primarily due to the large amount of permanent differences in 2008 as compared
to our net loss before income tax expense.
At
December 31, 2008, we have (1) tax net operating loss carryforwards of $160.9
million that will begin expiring in 2011 if not utilized, and (2) alternative
minimum tax credit carryforwards of $3.1 million available to offset regular
income taxes payable in future years.
We
have recorded deferred tax assets of $67.3 million associated with income tax
net operating losses that were generated from 1995 to 2008, and that expire from
2011 to 2028, and with charitable contributions that were converted to net
operating losses in 2004 through 2007, and that expire in 2024 through 2027,
respectively.
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 if estimates of future taxable income
during the carryforward period are reduced which would result in additional
income tax expense. We
estimate that our effective annual income tax rate for financial statement
purposes will be 49% to 51% in the year ended December 31, 2009.
Year
Ended December 31, 2007 (“2007”) Compared to Year Ended December 31, 2006
(“2006”)
Overview
of Revenues and Cost of Goods Sold
Total revenues
increased 9.0% from $477.5 million in 2006 to $520.3 million in
2007. Revenue increases in our Consumer and Managed Broadband
segments were partially off-set by decreases in our Network Access and
Commercial segments. See the discussion below for more information by
segment.
Total Cost of Goods
Sold increased 15.8% from $169.1 million in 2006 to $195.8 million in 2007. Cost
of Goods Sold increased in all of our segments. See the discussion
below for more information by segment.
Consumer
Segment Overview
Consumer segment
revenue represented 43.0% of 2007 consolidated revenues. The components of
Consumer segment revenue are as follow (amounts in thousands):
|
Percentage
|
||||||||||||
|
2007
|
2006
|
Change
|
||||||||||
|
Voice
|
$ | 46,212 | 45,625 | 1.3 | % | |||||||
|
Video
|
96,327 | 90,226 | 6.8 | % | ||||||||
|
Data
|
34,230 | 29,406 | 16.4 | % | ||||||||
|
Wireless
|
46,733 | 13,694 | 241.3 | % | ||||||||
|
Total
Consumer segment revenue
|
$ | 223,502 | 178,951 | 24.9 | % | |||||||
64
Consumer segment
Cost of Goods Sold represented 45.3% of 2007 consolidated Cost of Goods Sold.
The components of Consumer segment Cost of Goods Sold are as follows (amounts in
thousands):
|
Percentage
|
||||||||||||
|
2007
|
2006
|
Change
|
||||||||||
|
Voice
|
$ | 20,364 | 22,165 | (8.1 | %) | |||||||
|
Video
|
34,301 | 31,124 | 10.2 | % | ||||||||
|
Data
|
5,313 | 4,489 | 18.4 | % | ||||||||
|
Wireless
|
28,721 | 13,885 | 106.9 | % | ||||||||
|
Total
Consumer segment Cost of Goods Sold
|
$ | 88,699 | 71,663 | 23.8 | % | |||||||
Consumer segment
adjusted EBITDA representing 30.5% of 2007 consolidated adjusted EBITDA is as
follows (amounts in thousands):
|
Percentage
|
||||||||||||
|
2007
|
2006
|
Change
|
||||||||||
|
Consumer
segment adjusted EBITDA
|
$ | 46,808 | 32,550 | 43.8 | % | |||||||
Selected key
performance indicators for our Consumer segment follow:
|
December
31,
|
Percentage
|
|||||||||||
|
2007
|
2006
|
Change
|
||||||||||
|
Voice:
|
||||||||||||
|
Long-distance
subscribers1
|
89,900 | 89,800 | 0.1 | % | ||||||||
|
Long-distance
minutes carried (in millions)
|
135.8 | 141.9 | (4.3 | %) | ||||||||
|
Total local
access lines in service2
|
74,400 | 66,200 | 12.4 | % | ||||||||
|
Local access
lines in service on GCI facilities2
|
50,700 | 31,400 | 61.5 | % | ||||||||
|
Video:
|
||||||||||||
|
Basic
subscribers3
|
128,000 | 124,000 | 3.2 | % | ||||||||
|
Digital
programming tier subscribers4
|
65,800 | 58,700 | 12.1 | % | ||||||||
|
HD/DVR
converter boxes5
|
50,200 | 29,200 | 71.9 | % | ||||||||
|
Homes
passed
|
224,700 | 219,900 | 2.2 | % | ||||||||
|
Average
monthly gross revenue per subscriber6
|
$ | 64.01 | $ | 61.57 | 4.0 | % | ||||||
|
Data:
|
||||||||||||
|
Cable modem
subscribers7
|
88,000 | 78,500 | 12.1 | % | ||||||||
|
Wireless:
|
||||||||||||
|
Wireless
lines in service8
|
70,000 | 24,400 | 186.9 | % | ||||||||
|
Average
monthly gross revenue per subscriber9
|
$ | 58.29 | $ | 52.21 | 11.6 | % | ||||||
|
All footnote
references correspond to the footnotes in the table under "Year Ended
December 31, 2008 Compared to Year Ended December 31, 2007" – Consumer
Segment Overview.
|
||||||||||||
Consumer
Segment Revenues
The increase in
voice revenue is primarily due to a $991,000 or 15.8% increase in the monthly
local service network access fee in April 2007 and a $508,000 or 4.6% increase
due to increased local access lines partially offset by a $474,000 or 44.7%
decrease in support from the USF Program.
The increase in
video revenue is primarily due to the following:
|
|
·
|
A 22.7%
increase in equipment rental revenue to $16.3 million in 2007 primarily
resulting from our customers’ increased use of HD/DVR converter boxes,
and
|
|
|
·
|
A 4.1%
increase in programming services revenue to $78.6 million in 2007
primarily resulting from an increase in digital programming tier
subscribers in 2007 and increased rates charged for certain cable services
primarily effective in the fourth quarter of
2006.
|
65
The increase in
data revenue is primarily due to a 17.0% increase in cable modem revenue to
$28.8 million primarily due to increased subscribers.
The increase in
wireless revenue is due to our January 1, 2007 acquisition of Alaska DigiTel and
a $9.9 million or 72.3% increase in the wireless revenue from our resale
agreement primarily due to increased subscribers. Consumer segment
wireless revenues from our Alaska DigiTel investment totaled $23.1 million in
2007.
Consumer
Segment Cost of Goods Sold
The decrease in
voice Cost of Goods Sold is primarily due to cost savings resulting from the
increased deployment of DLPS lines during the year ended December 31, 2007 and
decreased voice minutes carried.
The voice Cost of
Goods Sold decrease is partially off-set by an increased UNE loop cost charged
by ACS due to the Settlement Agreement, as further described and defined above
in “Part I – Item 1 – Regulation.”
The video Cost of
Goods Sold increase is primarily due to increased channels offered to our
subscribers in three of Alaska’s five largest population centers and increased
rates paid to programmers, increased costs associated with delivery of digital
services offered over our HD/DVR converter boxes due to the increased number of
boxes in service, and increased subscribers.
The data Cost of
Goods Sold increase is primarily due to increased satellite costs due to
increased usage by existing customers and an increased number of cable modem
subscribers.
The wireless Cost
of Goods Sold increase is primarily due to our January 1, 2007 acquisition of
Alaska DigiTel and a $7.3 million or 52.8% increase in our wireless service Cost
of Goods Sold related to increased wireless service revenue from our resale
agreement. Consumer segment wireless Cost of Goods Sold from our
Alaska DigiTel investment totaled $6.4 million in 2007.
Consumer
Segment Adjusted EBITDA
The increase in
adjusted EBITDA was primarily due to increased margin resulting from increased
subscribers for most product lines in 2007. The increased margin was
partially offset by an increase in the selling, general and administrative
expense that was allocated to our Consumer segment primarily due to an increase
in the 2006 segment margin upon which the allocation is based.
See note 10 in the
"Notes to Consolidated Financial Statements" included in Part II of this annual
report on Form 10-K for a reconciliation of consolidated adjusted EBITDA, a
non-GAAP financial measure, to consolidated income (loss) before income
taxes.
Network
Access Segment Overview
Network access
segment revenue represented 31.4% of 2007 consolidated Revenues. The components
of Network Access segment revenue are as follows (amounts in
thousands):
|
Percentage
|
||||||||||||
|
2007
|
2006
|
Change
|
||||||||||
|
Voice
|
$ | 96,896 | 110,834 | (12.6 | %) | |||||||
|
Data
|
61,199 | 55,637 | 10.0 | % | ||||||||
|
Wireless
|
5,282 | --- |
NM
|
|||||||||
|
Total Network
Access segment revenue
|
$ | 163,377 | 166,471 | (1.9 | %) | |||||||
|
NM – Not
meaningful.
|
||||||||||||
66
Network Access
segment Cost of Goods Sold represented 22.4% of 2007 consolidated Cost of Goods
Sold. The components of Network Access segment Cost of Goods Sold are as follows
(amounts in thousands):
|
Percentage
|
||||||||||||
|
2007
|
2006
|
Change
|
||||||||||
|
Voice
|
$ | 31,042 | 30,390 | 2.1 | % | |||||||
|
Data
|
12,081 | 9,567 | 26.3 | % | ||||||||
|
Wireless
|
745 | --- |
NM
|
|||||||||
|
Total Network
Access segment Cost of Goods Sold
|
$ | 43,868 | 39,957 | 9.8 | % | |||||||
|
NM – Not
meaningful.
|
||||||||||||
Network Access
segment adjusted EBITDA, representing 53.6% of 2007 consolidated adjusted EBITDA
is as follows (amounts in thousands):
|
Percentage
|
||||||||||||
|
2007
|
2006
|
Change
|
||||||||||
|
Network
Access segment adjusted EBITDA
|
$ | 82,441 | 93,450 | (11.8 | %) | |||||||
Selected key
performance indicators for our Network Access segment follow:
|
December
31,
|
Percentage
|
|||||||||||
|
2007
|
2006
|
Change
|
||||||||||
|
Voice:
|
||||||||||||
|
Long-distance
minutes carried (in millions)
|
1,251 | 1,317 | (5.0 | %) | ||||||||
|
Data:
|
||||||||||||
|
Total Internet service
provider access lines in service1
|
2,600 | 3,100 | (16.1 | %) | ||||||||
|
1 An
Internet service provider access line in service is defined as a revenue
generating circuit or channel connecting a customer to the public switched
telephone network.
|
||||||||||||
Network
Access Segment Revenues
The decrease in
voice revenue is primarily due to decreased billable minutes and a 6.4% decrease
in our rate per minute on billable minutes carried for our common carrier
customers. The average rate per minute decrease is primarily due to a
change in the composition of traffic and a 3.0% rate decrease mandated by
federal law which will result in annual rate decreases of 3.0%.
The increase in
data revenue is primarily due to an increase in circuits sold.
The Network Access
segment wireless revenue results from our January 1, 2007 acquisition of Alaska
DigiTel.
Network
Access Segment Cost of Goods Sold
The increase in
voice Cost of Goods Sold is primarily due to an average cost per minute increase
due to a change in the composition of traffic and is partially off-set by
decreased long-distance minutes carried.
The increase in
data Cost of Goods Sold is primarily due to costs associated with the increased
circuits sold discussed above and $878,000 in costs to repair breaks in our
undersea and terrestrial fiber-optic cable systems.
The Network Access
segment wireless Cost of Goods Sold results from our January 1, 2007 acquisition
of Alaska DigiTel.
Network
Access Segment Adjusted EBITDA
The adjusted EBITDA
decrease was primarily due to decreased margin resulting from the decreased rate
per minute on billable minutes carried for our common carrier
customers. The decreased margin was partially offset by a decrease in
the selling, general and administrative expense allocated to our Network Access
segment primarily due to a decrease in the 2006 segment margin upon which the
allocation is based.
67
See note 10 in the
"Notes to Consolidated Financial Statements" included in Part II of this annual
report on Form 10-K for a reconciliation of consolidated adjusted EBITDA, a
non-GAAP financial measure, to consolidated income (loss) before income
taxes.
Commercial
Segment Overview
Commercial segment
revenue represented 20.1% of 2007 consolidated revenues. The components of
Commercial segment revenue are as follows (amounts in thousands):
|
Percentage
|
||||||||||||
|
2007
|
2006
|
Change
|
||||||||||
|
Voice
|
$ | 30,761 | 32,162 | (4.4 | %) | |||||||
|
Video
|
8,018 | 7,993 | 0.3 | % | ||||||||
|
Data
|
61,052 | 63,276 | (3.5 | %) | ||||||||
|
Wireless
|
4,809 | 2,498 | 92.5 | % | ||||||||
|
Total
Commercial segment revenue
|
$ | 104,640 | 105,929 | (1.2 | %) | |||||||
Commercial segment
Cost of Goods Sold represented 27.3% of 2007 consolidated Cost of Goods Sold.
The components of Commercial segment Cost of Goods Sold are as follows (amounts
in thousands):
|
Percentage
|
||||||||||||
|
2007
|
2006
|
Change
|
||||||||||
|
Voice
|
$ | 20,225 | 21,640 | (6.6 | %) | |||||||
|
Video
|
1,616 | 1,442 | 12.1 | % | ||||||||
|
Data
|
27,469 | 24,619 | 11.6 | % | ||||||||
|
Wireless
|
4,182 | 2,608 | 60.4 | % | ||||||||
|
Total
Commercial segment Cost of Goods Sold
|
$ | 53,492 | 50,309 | 6.3 | % | |||||||
Commercial segment
adjusted EBITDA, representing 10.5% of 2007 consolidated adjusted EBITDA, is as
follows (amounts in thousands):
|
Percentage
|
||||||||||||
|
2007
|
2006
|
Change
|
||||||||||
|
Commercial
segment adjusted EBITDA
|
$ | 16,164 | 21,164 | (23.6 | %) | |||||||
|
|
Selected key
performance indicators for our Commercial segment
follow:
|
|
December
31,
|
Percentage
|
||||||||||||
|
2007
|
2006
|
Change
|
|||||||||||
|
Voice:
|
|||||||||||||
|
Long-distance subscribers1
|
10,500
|
11,100
|
(5.4%)
|
||||||||||
|
Total local access lines in
service2
|
43,100
|
41,900
|
2.9%
|
||||||||||
|
Local access lines in service
on GCI facilities
2
|
12,500
|
8,400
|
48.8%
|
||||||||||
|
Long-distance
minutes carried (in millions)
|
131.3
|
131.8
|
(0.4%)
|
||||||||||
|
Data:
|
|||||||||||||
|
Cable modem subscribers3
|
8,500
|
7,800
|
9.0%
|
||||||||||
|
Wireless:
|
|||||||||||||
|
Wireless lines in service4
|
7,300
|
4,600
|
58.7%
|
||||||||||
|
All footnote
references correspond to the footnotes in the table under "Year Ended
December 31, 2008 Compared to Year Ended December 31, 2007" – Commercial
Segment Overview.
|
|||||||||||||
We
leased a portion of our 800-mile fiber optic system capacity that extends from
Prudhoe Bay to Valdez via Fairbanks, and provided management and maintenance
services for this capacity to a significant
68
customer. The
lessee signed a contract with a competitor in March 2005, started the transition
of their circuits from our fiber optic cable system to our competitor’s
microwave system in June 2006, and completed the transition in April 2007. In
November 2006, we signed an agreement with our competitor to lease capacity on
our fiber optic cable system and provide certain other services to them in
association with their contract.
Commercial
Segment Revenues
The decrease in
voice revenue is due to decreased long distance subscribers and decreased
minutes carried. Revenues associated with increased local access
lines in service partially off-set this decrease.
The decrease in
data revenue is primarily due to a $7.9 million or 58.2% decrease in revenue
earned from the lease and provision of management and maintenance services on a
portion of our 800-mile fiber optic system capacity that extends from Prudhoe
Bay to Valdez via Fairbanks as described above and a decrease in revenue earned
from a large customer who reduced their services with us. The decrease is
partially off-set by a $4.6 million increase in managed services project revenue
and growth in our private IP product resulting from new customers and increased
coverage for existing customers.
The increase in
wireless revenue is primarily due to increased subscribers to our wireless
offerings from our resale agreement.
Commercial
Segment Cost of Goods Sold
The decrease in
voice Cost of Goods Sold is due to savings resulting from increased provision of
services through our own facilities in 2007, decreased voice minutes carried,
and decreased costs associated with decreased long-distance
subscribers. The voice Cost of Goods Sold decrease is partially
off-set by an increased UNE loop cost charged by ACS due to the Settlement
Agreement, as further described and defined above in “Part I – Item 1 –
Regulation.”
The increase in
data Cost of Goods Sold resulted primarily from an increase in contract labor
and internal labor classified as Cost of Good Sold due to the increase in
managed service project revenue discussed above.
The wireless Cost
of Goods Sold increase is primarily due to increased wireless service revenue
from our resale agreement.
Commercial
Segment Adjusted EBITDA
The adjusted EBITDA
decrease was primarily due to the decreased revenue discussed above without a
similar decrease in expenses.
See note 10 in the
"Notes to Consolidated Financial Statements" included in Part II of this annual
report on Form 10-K for a reconciliation of consolidated adjusted EBITDA, a
non-GAAP financial measure, to consolidated income (loss) before income
taxes.
Managed
Broadband Segment Overview
Managed Broadband
segment revenue and Cost of Goods sold represented 5.5% and 5.0% of 2007
consolidated revenues and Cost of Goods Sold, respectively. Managed Broadband
segment adjusted EBITDA represented 5.4% of 2007 consolidated adjusted
EBITDA.
Selected key
performance indicators for our Managed Broadband segment follow:
|
December
31,
|
Percentage
|
|||||||||||
|
2007
|
2006
|
Change
|
||||||||||
|
Managed
Broadband segment:
|
||||||||||||
|
SchoolAccess®
customers
|
51 | 48 | 6.3 | % | ||||||||
|
Rural health
customers
|
21 | 21 | 0.0 | % | ||||||||
Managed
Broadband Segment Revenues
Managed Broadband
segment revenue, which includes data products only, increased 10.2% to $28.8
million in 2007 as compared to 2006. The increase is primarily due to increased
circuits purchased by our Rural Health and SchoolAccess®
customers and several 2007 product sales that did not occur in
2006.
69
Managed
Broadband Segment Cost of Goods Sold
Managed Broadband
segment Cost of Goods Sold increased $2.6 million to $9.7 million from 2006 to
2007 primarily due to costs associated with the product sales and increased
circuits purchased as discussed above.
Managed
Broadband Segment Adjusted EBITDA
Managed Broadband
segment adjusted EBITDA decreased $762,000 to $8.3 million in 2007 primarily due
to an increase in Cost of Goods Sold resulting from increased circuits sold to
our rural health and SchoolAccess®
customers.
See note 10 in the
"Notes to Consolidated Financial Statements" included in Part II of this annual
report on Form 10-K for a reconciliation of consolidated adjusted EBITDA, a
non-GAAP financial measure, to consolidated income (loss) before income
taxes.
Selling,
General and Administrative Expenses
Selling, general
and administrative expenses increased 10.6% to $175.8 million in 2007 primarily
due to the following:
|
|
·
|
Recognition
of $15.5 million in additional expense resulting from our January 1, 2007
acquisition of Alaska DigiTel,
|
|
|
·
|
A $3.8
million increase in labor and benefits costs,
and
|
|
|
·
|
A $1.4
million increase in bad debt expense primarily due to the realization of
recoveries for certain Managed Broadband services customers and MCI, Inc.
(merged with Verizon Communications, Inc.) in 2006 through a reduction to
bad debt expense which did not recur in
2007.
|
The selling,
general and administrative expenses increase is partially off-set by the
following:
|
|
·
|
A $2.2
million decrease in certain promotion expenses,
and
|
|
|
·
|
A $658,000
decrease in our company-wide success sharing bonus accrual in
2007.
|
As
a percentage of total revenues, selling, general and administrative expenses
increased to 33.8% in 2007 from 33.3% in 2006, primarily due to the net
increases described above without a proportional increase in
revenues.
Depreciation
and Amortization Expense
Depreciation and
amortization expense increased 6.7% to $87.6 million in 2007. The increase is
primarily due to our $83.4 million investment in equipment and facilities placed
into service during 2006 for which a full year of depreciation was recorded in
2007, the $113.3 million investment in equipment and facilities placed into
service during the year ended December 31, 2007 for which a partial year of
depreciation was recorded in 2007, and the increased depreciation and
amortization expense recognized in 2007 on the depreciable and amortizable
assets recorded upon the acquisition and consolidation of Alaska
DigiTel. The depreciation and amortization expense increase is
partially off-set by the $790,000 software impairment recognized in 2006 upon
the closure of an operating segment.
Other
Expense, Net
Other expense, net
of other income, increased 6.6% to $35.3 million in 2007 primarily due to the
following:
|
·
|
A $2.5
million or 7.2% increase in interest costs due to an increase in our
average outstanding debt balance in 2007 as compared to
2006,
|
|
·
|
A $1.3
million or 70.5% decrease in interest income in 2007 resulting from a
decrease in our average cash and cash equivalents balance in 2007 as
compared to 2006, and
|
|
·
|
In the third
quarter of 2007, we substantially modified our Senior Credit Facility
resulting in loan fee expense of
$611,000.
|
The increases
described above are partially offset by an increase in capitalized interest from
$820,000 in 2006 to $3.3 million in 2007 primarily due to increased qualifying
capital expenditures upon which capitalized interest is calculated.
Income
Tax Expense
Income tax expense
totaled $12.2 million and $15.8 million in 2007 and 2006, respectively. Our
effective income tax rate increased from 46.1% in 2006 to 47.0% in 2007
primarily due to increases in permanent differences in 2007.
70
Cumulative
Effect of a Change in Accounting Principle
On
January 1, 2006 we adopted SFAS No. 123(R), “Share-Based
Payment.” SFAS 123(R) requires us to estimate pre-vesting option
forfeitures at the time of grant and periodically revise those estimates in
subsequent periods if actual forfeitures differ from those estimates. We record
share-based compensation expense only for those awards expected to vest using an
estimated forfeiture rate based on our historical pre-vesting forfeiture data.
Previously, we accounted for forfeitures as they occurred under the pro forma
disclosure provisions of SFAS 123 for periods prior to 2006. The transition
impact (benefit) of adopting SFAS No. 123(R) attributed to accruing for expected
forfeitures on outstanding share-based awards totaled $108,000, which was
reduced by income tax expense of $44,000, and is reported as a cumulative effect
of a change in accounting principle during the year ended December 31, 2006 in
the accompanying Consolidated Statements of Operations.
Multiple
System Operator (“MSO”) Operating Statistics
Our operating
statistics include capital expenditures and customer information from our
Consumer and Commercial segments which offer services utilizing our cable
services’ facilities.
Our capital
expenditures including non-cash additions by standard reporting category in
2008, 2007 and 2006 follow (amounts in thousands):
|
2008
|
2007
|
2006
|
||||||||||
|
Line
extensions
|
$ | 35,813 | 62,984 | 24,126 | ||||||||
|
Customer
premise equipment
|
22,821 | 23,554 | 14,771 | |||||||||
|
Scalable
infrastructure
|
2,985 | 4,749 | 1,062 | |||||||||
|
Upgrade/rebuild
|
2,705 | 1,451 | 4,145 | |||||||||
|
Commercial
|
2,206 | 392 | 138 | |||||||||
|
Support
capital
|
1,277 | 1,317 | 1,146 | |||||||||
|
Sub-total
|
67,807 | 94,447 | 45,388 | |||||||||
|
Remaining
reportable segments capital expenditures
|
261,063 | 64,569 | 59,672 | |||||||||
| $ | 328,870 | 159,016 | 105,060 | |||||||||
The standardized
definition of a customer relationship is the number of customers that receive at
least one level of service utilizing our cable service facilities, encompassing
voice, video, and data services, without regard to which services customers
purchase. At December 31, 2008, 2007 and 2006 we had 133,400, 129,000 and
125,300 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, 2008, 2007 and 2006 we had 327,200, 295,200 and 249,300
revenue generating units, respectively.
Liquidity
and Capital Resources
Our principal
sources of current liquidity are cash and cash equivalents. We believe, but can
provide no assurances, that we will be able to meet our current and long-term
liquidity and capital requirements and fixed charges through our cash flows from
operating activities, existing cash, cash equivalents, credit facilities, and
other external financing and equity sources. Should operating cash flows be
insufficient to support additional borrowings and principal payments scheduled
under our existing credit facilities, capital expenditures will likely be
reduced.
Global capital and
credit markets have recently experienced increased volatility and disruption.
Despite this volatility and disruption, we continue to have full access to our
Senior Credit Facility. Although there can be no assurances in these
difficult economic times that financial institutions will continue to provide
financing, we believe that the lenders participating in our credit facilities
will be willing and able to provide financing to us in accordance with their
legal obligations under our credit facilities. While our short-term and
long-term financing abilities are believed to be adequate as a supplement to
internally generated cash flows to fund capital expenditures and acquisitions as
opportunities arise, the current decline in the global financial markets may
negatively impact our ability to access the capital markets in a timely manner
and on attractive terms, which may have a negative impact on our ability to grow
our business.
We
monitor the third-party depository institutions that hold our cash and cash
equivalents on a daily basis. Our emphasis is primarily on safety of principal
and secondarily on maximizing yield on those funds.
71
Our net cash flows
provided by and (used for) operating, investing and financing activities, as
reflected in the Consolidated Statement of Cash Flows for 2008 and 2007, are
summarized as follows:
|
2008
|
2007
|
|||||||
|
Operating
activities
|
$ | 175,335 | 110,288 | |||||
|
Investing
activities
|
(290,967 | ) | (175,087 | ) | ||||
|
Financing
activities
|
132,462 | 20,226 | ||||||
|
Net increase
(decrease) in cash and cash equivalents
|
$ | 16,830 | (44,573 | ) | ||||
Operating
Activities
The increase in
cash flows provided by operating activities is due primarily to a $49.2 million
increase in long-term deferred revenue due to cash received from IRU capacity
agreements.
Investing
Activities
The increase in
cash flows used for investing activities is due primarily to 2008 cash
expenditures of $221.5 million for property and equipment, including
construction in progress, the purchase of the stock of the UUI and Unicom
subsidiaries of UCI for $40.2 million, net of cash received, the purchase of the
remaining minority interest in Alaska DigiTel for $10.4 million, and the
purchase of the stock of Alaska Wireless for $14.5 million.
Financing
Activities
The increase in
cash flows provided by financing activities is due primarily to borrowing
of $144.5 million in 2008.
Senior
Notes
We
have outstanding Senior Notes of $317.4 million at December 31, 2008. We pay
interest of 7.25% on the Senior Notes and they are due in 2014. The Senior Notes
are carried on our Consolidated Balance Sheet net of the unamortized portion of
the discount, which is being amortized to Interest Expense over the term of the
Senior Notes.
The Senior Notes
are not redeemable prior to February 15, 2009. At any time on or after February
15, 2009, the 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 | % | ||
The Senior Notes
restrict GCI, Inc. and certain of its subsidiaries from incurring debt, but
permits debt under the Senior Credit Facility and vendor financing as long as
our leverage ratio does not exceed 6.0 to one. In addition, certain
other debt is permitted regardless of our leverage ratio, including debt under
the Senior Credit Facility not exceeding (and reduced by certain stated
items):
|
|
·
|
$250.0
million, reduced by the amount of any prepayments,
or
|
|
|
·
|
3.0 times
earnings before interest, taxes, depreciation and amortization for the
last four full fiscal quarters of GCI, Inc. and its
subsidiaries.
|
The Senior Notes
limit the ability of our subsidiaries to make cash dividend payments to
GCI.
Semi-annual
interest payments of $11.6 million are payable in February and August of each
year.
The Senior Notes
are structurally subordinate to our Senior Credit Facility.
Our Senior Notes’
key debt covenants require our Total Leverage Ratio (as defined) be 6.0:1.0 or
less and our Senior Leverage Ratio (as defined) be 3.0:1.0 or less if our Senior
Debt (as defined) is greater than $250.0 million.
72
We
were in compliance with all Senior Notes loan covenants at December 31,
2008.
Senior
Credit Facility
The Senior Credit
Facility includes a $360.0 million term loan, including the Additional
Incremental Term Loan discussed below, and a $100.0 million revolving credit
facility with a $25.0 million sublimit for letters of credit. Our term loan is
fully drawn.
In
May 2008, we signed an agreement to add an Additional Incremental Term Loan of
$145.0 million to our then existing Senior Credit Facility. The
Additional Incremental Term Loan will become due under the same terms and
conditions as set forth in the existing Senior Credit Facility.
The Additional
Incremental Term Loan increased the interest rate on the term loan component of
our Senior Credit Facility from LIBOR plus 2.00% to LIBOR plus
4.25%. The Additional Incremental Term Loan increased the revolving
credit facility interest rate for our Senior Credit Facility from LIBOR plus a
margin dependent upon our Total Leverage Ratio ranging from 1.50% to 2.25% to
LIBOR plus the following Applicable Margin set forth opposite each applicable
Total Leverage Ratio below:
|
Total
Leverage Ratio (as defined)
|
Applicable
Margin
|
|||
|
>3.75
|
4.25 | % | ||
|
>3.25
but <3.75
|
3.75 | % | ||
|
>2.75
but <3.25
|
3.25 | % | ||
|
<2.75
|
2.75 | % | ||
|
The
commitment fee we are required to pay on the unused portion of the
commitment is 0.5%.
|
|
Substantially
all of the Company's assets collateralize the Senior Credit
Facility.
|
$145.0 million was
drawn on the Additional Incremental Term Loan at the time of the debt
modification. We used $30.0 million of the proceeds to repay the
revolver portion of our Senior Credit Facility and our loan proceeds were
reduced by $2.9 million for an original issue discount and $1.5 million for bank
and legal fees associated with the new term loan. We borrowed $10.0
million under our revolving credit facility in October 2008 and we have letters
of credit outstanding totaling $4.0 million, which leaves $86.0 million
available for borrowing under the revolving credit facility as of December 31,
2008 if needed.
The Term Loan
allows for the repurchase of our common stock under our buyback program when our
total debt leverage is below 4.0 times adjusted EBITDA. The amendment revised
various financial covenants in the agreement and made conforming changes to
various covenants to permit our 2008 acquisitions. Additionally, our
loan proceeds were reduced by $2.9 million for an original issue
discount. The discount on the term loan is being amortized into
interest expense using the effective interest method.
Borrowings under
the Senior Credit Facility are subject to certain financial covenants and
restrictions on indebtedness, dividend payments, financial guarantees, business
combinations, and other related items. At December 31, 2008 we were
in compliance with all loan covenants relating to our Senior Credit
Facility.
Our Senior Credit
Facility, which was further amended in October 2008 to allow an additional $15.0
million in capital expenditures for the year ended December 31, 2008, also
limits the amount of capital expenditures, excluding acquisitions that we can
incur each year.
If
our capital expenditures for a given year are less than the maximum, the
difference between the amount incurred and the maximum capital expenditure
limitation may be carried over to the following year if certain levels of EBITDA
are met.
The transaction in
May 2008 to add an Additional Incremental Term Loan of up to $145.0 million to
our existing Senior Credit Facility was a partial substantial modification of
our existing Senior Credit Facility resulting in a $667,000 write-off of
previously deferred loan fees during the twelve months ended December 31, 2008
in our Consolidated Statement of Operations. Deferred loan fees of
$58,000 associated with the portion of our existing Senior Credit Facility
determined not to have been substantially modified continue to be amortized over
the remaining life of the Senior Credit Facility.
73
Additionally, in
connection with the Additional Incremental Term Loan, we paid bank fees and
other expenses of $1.6 million during 2008, of which $527,000 were immediately
expensed in 2008 and $1.1 million were deferred and are being amortized over the
remaining life of the Senior Credit Facility.
In
connection with the October 2008 amendment to the Senior Credit Facility, we
paid loan fees of $453,000 which are being amortized over the remaining life of
the Senior Credit Facility. The October amendment to the Senior
Credit Facility was determined not to be a substantial
modification.
Rural
Utilities Services and CoBank Mortgage Note Payable
We
acquired long-term debt of $43.6 million upon our acquisition of UUI and Unicom
effective June 1, 2008. As of December 31, 2008, the long-term debt
consists of $35.3 million from the Rural Utility Services (“RUS”) and $3.5
million mortgage note payable due to CoBank. The long-term debt is
due in monthly installments of principal based on fixed rate amortization
schedules. The interest rates on the various loans to which this debt
relates range from 2.0% to 6.76%. Through UUI and Unicom, we have
$9.9 million available for borrowing for specific capital expenditures under
existing borrowing arrangements. At December 31, 2008 we were in
compliance with all loan covenants relating to our RUS and CoBank
debt. Substantially all of the assets of our subsidiaries, UUI and
Unicom are collateral for the amounts due to RUS and CoBank.
Total
Long-term Debt
As
of December 31, 2008 maturities of long-term debt were as follows (amounts in
thousands):
|
Years ending
December 31,
|
||||
|
2009
|
$ | 8,425 | ||
|
2010
|
8,657 | |||
|
2011
|
188,147 | |||
|
2012
|
176,323 | |||
|
2013
|
4,749 | |||
|
2014 and
thereafter
|
335,585 | |||
| 721,886 | ||||
|
Less
unamortized discount paid on Senior Notes
|
2,589 | |||
|
Less
unamortized discount paid on Senior Credit Facility
|
2,466 | |||
|
Less current
portion of long-term debt
|
8,425 | |||
| $ | 708,406 | |||
See note 6 in the
"Notes to Consolidated Financial Statements" included in Part II of this annual
report on Form 10-K for a discussion of our debt.
Capital
Lease Obligation
On
March 31, 2006, through our subsidiary GCI Communication Corp. we entered into
an agreement to lease transponder capacity on Intelsat, Ltd.’s (“Intelsat”)
Galaxy 18 spacecraft that successfully launched on May 21, 2008. We are also
leasing capacity on the Horizons 1 satellite, which is owned jointly by Intelsat
and JSAT International, Inc. The leased capacity replaced our existing
transponder capacity on Intelsat’s Galaxy XR satellite.
|
The Intelsat
Galaxy 18 C-band and Ku-Band transponders are being leased over an
expected term of 14 years. The present value of the lease payments,
excluding telemetry, tracking and command services and back-up protection,
is $98.6 million. We have recorded a capital lease obligation and an
addition to our Property and Equipment at December 31,
2008.
|
In
June 2008 Galaxy XR was taken out of service resulting in the removal of the
remaining $8.8 million net book value and the recognition of an $8.8 million
warranty receivable. We applied $8.4 million of the warranty
receivable to offset our cash obligation relating to the capital lease during
the year ended December 31, 2008, resulting in an outstanding warranty
receivable of $465,000 as of December 31, 2008.
74
A
summary of estimated future minimum lease payments for this lease follows
(amounts in thousands):
|
Years ending
December 31:
|
||||
|
2009
|
$ | 11,160 | ||
|
2010
|
11,160 | |||
|
2011
|
11,160 | |||
|
2012
|
11,160 | |||
|
2013
|
11,160 | |||
|
2014 and
thereafter
|
93,930 | |||
|
Total minimum
lease payments
|
$ | 149,730 | ||
Working
Capital
Capital
Expenditures
Our cash
expenditures for property and equipment, including construction in progress,
totaled $221.5 million and $153.0 million during the years ended December 31,
2008 and 2007, respectively. Our capital expenditures requirements in excess of
approximately $25.0 million per year are largely success driven and are a result
of the progress we are making in the marketplace. We expect our 2009
expenditures for property and equipment for our core operations, including
construction in progress to total $115.0 million to $120.0 million, depending on
available opportunities and the amount of cash flow we generate during
2009.
Planned capital
expenditures over the next five years include those necessary for the expansion
of Alaska DigiTel’s CDMA network, construction of our GSM network, maintenance
of existing facilities, growth of our long-distance, local access, cable and
Internet facilities, improving network integrity, continuing deployment of DLPS,
adding new products, and introducing other new facilities and automation to
reduce costs.
During 2007 Alaska
DigiTel and GCI signed an agreement with a customer to build-out Alaska
DigiTel's CDMA network to provide expanded roaming area coverage. If
we fail to meet the schedule, the customer has the right to terminate the
agreement and we may be required to pay up to $16.0 million as liquidated
damages. We expect to meet the deadlines imposed by the build-out
schedule and therefore expect our expenditures to result in an expansion of our
wireless facilities rather than payment of the liquidated damages. We spent
$28.1 million in 2008 to partially complete the CDMA network
build-out.
On
July 31, 2006, through our subsidiary GCC we entered into an agreement to
purchase IRU capacity in the Kodiak-Kenai Cable Company, LLC’s marine-based
fiber optic cable system linking Anchorage to Kenai, Homer, Kodiak and Seward,
Alaska. The new system was placed into service in December 2006. We accepted the
first installment of our IRU capacity in December 2006. We have committed to
purchase a minimum of $5.0 million to $5.5 million in additional IRU capacity in
two installments through 2011.
We
have entered into an agreement to purchase hardware and software capable of
providing wireless service to small markets in rural Alaska as a reliable
substitute for standard wire line service. The agreement has a total
commitment of $20.6 million. We paid $3.8 million and $3.5 million in
2008 and 2007, respectively, and expect to pay $4.8 million and $5.1 million
during 2009 and 2010, respectively.
In
2008 and 2007 we paid $22.8 million and $2.5 million, respectively, for
submarine cable, amplifiers and line terminal equipment for our Southeast Alaska
submarine fiber optic system project. In addition to providing the equipment for
the new submarine line, the contracts include additional equipment to upgrade
the Alaska United West submarine cable system and also include an option to
increase capacity on the Alaska United East submarine cable system.
75
Operating
Leases
A
summary of estimated future minimum lease payments for operating leases follows
(amounts in thousands):
|
Years ending
December 31:
|
||||
|
2009
|
$ | 16,401 | ||
|
2010
|
8,703 | |||
|
2011
|
7,387 | |||
|
2012
|
5,601 | |||
|
2013
|
4,797 | |||
|
2014 and
thereafter
|
17,429 | |||
|
Total minimum
lease payments
|
$ | 60,318 | ||
Share
Repurchases
GCI’s Board of
Directors has authorized a common stock buyback program for the repurchase of
our Class A and Class B common stock in order to reduce our outstanding shares
of Class A and Class B common stock. The Term Loan agreement entered into in May
2008 and described above allows for the repurchase of our common stock under our
buyback program when our total debt leverage is below 4.0 times adjusted
EBITDA. Under the buyback program we had made repurchases of $68.9
million through December 31, 2007. During the year ended December 31,
2008 we repurchased no shares of our Class A and B common stock. In
2008 we retired 540,000 shares of our Class A common stock, all of which were
repurchased in 2007.
Other
Expenditures and Commitments
Effective January
1, 2007 we invested $29.5 million in Alaska DigiTel in exchange for an 81.9%
equity interest. We funded the transaction from existing cash balances and by
drawing down $15.0 million under the revolving portion of our Senior Credit
Facility. In August 2008, we acquired the remaining minority interest
in Alaska DigiTel for total consideration of $10.4 million.
In
June 2008, we purchased the stock of the UUI and Unicom, telecommunications
subsidiaries of UCI, for $40.6 million, net of cash received. We
funded the transaction by drawing down additional debt.
In
July 2008, we purchased all of the interests in Alaska Wireless for $14.5
million. We funded the transaction by drawing down additional
debt.
We
received cash of $46.0 million for long-haul fiber capacity IRU agreements that
were signed in 2008.
The long-distance,
local access, cable, Internet and wireless services industries continue to
experience substantial competition, regulatory uncertainty, and continuing
technological changes. Our future results of operations will be affected by our
ability to react to changes in the competitive and regulatory environment and by
our ability to fund and implement new or enhanced technologies. We are unable to
determine how competition, economic conditions, and regulatory and technological
changes will affect our ability to obtain financing under acceptable terms and
conditions.
New
Accounting Standards
In
December 2007, the FASB issued SFAS No. 141(R), "Business Combinations" which
requires the acquiring entity in a business combination to record all assets
acquired and liabilities assumed at their respective acquisition-date fair
values, changes the recognition of assets acquired and liabilities assumed
arising from contingencies, changes the recognition and measurement of
contingent consideration, and requires the expensing of acquisition-related
costs as incurred. SFAS 141(R) also requires additional disclosure of
information surrounding a business combination, such that users of the entity's
financial statements can fully understand the nature and financial impact of the
business combination. We will implement SFAS No. 141(R) on January 1,
2009 and we will apply it to any business combinations with an acquisition date
after January 1, 2009.
In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements" which establishes accounting and reporting
standards for ownership interests in subsidiaries held by parties other than the
parent, the amount of consolidated net income attributable to the parent and to
the noncontrolling interest, changes in a parent's ownership interest and the
valuation of retained noncontrolling equity investments when a subsidiary is
deconsolidated. SFAS No. 160 also established reporting requirements
that provide sufficient disclosures that clearly identify and distinguish
between the interests of the parent and the interests of the noncontrolling
owner. We will implement SFAS No. 160 on January 1,
2009. We do not expect the adoption of this standard to have a
material impact on our statement of operations, financial position or cash
flows.
76
In
March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities." This statement requires companies to
provide enhanced disclosures about (a) how and why they use derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under SFAS No. 133 and its related interpretations, and (c) how
derivative instruments and related hedged items affect a company’s financial
position, financial performance, and cash flows. We will implement
SFAS No. 161 on January 1, 2009. We do not expect the adoption of
this standard to have a material impact on our statement of operations,
financial position or cash flows.
In
April 2008, FASB issued FSP No. 142-3, “Determination of the Useful Life of
Intangible Assets”, which amends the factors that must be considered in
developing renewal or extension assumptions used to determine the useful life
over which to amortize the cost of a recognized intangible asset under SFAS 142,
“Goodwill and Other Intangible Assets”. FSP 142-3 requires an entity to consider
its own assumptions about renewal or extension of the term of the arrangement,
consistent with its expected use of the asset. FSP 142-3 also requires the
disclosure of the weighted-average period prior to the next renewal or extension
for each major intangible asset class, the accounting policy for the treatment
of costs incurred to renew or extend the term of recognized intangible assets
and for intangible assets renewed or extended during the period, if renewal or
extension costs are capitalized, the costs incurred to renew or extend the asset
and the weighted-average period prior to the next renewal or extension for each
major intangible asset class. FSP 142-3 is effective for financial statements
for fiscal years beginning after December 15, 2008. The adoption of FSP 142-3 is
not expected to have a material impact on the Company’s financial condition and
results of operations.
On
January 1, 2008, we partially adopted SFAS No. 157 “Fair Value Measurements,”
which did not have a material impact on our consolidated financial statements.
We partially adopted SFAS No. 157 due to the issuance of FSP FASB 157-2,
“Effective Date of FASB Statement No. 157.” SFAS No. 157 defines fair
value, establishes a common framework for measuring fair value under U.S. GAAP,
and expands disclosures about fair value measurements for assets and
liabilities. SFAS No. 157 does not require additional assets or liabilities to
be accounted for at fair value beyond that already required under other U.S.
GAAP accounting standards. FSP No. 157-2 deferred the effective date of SFAS No.
157 for all nonfinancial assets and nonfinancial liabilities that are not
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). Included in the scope of FSP No. 157-2 are
nonfinancial assets and liabilities acquired in business combinations and
impaired assets. The effective date for nonfinancial assets and nonfinancial
liabilities has been delayed by one year to fiscal years beginning after
November 15, 2008, and interim periods within those fiscal years. We continue to
assess the deferred portion of SFAS No. 157.
In
June 2008, the FASB issued FSP No. EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities. FSP
EITF 03-6-1 requires that unvested share-based payment awards containing
nonforfeitable rights to dividends or dividend equivalents (whether paid or
unpaid) be considered participating securities and included in the computation
of EPS pursuant to the two-class method of SFAS No. 128, “Earnings per Share.”
We will implement FSP EITF 03-6-1 on January 1, 2009. All
prior-period EPS data presented shall be adjusted retrospectively to conform to
this FSP. This FSP is not anticipated to have a material impact on our EPS
attributable to common stockholders.
In
October 2008, the FASB issued FSP 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active.” FSP 157-3
clarifies the application of SFAS 157 in a market that is not active and
addresses application issues such as the use of internal assumptions when
relevant observable data does not exist, the use of observable market
information when the market is not active and the use of market quotes when
assessing the relevance of observable and unobservable data. FSP 157-3 is
effective for all periods presented in accordance with SFAS No. 157. The
guidance in FSP 157-3 is effective immediately and did not have an impact on the
Company upon adoption. See note 11 for information and related
disclosures regarding the Company’s fair value measurements.
Critical
Accounting Policies
Our accounting and
reporting policies comply with GAAP. The preparation of financial statements in
conformity with GAAP requires management to make estimates and assumptions. The
financial position and results of operations can be affected by these estimates
and assumptions, which are integral to understanding reported results. Critical
accounting policies are those policies that management believes are the most
important to the portrayal of our financial condition and results, and require
management to make estimates that are difficult, subjective or complex. Most
accounting policies are not considered by management to
77
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
GAAP. For all of these policies, management cautions that future events rarely
develop exactly as forecast, and the best estimates routinely require
adjustment. Management has discussed the development and the selection of
critical accounting policies with our Audit Committee.
Those policies
considered to be critical accounting policies for the year ended December 31,
2008 are described below.
Allowance
for Doubtful Accounts
We
maintain allowances for doubtful accounts for estimated losses resulting from
the inability of our customers to make required payments. We also maintain an
allowance for doubtful accounts based on our assessment of the likelihood that
our customers will satisfactorily comply with rules necessary to obtain
supplemental funding from the USAC for services provided by us under our
packaged communications offerings to rural hospitals, health clinics and school
districts. We base our estimates on the aging of our accounts receivable
balances, financial health of specific customers, regional economic data,
changes in our collections process, regulatory requirements, and our customers’
compliance with USAC rules.
If the financial condition of our customers were to deteriorate or if
they are unable to emerge from reorganization proceedings, resulting in an
impairment of their ability to make payments, additional allowances may be
required. If their financial condition improves or they emerge successfully from
reorganization proceedings, allowances may be reduced. Such allowance changes
could have a material effect on our consolidated financial condition and results
of operations.
Impairment
and Useful Lives of Intangible Assets
We
record all assets and liabilities acquired in purchase acquisitions, including
goodwill and other intangibles, at fair value as required by SFAS No. 141,
“Business Combinations.” Goodwill and indefinite-lived assets such as
our cable certificates and wireless licenses are not amortized but are subject,
at a minimum, to annual tests for impairment and quarterly evaluations of
whether events and circumstances continue to support an indefinite useful life
as required by SFAS No. 142, “Goodwill and Other Intangible
Assets.” Other intangible assets are amortized over their estimated
useful lives primarily using the straight-line method, and are subject to
impairment if events or circumstances indicate a possible inability to realize
the carrying amount as required by SFAS No. 142 and SFAS No. 144. The initial
goodwill and other intangibles recorded and subsequent impairment analysis
requires management to make subjective judgments concerning estimates of the
applicability of quoted market prices in active markets and, if quoted market
prices are not available and/or are not applicable, how the acquired asset will
perform in the future using a discounted cash flow analysis. Estimated cash
flows may extend beyond ten years and, by their nature, are difficult to
determine over an extended timeframe. Events and factors that may significantly
affect the estimates include, among others, competitive forces, customer
behaviors and attrition, changes in revenue growth trends, cost structures and
technology, and changes in discount rates, performance compared to peers,
material and ongoing negative economic trends, and specific industry or market
sector conditions. In determining the reasonableness of cash flow estimates, we
review historical performance of the underlying asset or similar assets in an
effort to improve assumptions utilized in our estimates. In assessing the fair
value of goodwill and other intangibles, we may consider other information to
validate the reasonableness of our valuations including third-party assessments.
These evaluations could result in a change in useful lives in future periods and
could result in write-down of the value of intangible assets. Our cable
certificates, wireless licenses and goodwill assets are our only
indefinite-lived intangible assets and because of the significance of these
assets to our consolidated balance sheet, our annual and quarterly impairment
analyses and quarterly evaluations of remaining useful lives are critical. Any
changes in key assumptions about the business and its prospects, changes in
market conditions or other externalities, or recognition of previously
unrecognized intangible assets for impairment testing purposes could result in
an impairment charge and such a charge could have a material adverse effect on
our consolidated results of operations.
For the period from
January 1, 2008 to December 31, 2008, the U.S. financial markets have been
impacted by continued deterioration in economic conditions. Should economic
conditions in the State of Alaska and other indicators deteriorate such that
they impact our ability to achieve levels of forecasted operating results and
cash flows, should our stock price and market capitalization decline below our
book value for a sustained period of time, or should other events occur
indicating the carrying value of goodwill and intangible assets might be
impaired, we would test our intangible assets for impairment and may recognize
an impairment loss to the extent that the carrying amount exceeds such asset’s
fair value. Any future
impairment charges could have a material adverse effect on our results of
operations.
78
Accruals
for Unbilled Costs
We
estimate unbilled long-distance services Cost of Goods Sold based upon minutes
of use carried through our network and established rates. We estimate unbilled
costs for new circuits and services, and network changes that result in traffic
routing changes or a change in carriers. Carriers that provide service to us
regularly make network changes that can lead to new, revised or corrected
billings. Such estimates are revised or removed when subsequent billings are
received, payments are made, billing matters are researched and resolved,
tariffed billing periods lapse, or when disputed charges are resolved. Revisions
to previous estimates could either increase or decrease costs in the year in
which the estimate is revised which could have a material effect on our
consolidated financial condition and results of operations.
Valuation
Allowance for Net Operating Loss Deferred Tax Assets
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 $67.3 million associated with income tax net operating
losses that were generated from 1995 to 2008, and that expire from 2011 to 2028,
and with charitable contributions that were converted to net operating losses in
2004 through 2007, and that expire in 2024 through 2027,
respectively. Pre-acquisition income tax net operating losses
associated with acquired companies are subject to additional deductibility
limits. We have recorded deferred tax assets of $3.1 million associated with
alternative minimum tax credits that do not expire. Significant management
judgment is required in developing our provision for income taxes, including the
determination of deferred tax assets and liabilities and any valuation
allowances that may be required against the deferred tax assets. We have not
recorded a valuation allowance on the deferred tax assets as of December 31,
2008 based on management’s belief that future reversals of existing taxable
temporary differences and estimated future taxable income exclusive of reversing
temporary differences and carryforwards, will, more likely than not, be
sufficient to realize the benefit of these assets over time. In the event that
actual results differ from these estimates or if our historical trends change,
we may be required to record a valuation allowance on deferred tax assets, which
could have a material adverse effect on our consolidated financial position or
results of operations.
Other significant
accounting policies, not involving the same level of measurement uncertainties
as those discussed above, are nevertheless important to an understanding of the
financial statements. Policies related to revenue recognition, share-based
expense, and financial instruments require difficult judgments on complex
matters that are often subject to multiple sources of authoritative guidance.
Certain of these and other matters are among topics currently under
reexamination by accounting standards setters and regulators. No specific
conclusions reached by these standard setters appear likely to cause a material
change in our accounting policies, although outcomes cannot be predicted with
confidence. A complete discussion of our significant accounting policies can be
found in note 1 in the accompanying “Notes to Consolidated Financial
Statements.”
Geographic
Concentration and the Alaska Economy
We
offer voice, data and wireless telecommunication services 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. A significant part of the Alaska
economy is the state government. 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 for the State of
Alaska. The State of Alaska reported in fiscal 2008 that oil revenues, federal
funding revenues, and investment revenues supplied 93%, 5% and 2%, respectively,
of the State's unrestricted revenues. In fiscal 2009 state economists forecast
that Alaska’s oil revenues, federal funding and investment revenues will supply
87%, 8% and 5%, respectively, of the state’s total projected unrestricted
revenues.
The volume of oil
transported by the TransAlaska Oil Pipeline System over the past 20 years has
been as high as 2.0 million barrels per day in fiscal 1988. Production has been
declining over the last several years with an average of 0.72 million barrels
produced per day in fiscal 2008. The state forecasts the production rate to
decline from 0.69 million barrels produced per day in fiscal 2009 to 0.59
million barrels produced per day in fiscal 2018.
79
Market prices for
North Slope oil averaged $96.51 in fiscal 2008 and are forecasted to average
$77.66 in fiscal 2009. The closing price per barrel was $37.68 on February 2,
2009. To the extent that actual oil prices vary materially from the State’s
projected prices, the State’s projected revenues and deficits will change. 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 (“CBRF”) that is intended to
fund budgetary shortfalls. If the State’s current projections are realized and
no surpluses are deposited into the CBRF it will be depleted in December 2020.
The date the CBRF is depleted is highly influenced by the price of oil. If the
fund is depleted, aggressive state action will be necessary to increase revenues
and reduce spending in order to balance the budget. The governor of the State of
Alaska and the Alaska legislature continue to evaluate cost cutting and revenue
enhancing measures.
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 has
estimated that it could take nine years to begin oil field drilling after
approval of ANWR exploration.
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. 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.
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. There are two
competing companies that are studying the economic viability of a natural gas
pipeline, which depends upon the price of and demand for natural
gas.
Development of the
ballistic missile defense system project has had a significant impact on Alaskan
telecommunication requirements. The system is a fixed, land-based, non-nuclear
missile defense system with a land and space based detection system capable of
responding to limited strategic ballistic missile threats to the United States.
The system includes deployment of up to 100 ground-based interceptor silos and
battle management command and control facilities at Fort Greely,
Alaska.
The United States
Army Corps of Engineers awarded a construction contract and construction of test
bed facilities began in 2002. As of January 2009 a total of thirty ground-based
missile interceptors have been placed in underground silos.
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
670,000 people. The State of Alaska’s population is distributed as
follows:
|
|
·
|
42% are
located in the Municipality of
Anchorage,
|
|
|
·
|
13% are
located in the Fairbanks North Star
Borough,
|
|
|
·
|
12% are
located in the Matanuska-Susitna
Borough,
|
|
|
·
|
8% are
located in the Kenai Peninsula
Borough,
|
|
|
·
|
5% are
located in the City and Borough of Juneau,
and
|
· The
remaining 20% are located in other communities across the State of
Alaska.
80
Seasonality
Revenue derived
from our long-distance services product in our Network Access segment 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
long-distance services product in our Consumer and Commercial segments and our
other products in
all our segments do
not exhibit significant seasonality. Our ability to implement construction
projects is 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.
Schedule
of Certain Known Contractual Obligations
The following table
details future projected payments associated with certain known contractual
obligations as of December 31, 2008:
|
Payments Due
by Period
|
||||||||||||||||||||
|
Total
|
Less than 1
Year
|
1 to
3
Years
|
4 to
5
Years
|
More Than 5
Years
|
||||||||||||||||
|
(Amounts in
thousands)
|
||||||||||||||||||||
|
Long-term
debt
|
$ | 721,886 | 8,424 | 196,804 | 181,072 | 335,586 | ||||||||||||||
|
Interest on
long-term debt
|
195,987 | 44,037 | 87,324 | 53,026 | 11,600 | |||||||||||||||
|
Capital lease
obligations, including interest
|
160,431 | 11,646 | 23,328 | 23,474 | 101,983 | |||||||||||||||
|
Operating
lease commitments
|
60,318 | 16,401 | 16,089 | 10,399 | 17,429 | |||||||||||||||
|
Purchase
obligations
|
54,826 | 25,134 | 24,412 | 5,280 | --- | |||||||||||||||
|
Total
contractual obligations
|
$ | 1,193,448 | 105,642 | 347,957 | 273,251 | 466,598 | ||||||||||||||
For long-term debt
included in the above table, we have included principal payments on our Senior
Credit Facility and Senior Notes. Interest on amounts outstanding under our
Senior Credit Facility is based on variable rates. We used the current rate paid
on the Senior Credit Facility to estimate our future interest payments. Our
Senior Notes require semi-annual interest payments of $11.6 million through
February 2014. For a discussion of our Senior Notes and Senior Credit Facility
see note 6 in the accompanying “Notes to Consolidated Financial
Statements.”
Capital lease
obligations include our obligation to lease transponder capacity on Galaxy
18. For a discussion of our capital and operating leases, see note 13
in the accompanying “Notes to Consolidated Financial Statements.”
Purchase
obligations include a commitment to purchase hardware and software capable of
providing wireless service to small markets in rural Alaska of $21.4
million. The contract associated with this commitment is
non-cancelable. Purchase obligations also include open purchase orders for goods
and services for capital projects and normal operations totaling $11.7 million
which are not included in our Consolidated Balance Sheets at December 31, 2008,
because the goods had not been received or the services had not been performed
at December 31, 2008. The open purchase orders are cancelable.
Regulatory
Developments
See “Part I — Item
1 — Business — Regulation” for more information about regulatory developments
affecting us.
Inflation
We
do not believe that inflation has a significant effect on our
operations.
81
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 Senior Credit
Facility carries interest rate risk. Amounts borrowed under this Agreement bear
interest at LIBOR plus 4.25% or less depending upon our Total Leverage Ratio (as
defined). Should the LIBOR rate change, our interest expense will increase or
decrease accordingly. In July 2008, we entered into an interest rate cap
agreement with a two year term to limit the LIBOR rate on $180.0 million of
variable interest rate debt to 4.5%. The agreement is being accounted
for as a derivative under SFAS 133 "Accounting for Derivative Instruments and
Hedging Activities." As of December 31, 2008, we have borrowed
$360.1 million subject to interest rate risk. On this amount, each 1% increase
in the LIBOR interest rate would result in $3.6 million of 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 89. Our
supplementary data is filed under Item 7, beginning on page 52.
Item
9. Changes In and Disagreements With Accountants on Accounting and Financial
Disclosure
None.
Item
9A. Controls and Procedures
(a)
Evaluation of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed by us in reports that we file or submit
under the Securities Exchange Act of 1934 (“Exchange Act”) is recorded,
processed, summarized and reported as specified in the SEC’s rules and forms. 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 Exchange Act Rule 13a -
15(e)) under the supervision and with the participation of our management,
including our Chief Executive Officer and our Chief Financial
Officer.
Based on that
evaluation and as described below under “Management’s Report on Internal Control
Over Financial Reporting" (Item 9A(b)), we have identified material weaknesses
in our internal control over financial reporting. Because of these material
weaknesses, our management, including our Chief Executive Officer and our Chief
Financial Officer, concluded that our disclosure controls and procedures were
not effective as of December 31, 2008.
The certifications
attached as Exhibits 31 and 32 to this report should be read in conjunction with
the disclosures set forth herein.
(b)
Management’s Report on Internal Control Over Financial Reporting
Our management is
responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rule 13a-15(f).
Under the supervision and with the participation of our management, including
our Chief Executive Officer and our Chief Financial Officer, we conducted an
evaluation of the effectiveness of our internal control over financial reporting
based on the framework in Internal
Control—Integrated Framework issued by the Committee of Sponsoring
Organizations (COSO).
We
acquired UUI, Unicom and Alaska Wireless during 2008, and have excluded from our
assessment of the effectiveness of our internal control over financial reporting
as of December 31, 2008, UUI’s, Unicom’s and Alaska Wireless’ internal control
over financial reporting associated with total assets of $108.9 million and
total revenues of $23.4 million included in our consolidated financial
statements as of and for the year ended December 31, 2008. Goodwill
and intangible assets associated with these acquisitions totaled $28.1 million
as of December 31, 2008, and the internal control over financial reporting
associated with such goodwill and intangible assets has been subjected to our
assessment of effectiveness.
82
Based on our
evaluation of the effectiveness of our internal control over financial
reporting, our management concluded that as of December 31, 2008, we did not
maintain effective internal control over financial reporting due to the
existence of the following material weaknesses:
|
·
|
Our
entity-level control related to the selection and application of
accounting policies in accordance with GAAP was not designed to include
policies and procedures to periodically review our accounting policies to
ensure ongoing GAAP compliance. This led to ineffective procedures for
recording depreciation expense which caused material errors in interim
financial reporting which were corrected through the restatement of our
2007 interim financial information.
|
|
·
|
The internal
control over financial reporting at Alaska DigiTel does not include
activities adequate to i) timely identify changes in financial reporting
risks, ii) monitor the continued effectiveness of controls, and iii) does
not include staff with adequate technical expertise to ensure that
policies and procedures necessary for reliable interim and annual
financial statements are selected and applied. Prior to August 18, 2008,
our control over the operations of Alaska DigiTel was limited as required
by the FCC upon their approval of our initial acquisition completed in
January 2007. These control deficiencies in our Alaska DigiTel business
represent material weaknesses in our internal control over financial
reporting and led to the failure to timely identify and respond to
triggering events which necessitated a change in useful life of
depreciable assets to ensure reporting in accordance with GAAP. These
material weaknesses led to errors in our interim financial reporting which
were corrected through the restatement of our interim financial
information for the March 31 and June 30, 2008 quarterly
periods.
|
A
material weakness is a control deficiency, or a combination of deficiencies, in
internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of the company's annual or interim
financial statements will not be prevented or detected on a timely
basis.
KPMG LLP, the
Company’s independent registered public accounting firm, has issued an audit
report on the Company’s internal control over financial reporting as of December
31, 2008, which is included in Item 8 of this Form 10-K.
(c)
Managements Plan for Remediation of Material Weaknesses
As
previously disclosed under “Item 9(A) – Controls and Procedures” in our Annual
Report on Form 10-K/A #2 for the year ended December 31, 2007, we concluded that
our internal control over financial reporting was not effective. During 2008, we
implemented the activities described below to remediate certain material
weaknesses which existed as of December 31, 2007.
Information
technology program development and change controls over the unified billing
system and the interface with the general ledger were not designed effectively.
As a result, our automated interface between the unified billing system and the
general ledger was not appropriately configured. In addition, our management
review control over unreconciled transactions recorded in accounts receivable
general ledger accounts was not designed at the level of precision to detect and
correct errors that could be material to annual or interim financial statements.
As a result of these deficiencies, errors existed in our accounts receivable and
revenues that were corrected prior to the issuance of our Annual Report on Form
10-K/A #2 for the year ended December 31, 2007. In 2008 we remediated
the material weaknesses associated with the unified billing system by taking the
following actions:
|
·
|
We enhanced
the design of our detective monitoring control over of the recording of
receivables and revenues by:
|
|
|
1) Performing
the monitoring at a level of precision to detect all transactions that
could aggregate to a material component of the account balances,
and
|
|
|
2) Ensuring
differences identified during the monitoring process are resolved in a
timely manner.
|
|
·
|
With regards
to our system development and change controls we incorporated more
thorough end-user testing of developments and changes to ensure the
outputs of transactions processed are recorded correctly in the general
ledger before the system changes are implemented,
and
|
|
·
|
Our
management review control over unreconciled transactions recorded in
accounts receivable general ledger accounts has been designed at the level
of precision to detect and correct errors that could be material to annual
or interim financial statements.
|
83
Our policies and
procedures to ensure that our accounting personnel are sufficiently trained on
technical accounting matters did not operate effectively. More specifically, our
accounting personnel did not have the necessary knowledge and training to
adequately account for and disclose certain share-based compensation awards in
accordance with Statement of Financial Accounting Standard No.123(R), Share-Based
Payment. In addition, our accounting personnel lacked adequate training
on the operation of certain aspects of the software used to calculate our
share-based compensation expense. As a result of these deficiencies,
errors existed in our share-based compensation expense that were corrected prior
to the issuance of our Annual Report on Form 10-K/A #2 for the year ended
December 31, 2007. In 2008 we completed the final steps to remediate the
share-based payments material weakness by implementing the following
controls:
|
·
|
Independently
recalculating shared-based compensation expense on a sample of options and
restricted stock awards on a quarterly basis and comparing the expense to
the amounts reported by our stock option plan administration software to
validate correct settings were entered into the software. This independent
verification is reviewed and approved on a quarterly basis,
and
|
|
·
|
Requiring our
staff to continue to attend training related to the application of SFAS
No. 123(R), “Share-Based Payment,” and related interpretations and obtain
further training in using our stock option plan administration software as
appropriate.
|
In
2008 we remediated the material weakness associated with our policies and
procedures for the recording of depreciation expense during interim reporting
periods that were not designed to ensure reporting in accordance with GAAP by
revising our accounting policies and implementing procedures to ensure
depreciation is recorded consistent with GAAP for interim and annual reporting
periods.
As
described in Item 9(b) above our entity-level control related to the selection
and application of accounting policies in accordance with GAAP was not designed
to include policies and procedures to periodically review our accounting
policies to ensure ongoing GAAP compliance. Although we began to remediate this
material weakness in June 2008, by expanding our accounting policy documentation
we have not had sufficient time to fully implement the control changes necessary
to ensure a misstatement of interim or annual financial reporting does not
occur. We will continue to remediate this deficiency in 2009 by implementing
policies and procedures to periodically review our accounting policies to ensure
ongoing GAAP compliance.
As
previously disclosed under “Item 4(a) – Controls and Procedures” in our
Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2008,
we concluded that our internal control over financial reporting was not
effective related to internal control over financial reporting at Alaska
DigiTel, as described in Item 9(b) above.
We
have made progress towards remediation with the acquisition of the Alaska
DigiTel minority interest on August 18, 2008, which gave us 100% ownership and
control over this subsidiary. During the fourth quarter of 2008 we
made progress towards integrating Alaska DigiTel into our financial reporting
process by replacing the accounting management with GCI accounting
management. During the first quarter of 2009 we will integrate the
internal control over financial reporting at Alaska DigiTel by including Alaska
DigiTel’s accounting process in our general ledger
system. Additionally, Alaska DigiTel will become subject to the
improvements we anticipate due to the fourth quarter of 2008 expansion of our
accounting policy documentation and the 2009 implementation of a procedure to
periodically review our accounting policies to ensure ongoing GAAP
compliance.
We
cannot assure you that these remediation efforts will be successful or that our
internal control over financial reporting will be effective in accomplishing all
control objectives all of the time. See “Part I — Item 1A — Risk
Factors.”
(d)
Changes in Internal Control Over Financial Reporting
In
the fourth quarter of 2008 we completed remediation of certain material
weaknesses by implementing the changes in internal control over financial
reporting described below.
We
remediated the material weaknesses associated with the unified billing system by
taking the following actions:
|
·
|
We enhanced
the design of our detective monitoring control over of the recording of
receivables and revenues by:
|
|
|
1) Performing
the monitoring at a level of precision to detect all transactions that
could aggregate to a material component of the account balances,
and
|
|
|
2) Ensuring
differences identified during the monitoring process are resolved in a
timely manner.
|
|
·
|
With regards
to our system development and change controls we incorporated more
thorough end-user testing of developments and changes to ensure the
outputs of transactions processed are recorded correctly in the general
ledger before the system changes are implemented,
and
|
|
·
|
Our
management review control over unreconciled transactions recorded in
accounts receivable general ledger accounts has been designed at the level
of precision to detect and correct errors that could be material to annual
or interim financial statements.
|
84
We
completed the final steps to remediate the share-based payments material
weakness by independently recalculating shared-based compensation expense on a
sample of options and restricted stock awards on a quarterly basis and comparing
the expense to the amounts reported by our stock option plan administration
software to validate correct settings were entered into the software. This
independent verification is reviewed and approved on a quarterly
basis.
We
remediated the material weakness associated with our policies and procedures for
the recording of depreciation expense during interim reporting periods that were
not designed to ensure reporting in accordance with GAAP by revising our
accounting policies and implementing procedures to ensure depreciation is
recorded consistent with GAAP for interim and annual reporting
periods.
Except as described
above there were no changes in our internal control over financial reporting (as
defined in Rules 13a-13(f) and 15d-15(f) of the Exchange Act) identified in
connection with the evaluation of our controls performed during the quarter
ended December 31, 2008 that have materially affected, or are reasonably likely
to materially affect, our internal control over financial
reporting.
A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Internal control
over financial reporting has inherent limitations. Internal control over
financial reporting is a process that involves human diligence and compliance
and is subject to lapses in judgment and breakdowns resulting from human
failures. Internal control over financial reporting also can be
circumvented by collusion or improper management override. Because of
such limitations, there is a risk that material misstatements will not be
prevented or detected on a timely basis by internal control over financial
reporting. However, these inherent limitations are known features of
the financial reporting process. Therefore, it is possible to design
into the process safeguards to reduce, though not eliminate, this
risk.
We
may enhance, modify, and supplement internal controls and disclosure controls
and procedures based on experience.
Item
9B. Other Information
None.
Part
III
Item
10. Directors, Executive Officers and Corporate Governance
Information
regarding our directors and executive officers and compliance with Section 16(a)
of the Exchange Act appearing under the heading “Management of the Company” will
be included in GCI’s definitive proxy statement relating to our 2009 Annual
Meeting of Shareholders and is hereby incorporated by reference. Alternatively,
the Registrant may file an amendment to this Form 10-K to provide such
information within 120 days following the end of the Registrant’s fiscal year
ended December 31, 2008.
85
Information
regarding our code of ethics appearing under the heading “Code of Business
Conduct and Ethics” will be included in GCI’s definitive proxy statement
relating to our 2009 Annual Meeting of Shareholders
and is hereby
incorporated by reference. Alternatively, GCI may file an amendment to this Form
10-K to provide such information within 120 days following the end of its fiscal
year ended December 31, 2008.
The Audit
Committee, composed entirely of independent directors (as such term is
prescribed by Nasdaq Stock Market Rule 4200(a)(15)), meets periodically with our
independent auditors and management to review our 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:
|
|
·
|
Audit (audit
of financial statements filed with the SEC, quarterly reviews, comfort
letters, consents, review of registration statements, accounting
consultations);
|
|
|
·
|
Audit-related
(employee benefit plan audits and accounting consultation on proposed
transactions); and
|
|
|
·
|
Income tax
services (review of corporate and partnership income tax returns, and
consultations regarding income tax
matters).
|
There have been no
material changes to the procedures by which security holders may recommend
nominee’s to our board of directors from those procedures described in GCI’s
definitive proxy statement relating to our 2008 Annual Meeting of
Shareholders.
The report of our
Audit Committee, information regarding the independence of our Audit Committee
and our Audit Committee financial expert appearing under the heading “Management
of Company” will be included in GCI’s definitive proxy statement relating to our
2009 Annual Meeting of Shareholders and is hereby incorporated by reference.
Alternatively, GCI may file an amendment to this Form 10-K to provide such
information within 120 days following the end of its fiscal year ended December
31, 2008.
Item
11. Executive Compensation
Information
regarding the compensation of our directors and executive officers appearing
under the heading “Management of the Company” will be included in GCI’s
definitive proxy statement relating to our 2009 Annual Meeting of Shareholders
and is hereby incorporated by reference. Alternatively, GCI may file an
amendment to this Form 10-K to provide such information within 120 days
following the end of its fiscal year ended December 31, 2008.
Item
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Information
regarding the security ownership of our directors, executive officers and
certain beneficial owners appearing under the heading “Ownership of the Company”
will be included in GCI’s definitive proxy statement relating to our 2009 Annual
Meeting of Shareholders and is hereby incorporated by reference. Alternatively,
the Registrant may file an amendment to this Form 10-K to provide such
information within 120 days following the end of Registrant’s fiscal year ended
December 31, 2008.
Information
regarding securities authorized for issuance under our equity compensation plans
appearing under the heading “Management of the Company” will be included in
GCI’s definitive proxy statement to our 2009 Annual Meeting of Shareholders and
is hereby incorporated by reference. Alternatively, GCI may file an amendment to
this Form 10-K to provide such information within 120 days following the end of
its fiscal year ended December 31, 2008.
Item
13. Certain Relationships and Related Transactions, and Director
Independence
Information
regarding transactions with our directors, executive officers, certain
beneficial owners and related persons appearing under the heading “Certain
Transactions” will be included in GCI’s definitive proxy statement relating to
our 2008 Annual Meeting of Shareholders and is hereby incorporated by reference.
Alternatively, GCI may file an amendment to this Form 10-K to provide such
information within 120 days following the end of its fiscal year ended December
31, 2008.
86
Information
regarding the independence of our board of directors appearing under the heading
“Company Annual Meeting: Director Elections” will be included in GCI’s
definitive proxy statement relating to our 2009
Annual Meeting of
Shareholders and is hereby incorporated by reference. Alternatively, GCI may
file an amendment to this Form 10-K to provide such information within 120 days
following the end of its fiscal year ended December 31, 2008.
Item
14. Principal Accountant Fees and Services
Information
regarding the fees paid to our principal accountant and the pre-approval
policies and procedures of our audit committee appearing under the heading
“Relationship with Independent Public Accountants” will be included in GCI’s
definitive proxy statement relating to our 2009 Annual Meeting of Shareholders
and is hereby incorporated by reference. Alternatively, the Registrant may file
an amendment to this Form 10-K to provide such information within 120 days
following the end of Registrant’s fiscal year ended December 31,
2008.
87
Part
IV
Item
15. Exhibits, Consolidated Financial Statement Schedules
|
(l)
Consolidated Financial Statements
|
Page
No.
|
|
|
Included in
Part II of this Report:
|
||
|
Reports of
Independent Registered Public Accounting Firm
|
89 - 91
|
|
|
Consolidated
Balance Sheets, December 31, 2008 and 2007
|
92 - 93
|
|
|
Consolidated
Statements of Operations, years ended December 31, 2008, 2007
and 2006
|
94
|
|
|
Consolidated
Statements of Stockholders’ Equity, years ended December 31, 2008, 2007
and 2006
|
95 -
96
|
|
|
Consolidated
Statements of Cash Flows, years ended December 31, 2008, 2007 and
2006
|
97
|
|
|
Notes to
Consolidated Financial Statements
|
98 -
140
|
|
|
(2)
Consolidated Financial Statement Schedules
|
||
|
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.
|
||
|
(3)
Exhibits
|
141
|
|
88
Report
of Independent Registered Public Accounting Firm
The Board of
Directors and Stockholders
General
Communication, Inc.:
We
have audited the accompanying consolidated balance sheets of General
Communication, Inc. and subsidiaries as of December 31, 2008 and 2007, 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, 2008. 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 the standards of the Public Company
Accounting Oversight Board (United States). 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, 2008 and 2007, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2008, in conformity with
U.S. generally accepted accounting principles.
As
discussed in Note 1(ai) to the financial statements, the Company has elected to
change its method of accounting for recording depreciation on their property and
equipment placed in service in 2008.
We
also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), General Communication, Inc.’s
internal control over financial reporting as of December 31, 2008, based on
criteria established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated
March 20, 2009 expressed an adverse opinion on the effectiveness of the
Company’s internal control over financial reporting.
(signed) KPMG
LLP
Anchorage,
Alaska
March 20,
2009
89
Report
of Independent Registered Public Accounting Firm
The Board of
Directors and Stockholders
General
Communication, Inc.:
We
have audited General Communication, Inc.’s internal control over financial
reporting as of December 31, 2008, based on criteria established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). General Communication, Inc.'s
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Management’s
Report on Internal Control over Financial Reporting (Item 9A(b)). Our
responsibility is to express an opinion on the Company's internal control over
financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because of its
inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
A material weakness is a deficiency,
or a combination of deficiencies, in internal control over financial reporting,
such that there is a reasonable possibility that a material misstatement of the
company’s annual or interim financial statements will not be prevented or
detected on a timely basis. Material weaknesses related to the following
have been identified and included in management’s assessment:
|
·
|
The
entity-level control related to the selection and application of
accounting policies in accordance with GAAP was not designed to include
policies and procedures to periodically review accounting policies to
ensure ongoing GAAP compliance.
|
|
·
|
The
internal control over financial reporting at Alaska DigiTel (a
wholly-owned subsidiary) does not include activities adequate to i) timely
identify changes in financial reporting risks, ii)monitor the continued
effectiveness of controls, and iii) does not include staff with adequate
technical expertise to ensure that policies and procedures necessary for
reliable interim and annual financial statements are selected and
applied.
|
We
also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
General Communication, Inc. and subsidiaries as of December 31, 2008 and 2007,
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,
2008. These material weaknesses were considered in determining the
nature, timing, and extent of audit tests applied in our audit of the 2008
consolidated financial statements, and this report does not affect our report
dated March 20, 2009, which expressed an unqualified opinion on those
consolidated financial statements.
90
In
our opinion, because of the effect of the aforementioned material weaknesses on
the achievement of the objectives of the control criteria, General
Communication, Inc. has not maintained effective internal control over financial
reporting as of December 31, 2008, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
General
Communication, Inc. acquired United Utilities, Inc., Unicom, Inc. and
Alaska Wireless, LLC (collectively, the Acquired Entities) during 2008, and
management excluded from its assessment of the effectiveness of General
Communication Inc.’s internal control over financial reporting as of December
31, 2008, the Acquired Entities’ internal control over financial reporting
associated with total assets of $108.9 million, of which $28.1 million
represents goodwill and intangible assets within the scope of the
assessment, and total revenues of $23.4 million included in the consolidated
financial statements of General Communication, Inc. and subsidiaries as of and
for the year ended December 31, 2008. Our audit of internal control
over financial reporting of General Communication, Inc. also excluded an
evaluation of the internal control over financial reporting of the Acquired
Entities except for the $28.1 million of goodwill and intangible
assets.
(signed) KPMG
LLP
Anchorage,
Alaska
March 20,
2009
91
GENERAL
COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
(Amounts in
thousands)
|
December
31,
|
|||||||
|
ASSETS
|
2008
|
2007
|
||||||
|
Current assets:
|
||||||||
|
Cash and cash equivalents
|
$ | 29,904 | 13,074 | |||||
|
Receivables
|
113,136 | 97,913 | ||||||
|
Less
allowance for doubtful receivables
|
2,582 | 1,657 | ||||||
|
Net receivables
|
110,554 | 96,256 | ||||||
|
Deferred
income taxes
|
7,843 | 5,734 | ||||||
|
Inventories
|
7,085 | 2,541 | ||||||
|
Prepaid expenses
|
5,960 | 5,356 | ||||||
|
Investment securities
|
1,563 | --- | ||||||
|
Other current assets
|
647 | 717 | ||||||
|
Total
current assets
|
163,556 | 123,678 | ||||||
|
Property and equipment in service, net of depreciation
|
793,051 | 504,273 | ||||||
|
Construction in progress
|
54,098 | 69,409 | ||||||
|
Net
property and equipment
|
847,149 | 573,682 | ||||||
|
Cable
certificates
|
191,565 | 191,565 | ||||||
|
Goodwill
|
66,868 | 42,181 | ||||||
|
Wireless
licenses
|
25,967 | 25,757 | ||||||
|
Other
intangible assets, net of amortization
|
22,976 | 11,769 | ||||||
|
Deferred loan and senior notes costs, net of amortization of $3,900 and
$2,787 at December 31, 2008 and 2007, respectively
|
6,496 | 6,202 | ||||||
|
Other
assets
|
10,724 | 9,399 | ||||||
|
Total other
assets
|
324,596 | 286,873 | ||||||
|
Total
assets
|
$ | 1,335,301 | 984,233 | |||||
See accompanying
notes to consolidated financial statements.
92
GENERAL
COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(Continued)
|
(Amounts in
thousands)
|
December
31,
|
|||||||
|
LIABILITIES,
MINORITY INTEREST AND STOCKHOLDERS’ EQUITY
|
2008
|
2007
|
||||||
|
Current
liabilities:
|
||||||||
|
Current
maturities of obligations under long-term debt and capital
leases
|
$ | 12,857 | 2,375 | |||||
|
Accounts
payable
|
40,497 | 35,747 | ||||||
|
Accrued
payroll and payroll related obligations
|
22,632 | 16,329 | ||||||
|
Deferred
revenue
|
22,095 | 16,600 | ||||||
|
Accrued
liabilities
|
11,043 | 7,536 | ||||||
|
Accrued
interest
|
10,224 | 8,927 | ||||||
|
Subscriber
deposits
|
1,262 | 877 | ||||||
|
Total current
liabilities
|
120,610 | 88,391 | ||||||
|
Long-term
debt
|
708,406 | 536,115 | ||||||
|
Obligations
under capital leases, excluding current maturities
|
94,029 | 2,290 | ||||||
|
Obligation
under capital lease due to related party, excluding current
maturity
|
1,868 | 469 | ||||||
|
Deferred
income taxes
|
86,187 | 84,294 | ||||||
|
Long-term
deferred revenue
|
49,998 | 845 | ||||||
|
Other
liabilities
|
15,288 | 12,396 | ||||||
|
Total
liabilities
|
1,076,386 | 724,800 | ||||||
|
Minority
interest
|
--- | 6,478 | ||||||
|
Commitments
and contingencies
|
||||||||
|
Stockholders’
equity:
|
||||||||
|
Common stock
(no par):
|
||||||||
|
Class A.
Authorized 100,000 shares; issued 50,062 and 50,437 shares at
December 31, 2008 and 2007, respectively; outstanding 49,593 and 49,425 at
December 31, 2008 and 2007, respectively
|
151,262 | 155,980 | ||||||
|
Class B.
Authorized 10,000 shares; issued 3,203 and 3,257 shares at December
31, 2008 and 2007, respectively; outstanding 3,201 and 3,255 at December
31, 2008 and 2007, respectively; convertible on a
share-per-share basis into Class A common stock
|
2,706 | 2,751 | ||||||
|
Less cost of
471 and 473 Class A and Class B common shares held in treasury at December
31, 2008 and 2007, respectively
|
(2,462 | ) | (3,448 | ) | ||||
|
Paid-in
capital
|
27,233 | 20,132 | ||||||
|
Retained
earnings
|
80,176 | 77,540 | ||||||
|
Total
stockholders’ equity
|
258,915 | 252,955 | ||||||
|
Total
liabilities, minority interest and stockholders’ equity
|
$ | 1,335,301 | 984,233 | |||||
|
|
See
accompanying notes to consolidated financial
statements.
|
93
|
|
GENERAL
COMMUNICATION, INC. AND
SUBSIDIARIES
|
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
YEARS
ENDED DECEMBER 31, 2008, 2007 AND
2006
|
|
(Amounts in
thousands, except per share amounts)
|
2008
|
2007
|
2006
|
|||||
|
Revenues
|
$
|
575,442
|
520,311
|
477,482
|
||||
|
Cost of goods
sold (exclusive of depreciation and amortization shown separately
below)
|
203,058
|
195,799
|
169,107
|
|||||
|
Selling,
general and administrative expenses
|
210,306
|
175,752
|
158,950
|
|||||
|
Depreciation
and amortization expense
|
114,369
|
87,615
|
82,099
|
|||||
|
Operating
income
|
47,709
|
61,145
|
67,326
|
|||||
|
Other income
(expense):
|
||||||||
|
Interest
expense
|
(48,303
|
)
|
(34,407
|
)
|
(34,413
|
)
|
||
|
Interest and
investment income
|
576
|
544
|
1,841
|
|||||
|
Amortization
and write-off of loan fees
|
(2,060
|
)
|
(1,423
|
)
|
(964
|
)
|
||
|
Minority
interest
|
1,503
|
36
|
463
|
|||||
|
Other
|
(217
|
)
|
---
|
---
|
||||
|
Other
expense, net
|
(48,501
|
)
|
(35,250
|
)
|
(33,073
|
)
|
||
|
Income (loss)
before income tax expense and cumulative effect of a change in accounting
principle
|
(792
|
)
|
25,895
|
34,253
|
||||
|
Income tax
expense
|
1,077
|
12,162
|
15,797
|
|||||
|
Income (loss)
before cumulative effect of a change in accounting
principle
|
(1,869
|
)
|
13,733
|
18,456
|
||||
|
Cumulative
effect of a change in accounting principle, net of income tax expense
of $44
|
---
|
---
|
64
|
|||||
|
Net income
(loss)
|
$
|
(1,869
|
)
|
13,733
|
18,520
|
|||
|
Basic net
income (loss) per share of Class A and Class B common
stock:
|
||||||||
|
Income (loss)
before cumulative effect of a change in accounting
principle
|
$
|
(0.04
|
)
|
0.26
|
0.34
|
|||
|
Cumulative
effect of a change in accounting principle
|
---
|
---
|
---
|
|||||
|
Net income
(loss)
|
$
|
(0.04
|
)
|
0.26
|
0.34
|
|||
|
Diluted net
income (loss) per share of Class A and Class B common
stock:
|
||||||||
|
Income (loss)
before cumulative effect of a change in accounting
principle
|
$
|
(0.04
|
)
|
0.23
|
0.33
|
|||
|
Cumulative
effect of a change in accounting principle
|
---
|
---
|
---
|
|||||
|
Net income
(loss)
|
$
|
(0.04
|
)
|
0.23
|
0.33
|
See accompanying
notes to consolidated financial statements.
94
GENERAL
COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS
ENDED DECEMBER 31, 2008, 2007 AND 2006
|
(Amounts in
thousands)
|
Class A
Common Stock
|
Class B
Common Stock
|
Class A and B
Shares Held in Treasury
|
Paid-in
Capital
|
Notes
Receivable with Related Parties
|
Retained
Earnings
|
Total
Stockholders’ Equity
|
|||||||||||||||||||||
|
Balances at
January 1, 2006
|
$ | 178,351 | 3,247 | (1,730 | ) | 16,425 | (1,722 | ) | 49,854 | 244,425 | ||||||||||||||||||
|
SAB 108
cumulative adjustment, net of income tax expense
|
--- | --- | --- | --- | --- | 1,104 | 1,104 | |||||||||||||||||||||
|
Net
income
|
--- | --- | --- | --- | --- | 18,520 | 18,520 | |||||||||||||||||||||
|
Cumulative
effect adjustments upon implementation of Statement of Financial
Accounting Standard No. 123(R)
|
--- | --- | --- | (108 | ) | --- | --- | (108 | ) | |||||||||||||||||||
|
Common stock
repurchases
|
--- | --- | (3 | ) | --- | --- | (34,672 | ) | (34,675 | ) | ||||||||||||||||||
|
Common stock
retirements
|
(32,571 | ) | (369 | ) | --- | --- | --- | 32,940 | --- | |||||||||||||||||||
|
Shares issued
under stock option plan
|
11,690 | --- | --- | --- | --- | --- | 11,690 | |||||||||||||||||||||
|
Class B
shares converted to Class A
|
32 | (32 | ) | --- | --- | --- | --- | --- | ||||||||||||||||||||
|
Issuance of
service awards
|
--- | --- | 14 | --- | --- | --- | 14 | |||||||||||||||||||||
|
Share-based
compensation expense
|
--- | --- | --- | 4,407 | --- | --- | 4,407 | |||||||||||||||||||||
|
Payments
received on notes receivable with related parties issued upon stock option
exercise
|
--- | --- | --- | --- | 1,001 | --- | 1,001 | |||||||||||||||||||||
|
Reclassification
from treasury stock to be held for general corporate purposes to common
stock to be retired
|
--- | --- | 283 | --- | --- | (283 | ) | --- | ||||||||||||||||||||
|
Other
|
--- | --- | --- | (83 | ) | (17 | ) | --- | (100 | ) | ||||||||||||||||||
|
Balances at
December 31, 2006
|
157,502 | 2,846 | (1,436 | ) | 20,641 | (738 | ) | 67,463 | 246,278 | |||||||||||||||||||
|
Net
income
|
--- | --- | --- | --- | --- | 13,733 | 13,733 | |||||||||||||||||||||
|
Common stock
repurchases
|
--- | --- | (2,000 | ) | --- | --- | (15,076 | ) | (17,076 | ) | ||||||||||||||||||
|
Common stock
retirements
|
(11,420 | ) | --- | --- | --- | --- | 11,420 | --- | ||||||||||||||||||||
|
Shares issued
under stock option plan
|
3,311 | --- | --- | --- | --- | --- | 3,311 | |||||||||||||||||||||
|
Issuance of
restricted stock awards
|
6,492 | --- | --- | (6,492 | ) | --- | --- | --- | ||||||||||||||||||||
|
Class B
shares converted to Class A
|
95 | (95 | ) | --- | --- | --- | --- | --- | ||||||||||||||||||||
|
Issuance of
service awards
|
--- | --- | 28 | --- | --- | --- | 28 | |||||||||||||||||||||
|
Share-based
compensation expense
|
--- | --- | --- | 5,983 | --- | --- | 5,983 | |||||||||||||||||||||
|
Payments
received on notes receivable with related parties issued upon stock option
exercise
|
--- | --- | --- | --- | 738 | --- | 738 | |||||||||||||||||||||
|
Other
|
--- | --- | (40 | ) | --- | --- | --- | (40 | ) | |||||||||||||||||||
|
Balances at
December 31, 2007
|
155,980 | 2,751 | (3,448 | ) | 20,132 | --- | 77,540 | 252,955 | ||||||||||||||||||||
95
GENERAL
COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS
ENDED DECEMBER 31, 2008, 2007 AND 2006
(Continued)
|
(Amounts in
thousands)
|
Class A
Common Stock
|
Class B
Common Stock
|
Class A and B
Shares Held in Treasury
|
Paid-in
Capital
|
Retained
Earnings
|
Total
Stockholders’ Equity
|
||||||||||||||||||
|
Balances at
December 31, 2007
|
$ | 155,980 | 2,751 | (3,448 | ) | 20,132 | 77,540 | 252,955 | ||||||||||||||||
|
Net
loss
|
--- | --- | --- | --- | (1,869 | ) | (1,869 | ) | ||||||||||||||||
|
Common stock
retirements
|
(5,465 | ) | --- | --- | --- | 5,465 | --- | |||||||||||||||||
|
Shares issued
under stock option plan
|
415 | --- | --- | --- | --- | 415 | ||||||||||||||||||
|
Issuance of
restricted stock awards
|
331 | --- | --- | (331 | ) | --- | --- | |||||||||||||||||
|
Class B
shares converted to Class A
|
45 | (45 | ) | --- | --- | --- | --- | |||||||||||||||||
|
Issuance of
service awards
|
--- | --- | 28 | --- | --- | 28 | ||||||||||||||||||
|
Share-based
compensation expense
|
--- | --- | --- | 7,432 | --- | 7,432 | ||||||||||||||||||
|
Reclassification
from treasury stock to be held for general corporate purposes to common
stock to be retired
|
--- | 960 | --- | (960 | ) | --- | ||||||||||||||||||
|
Other
|
(44 | ) | --- | (2 | ) | --- | --- | (46 | ) | |||||||||||||||
|
Balances at
December 31, 2008
|
$ | 151,262 | 2,706 | (2,462 | ) | 27,233 | 80,176 | 258,915 | ||||||||||||||||
See accompanying
notes to consolidated financial statements.
96
GENERAL
COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
YEARS
ENDED DECEMBER 31, 2008, 2007 AND 2006
|
(Amounts in
thousands)
|
2008
|
2007
|
2006
|
|||||
|
Cash flows
from operating activities:
|
||||||||
|
Net income
(loss)
|
$
|
(1,869
|
)
|
13,733
|
18,520
|
|||
|
Adjustments
to reconcile net income (loss) to net cash provided by
operating activities, net of effect of acquisitions:
|
||||||||
|
Depreciation
and amortization expense
|
114,369
|
87,615
|
82,099
|
|||||
|
Deferred
income tax expense
|
1,077
|
11,649
|
15,384
|
|||||
|
Other noncash
income and expense items
|
7,393
|
7,602
|
4,924
|
|||||
|
Share-based
compensation expense
|
7,278
|
4,944
|
6,365
|
|||||
|
Change in
operating assets and liabilities, net of effect of
acquisitions
|
47,087
|
(15,255
|
)
|
(4,510
|
)
|
|||
|
Net cash
provided by operating activities
|
175,335
|
110,288
|
122,782
|
|||||
|
Cash flows
from investing activities:
|
||||||||
|
Purchases of
property and equipment, including construction period
interest
|
(221,458
|
)
|
(153,030
|
)
|
(95,998
|
)
|
||
|
Purchase of
businesses and minority interest, net of cash received
|
(65,335
|
)
|
(19,530
|
)
|
---
|
|||
|
Purchase of
software licenses and other assets
|
(8,974
|
)
|
(7,183
|
)
|
(4,751
|
)
|
||
|
Proceeds from
sale of marketable securities
|
4,800
|
---
|
---
|
|||||
|
Restricted
cash
|
---
|
4,612
|
(4,612
|
)
|
||||
|
Other
|
---
|
44
|
3,326
|
|||||
|
Net cash used
in investing activities
|
(290,967
|
)
|
(175,087
|
)
|
(102,035
|
)
|
||
|
Cash flows
from financing activities:
|
||||||||
|
Borrowing on
long-term debt
|
114,486
|
10,000
|
---
|
|||||
|
Borrowing on
revolving credit facility, net
|
30,000
|
50,000
|
15,000
|
|||||
|
Payment of
debt
|
(10,248
|
)
|
(27,152
|
)
|
(1,725
|
)
|
||
|
Payment of
debt issuance costs
|
(2,118
|
)
|
(527
|
)
|
(44
|
)
|
||
|
Proceeds from
common stock issuance
|
415
|
3,311
|
11,472
|
|||||
|
Purchase of
treasury stock to be held for general corporate purposes
|
(3)
|
(2,000
|
)
|
(3
|
)
|
|||
|
Purchase of
treasury stock to be retired
|
---
|
(13,337
|
)
|
(32,561
|
)
|
|||
|
Other
|
(70
|
)
|
(69
|
)
|
399
|
|||
|
Net cash
provided by (used in) financing activities
|
132,462
|
20,226
|
(7,462
|
)
|
||||
|
Net increase
(decrease) in cash and cash equivalents
|
16,830
|
(44,573
|
)
|
13,285
|
||||
|
Cash and cash
equivalents at beginning of period
|
13,074
|
57,647
|
44,362
|
|||||
|
Cash and cash
equivalents at end of period
|
$
|
29,904
|
13,074
|
57,647
|
See accompanying
notes to consolidated financial statements.
97
GENERAL
COMMUNICATION, INC. AND SUBSIDIARIES
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:
|
|
·
|
Origination
and termination of traffic in Alaska for certain common
carriers,
|
|
|
·
|
Cable
television services throughout
Alaska,
|
|
|
·
|
Competitive
local access services in Anchorage, Fairbanks, Juneau, Wasilla, Eagle
River, Kodiak, Palmer, Kenai, Soldotna, Seward, Chugiak, Sitka, Valdez,
Ketchikan, Nome, and Homer, Alaska as of December 31, 2008 with on-going
expansion into additional Alaska
communities,
|
|
|
·
|
Incumbent
local access services in rural
Alaska,
|
|
|
·
|
Long-distance
telephone service between Alaska and the remaining United States and
foreign countries,
|
|
|
·
|
Sale and
resale of postpaid and sale of prepaid wireless telephone services and
sale of wireless telephone handsets and
accessories,
|
|
|
·
|
Data network
services,
|
|
|
·
|
Internet
access services,
|
|
|
·
|
Broadband
services, including our SchoolAccess®
offering to rural school districts, our ConnectMD®
offering to rural hospitals and health clinics, and managed video
conferencing,
|
|
|
·
|
Managed
services to certain commercial
customers,
|
|
|
·
|
Sales and
service of dedicated communications systems and related
equipment,
|
|
|
·
|
Lease,
service arrangements and maintenance of capacity on our fiber optic cable
systems used in the transmission of interstate and intrastate data,
switched message long-distance and Internet services within Alaska and
between Alaska and the remaining United States and foreign countries,
and
|
|
|
·
|
Distribution
of white and yellow pages directories to residential and business
customers in certain markets we serve and on-line directory
products.
|
|
|
(b)
|
Principles
of Consolidation
|
|
|
The
consolidated financial statements include the consolidated accounts of GCI
and its wholly-owned subsidiaries, as well as a variable interest entity
in which we were the primary beneficiary as defined by Financial
Accounting Standards Board ("FASB") Interpretation ("FIN") No. 46R,
“Consolidation of Variable Interest Entities, an interpretation of ARB No.
51” through August 17, 2008. We purchased the minority interest
of the variable interest entity on August 18, 2008 as further described in
note 1(c). All significant intercompany transactions between
non-regulated affiliates of our company are
eliminated. Statement of Financial Accounting Standard ("SFAS")
No. 71, "Accounting for the Effects of Certain Types of Regulation"
requires intercompany revenue and expenses generated between regulated and
non-regulated affiliates of the company not be eliminated on
consolidation. Intercompany revenue and expenses with
affiliates not subject to SFAS 71 have been
eliminated.
|
|
|
(c)
|
Acquisitions
|
|
|
Effective
June 1, 2008, we closed on our purchase of 100% of the outstanding stock
of UUI and Unicom, which were subsidiaries of UCI. UUI,
together with its subsidiary, United-KUC, provides local telephone service
to 60 rural communities in the Bethel, Alaska area. Unicom
operates DeltaNet, a long-haul broadband microwave network ringing the
Yukon-Kuskokwim Delta. We view this investment as an
opportunity to expand our Managed Broadband services in rural
Alaska. The UUI and Unicom acquisition were stock purchases but
we elected to treat them as an asset purchase for income tax purposes,
resulting in goodwill being deductible for tax
purposes.
|
(Continued)
98
COMMUNICATION,
INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
|
|
Effective
July 1, 2008, we closed on our purchase of 100% of the ownership interests
of Alaska Wireless, which provides wireless and Internet services in the
Dutch Harbor, Sand Point, Akutan, and Adak, Alaska areas. Such
purchase was treated as an asset purchase for income tax
purposes. We view this investment as an opportunity to expand
our wireless services in the Aleutian Chain region of rural
Alaska. We consider this business combination to be immaterial
to our consolidated financial
statements.
|
|
|
On August 18,
2008, we exercised our option to acquire the remaining 18.1% of the equity
interest and voting control of Alaska DigiTel for $10.4
million. Prior to August 18, 2008, our ability to control the
operations of Alaska DigiTel was limited as required by the FCC upon their
approval of our initial acquisition of 81.9% of the noncontrolling equity
interest obtained in January 2007. Subsequent to the
acquisition of the minority interest, we own 100% of the outstanding
common ownership units and voting control of Alaska
DigiTel. Such purchase was treated as an asset purchase for
income tax purposes. We purchased Alaska DigiTel as a way to
participate in the future growth of the Alaska wireless
industry. We consolidated 100% of Alaska DigiTel's assets and
liabilities at fair value beginning on January 1, 2007, when we determined
that Alaska DigiTel was a variable interest entity of which we were the
primary beneficiary. Upon our acquisition of the minority
interest in Alaska DigiTel on August 18, 2008, we recorded 18.1% of the
change in fair value between the assets and liabilities on January 1, 2007
and the fair value of the assets and liabilities on August 18,
2008.
|
|
|
On the
closing date of the acquisition of UUI and Unicom, $8.0 million of the
purchase price was deposited in an escrow account to compensate us for any
indemnification claims we may have after the acquisition and was included
in the purchase price. At this time, we are not aware of any
indemnification claims and expect the portion of the purchase price in the
escrow account to be paid to the seller in the
future.
|
|
|
We have
agreed to make additional payments for UUI and Unicom in each of the years
2009 through 2013 that are contingent on sequential year-over-year revenue
growth for specified customers. We have agreed to make an
additional payment for Alaska Wireless in 2010 that is contingent on
meeting certain financial conditions. The amount of the 2009
UUI and Unicom contingent payment is not expected to be significant and we
are unable to reasonably estimate the remaining contingent consideration
amounts that may be paid for either acquisition, but do not believe any
amount paid will be significant.
|
|
|
We recorded
our business acquisitions and the acquisition of the minority interest in
Alaska DigiTel based on the provisions of SFAS No. 141, "Business
Combinations," and accordingly, the purchase price has been allocated
based on the fair values of the assets acquired and liabilities
assumed. In addition, the acquired companies' results of
operations are included since the effective date of each
acquisition.
|
|
|
The purchase
prices for our 2008 acquisitions, net of cash received of approximately
$1.7 million from UUI and Unicom, are as follows (amounts in
thousands):
|
|
UUI and
Unicom
|
$ | 40,575 | ||
|
Alaska
Wireless
|
$ | 14,508 | ||
|
Alaska
DigiTel
|
$ | 10,434 |
(Continued)
99
GENERAL
COMMUNICATION, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
|
|
We are in the
process of determining the fair value of goodwill and certain tax
liabilities for UUI and Unicom, therefore, the purchase price allocations
for UUI and Unicom have not been finalized at December 31, 2008 and the
goodwill and the tax liabilities associated with UUI and Unicom are
subject to refinement. The purchase price for all acquisitions
except for UUI and Unicom have been finalized and allocated as of December
31, 2008 as follows (amounts in
thousands):
|
|
UUI and
Unicom
|
Alaska
DigiTel
|
|||||||
|
Current
assets
|
$ | 15,008 | 2,220 | |||||
|
Property and
equipment, including construction in progress
|
59,629 | 6,015 | ||||||
|
Intangible
assets
|
8,175 | 1,468 | ||||||
|
Wireless
licenses
|
100 | 4,396 | ||||||
|
Goodwill
|
9,102 | 4,534 | ||||||
|
Other
assets
|
3,106 | 1 | ||||||
|
Total assets
acquired
|
95,120 | 18,634 | ||||||
|
Current
liabilities
|
4,916 | 2,588 | ||||||
|
Long-term
debt, including current portion
|
43,614 | 5,515 | ||||||
|
Other
long-term liabilities
|
4,335 | 97 | ||||||
|
Total
liabilities assumed
|
52,865 | 8,200 | ||||||
|
Net assets
acquired
|
$ | 42,255 | 10,434 | |||||
|
|
We modified
the initial preliminary UUI and Unicom purchase price allocation during
the third and fourth quarters of 2008 by increasing current assets
$548,000, decreasing property and equipment $8.5 million, increasing
intangible assets $1.7 million, increasing goodwill $3.1 million, increase
other assets $695,000, increasing current liabilities $464,000, increasing
long-term debt $910,000, and decreasing other long-term liabilities $3.9
million for adjustments due to the refinement of the estimated fair
value.
|
|
|
We modified
the initial preliminary Alaska DigiTel purchase price allocation for the
purchase of the minority interest during the fourth quarter of 2008 by
decreasing property and equipment $202,000, increasing intangible assets
$503,000, decreasing goodwill $88,000, and increasing liabilities $253,000
for adjustments to the fair value of the fixed assets and intangibles due
to refinement of the valuation. An adjustment to the fair value
of the liabilities was due to refinement of the estimated fair
value.
|
|
|
All of our
2008 acquisitions resulted in goodwill which is deductible over 15 years
for income tax purposes.
|
|
|
Revenues from
the date of acquisition, net of intercompany revenue, for our acquisitions
of UUI, Unicom and Alaska Wireless are allocated to our Consumer, Network
Access, Managed Broadband, and Regulated Operations
segments. As a result of the acquisition of UUI and Unicom, we
have a new operating segment for our regulated
activities.
|
|
|
UUI and
Unicom had outstanding debt of $38.9 million at December 31, 2008 that is
collateralized by substantially all of UUI's and Unicom's
assets. UUI and Unicom's creditors do not have recourse to
GCI's assets.
|
|
|
The following
unaudited pro forma financial information is presented as if we had
acquired the companies as of the beginning of the periods
presented. The pro forma results of operations as if the
acquisitions occurred on January 1, 2007 or 2008 for the years ended
December 31 are as follows (amount in
thousands):
|
(Continued)
100
GENERAL
COMMUNICATION, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
|
(unaudited)
|
||||||||
|
2008
|
2007
|
|||||||
|
Pro forma
consolidated revenue
|
$ | 588,691 | 546,728 | |||||
|
Pro forma net
income (loss)
|
$ | (2,932 | ) | 12,773 | ||||
|
EPS:
|
||||||||
|
Basic – pro
forma
|
$ | (0.06 | ) | 0.24 | ||||
|
Diluted – pro
forma
|
$ | (0.06 | ) | 0.22 | ||||
|
|
(d)
|
Regulatory
Accounting and
Regulation
|
|
|
We account
for our regulated operations in accordance with the accounting principles
for regulated enterprises prescribed by SFAS No. 71. This
accounting recognizes the economic effects of rate regulation by recording
cost and a return on investment as such amounts are recovered through
rates authorized by regulatory authorities. Accordingly, under
SFAS No. 71, plant and equipment is depreciated over lives approved by
regulators and certain costs and obligations are deferred based upon
approvals received from regulators to permit recovery of such amounts in
future years. Our cost studies and depreciation rates for our
regulated operations are subject to periodic audits that could result in
reductions of revenues. Based upon the purchase price
allocation described in note 1(c), the effects of regulation for the year
ended December 31, 2008 are not material to the consolidated financial
statements.
|
|
|
(e) Earnings
per Common Share
|
|
|
We compute
net income (loss) per share of Class A and Class B common stock in
accordance with SFAS No. 128, "Earnings per Share" (“SFAS 128”) using the
two class method. Under the provisions of SFAS 128, basic net
income (loss) per share is computed by dividing net income (loss)
applicable to common stockholders by the weighted average number of common
shares outstanding during the year. Diluted net income (loss)
per share is computed by dividing net income (loss) applicable to common
stockholders by the weighted average number of common and dilutive common
equivalent shares outstanding during the period. The
computation of the dilutive net income (loss) per share of Class A common
stock assumes the conversion of Class B common stock to Class A common
stock, while the dilutive net income (loss) per share of Class B common
stock does not assume the conversion of those
shares.
|
|
|
In accordance
with EITF 03-06, “Participating Securities and the Two Class Method under
FASB No. 128,” the undistributed earnings for each year are allocated
based on the contractual participation rights of Class A and Class B
common shares as if the earnings for the year had been
distributed. Considering the terms of our Articles of
Incorporation which provides that, if and when dividends are declared on
our common stock in accordance with Alaska corporate law, equivalent
dividends shall be paid with respect to the shares of Class A common stock
and Class B common stock and that both classes of common stock have
identical dividend rights and would share equally in our net assets in the
event of liquidation, we have allocated undistributed earnings (losses) on
a proportionate basis.
|
|
|
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,
2008
|
||||||||
|
Class
A
|
Class
B
|
|||||||
|
Basic
net loss per share:
|
||||||||
|
Numerator:
|
||||||||
|
Allocation of
undistributed losses
|
$ | (1,754 | ) | (115 | ) | |||
|
Denominator:
|
||||||||
(Continued)
101
GENERAL
COMMUNICATION, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
|
Weighted
average common shares outstanding
|
49,080 | 3,241 | ||||||
|
Basic net
loss per share
|
$ | (0.04 | ) | (0.04 | ) | |||
|
Diluted
net loss per share:
|
||||||||
|
Numerator:
|
||||||||
|
Allocation of
undistributed losses for basic computation
|
$ | (1,754 | ) | (115 | ) | |||
|
Reallocation
of undistributed losses as a result of conversion of Class B to Class
A shares
|
(115 | ) | --- | |||||
|
Allocation of
undistributed losses
|
$ | (1,869 | ) | (115 | ) | |||
|
Denominator:
|
||||||||
|
Number of
shares used in basic computation
|
49,080 | 3,241 | ||||||
|
Conversion of
Class B to Class A common shares outstanding
|
3,241 | --- | ||||||
|
Number of
shares used in per share computations
|
52,321 | 3,241 | ||||||
|
Diluted net
loss per share
|
$ | (0.04 | ) | (0.04 | ) |
|
Years Ended
December 31,
|
||||||||||||||||
|
2007
|
2006
|
|||||||||||||||
|
Class
A
|
Class
B
|
Class
A
|
Class
B
|
|||||||||||||
|
Basic
net income per share:
|
||||||||||||||||
|
Numerator:
|
||||||||||||||||
|
Allocation of
undistributed earnings before cumulative effect of a change in accounting
principle
|
$ | 12,884 | 849 | 17,250 | 1,206 | |||||||||||
|
Allocation of
undistributed earnings from cumulative effect of a change in accounting
principle
|
--- | --- | 60 | 4 | ||||||||||||
|
Allocation of
undistributed earnings after cumulative effect of a change in accounting
principle
|
$ | 12,884 | 849 | 17,310 | 1,210 | |||||||||||
|
Denominator:
|
||||||||||||||||
|
Weighted
average common shares outstanding
|
49,678 | 3,273 | 50,260 | 3,517 | ||||||||||||
|
Basic net
income per share before cumulative effect of a change in accounting
policy
|
$ | 0.26 | 0.26 | 0.34 | 0.34 | |||||||||||
|
Basic net
income per share from cumulative effect of a change in accounting
policy
|
--- | --- | --- | --- | ||||||||||||
|
Basic net
income per share after effect of a change in accounting
policy
|
$ | 0.26 | $ | 0.26 | $ | 0.34 | $ | 0.34 | ||||||||
|
Diluted
net income per share:
|
||||||||||||||||
|
Numerator:
|
||||||||||||||||
|
Allocation of
undistributed earnings for basic computation
|
$ | 12,884 | $ | 849 | 17,250 | 1,206 | ||||||||||
|
Reallocation
of undistributed earnings as a result of conversion of Class B to Class A
shares
|
849 | --- | 1,206 | --- | ||||||||||||
(Continued)
102
GENERAL
COMMUNICATION, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
|
Reallocation
of undistributed earnings due to conversion of Class B to Class A shares
outstanding
|
--- | (96 | ) | --- | (44 | ) | ||||||||||
|
Allocation of
effect of share based compensation that may be settled in cash or
shares
|
(1,329 | ) | --- | --- | --- | |||||||||||
|
Allocation of
undistributed earnings before cumulative effect of a change in accounting
principle
|
12,404 | 753 | 18,456 | 1,162 | ||||||||||||
|
Allocation of
undistributed earnings from cumulative effect of a change in accounting
principle
|
--- | --- | 60 | 4 | ||||||||||||
|
Allocation of
undistributed earnings after cumulative effect of a change in accounting
principle
|
$ | 12,404 | 753 | 18,516 | 1,166 | |||||||||||
|
Denominator:
|
||||||||||||||||
|
Number of
shares used in basic computation
|
49,678 | 3,273 | 50,260 | 3,517 | ||||||||||||
|
Conversion of
Class B to Class A common shares outstanding
|
3,273 | --- | 3,517 | --- | ||||||||||||
|
Effect of
share based compensation that may be settled in cash or
shares
|
318 | --- | --- | --- | ||||||||||||
|
Unexercised
stock options, net
|
1,288 | --- | 1,548 | --- | ||||||||||||
|
Unvested
stock awards
|
24 | --- | --- | --- | ||||||||||||
|
Number of
shares used in per share computations
|
54,581 | 3,273 | 55,325 | 3,517 | ||||||||||||
|
Diluted net
income per share before cumulative effect of a change in accounting
policy
|
$ | 0.23 | 0.23 | 0.33 | 0.33 | |||||||||||
|
Diluted net
income per share from cumulative effect of a change in accounting
policy
|
--- | --- | 0.00 | 0.00 | ||||||||||||
|
Diluted net
income per share after effect of a change in accounting
policy
|
$ | 0.23 | 0.23 | 0.33 | 0.33 |
Weighted average
shares associated with outstanding share awards for the years ended December 31,
2008, 2007 and 2006 which have been excluded from the computations of diluted
EPS because the effect of including these share awards would have been
anti-dilutive, consist of the following (shares, in thousands):
|
2008
|
2007
|
2006
|
||||
|
Weighted
average shares associated with outstanding stock options
|
4,238
|
1,909
|
1,394
|
|||
|
Effect of
share-based compensation that may be settled in cash or
shares
|
289
|
---
|
99
|
|||
|
4,527
|
1,909
|
1,493
|
Additionally,
258,000, 306,000, and 0 weighted average shares associated with contingent
awards for years ended December 31, 2008, 2007, and 2006, respectively were
excluded from the computation of diluted EPS because the contingencies of these
awards have not been met at December 31, 2008, 2007, and 2006,
respectively.
(Continued)
103
GENERAL
COMMUNICATION, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
|
|
(f)
|
Common
Stock
|
Following
are the changes in issued shares of common stock for the years ended December
31, 2008, 2007 and 2006 (shares, in thousands):
|
Class
A
|
Class
B
|
|||||||
|
Balances at
January 1, 2006
|
51,200 | 3,843 | ||||||
|
Shares
retired
|
(2,770 | ) | (435 | ) | ||||
|
Shares issued
under stock option plan
|
1,706 | --- | ||||||
|
Share awards
issued
|
17 | --- | ||||||
|
Class B
shares converted to Class A
|
38 | (38 | ) | |||||
|
Balances at
December 31, 2006
|
50,191 | 3,370 | ||||||
|
Shares
retired
|
(843 | ) | --- | |||||
|
Shares issued
under stock option plan
|
477 | --- | ||||||
|
Share awards
issued
|
499 | --- | ||||||
|
Class B
shares converted to Class A
|
113 | (113 | ) | |||||
|
Balances at
December 31, 2007
|
50,437 | 3,257 | ||||||
|
Shares
retired
|
(540 | ) | --- | |||||
|
Shares issued
under stock option plan
|
71 | --- | ||||||
|
Share awards
issued
|
45 | --- | ||||||
|
Class B
shares converted to Class A
|
54 | (54 | ) | |||||
|
Other
|
(5 | ) | --- | |||||
|
Balances at
December 31, 2008
|
50,062 | 3,203 | ||||||
|
|
GCI's Board
of Directors has authorized a common stock buyback program for the
repurchase of our Class A and Class B common stock in order to reduce our
outstanding shares of Class A and Class B common stock. The Additional
Incremental Term Loan agreement entered into in May 2008 and described in
note 6 allows for the repurchase of our common stock under our buyback
program when our total debt leverage is below 4.0 times earnings before
depreciation and amortization expense, net interest expense, income taxes,
share-based compensation expense, and non-cash contribution adjustment
(“adjusted EBITDA”).
|
|
|
Under the
buyback program we had made repurchases of $68.9 million through December
31, 2007. During the year ended December 31, 2008 we
repurchased no shares of our Class A and B common stock. During the years
ended December 31, 2007 and 2006, we repurchased 1,252,000 and 2,858,000
shares of our Class A and B common stock at a cost of $15.1 million and
$34.7 million, respectively. The cost of the repurchased common
stock is recorded in Retained Earnings on our Consolidated Balance
Sheets. In 2008 we retired 540,000 shares of our Class A common
stock all of which we repurchased in 2007. All shares of our
Class A common stock repurchased for retirement have been retired as of
December 31, 2008.
|
|
|
(g)
|
Investment
Securities
|
|
|
We have
investment securities of $1.6 million at December 31, 2008 that are
classified as trading under SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Our investments
consist primarily of money market funds and U.S. government
securities. Trading securities are recorded at fair value with
unrealized holding gains and losses included in net income
(loss). In 2008, the change in net unrealized holding
gains/losses in the trading portfolio included in earnings was a net gain
of $43,000.
|
|
|
(h) Redeemable
Preferred
Stock
|
|
|
We have
1,000,000 shares of preferred stock authorized with no shares issued and
outstanding at December 31 2008, 2007 and
2006.
|
(Continued)
104
GENERAL
COMMUNICATION, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
|
|
(i) Treasury
Stock
|
|
|
We account
for treasury stock purchased for general corporate purposes under the cost
method and include treasury stock as a component of Stockholders’
Equity. Treasury stock purchased with an intent to retire
(whether or not the retirement is actually accomplished) is charged
entirely to Retained Earnings.
|
|
|
(j) Cash
Equivalents
|
|
|
Cash
equivalents consist of overnight sweep investments and certificates of
deposit which have an original maturity of three months or less at the
date acquired and are readily convertible into
cash.
|
|
|
(k) Restricted
Cash
|
|
|
We had
provided a $4.6 million bank depository account as collateral for a term
loan from a bank to Alaska DigiTel as of December 31, 2006. The
cash was released from the restriction in January 2007 subsequent to our
initial investment in Alaska
DigiTel.
|
|
|
(l) 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
base our estimates on the aging of our accounts receivable balances,
financial health of specific customers, regional economic data, changes in
our collections process, regulatory requirements, and our customers’
compliance with USAC rules. We review our allowance for doubtful accounts
methodology at least annually.
|
|
|
Depending
upon the type of account receivable our allowance is calculated using a
pooled basis with an allowance for all accounts greater than 120 days past
due, a specific identification method, or a combination of the two
methods. When a specific identification method is used past due balances
over 90 days old and balances less than 90 days old but potentially
uncollectible due to bankruptcy or other issues are reviewed individually
for collectability. Account 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.
|
|
|
(m) Inventories
|
|
|
Wireless
handset inventories are stated at the lower of cost or market (net
realizable value). Cost is determined using the average cost method.
Handset costs in excess of the revenues generated from handset sales, or
handset subsidies, are expensed at the time of sale. We do not recognize
the expected handset subsidies prior to the time of sale because the
promotional discount decision is made at the point of sale and/or because
we expect to recover the handset subsidies through service
revenue.
|
|
|
Inventories
of other merchandise for resale and parts are stated at the lower of cost
or market. Cost is determined using the average cost
method.
|
|
|
(n) 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 at inception of the lease. Construction in progress represents
distribution equipment and systems and support equipment and systems not
placed in service on December 31, 2008 that management intends to place in
service during 2009.
|
(Continued)
105
GENERAL
COMMUNICATION, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
|
|
Depreciation
is computed using the straight-line method 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 equipment
|
12
years
|
|
Fiber optic
cable systems
|
12-30
years
|
|
Cable
television distribution equipment and systems
|
10
years
|
|
Support
equipment and systems
|
3-5
years
|
|
Transportation
equipment
|
3
years
|
|
Property and
equipment under capital leases
|
12-20
years
|
|
Buildings
|
20
years
|
|
|
Amortization
of property and equipment under capital leases is included in Depreciation
and Amortization Expense on the Consolidated Statements of
Operations.
|
|
|
Repairs and
maintenance are charged to expense as incurred. Expenditures for major
renewals and betterments are capitalized. Accumulated depreciation is
removed and gains or losses are recognized at the time of retirements,
sales or other dispositions of property and
equipment.
|
|
|
(o)Long-lived
Assets to be Disposed
of
|
|
|
Long-lived
assets to be disposed of, including those of discontinued operations, if
any, are measured at the lower of carrying amount or fair value less cost
to sell, if applicable. We classify a long-lived asset to be disposed of
other than by sale as held and used until it is disposed of. We classify a
long-lived asset to be sold as held for sale in the period in which the
criteria established by SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-lived Assets” are met. We do not depreciate or amortize
long-lived assets to be sold.
|
|
|
A loss is
recognized for any initial or subsequent write-down to fair value less
cost to sell. A gain is recognized for any subsequent increase in fair
value less cost to sell, but not in excess of the cumulative loss
previously recognized (for a write-down to fair value less cost to sell).
The loss or gain adjusts only the carrying amount of a long-lived asset,
whether classified as held for sale individually or as part of a disposal
group. A gain or loss not previously recognized that results from the sale
of a long-lived asset (disposal group) is recognized at the date of
sale.
|
|
|
(p)Intangible
Assets
and Goodwill
|
|
|
Goodwill,
cable certificates (certificates of convenience and public necessity) and
wireless licenses are not amortized. Cable certificates represent certain
perpetual operating rights to provide cable services. Wireless licenses
represent the right to utilize certain radio frequency spectrum to provide
wireless communications services. Goodwill represents the
excess of cost over fair value of net assets acquired in connection with a
business acquisition. Goodwill is not allocated to our segments as our
Chief Operating Decision Maker does not review a balance sheet by segment
to make decisions about resource allocation or evaluate segment
performance. Goodwill is allocated to all reporting segments for the sole
purpose of the annual impairment
test.
|
|
|
All other
amortizable intangible assets are being amortized over 1 to 20 year
periods using the straight-line
method.
|
|
|
(q) Impairment
of Intangibles, Goodwill, and Long-lived
Assets
|
|
|
Cable
certificate assets and wireless licenses 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 assets 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 becomes its new accounting basis. Impairment testing of our
cable certificate assets and wireless licenses as of December 31, 2008 and
2007 used a direct value method.
|
|
|
Our goodwill
assets are tested annually for impairment, and are tested for impairment
more frequently if events and circumstances indicate that the assets 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 asset over the implied fair value of that
asset. 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.”
|
(Continued)
106
GENERAL
COMMUNICATION, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
|
|
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
group may not be recoverable. Recoverability of an asset group to be held
and used is measured by a comparison of the carrying amount of an asset
group to estimated undiscounted future cash flows expected to be generated
by the asset group. If the carrying amount of an asset group exceeds its
estimated undiscounted future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset group
exceeds the fair value of the asset
group.
|
|
|
For the
period from January 1, 2008 to December 31, 2008, the U.S. financial
markets have been impacted by continued deterioration in economic
conditions. Should economic conditions in the State of Alaska and other
indicators deteriorate such that they impact our ability to achieve levels
of forecasted operating results and cash flows, should our stock price and
market capitalization decline below our book value for a sustained period
of time, or should other events occur indicating the carrying value of
goodwill and intangible assets might be impaired, we would test our
intangible assets for impairment and may recognize an impairment loss to
the extent that the carrying amount exceeds such asset’s fair value.
Any
future impairment charges could have a material adverse effect on our
results of operations.
|
|
|
(r) Amortization
and Write-off of Loan
Fees
|
|
|
Debt issuance
costs are deferred and amortized using the effective interest method. If a
refinancing or amendment of a debt instrument is a substantial
modification, all or a portion of the applicable debt issuance costs are
written off. If a debt instrument is repaid prior to the
maturity date we will write-off a proportional amount of debt issuance
costs.
|
|
|
(s)Other
Assets
|
|
|
Other Assets
primarily include long-term deposits, prepayments, and non-trade accounts
receivable.
|
|
|
(t) Asset
Retirement
Obligations
|
|
|
We record the
fair value of a liability for an asset retirement obligation in the period
in which it is incurred in Other Liabilities on the Consolidated Balance
Sheets. Additionally, a conditional asset retirement obligation is
recognized as a liability if the fair value of the liability can be
reasonably estimated. When the liability is initially recorded, we
capitalize 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, we either
settle the obligation for its recorded amount or incur a gain or loss upon
settlement.
|
|
|
The majority
of our asset retirement obligation is the estimated cost to remove
telephony distribution equipment and support equipment from leased
property.
|
|
|
Following is
a reconciliation of the beginning and ending aggregate carrying amount of
our liability for asset retirement obligation (amounts in
thousands):
|
(Continued)
107
GENERAL
COMMUNICATION, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
|
Balance at
December 31, 2006
|
$ | 3,408 | ||
|
Liability
incurred
|
260 | |||
|
Additions
upon consolidation of Alaska DigiTel
|
365 | |||
|
Accretion
expense
|
144 | |||
|
Liability
settled
|
(4 | ) | ||
|
Balance at
December 31, 2007
|
4,173 | |||
|
Liability
incurred
|
1,408 | |||
|
Additions
upon acquisition of UUI, Unicom, Alaska Wireless and Alaska
DigiTel
|
803 | |||
|
Accretion
expense
|
396 | |||
|
Liability
settled
|
(601 | ) | ||
|
Balance at
December 31, 2008
|
$ | 6,179 |
|
|
During the
years ended December 31, 2008 and 2007 we recorded additional capitalized
costs of $1.4 million and $260,000, respectively, in Property and
Equipment in Service, Net of
Depreciation.
|
|
|
(u)
|
Derivatives
|
|
|
We enter into
derivative contracts to manage exposure to variability in cash flows from
floating-rate financial instruments, particularly on our long-term debt
instruments and credit facilities. We do not apply hedge
accounting to our derivative instruments and therefore treat these
instruments as “economic hedges.” Consistent with the
guidance in SFAS No. 133, “Accounting for Derivative Instruments and
Hedging Activities,” derivative instruments are accounted for at fair
value as either assets or liabilities on the balance
sheet. Changes in the fair value of derivatives are recognized
in earnings each reporting
period.
|
|
|
Derivative
financial instruments are subject to credit risk and market
risk. Credit risk is the failure of the counterparty to perform
under the terms of the derivative contract. We minimize the
credit risk in derivative instruments by entering into transactions with
high-quality counterparties.
|
|
|
Market risk
is the adverse effect on the value of a derivative instrument that results
from a change in interest rates or other market variables. The
market risk associated with interest-rate contracts is managed by
establishing and monitoring parameters that limit the types and degree of
market risk that may be undertaken.
|
|
|
In the third
quarter of 2008, we entered into two interest rate caps with a combined
notional value of $180.0 million that mature on July 1,
2010. The initial cost of the caps was
$928,000. These derivative instruments are being used to manage
the interest rate risk on our Senior Credit Facility, which is indexed to
the London Interbank Offered Rate ("LIBOR"). In prior reporting
periods, we did not own any derivative
instruments.
|
|
|
The following
is a summary of the derivative contracts outstanding in the balance sheet
at December 31, 2008 (dollar amounts in
thousands):
|
|
Number of
Contracts
|
Notional
Value
|
Balance Sheet
Location
|
Fair
Value
|
|||||||
|
Interest rate
caps
|
2
|
$ |
180,000
|
Other
Assets
|
$ |
7
|
||||
|
|
During the
year ended December 31, 2008, a loss of $921,000 relating to the fair
value change on derivative instruments was reported in interest
expense.
|
(Continued)
108
GENERAL
COMMUNICATION, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
|
|
(v)Revenue
Recognition
|
|
|
All revenues
are recognized when the earnings process is complete in accordance with
SEC Staff Accounting Bulletins (“SAB”) No. 104, “Revenue Recognition” as
follows:
|
|
|
·
|
Revenues
generated from long-distance service usage and plan fees, Internet service
excess usage, and managed services are recognized when the services are
provided,
|
|
|
·
|
We recognize
unbilled revenues when the service is provided based upon minutes of use
processed, and/or established rates, net of credits and
adjustments,
|
|
|
·
|
Cable
television service package fees, local access and Internet service plan
fees, 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,
|
|
|
·
|
Certain of
our wireless services offerings have been determined to be revenue
arrangements with multiple deliverables. Revenues are recognized as each
element is earned based on objective evidence regarding the relative fair
value of each element and when there are no undelivered elements that are
essential to the functionality of the delivered elements. Revenues
generated from wireless service usage and plan fees are recognized when
the services are provided. Revenues generated from the sale of wireless
handsets and accessories are recognized when title to the handset and
accessories passes to the customer. As the non-refundable, up-front
activation fee charged to the customer does not meet the criteria as a
separate unit of accounting, we allocate the additional arrangement
consideration received from the activation fee to the handset (the
delivered item) to the extent that the aggregate handset and activation
fee proceeds do not exceed the fair value of the handset. Any activation
fees not allocated to the handset would be deferred upon activation and
recognized as service revenue on a straight-line basis over the expected
customer relationship period,
|
|
|
·
|
The majority
of our equipment sale transactions involve the sale of communications
equipment with no other services involved. Such equipment is subject to
standard manufacturer warranties and we do not manufacture any of the
equipment we sell. In such instances the customer takes title to the
equipment generally upon delivery. We recognize revenue for such
transactions when title passes to the customer and the revenue is earned
and realizable pursuant to the provisions of SAB 104. On certain occasions
we enter into agreements to sell and satisfactorily install or integrate
telecommunications equipment for a fixed fee. Customers may have refund
rights if the installed equipment does not meet certain performance
criteria. We defer revenue recognition until we have received customer
acceptance per the contract or agreement, and all other required revenue
recognition elements have been achieved. Revenues from contracts with
multiple element arrangements, such as those including installation and
integration services, are recognized as each element is earned based on
objective evidence regarding the relative fair value of each element and
when there are no undelivered elements that are essential to the
functionality of the delivered
elements,
|
(Continued)
109
GENERAL
COMMUNICATION, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
|
|
·
|
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
white 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,
|
|
|
·
|
We account
for fiber capacity IRU agreements as an operating lease or service
arrangement and we defer the revenue and recognize it ratably over the
life of the IRU or as services are
rendered,
|
|
|
·
|
Access
revenue is recognized when earned. We participate in access
revenue pools with other telephone companies. Such pools are
funded by toll revenue and/or access charges regulated by the RCA within
the intrastate jurisdiction and the FCC within the interstate
jurisdiction. Much of the interstate access revenue is initially recorded
based on estimates. These estimates are derived from interim financial
information, available separation studies and the most recent information
available about achieved rates of return. These estimates are subject to
adjustment in future accounting periods as additional information becomes
available. To the extent that a dispute arises over revenue settlements,
our policy is to defer revenue collected until the dispute is
resolved,
|
|
|
·
|
As an
ETC, we receive subsidies from the USF to support the provision of
local access service in high-cost areas. We accrue estimated
program revenue quarterly based on current line counts, the most current
rates paid to us, our assessment of the impact of current FCC regulations,
and our assessment of the potential outcome of FCC
proceedings. Our estimated accrued revenue is subject to our
judgment regarding the outcome of many variables and is subject to upward
or downward adjustment in subsequent periods. Our ability to
collect our accrued USF subsidies is contingent upon continuation of the
USF program and upon our eligibility to participate in that program, which
is subject to change by future regulatory, legislative or judicial
actions. We adjust revenue and the account receivable in the
period the FCC makes a program change or we assess the likelihood that
such a change has increased or decreased revenue. The payment
from the USF is generally received approximately nine months subsequent to
the services being performed. At December 31, 2008 we have $8.7
million in accounts receivable related to the USF high-cost area
program,
|
|
|
·
|
We receive
refunds from time to time from Incumbent
Local Exchange Carriers (“ILECs”), with
which we do business in respect of their earnings that exceed regulatory
requirements. Telephone companies that are rate regulated by the 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,
and
|
|
|
·
|
Other
revenues are recognized when the service is
provided.
|
|
|
We recognized
$2.8 million of wireless revenue in July 2008 from USAC for interstate
common line support. Due to the uncertainty in our ability to
retroactively claim reimbursement under the program, we accounted for this
payment as a gain contingency and, accordingly, recognized revenue only
upon receipt of payment when realization was
certain.
|
|
|
(w)Payments
Received from
Suppliers
|
|
|
Our Consumer
and Commercial segments occasionally receive reimbursements for video
services 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.
|
|
|
Occasionally
our Consumer and Commercial segments enter 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 Goods
Sold 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.
|
|
|
(x)Advertising
Expense
|
|
|
We expense
advertising costs in the year during which the first advertisement
appears. Advertising expenses were $5.6 million, $5.6 million and $3.5
million for the years ended December 31, 2008, 2007 and 2006,
respectively.
|
(Continued)
110
GENERAL
COMMUNICATION, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
|
|
(y)Leases
|
|
|
We account
for capital and operating leases as lessee as required by SFAS No. 13,
“Accounting for Leases” and in subsequently issued amendments and
interpretations of SFAS No. 13. Scheduled operating lease rent increases
are amortized over the lease term on a straight-line basis. Rent holidays
are recognized on a straight-line basis over the operating lease term
(including any rent holiday
period).
|
|
|
Leasehold
improvements are amortized over the shorter of their economic lives or the
lease term. We may amortize a leasehold improvement over a term that
includes assumption of a lease renewal if the renewal is reasonably
assured. Leasehold improvements acquired in a business combination are
amortized over the shorter of the useful life of the assets or a term that
includes required lease periods and renewals that are deemed to be
reasonably assured at the date of acquisition. Leasehold improvements that
are placed in service significantly after and are not contemplated at or
near the beginning of the lease term are amortized over the shorter of the
useful life of the assets or a term that includes required lease periods
and renewals that are deemed to be reasonably assured at the date the
leasehold improvements are purchased. Leasehold improvements made by us
and funded by landlord incentives or allowances under an operating lease
are recorded as deferred rent and amortized as reductions to lease expense
over the lease term.
|
|
|
(z)Interest
Expense
|
|
|
Material
interest costs incurred during the construction period of non-software
capital projects are capitalized. Interest costs incurred during the
development period of a software capital project are capitalized. Interest
is capitalized in the period commencing with the first expenditure for a
qualifying capital project and ending when the capital project is
substantially complete and ready for its intended use. We capitalized
interest cost of $4.2 million, $3.3 million and $820,000 during the years
ended December 31, 2008, 2007 and 2006,
respectively.
|
|
|
(aa)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 recovered or settled. Deferred
tax assets recognized are reduced by a valuation allowance to the extent
that the benefits are more likely to be realized than
not.
|
|
|
We file
federal income tax returns in the U.S. and in various state
jurisdictions. We are no longer subject to U.S. or state tax
examinations by tax authorities for years before 2005 except
that certain U.S. federal income tax returns for years after
1997 are not closed by relevant statutes of limitations due to unused net
operating losses reported on those income tax
returns.
|
|
|
We recognize
accrued interest on unrecognized tax benefits in interest expense and
penalties in selling, general and administrative expenses. We
did not have any unrecognized tax benefits as of December 31, 2008, 2007
and 2006, and, accordingly, we did not recognize any interest
expense. Additionally, we recorded $0 in penalties during the
years ended December 31, 2008, 2007 and 2006,
respectively.
|
|
|
(ab)Share-based
Payment
Arrangements
|
|
|
We apply the
provisions SFAS No. 123(R), “Shared-Based Payment,” in the measurement and
recognition of compensation expense for all share-based payment awards to
employees and directors based on estimated fair values. We currently use
the Black-Scholes-Merton option-pricing model to value stock options
granted to employees. We use these values to recognize stock compensation
expense for stock options in accordance with SFAS No.
123(R). Among other things, SFAS 123(R) requires that
compensation expense be recognized in the financial statements for
share-based awards based on the grant date fair value of those awards.
Additionally, share-based compensation expense includes an estimate for
pre-vesting forfeitures and is recognized over the requisite service
periods of the awards on a straight-line basis, which is generally
commensurate with the vesting term. See note 9 for information on the
assumptions we used to calculate the fair value of share-based
compensation.
|
(Continued)
111
GENERAL
COMMUNICATION, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
|
|
Additionally,
SFAS 123(R) requires the benefits associated with tax deductions in excess
of recognized compensation cost to be reported as a financing cash flow
rather than as an operating cash
flow.
|
|
|
(ac)
|
Stock
Options and Stock Warrants Issued for Non-employee
Services
|
|
|
Stock options
and warrants issued in exchange for non-employee services are accounted
for pursuant to the provisions of SFAS 123(R), Emerging Issues Task Force
("EITF") 96-3 and EITF 96-18 based upon the fair value of the
consideration or services received or the fair value of the equity
instruments issued using the Black-Scholes-Merton method, whichever is
more reliably measurable.
|
|
|
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.
|
|
|
(ad)
|
Use
of Estimates
|
|
|
The
preparation of financial statements in conformity with GAAP 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 the allowance for doubtful receivables,
unbilled revenues, accrual of the USF high-cost area program subsidy,
share-based compensation, reserve for future customer credits, valuation
allowances for deferred income tax assets, depreciable and amortizable
lives of assets, the carrying value of long-lived assets including
goodwill, cable certificates and wireless licenses, purchase price
allocations, the accrual of Cost of Goods Sold, and the accrual of
contingencies and litigation. Actual results could differ from those
estimates.
|
|
|
(ae)
|
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, 2008 and
2007, substantially all of our cash and cash equivalents were invested in
short-term liquid money instruments at two highly rated financial
institutions.
|
|
|
We have one
major customer, (see note 10). Our remaining customers are
located primarily throughout Alaska. Because of this geographic
concentration, our growth and operations depend upon economic conditions
in Alaska. The economy of Alaska is dependent upon the natural resources
industries, and in particular oil production, as well as tourism,
government, and United States military spending. Any deterioration in
these markets could have an adverse impact on us. Though
limited to one geographical area and except for our major customer, 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.
|
|
|
(af)
|
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. 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.
|
(Continued)
112
GENERAL
COMMUNICATION, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
|
|
(ag)
|
Guarantees
|
|
|
Certain of
our customers have guaranteed levels of service. We accrue for any
obligations under these guarantees as they become probable and
estimable.
|
|
|
(ah)
|
Classification
of Taxes Collected from
Customers
|
|
|
We report
sales, use, excise, and value added taxes assessed by a governmental
authority that is directly imposed on a revenue-producing transaction
between us and a customer on a net basis in our statements of
operations. We report a certain surcharge on a gross basis in
our statement of operations of $4.1 million, $4.2 million and $4.6 million
for the years ended December 31, 2008, 2007 and 2006,
respectively.
|
|
|
(ai)
|
Changes
in Accounting Policy
|
|
|
Effective
January 1, 2008, we prospectively changed our accounting policy for
recording depreciation on our property and equipment placed in service.
For assets placed in service on or after January 1, 2008, we are using a
mid-month convention to recognize depreciation expense. Previous to this
change we used the half-year convention to recognize depreciation expense
in the year an asset was placed in service, regardless of the month the
property and equipment was placed in service. We believe the mid-month
convention is preferable because it results in more precise recognition of
depreciation expense over the estimated useful life of the asset. No
retroactive adjustment has been made. The following table sets
forth the impact of this accounting change on depreciation and
amortization expense, operating income and net loss for the year ended
December 31, 2008 (amounts in thousands, except per share
amounts):
|
|
Year Ended
December 31,
|
2008
|
|||
|
Depreciation
and amortization expense
|
$ | (521 | ) | |
|
Operating
income
|
521 | |||
|
Net
loss
|
214 | |||
|
Basic
EPS
|
0.00 | |||
|
Diluted
EPS
|
0.00 | |||
(aj)Recently
Issued Accounting Pronouncements
|
|
In December
2007, the FASB issued SFAS No. 141(R), "Business Combinations" which
requires the acquiring entity in a business combination to record all
assets acquired and liabilities assumed at their respective
acquisition-date fair values, changes the recognition of assets acquired
and liabilities assumed arising from contingencies, changes the
recognition and measurement of contingent consideration, and requires the
expensing of acquisition-related costs as incurred. SFAS 141(R)
also requires additional disclosure of information surrounding a business
combination, such that users of the entity's financial statements can
fully understand the nature and financial impact of the business
combination. We will implement SFAS No. 141(R) on January 1,
2009 and we will apply it to any business combinations after the effective
date.
|
|
|
In December
2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements" which establishes accounting and
reporting standards for ownership interests in subsidiaries held by
parties other than the parent, the amount of consolidated net income
attributable to the parent and to the noncontrolling interest, changes in
a parent's ownership interest and the valuation of retained noncontrolling
equity investments when a subsidiary is deconsolidated. SFAS
No. 160 also established reporting requirements that provide sufficient
disclosures that clearly identify and distinguish between the interests of
the parent and the interests of the noncontrolling owner. We
will implement SFAS No. 160 on January 1, 2009. We do not
expect the adoption of this standard to have a material impact on our
statement of operations, financial position or cash
flows.
|
(Continued)
113
GENERAL
COMMUNICATION, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
|
|
In March
2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities." This statement requires companies to
provide enhanced disclosures about (a) how and why they use derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under SFAS No. 133 and its related interpretations, and (c)
how derivative instruments and related hedged items affect a company’s
financial position, financial performance, and cash flows. We
will implement SFAS No. 161 on January 1, 2009. We do not
expect the adoption of this standard to have a material impact on our
statement of operations, financial position or cash
flows.
|
|
|
In April
2008, FASB issued FSP No. 142-3, “Determination of the Useful Life of
Intangible Assets”, which amends the factors that must be considered in
developing renewal or extension assumptions used to determine the useful
life over which to amortize the cost of a recognized intangible asset
under SFAS 142, “Goodwill and Other Intangible Assets”. FSP 142-3 requires
an entity to consider its own assumptions about renewal or extension of
the term of the arrangement, consistent with its expected use of the
asset. FSP 142-3 also requires the disclosure of the weighted-average
period prior to the next renewal or extension for each major intangible
asset class, the accounting policy for the treatment of costs incurred to
renew or extend the term of recognized intangible assets and for
intangible assets renewed or extended during the period, if renewal or
extension costs are capitalized, the costs incurred to renew or extend the
asset and the weighted-average period prior to the next renewal or
extension for each major intangible asset class. FSP 142-3 is effective
for financial statements for fiscal years beginning after December 15,
2008. The adoption of FSP 142-3 is not expected to have a material impact
on our statement of operations, financial position or cash
flows.
|
|
|
On January 1,
2008, we partially adopted SFAS No. 157 “Fair Value Measurements,” which
did not have a material impact on our consolidated financial statements.
We partially adopted SFAS No. 157 due to the issuance of FSP FASB 157-2,
“Effective Date of FASB Statement No. 157.” SFAS No. 157
defines fair value, establishes a common framework for measuring fair
value under U.S. GAAP, and expands disclosures about fair value
measurements for assets and liabilities. SFAS No. 157 does not require
additional assets or liabilities to be accounted for at fair value beyond
that already required under other U.S. GAAP accounting standards. FSP No.
157-2 deferred the effective date of SFAS No. 157 for all nonfinancial
assets and nonfinancial liabilities that are not recognized or disclosed
at fair value in the financial statements on a recurring basis (at least
annually). Included in the scope of FSP No. 157-2 are nonfinancial assets
and liabilities acquired in business combinations and impaired assets. The
effective date for nonfinancial assets and nonfinancial liabilities has
been delayed by one year to fiscal years beginning after November 15,
2008, and interim periods within those fiscal years. We continue to assess
the deferred portion of SFAS No.
157.
|
|
|
In June 2008,
the FASB issued FSP No. EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities.”
FSP EITF 03-6-1 requires that unvested share-based payment awards
containing nonforfeitable rights to dividends or dividend equivalents
(whether paid or unpaid) be considered participating securities and
included in the computation of EPS pursuant to the two-class method of
SFAS No. 128. We will implement FSP EITF 03-6-1 on January 1,
2009. All prior-period EPS data presented shall be adjusted
retrospectively to conform to this FSP. This FSP is not anticipated to
have a material impact on our EPS attributable to common
stockholders.
|
|
|
In October
2008, the FASB issued FSP 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not
Active.” FSP 157-3 clarifies the application of SFAS 157 in a
market that is not active and addresses application issues such as the use
of internal assumptions when relevant observable data does not exist, the
use of observable market information when the market is not active and the
use of market quotes when assessing the relevance of observable and
unobservable data. FSP 157-3 is effective for all periods presented in
accordance with SFAS No. 157. The guidance in FSP 157-3 is effective
immediately and did not have an impact on the Company upon
adoption. See note 11 for information and related disclosures
regarding the Company’s fair value
measurements.
|
(Continued)
114
GENERAL
COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated
Financial
Statements
|
|
(ak)
|
SAB
No. 108
|
|
|
SAB No. 108
“Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements” requires a dual
approach for quantifying misstatements using both a method that quantifies
a misstatement based on the amount of misstatement originating in the
current year statement of operations, as well as a method that quantifies
a misstatement based on the effects of correcting the misstatement
existing in the balance sheet. Prior to the adoption of SAB No. 108, we
quantified any misstatements in our consolidated financial statements
using the income statement method in addition to evaluating qualitative
characteristics. As this method focuses solely on the statement
of operations, this can lead to the accumulation of misstatements in the
balance sheet that may become material if recorded in a particular
period.
|
|
|
Prior to
January 1, 2006, only the interest costs incurred during the construction
period of significant capital projects, such as construction of an
undersea fiber optic cable system, were capitalized. Beginning
January 1, 2006, we modified our interest capitalization policy resulting
in the capitalization of material interest costs incurred during the
construction period of non-software capital projects and the
capitalization of interest costs incurred during the development period of
a software capital project.
|
|
|
These
misstatements accumulated over several years and were immaterial when
quantifying the misstatements using the income statement method. Upon
adoption of SAB No. 108 on January 1, 2006, we recorded a $3.5 million
increase to property and equipment in service and $1.6 million increase to
accumulated depreciation for the cumulative misstatement as of December
31, 2005. Accordingly, we increased retained earnings by $1.1
million and recorded $772,000 as a long-term deferred tax
liability.
|
|
|
(al)
|
Reclassifications
|
|
|
Reclassifications
have been made to the 2007 and 2006 financial statements to make them
comparable with the 2008
presentation.
|
|
|
We
reclassified $16.7 million and $12.7 million of network maintenance and
operations expense from selling, general and administrative expense to
Cost of Goods Sold for 2007 and 2006, respectively. We believe
this change in classification more closely aligns our maintenance and
operations components to the nature of expenses included in our financial
statement captions, and will improve the comparability of our financial
statement presentation with our industry
peers.
|
(Continued)
115
GENERAL
COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated
Financial Statements
|
(2)
|
Consolidated
Statements of Cash Flows Supplemental
Disclosures
|
Changes in
operating assets and liabilities, net effect of acquisitions, consist of
(amounts in thousands):
|
Year ended
December 31,
|
2008
|
2007
|
2006
|
|||||||||
|
Increase in
accounts receivable
|
$ | (5,209 | ) | (19,713 | ) | (5,649 | ) | |||||
|
Decrease in
prepaid expenses
|
488 | 949 | 863 | |||||||||
|
(Increase)
decrease in inventories
|
(3,336 | ) | 1,455 | (1,732 | ) | |||||||
|
(Increase)
decrease in other current assets
|
(69 | ) | 1,089 | 1,965 | ||||||||
|
Increase
(decrease) in accounts payable
|
(4,198 | ) | 2,738 | 3,790 | ||||||||
|
Increase
(decrease) in accrued payroll and payroll related
obligations
|
5,437 | 620 | (3,397 | ) | ||||||||
|
Increase
(decrease) in deferred revenue
|
4,543 | (2,000 | ) | (998 | ) | |||||||
|
Increase
(decrease) in accrued interest
|
1,226 | 217 | (878 | ) | ||||||||
|
Increase
(decrease) in accrued liabilities
|
2,695 | (1,330 | ) | 804 | ||||||||
|
Increase in
subscriber deposits
|
84 | 194 | 128 | |||||||||
|
Increase in
long-term deferred revenue
|
49,153 | --- | --- | |||||||||
|
Increase
(decrease) in components of other long-term liabilities
|
(3,727 | ) | 526 | 594 | ||||||||
| $ | 47,087 | (15,255 | ) | (4,510 | ) | |||||||
We
paid interest, net of amounts capitalized, totaling $46.8 million, $34.0 million
and $35.1 million during the years ended December 31, 2008, 2007 and 2006,
respectively.
We
paid income taxes totaling $884,000, $293,000 and $689,000 during the years
ended December 31, 2008, 2007 and 2006, respectively. We received $83,000,
$213,000 and $5,000 in income tax refunds during the years ended December 31,
2008, 2007 and 2006, respectively.
During the year
ended December 31, 2008, we financed $98.6 million for the use of satellite
transponders through a capital lease obligation. We also financed
$1.3 million in capital expenditures through the extension of a previously
existing capital lease.
We
received cash proceeds of $110.6 million from the $145.0 million term loan that
we obtained in May 2008. We used $30.0 million of the term loan to repay the
revolver portion of our Senior Credit Facility and our loan proceeds were
reduced by $2.9 million for an original issue discount and $1.5 million for bank
and legal fees associated with the new term loan.
In
June 2008 the Galaxy XR satellite was taken out of service resulting in the
removal of the remaining $8.8 million net book value and the recognition of an
$8.8 million warranty receivable. We applied $8.4 million of the
warranty receivable to offset our cash obligation relating to the capital lease
during the year ended December 31, 2008, resulting in an outstanding warranty
receivable of $465,000 as of December 31, 2008.
During the year
ended December 31, 2008, we had $12.1 million, in non-cash additions for unpaid
purchases of property and equipment.
During the year
ended December 31, 2007, $9.0 million in non-cash additions to property and
equipment were recorded consisting of $6.7 million in unpaid purchases as of
December 31, 2007 and $2.3 million in land and buildings that were transferred
from property held for sale.
During the year
ended December 31, 2006, we had $3.7 million, in non-cash additions for unpaid
purchases of property and equipment.
(Continued)
116
GENERAL
COMMUNICATION, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
During the years
ended December 31, 2008, 2007 and 2006, we had $1.4 million, $260,000 and
$30,000, respectively, in non-cash additions to property and equipment for
assets added when recording asset retirement obligations.
We
retired common stock shares in the amount of $5.5 million, $11.4 million and
$32.9 million during the years ended December 31, 2008, 2007 and 2006,
respectively.
During the year
ended December 31, 2006 a company owned by our President and CEO tendered
100,000 shares of its GCI Class A common stock to us at the then existing market
value of $15.34 per share for a total value of $1.5 million. Additionally,
during the year ended December 31, 2006 our President and CEO tendered 50,000
shares of his GCI Class A common stock to us at the then existing market value
of $15.34 per share for a total value of $767,000. The stock tenders were in
lieu of cash payments on behalf of our President and CEO on a note receivable
with related party and a note receivable with related party issued upon stock
option exercise.
In
February 2007, our President and Chief Executive Officer tendered 113,000 shares
of his GCI Class A common stock to us at $15.50 per share for a total value of
$1.7 million. The stock tender was in lieu of a cash payment on his
note receivable with related party and a note receivable with related party
issued upon stock option exercise, both of which originated in
2002.
We
recorded a net cumulative effect adjustment (benefit) of $64,000 during the year
ended December 31, 2006 for share-based compensation instruments outstanding at
December 31, 2005 for which the requisite service was not expected to be
rendered.
During the year
ended December 31, 2006 our Senior Vice President, Strategic Initiatives,
tendered 40,000 shares of his GCI Class A common stock to us at the then
existing market value of $12.50 per share for a total value of $500,000. The
stock tender was in lieu of a cash payment on a note receivable with related
party.
During the year
ended December 31, 2006 we financed $2.2 million for the acquisition of two
buildings through capital lease obligations.
As
described in note 1(ak) we adopted SAB No. 108 effective January 1, 2006,
resulting in a modification of our interest capitalization
policy. Upon adoption of SAB No. 108 we recorded a $3.5 million
increase to Property and Equipment in Service and a $722,000 increase to
Deferred Tax Liability during the year ended December 31, 2006.
|
(3)
|
Receivables
and Allowance for Doubtful
Receivables
|
Receivables consist
of the following at December 31, 2008 and 2007 (amounts in
thousands):
|
2008
|
2007
|
|||||||
|
Trade
|
$ | 109,835 | 95,941 | |||||
|
Employee
|
243 | 198 | ||||||
|
Other
|
3,058 | 1,774 | ||||||
|
Total
Receivables
|
$ | 113,136 | 97,913 | |||||
(Continued)
117
GENERAL
COMMUNICATION, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
Changes in the
allowance for doubtful receivables during the years ended December 31, 2008,
2007 and 2006 are summarized below (amounts in thousands).
|
Additions
|
Deductions
|
|||||||||||||||||||
|
Description
|
Balance at
beginning of year
|
Charged to
costs and expenses
|
Charged to
Other Accounts
|
Write-offs
net of recoveries
|
Balance at
end of year
|
|||||||||||||||
|
December 31,
2008
|
$ | 1,657 | 3,471 | --- | 2,546 | 2,582 | ||||||||||||||
|
December 31,
2007
|
$ | 2,922 | 4,822 | --- | 6,087 | 1,657 | ||||||||||||||
|
December 31,
2006
|
$ | 5,317 | 3,057 | --- | 5,452 | 2,922 | ||||||||||||||
|
(4)
|
Net
Property and Equipment in
Service
|
Net property and
equipment in service consists of the following at December 31, 2008 and 2007
(amounts in thousands):
|
2008
|
2007
|
|||||||
|
Land and
buildings
|
$ | 32,134 | 14,424 | |||||
|
Telephony
distribution systems
|
809,356 | 640,001 | ||||||
|
Cable
television distribution systems
|
194,616 | 161,934 | ||||||
|
Support
equipment
|
144,457 | 110,619 | ||||||
|
Transportation
equipment
|
10,550 | 8,102 | ||||||
|
Property and
equipment under capital leases
|
102,972 | 3,086 | ||||||
| 1,294,085 | 938,166 | |||||||
|
Less
accumulated depreciation
|
495,953 | 432,829 | ||||||
|
Less
amortization
|
5,081 | 1,064 | ||||||
|
Net property
and equipment in service
|
$ | 793,051 | 504,273 | |||||
|
(5)
|
Intangible
Assets and
Goodwill
|
As
of December 31, 2008 cable certificates, wireless licenses 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, 2008. The remaining useful lives of our cable certificates,
wireless licenses and goodwill were evaluated as of December 31, 2008 and events
and circumstances continue to support an indefinite useful life.
There are no
indicators of impairment of our intangible assets subject to amortization as of
December 31, 2008.
(Continued)
118
GENERAL
COMMUNICATION, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
Other Intangible
Assets subject to amortization include the following at December 31, 2008 and
2007 (amounts in thousands):
|
2008
|
2007
|
|||||||
|
Software
license fees
|
$ | 18,377 | 12,094 | |||||
|
Customer
relationships
|
11,467 | 4,528 | ||||||
|
Customer
contracts
|
3,538 | --- | ||||||
|
Right-of-way
|
783 | 783 | ||||||
|
Other
|
803 | 261 | ||||||
| 34,968 | 17,666 | |||||||
|
Less
amortization
|
11,992 | 5,897 | ||||||
|
Net other
intangible assets
|
$ | 22,976 | 11,769 | |||||
Changes in Other
Intangible Assets are as follows (amounts in thousands):
|
Balance at
December 31, 2006
|
$ | 7,011 | ||
|
Asset
additions upon consolidation of Alaska DigiTel
|
4,469 | |||
|
Asset
additions
|
3,738 | |||
|
Less
amortization expense
|
3,332 | |||
|
Less asset
write-off
|
117 | |||
|
Balance at
December 31, 2007
|
11,769 | |||
|
Asset
additions upon acquisition of UUI, Unicom, Alaska Wireless, and the
minority interest in Alaska DigiTel
|
10,861 | |||
|
Asset
additions
|
6,303 | |||
|
Less
amortization expense
|
5,948 | |||
|
Less asset
write-off
|
9 | |||
|
Balance at
December 31, 2008
|
$ | 22,976 |
During the year
ended December 31, 2008, goodwill increased $24.7 million, customer
relationships increased $6.8 million, customer contracts increased $3.5 million,
other intangible assets increased $542,000, and wireless licenses increased
$210,000 upon the acquisition of UUI, Unicom, Alaska Wireless, and the minority
interest in Alaska DigiTel. Goodwill and the wireless licenses are
indefinite-lived assets. The increase in other intangible assets is
due to the recognition of customer relationships, contracts, and the Alaska
DigiTel trademark. The intangible assets added during 2008 have a
weighted average amortization period of 3.6 years.
Amortization
expense for amortizable intangible assets for the years ended December 31, 2008,
2007 and 2006 follow (amounts in thousands):
|
Years Ended
December 31,
|
|||||||
|
2008
|
2007
|
2006
|
|||||
|
Amortization
expense for amortizable intangible assets
|
$
|
5,948
|
3,332
|
1,804
|
|||
(Continued)
119
GENERAL
COMMUNICATION, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
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,
|
||||
|
2009
|
$ | 7,364 | ||
|
2010
|
5,494 | |||
|
2011
|
3,422 | |||
|
2012
|
2,421 | |||
|
2013
|
1,092 | |||
For the period from
January 1, 2008 to December 31, 2008, the U.S. financial markets have been
impacted by continued deterioration in economic conditions. Should economic
conditions in the State of Alaska and other indicators deteriorate such that
they impact our ability to achieve levels of forecasted operating results and
cash flows, should our stock price and market capitalization decline below our
book value for a sustained period of time, or should other events occur
indicating the carrying value of goodwill and intangible assets might be
impaired, we would test our intangible assets for impairment and may recognize
an impairment loss to the extent that the carrying amount exceeds such asset’s
fair value. Any future
impairment charges could have a material adverse effect on our results of
operations.
|
(6)
|
Long-term
Debt
|
Long-term debt
consists of the following (amounts in thousands):
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Senior Credit
Facility (a)
|
$ | 362,529 | 220,760 | |||||
|
Senior Notes
(b)
|
320,000 | 320,000 | ||||||
|
Rural
Utilities Services Debt (c)
|
35,328 | -- | ||||||
|
CoBank
Mortgage Note Payable (c)
|
3,539 | -- | ||||||
|
Mortgage
|
490 | 529 | ||||||
|
Note
Payable
|
-- | 100 | ||||||
|
Debt
|
721,886 | 541,389 | ||||||
|
Less
unamortized discount paid on the Senior Notes
|
2,589 | 2,991 | ||||||
|
Less
unamortized discount paid on Senior Credit Facility
|
2,466 | --- | ||||||
|
Less current
portion of long-term debt
|
8,425 | 2,283 | ||||||
|
Long-term
debt, net of unamortized discount
|
$
|
708,406 | 536,115 | |||||
(Continued)
120
GENERAL
COMMUNICATION, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
|
|
(a)
|
The Senior
Credit Facility includes a $360.0 million term loan, including the
Additional Incremental Term Loan discussed below, and a $100.0 million
revolving credit facility with a $25.0 million sublimit for letters of
credit. Our term loan is fully drawn and becomes due in stages between
2011 and 2012.
|
In
May 2008, we signed an agreement to add a term loan of $145.0 million
("Additional Incremental Term Loan") to our then existing Senior Credit
Facility. The Additional Incremental Term Loan is due under the same
terms and conditions as set forth in the existing Senior Credit
Facility.
The Additional
Incremental Term Loan increased the interest rate on the term loan component of
our Senior Credit Facility from LIBOR plus 2.00% to LIBOR plus
4.25%. The Additional Incremental Term Loan increased the interest
rate for the revolving credit facility component of our Senior Credit Facility
from LIBOR plus a margin dependent upon our Total Leverage Ratio ranging from
1.50% to 2.25% to LIBOR plus the following Applicable Margin set forth opposite
each applicable Total Leverage Ratio below:
|
Total
Leverage Ratio (as defined)
|
Applicable
Margin
|
|||
|
>3.75
|
4.25 | % | ||
|
>3.25
but <3.75
|
3.75 | % | ||
|
>2.75
but <3.25
|
3.25 | % | ||
|
<2.75
|
2.75 | % | ||
The commitment fee
we are required to pay on the unused portion of the commitment is
0.5%.
Substantially all
of the Company's assets collateralize the Senior Credit Facility.
$145.0 million was
drawn on the Additional Incremental Term Loan at the time of the debt
modification. We used $30.0 million of the proceeds to repay the
revolver portion of our senior credit facility and our loan proceeds were
reduced by $2.9 million for an original issue discount and $1.5 million for bank
and legal fees associated with the new term loan. We borrowed $10.0
million under our revolving credit facility in October 2008 and we have letters
of credit outstanding totaling $4.0 million, which leaves $86.0 million
available for borrowing under the revolving credit facility as of December 31,
2008 if needed.
The Term Loan
allows for the repurchase of our common stock under our buyback program when our
total debt leverage is below 4.0 times adjusted EBITDA. The amendment revised
various financial covenants in the agreement and made conforming changes to
various covenants to permit our 2008 acquisitions. Additionally, our
loan proceeds were reduced by $2.9 million for an original issue
discount. The discount on the term loan is being amortized into
interest expense using the effective interest method.
Borrowings under
the Senior Credit Facility are subject to certain financial covenants and
restrictions on indebtedness, dividend payments, financial guarantees, business
combinations, and other related items. As a result of the Additional Incremental
Term Loan, our Senior Credit Facility key debt covenants changed to the
following: our Senior Credit Facility Total Leverage Ratio (as defined) may not
exceed (i) 5.25:1.00 for the period beginning May 2, 2008 and ending on June 30,
2009, (ii) 5.00:1.00 for the period beginning on July 1, 2009, and ending on
December 31, 2009, and (iii) 4.50:1.00 for the period beginning January 1, 2010,
and ending on August 31, 2012; the Senior Leverage Ratio (as defined) may not
exceed (i) 3.25:1.00 for the period beginning on May 2, 2008 and ending on June
30, 2009, and (ii) 3.00:1.00 for the period beginning July 1, 2009, and ending
on August 31, 2012; the Fixed Charge Coverage Ratio (as defined) must be 1.0:1.0
or greater beginning December 31, 2009; and the Interest Coverage Ratio (as
defined) must not be less than (i) 2.50:1.00 for the period beginning on May 2,
2008 and ending on September 30, 2009, and (ii) 2.75:1.00 for the period
beginning October 1, 2009, and ending on August 31, 2012.
(Continued)
121
GENERAL
COMMUNICATION, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
Our Senior Credit
Facility, which was further amended in October 2008 to allow an additional $15.0
million in capital expenditures for the year ended December 31, 2008, also
limits the amount of capital expenditures, excluding acquisitions, that we can
incur each year based on the following (amounts in thousands):
|
Year
Ended:
|
Maximum
Capital Expenditure Amount
|
|||
|
2008
|
$ | 240,000 | ||
|
2009
|
$ | 125,000 | ||
|
2010
|
$ | 125,000 | ||
|
2011 and
thereafter
|
$ | 100,000 | ||
If
our capital expenditures for a given year are less than the maximum, the
cumulative difference between the amount incurred and the maximum capital
expenditure limitation may be carried over to the following year if certain
levels of EBITDA are met.
The transaction in
May 2008 to add the Additional Incremental Term Loan was a partial substantial
modification of our existing Senior Credit Facility resulting in a $667,000
write-off of previously deferred loan fees during the year ended December 31,
2008 in our Consolidated Statements of Operations. Deferred loan fees
of $58,000 associated with the portion of our existing Senior Credit Facility
determined not to have been substantially modified continue to be amortized over
the remaining life of the Senior Credit Facility.
Additionally, in
connection with the Additional Incremental Term Loan, we paid bank fees and
other expenses of $1.6 million during 2008, of which $527,000 were immediately
expensed in the twelve months ended December 31, 2008 and $1.1 million were
deferred and are being amortized over the remaining life of the Senior Credit
Facility.
In
connection with the October 2008 amendment to the Senior Credit Facility, we
paid loan fees of $453,000 which are being amortized over the remaining life of
the Senior Credit Facility. The October amendment to the Senior
Credit Facility was determined not to be a substantial
modification.
|
|
(b)
|
We pay
interest of 7.25% on Senior Notes that are due in 2014. The Senior Notes
are an unsecured senior obligation of GCI, Inc. The Senior Notes are
carried on our Consolidated Balance Sheet net of the unamortized portion
of the discount based on an effective interest rate of 7.50%, which is
being amortized to Interest Expense over the term of the Senior Notes
using the effective interest
method.
|
The Senior Notes
are not redeemable prior to February 15, 2009. At any time on or after February
15, 2009, the 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 | % | ||
(Continued)
122
GENERAL
COMMUNICATION, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
The Senior Notes
restrict GCI, Inc. and certain of its subsidiaries from incurring debt, but
permits debt under the Senior Credit Facility and vendor financing as long as
our leverage ratio, as defined does not exceed 6.0 to one. In
addition, certain other debt is permitted regardless of our leverage ratio,
including debt under the Senior Credit Facility not exceeding (and reduced by
certain stated items):
|
|
·
|
$250.0
million, reduced by the amount of any prepayments,
or
|
|
|
·
|
3.0 times
earnings before interest, taxes, depreciation and amortization for the
last four full fiscal quarters of GCI, Inc. and its
subsidiaries.
|
The Senior Notes
limit the ability of our subsidiaries to make cash dividend payments to
GCI.
Semi-annual
interest payments of $11.6 million are payable in February and August of each
year.
The Senior Notes
are structurally subordinate to our Senior Credit Facility.
Our Senior Notes’
key debt covenants require our Total Leverage Ratio (as defined) be 6.0:1.0 or
less and our Senior Leverage Ratio (as defined) be 3.0:1.0 or less if our Senior
Debt (as defined) is greater than $250.0 million.
|
|
(c)
|
We acquired
long-term debt of $43.6 million upon our acquisition of UUI and Unicom
effective June 1, 2008. As of December 31, 2008, the long-term
debt consists of $35.3 million from the Rural Utility Services (“RUS”) and
$3.5 million mortgage note payable due to CoBank. The long-term
debt is due in monthly installments of principal based on a fixed rate
amortization schedule. The interest rates on the various loans
to which this debt relates range from 2.0% to 6.76%. Through
UUI and Unicom, we have $9.9 million available for borrowing for specific
capital expenditures under existing borrowing arrangements.
Substantially all of the assets of our subsidiaries, UUI and Unicom are
collateral for the amounts due to RUS and
CoBank.
|
Maturities of
long-term debt as of December 31, 2008 are as follows (amounts in
thousands):
|
Years ending
December 31,
|
||||
|
2009
|
$ | 8,425 | ||
|
2010
|
8,657 | |||
|
2011
|
188,147 | |||
|
2012
|
176,323 | |||
|
2013
|
4,749 | |||
|
2014 and
thereafter
|
335,585 | |||
| 721,886 | ||||
|
Less
unamortized discount paid on Senior Notes
|
2,589 | |||
|
Less
unamortized discount paid on Senior Credit Facility
|
2,466 | |||
|
Less current
portion of long-term debt
|
8,425 | |||
| $ | 708,406 | |||
|
(7)
|
Comprehensive
Income (Loss)
|
During the years
ended December 31, 2008, 2007 and 2006 we had no other comprehensive income.
Total comprehensive income (loss) which was equal to net income (loss) during
the years ended December 31, 2008, 2007 and 2006 was $(1.9) million, $13.7
million and $18.5 million, respectively.
(Continued)
123
GENERAL
COMMUNICATION, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
|
(8)
|
Income
Taxes
|
|
Years ended
December 31,
|
|||||||
|
|
2008
|
2007
|
2006
|
||||
|
Income (loss)
before cumulative effect of a change in accounting
principle
|
$
|
(792
|
)
|
12,162
|
15,797
|
||
|
SAB 108
cumulative adjustment
|
---
|
---
|
772
|
||||
|
Cumulative
effect of a change in accounting principle
|
---
|
---
|
44
|
||||
|
Net income
(loss)
|
$
|
(792
|
)
|
12,162
|
16,613
|
||
We
did not record any excess tax benefit generated from stock options exercised
during the years ended December 31, 2008, 2007, and 2006 since we are in a net
operating loss carryforward position and the income tax deduction will not yet
reduce income taxes payable. The cumulative excess tax benefits
generated for stock options exercised that have not been recognized is $4.6
million at December 31, 2008.
We
have an income tax receivable for federal and state alternative minimum tax paid
in 2008 of $899,000 at December 31, 2008.
Income tax expense
consists of the following (amounts in thousands):
|
Years ended
December 31,
|
|||||||
|
2008
|
2007
|
2006
|
|||||
|
Current tax
expense (benefit):
|
|||||||
|
Federal
taxes
|
$
|
---
|
436
|
(278
|
)
|
||
|
State
taxes
|
---
|
77
|
(81
|
)
|
|||
|
---
|
513
|
(359
|
)
|
||||
(Continued)
124
GENERAL
COMMUNICATION, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
|
Deferred tax
expense:
|
|||||||
|
Federal
taxes
|
922
|
9,785
|
12,514
|
||||
|
State
taxes
|
155
|
1,864
|
3,642
|
||||
|
1,077
|
11,649
|
16,156
|
|||||
|
$
|
1,077
|
12,162
|
15,797
|
Total income tax
expense differed from the “expected” income tax expense determined by applying
the statutory federal income tax rate of 35% as follows (amounts in
thousands):
|
Years ended
December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
“Expected”
statutory tax expense (benefit)
|
$ | (277 | ) | 9,063 | 11,988 | |||||||
|
State income
taxes, net of federal expense (benefit)
|
(48 | ) | 1,585 | 2,529 | ||||||||
|
Income tax
effect of nondeductible entertainment expenses
|
725 | 569 | 423 | |||||||||
|
Income tax
effect of nondeductible lobbying expenses
|
424 | 468 | 409 | |||||||||
|
Income tax
effect of nondeductible expenditures and other
items,
net
|
247 | 500 | 60 | |||||||||
|
Other,
net
|
6 | (23 | ) | 388 | ||||||||
| $ | 1,077 | 12,162 | 15,797 | |||||||||
The tax effects of
temporary differences that give rise to significant portions of deferred tax
assets and liabilities at December 31, 2008 and 2007 are summarized below
(amounts in thousands):
|
2008
|
2007
|
|||||||
|
Current
deferred tax assets, net of current deferred tax
liability:
|
||||||||
|
Compensated
absences, accrued for financial reporting purposes
|
$ | 2,771 | 2,196 | |||||
|
Net operating
loss carryforwards
|
--- | 2,033 | ||||||
|
Workers
compensation and self insurance health reserves, principally due to
accrual for financial reporting purposes
|
869 | 694 | ||||||
|
Accounts
receivable, principally due to allowance for doubtful
accounts
|
980 | 629 | ||||||
|
Deferred
compensation expense for tax purposes in excess of amounts recognized for
financial reporting purposes
|
966 | (401 | ) | |||||
|
Other
|
2,257 | 583 | ||||||
|
Total current
deferred tax assets
|
$ | 7,843 | 5,734 | |||||
(Continued)
125
GENERAL
COMMUNICATION, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
|
2008
|
2007
|
|||||||
|
Long-term
deferred tax assets:
|
||||||||
|
Net operating
loss carryforwards
|
$ | 65,890 | 45,518 | |||||
|
IRU revenue
deferred for financial reporting purposes
|
20,658 | --- | ||||||
|
Alternative
minimum tax credits
|
3,055 | 3,160 | ||||||
|
Deferred
compensation expense for financial reporting purposes in excess of amounts
recognized for tax purposes
|
1,274 | 2,690 | ||||||
|
Asset
retirement obligations in excess of amounts recognized for tax
purposes
|
1,812 | 1,444 | ||||||
|
Share-based
compensation expense for financial reporting purposes in excess of amounts
recognized for tax purposes
|
2,079 | --- | ||||||
|
Other
|
115 | 222 | ||||||
|
Total
long-term deferred tax assets
|
94,883 | 53,034 | ||||||
|
Long-term
deferred tax liabilities
|
||||||||
|
Plant and
equipment, principally due to differences in depreciation
|
108,015 | 68,278 | ||||||
|
Intangible
assets
|
73,000 | 68,588 | ||||||
|
Other
|
55 | 462 | ||||||
|
Total
long-term deferred tax liabilities
|
181,070 | 137,328 | ||||||
|
Net long-term
deferred tax liabilities
|
$ | 86,187 | 84,294 | |||||
At
December 31, 2008, we have (1) tax net operating loss carryforwards of $160.8
million that will begin expiring in 2011 if not utilized, and (2) alternative
minimum tax credit carryforwards of $3.1 million available to offset regular
income taxes payable in future years. 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.
We
are no longer subject to U.S. or state tax examinations by tax authorities for
years before 2005 except that certain U.S. federal income tax returns
for years after 1997 are not closed by relevant statutes of limitations due to
unused net operating losses reported on those income tax returns.
Our tax net
operating loss carryforwards are summarized below by year of expiration (amounts
in thousands).
|
Years ending
December 31,
|
Federal
|
State
|
||||||
|
2011
|
$ | 759 | 759 | |||||
|
2019
|
25,942 | 25,552 | ||||||
|
2020
|
44,744 | 43,797 | ||||||
|
2021
|
29,614 | 28,987 | ||||||
|
2022
|
14,081 | 13,788 | ||||||
|
2023
|
3,968 | 3,903 | ||||||
|
2024
|
544 | --- | ||||||
|
2025
|
1,342 | --- | ||||||
|
2026
|
337 | --- | ||||||
|
2027
|
116 | --- | ||||||
|
2028
|
39,400 | 43,663 | ||||||
|
Total tax net
operating loss carryforwards
|
$ | 160,847 | 160,449 | |||||
(Continued)
126
GENERAL
COMMUNICATION, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
Tax benefits
associated with recorded deferred tax assets are considered to be more likely
than not realizable through taxable income earned in carryback years, 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 if estimates
of future taxable income during the carryforward period are
reduced.
|
(9)
|
Stockholders’
Equity
|
Common
Stock
GCI’s Class A 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. Each share of Class B common stock outstanding is
convertible, at the option of the holder, into one share of Class A common
stock.
During the years
ended December 31, 2008, 2007 and 2006 we repurchased 0, 1.3 million, and 2.9
million, respectively, shares of our Class A and Class B common stock at a cost
of $0, $15.1 million and $34.7 million, respectively, pursuant to the Class A
and Class B common stock repurchase program authorized by our Board of
Directors. The Term Loan agreement entered into in May 2008 and
described in note 6 allows for the repurchase of our common stock under our
buyback program when our total debt leverage is below 4.0 times adjusted EBITDA.
During the years ended December 31, 2008, 2007 and 2006 we retired 540,000,
843,000, and 3.2 million shares, respectively, of our Class A and Class B common
stock that we purchased pursuant to the Class A and Class B common stock
repurchase program.
Verizon owned
1,276,000 shares of our Class B common stock that represented 38 percent of the
issued and outstanding Class B shares at December 31, 2006, and 15 percent of
voting interest at December 31, 2006. In March 2007, Verizon sold all
of their GCI Class B common stock to two individuals in a private
transaction.
Share-Based
Compensation
Our 1986 Stock
Option Plan, as amended ("Stock Option Plan"), provides for the grant of options
and restricted stock awards (collectively "award") for a maximum of 15.7 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 award expires or terminates, the
shares subject to the award will be available for further grants of awards under
the Stock Option Plan. The Compensation Committee of GCI’s Board of Directors
administers the Stock Option Plan. Substantially all restricted stock awards
granted vest over periods of up to five years. Substantially all options vest in
equal installments over a period of five years and expire ten years from the
date of grant. The requisite service period of our awards is generally the same
as the vesting period. Options granted pursuant to the Stock 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. New shares are issued when stock option agreements are exercised or
restricted stock awards are made. Our share repurchase program as described
above may include the purchase of shares issued pursuant to stock option
agreement exercise transactions.
The fair value of
restricted stock awards is determined based on the number of shares granted and
the quoted price of our common stock. We use a Black-Scholes-Merton
option pricing model to estimate the fair value of stock options issued under
SFAS 123(R). The Black-Scholes-Merton option pricing model incorporates various
and highly subjective assumptions, including expected term and expected
volatility. We have reviewed our historical pattern of option exercises and have
determined that meaningful differences in option exercise activity existed among
employee job categories. Therefore, we have categorized these awards into two
groups of employees for valuation purposes.
We
estimated the expected term of options granted by evaluating the vesting period
of stock option awards, employee’s past exercise and post-vesting employment
departure behavior, and expected volatility of the price of the underlying
shares.
(Continued)
127
GENERAL
COMMUNICATION, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
We
estimated the expected volatility of our common stock at the grant date using
the historical volatility of our common stock over the most recent period equal
to the expected stock option term and evaluated the extent to which available
information indicated that future volatility may differ from historical
volatility.
The risk-free
interest rate assumption was determined using the Federal Reserve nominal rates
for U.S. Treasury zero-coupon bonds with maturities similar to those of the
expected term of the award being valued. We have never paid any cash dividends
on our common stock and we do not anticipate paying any cash dividends in the
foreseeable future. Therefore, we assumed an expected dividend yield of
zero.
The following table
shows our assumptions used to compute the share-based compensation expense for
stock options granted during the years ended December 31, 2008, 2007 and
2006:
|
2008
|
2007
|
2006
|
||||||||||
|
Expected term
(years)
|
5.2 – 6.8 | 5.2 – 6.8 | 5.4 – 8.0 | |||||||||
|
Volatility
|
47.6% – 55.4 | % | 41.5% – 54.3 | % | 43.3% – 61.4 | % | ||||||
|
Risk-free
interest rate
|
1.6% – 3.4 | % | 3.5% – 4.7 | % | 4.7% – 5.0 | % | ||||||
|
|
SFAS 123(R)
requires us to estimate pre-vesting option forfeitures at the time of
grant and periodically revise those estimates in subsequent periods if
actual forfeitures differ from those estimates. We record share-based
compensation expense only for those awards expected to vest using an
estimated forfeiture rate based on our historical pre-vesting forfeiture
data. Previously, we accounted for forfeitures as they occurred under the
pro forma disclosure provisions of SFAS 123 for periods prior to 2006. The
transition impact of adopting SFAS No. 123(R), attributed to accruing for
expected forfeitures on outstanding share-based awards, totaled $108,000,
which was reduced by income tax expense of $44,000 and is reported as
cumulative effect of a change in accounting principle in the accompanying
Consolidated Statement of Operations for the year ended December 31,
2006.
|
|
|
During the
year ended December 31, 2008, we modified the option price of several
performance based stock options as consideration for a modification of the
performance target. SFAS No. 123(R) requires that we recognize
incremental compensation expense based on the difference between the fair
value of the modified option as compared to the original option as of the
modification date. The modification resulted in $372,000
incremental expense that is expected to be recognized over the weighted
average period of 1.0 years.
|
|
|
The weighted
average grant date fair value of options granted during the years ended
December 31, 2008, 2007 and 2006 was $3.10 per share, $7.03 per share and
$6.92 per share, respectively. The total fair value of options vesting
during the years ended December 31, 2008, 2007 and 2006 was $3.3 million,
$3.3 million and $3.6 million,
respectively.
|
|
|
We have
recorded share-based compensation expense of $7.3 million for the year
ended December 31, 2008, which consists of $7.3 million for employee
share-based compensation expense and a $4,000 decrease in the fair value
of liability-classified share-based compensation. We recorded
share-based compensation expense of $4.9 million for the year ended
December 31, 2007, which consists of $6.2 million for employee share-based
compensation expense and a $1.3 million decrease for liability-classified
share-based compensation. We recorded share-based compensation
expense of $6.4 million for the year ended December 31, 2006, which
consists of $4.8 million for employee share-based compensation expense and
$1.6 million for liability-classified share-based
compensation. Share-based compensation expense is classified as
selling, general and administrative expense in our consolidated Statements
of Operations. Unrecognized share-based compensation expense
was $2.8 million relating to 413,000 restricted stock awards and $9.7
million relating to 2.5 million unvested stock options as of December 31,
2008. We expect to recognize share-based compensation expense over a
weighted average period of 2.7 years for stock options and 1.7 years for
restricted stock awards.
|
(Continued)
128
GENERAL
COMMUNICATION, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial
Statements
The following is a summary of our Stock
Option Plan activity for the years ended December 31, 2008, 2007 and 2006 (in
thousands):
|
Shares
|
Weighted
Average
Exercise
Price
|
|||||||
|
Outstanding
at December 31, 2005
|
6,543 | $ | 7.27 | |||||
|
Options
granted
|
1,003 | $ | 12.11 | |||||
|
Options
exercised
|
(1,606 | ) | $ | 6.74 | ||||
|
Options
forfeited and retired
|
(73 | ) | $ | 8.83 | ||||
|
Outstanding
at December 31, 2006
|
5,867 | $ | 8.22 | |||||
|
Options
granted
|
983 | $ | 12.85 | |||||
|
Restricted
stock awards granted
|
499 | $ | 13.04 | |||||
|
Options
exercised
|
(477 | ) | $ | 6.93 | ||||
|
Restricted
stock awards vested
|
(23 | ) | $ | 13.34 | ||||
|
Options
forfeited and retired
|
(98 | ) | $ | 9.69 | ||||
|
Outstanding
at December 31, 2007
|
6,751 | $ | 9.37 | |||||
|
Options
granted
|
751 | $ | 7.80 | |||||
|
Restricted
stock awards granted
|
45 | $ | 7.36 | |||||
|
Options
exercised
|
(71 | ) | $ | 5.77 | ||||
|
Restricted
stock awards vested
|
(131 | ) | $ | 12.05 | ||||
|
Options
forfeited and retired
|
(140 | ) | $ | 9.57 | ||||
|
Outstanding
options and restricted stock awards at December 31, 2008
|
7,205 | $ | 9.08 | |||||
|
Available for
grant at December 31, 2008
|
918 | |||||||
The following is a
summary of activity for stock options granted not pursuant to the Stock Option
Plan for the years ended December 31, 2008, 2007 and 2006 (in
thousands):
|
Shares
|
Weighted
Average
Exercise
Price
|
|||||||
|
Outstanding
at December 31, 2006, 2007, and 2008
|
150 | $ | 6.50 | |||||
|
Available for
grant at December 31, 2008
|
--- | |||||||
In
January 2001 we entered into an aircraft operating lease agreement with a
company owned by our President and CEO. The lease was amended
effective January 1, 2002 and February 25, 2005. 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, of which 150,000 shares remain available for
purchase and expire on March 31, 2010.
(Continued)
129
GENERAL
COMMUNICATION, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
The following is a
summary of all outstanding stock options at December 31,
2008:
|
Options
Outstanding
|
||||||||||||||||||
|
Weighted
Average
|
||||||||||||||||||
|
Remaining
|
Aggregate
|
|||||||||||||||||
|
Range
of
|
Shares
|
Contractual
Life
|
Weighted
Average
|
Intrinsic
Value
|
||||||||||||||
|
Exercise
Prices
|
(thousands)
|
(years)
|
Exercise
Price
|
(thousands)
|
||||||||||||||
| $ | 3.11-$6.00 | 664 | 3.40 | $ | 5.50 | $ | 1,721 | |||||||||||
| $ | 6.01-$6.35 | 41 | 2.01 | $ | 6.12 | $ | 81 | |||||||||||
| $ | 6.36-$6.50 | 747 | 1.85 | $ | 6.50 | $ | 1,188 | |||||||||||
| $ | 6.51-$7.12 | 108 | 2.08 | $ | 7.09 | $ | 108 | |||||||||||
| $ | 7.13-$7.25 | 1,050 | 3.10 | $ | 7.25 | $ | 882 | |||||||||||
| $ | 7.26-$8.40 | 1,422 | 7.29 | $ | 8.04 | $ | 189 | |||||||||||
| $ | 8.41-$9.86 | 705 | 5.65 | $ | 9.54 | $ | --- | |||||||||||
| $ | 9.87-$12.99 | 1,680 | 7.90 | $ | 11.91 | $ | --- | |||||||||||
| $ | 13.00-$15.31 | 394 | 7.47 | $ | 13.21 | $ | --- | |||||||||||
| $ | 15.32-$15.48 | 1 | 8.08 | $ | 15.48 | $ | --- | |||||||||||
| $ | 3.11-$15.48 | 6,812 | 5.54 | $ | 8.88 | $ | 4,169 | |||||||||||
We
had 6,812,000 total outstanding shares that excluded 393,000 restricted stock
awards at December 31, 2008.
|
Options
Exercisable
|
||||||||||||||||||
|
Weighted
Average
|
||||||||||||||||||
|
Remaining
|
Aggregate
|
|||||||||||||||||
|
Range
of
|
Shares
|
Contractual
Life
|
Weighted
Average
|
Intrinsic
Value
|
||||||||||||||
|
Exercise
Prices
|
(thousands)
|
(years)
|
Exercise
Price
|
(thousands)
|
||||||||||||||
| $ | 3.11-$6.00 | 664 | 3.40 | $ | 5.50 | $ | 1,721 | |||||||||||
| $ | 6.01-$6.35 | 41 | 2.01 | $ | 6.12 | $ | 81 | |||||||||||
| $ | 6.36-$6.50 | 747 | 1.85 | $ | 6.50 | $ | 1,188 | |||||||||||
| $ | 6.51-$7.12 | 108 | 2.08 | $ | 7.09 | $ | 108 | |||||||||||
| $ | 7.13-$7.25 | 1,008 | 3.10 | $ | 7.25 | $ | 847 | |||||||||||
| $ | 7.26-$8.40 | 518 | 4.65 | $ | 8.17 | $ | 70 | |||||||||||
| $ | 8.41-$9.86 | 501 | 5.36 | $ | 9.48 | $ | --- | |||||||||||
| $ | 9.87-$12.99 | 525 | 7.34 | $ | 11.48 | $ | --- | |||||||||||
| $ | 13.00-$15.31 | 163 | 7.48 | $ | 13.24 | $ | --- | |||||||||||
| $ | 15.32-$15.48 | 0 | 8.08 | $ | 15.48 | $ | --- | |||||||||||
| $ | 3.11-$15.48 | 4,275 | 4.03 | $ | 7.95 | $ | 4,015 | |||||||||||
The total intrinsic
values, determined as of the date of exercise, of options exercised in the years
ended December 31, 2008, 2007 and 2006 were $214,000, $3.5 million and $9.8
million, respectively. We received $416,000, $3.3 million and $11.5 million in
cash from stock option exercises in the years ended December 31, 2008, 2007
and 2006, respectively. We used cash of $0, $0, and $5.8 million to settle stock
option agreements in the years ended December 31, 2008, 2007 and 2006,
respectively. We discontinued offering a cash-settlement exercise option to
employees on October 23, 2006 and do not intend to cash-settle option exercises
in the future.
(Continued)
130
GENERAL
COMMUNICATION, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
Employee
Stock Purchase Plan
In
December 1986, we adopted an Employee Stock Purchase Plan (the “401(k) Plan”)
qualified under Section 401 of the Internal Revenue Code of 1986. The 401(k)
Plan provides for acquisition of GCI’s Class A and Class B common stock at
market value. The 401(k) Plan permits each employee who has completed one year
of service to elect to participate in the 401(k) Plan. Through December 31,
2008, eligible employees could elect to reduce their compensation by up to 50
percent of such compensation (subject to certain limitations) up to a maximum of
$15,500. Beginning January 1, 2009, eligible employees can elect to reduce their
compensation by up to 50 percent of such compensation (subject to certain
limitations) up to a maximum of $16,500. 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 $5,000 during the
year ended December 31, 2008 and will be able to make such contributions limited
to $5,500 during the year ended December 31, 2009. We do not match employee
catch-up contributions.
We
may match up to 100% of employee salary reductions and after tax contributions
in any amount, decided 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 year ended
December 31, 2008, the combination of salary reductions, after tax contributions
and matching contributions could not exceed the lesser of 100 percent of an
employee’s compensation or $46,000 (determined after salary reduction). For
the year ended December 31, 2007, the combination of salary reductions, after
tax contributions and matching contributions could not exceed the lesser of 100
percent of an employee’s compensation or $45,000 (determined after salary
reduction).
Employee
contributions may be invested in GCI Class A common stock or various mutual
funds.
In
2006 employee contributions received up to 100% matching, as determined by our
Board of Directors each year, in GCI common stock. As of January 1, 2007,
employee contributions receive up to 100% matching and employees self-direct
their matching investment. Our matching contributions allocated to participant
accounts totaled $5.8 million, $5.5 million, and $4.6 million for the years
ended December 31, 2008, 2007, and 2006, respectively. The 401(k) 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. We funded all of our
employer-matching contributions through market purchases during the years ended
December 31, 2008, 2007 and 2006.
Employees of our
subsidiaries UUI and Unicom who meet certain age and length of service
requirements may participate in a profit sharing and 401(k) deferred
contribution plan. We may match up to 100% of employee salary
reductions up to the first 4% of an employee’s contribution. The
annual contribution to the profit sharing plan is at the discretion of the UUI
and Unicom Board of Directors. Matching contributions totaled
$104,000 from June 1, 2008 through December 31, 2008.
|
(10)
|
Industry
Segments Data
|
Our reportable
segments are business units that offer different products and are each managed
separately.
A
description of our five reportable segments follows:
Consumer
- - We offer a full range of voice, video, data and wireless services to
residential customers.
Network
Access - We offer a full range of voice, data and wireless services to
common carrier customers.
(Continued)
131
GENERAL
COMMUNICATION, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
Commercial
- - We offer a full range of voice, video, data and wireless services to business
and governmental customers.
Managed
Broadband - We offer data services to rural school districts and
hospitals and health clinics through our SchoolAccess® and
ConnectMD®
initiatives.
Regulated
Operations - We offer voice, data and wireless services to residential,
business, and governmental customers in areas of rural
Alaska.
Corporate related
expenses including engineering, information technology, accounting, legal and
regulatory, human resources, and other general and administrative expenses for
the years ended December 31, 2008, 2007, and 2006 are allocated to our Consumer,
Network Access, Commercial, and Managed Broadband segments using segment margin
for the years ended December 31, 2007, 2006, and 2005 respectively. Bad
debt expense for the years ended December 31, 2008, 2007, and 2006 is allocated
to our Consumer, Network Access, Commercial and Managed Broadband segments using
a combination of specific identification and allocations based upon segment
revenue for the years ended December 31, 2008, 2007 and 2006,
respectively. Corporate related expenses and bad debt expense are
specifically identified for our Regulated Operations segment and therefore, are
not included in the allocations.
We
evaluate performance and allocate resources based on adjusted EBITDA. 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 82% of our undersea fiber optic cable systems which transit
international waters and all of our satellite transponders.
Summarized
financial information for our reportable segments for the years ended December
31, 2008, 2007 and 2006 follows (amounts in thousands):
|
Consumer
|
Network
Access
|
Commercial
|
Managed
Broadband
|
Regulated
Operations
|
Total
Reportable Segments
|
|||||||||||||||||||
|
2008
|
||||||||||||||||||||||||
|
Revenues:
|
||||||||||||||||||||||||
|
Intersegment
|
$ | 84 | 916 | 5,808 | --- | 157 | 6,965 | |||||||||||||||||
|
External
|
255,632 | 153,821 | 114,660 | 37,047 | 14,282 | 575,442 | ||||||||||||||||||
|
Total
revenues
|
255,716 | 154,737 | 120,468 | 37,047 | 14,439 | 582,407 | ||||||||||||||||||
|
Cost of Goods
Sold:
|
||||||||||||||||||||||||
|
Intersegment
|
656 | 685 | 2,821 | 125 | 97 | 4,384 | ||||||||||||||||||
|
External
|
89,853 | 40,326 | 59,480 | 10,265 | 3,134 | 203,058 | ||||||||||||||||||
|
Total Cost of
Goods Sold
|
90,509 | 41,011 | 62,301 | 10,390 | 3,231 | 207,442 | ||||||||||||||||||
|
Contribution:
|
||||||||||||||||||||||||
|
Intersegment
|
(572 | ) | 231 | 2,987 | (125 | ) | 60 | 2,581 | ||||||||||||||||
|
External
|
165,779 | 113,495 | 55,180 | 26,782 | 11,148 | 372,384 | ||||||||||||||||||
|
Total
contribution
|
165,207 | 113,726 | 58,167 | 26,657 | 11,208 | 374,965 | ||||||||||||||||||
(Continued)
132
GENERAL
COMMUNICATION, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
|
Less
SG&A
|
110,364 | 43,057 | 36,191 | 13,132 | 7,562 | 210,306 | ||||||||||||||||||
|
Plus
share-based compensation
|
2,891 | 2,443 | 1,392 | 552 | --- | 7,278 | ||||||||||||||||||
|
Plus non-cash
contribution expense
|
199 | 177 | 76 | 28 | --- | 480 | ||||||||||||||||||
|
Plus minority
interest
|
661 | 589 | 253 | --- | --- | 1,503 | ||||||||||||||||||
|
Plus other
expense
|
(217 | ) | --- | --- | --- | --- | (217 | ) | ||||||||||||||||
|
Adjusted
EBITDA
|
$ | 58,949 | 73,647 | 20,710 | 14,230 | 3,586 | 171,122 | |||||||||||||||||
|
2007
|
||||||||||||||||||||||||
|
Revenues:
|
||||||||||||||||||||||||
|
Intersegment
|
$ | --- | 2,978 | 5,471 | --- | --- | 8,449 | |||||||||||||||||
|
External
|
223,502 | 163,377 | 104,640 | 28,792 | --- | 520,311 | ||||||||||||||||||
|
Total
revenues
|
223,502 | 166,355 | 110,111 | 28,792 | --- | 528,760 | ||||||||||||||||||
|
Cost of Goods
Sold:
|
||||||||||||||||||||||||
|
Intersegment
|
2,067 | 1,303 | 2,487 | --- | --- | 5,857 | ||||||||||||||||||
|
External
|
88,699 | 43,868 | 53,492 | 9,740 | --- | 195,799 | ||||||||||||||||||
|
Total Cost of
Goods Sold
|
90,766 | 45,171 | 55,979 | 9,740 | --- | 201,656 | ||||||||||||||||||
|
Contribution:
|
||||||||||||||||||||||||
|
Intersegment
|
(2,067 | ) | 1,675 | 2,984 | --- | --- | 2,592 | |||||||||||||||||
|
External
|
134,803 | 119,509 | 51,148 | 19,052 | --- | 324,512 | ||||||||||||||||||
|
Total
contribution
|
132,736 | 121,184 | 54,132 | 19,052 | --- | 327,104 | ||||||||||||||||||
|
Less
SG&A
|
89,723 | 38,859 | 36,060 | 11,110 | --- | 175,752 | ||||||||||||||||||
|
Plus
share-based compensation
|
1,715 | 1,775 | 1,069 | 385 | --- | 4,944 | ||||||||||||||||||
|
Plus other
income
|
13 | 16 | 7 | --- | --- | 36 | ||||||||||||||||||
|
Adjusted
EBITDA
|
$ | 46,808 | 82,441 | 16,164 | 8,327 | --- | 153,740 | |||||||||||||||||
|
2006
|
||||||||||||||||||||||||
|
Revenues:
|
||||||||||||||||||||||||
|
Intersegment
|
$ | --- | --- | 5,335 | --- | --- | 5,335 | |||||||||||||||||
|
External
|
178,951 | 166,471 | 105,929 | 26,131 | --- | 477,482 | ||||||||||||||||||
|
Total
revenues
|
178,951 | 166,471 | 111,264 | 26,131 | --- | 482,817 | ||||||||||||||||||
|
Cost of Goods
Sold:
|
||||||||||||||||||||||||
|
Intersegment
|
--- | 636 | 2,353 | --- | --- | 2,989 | ||||||||||||||||||
|
External
|
71,663 | 39,957 | 50,309 | 7,178 | --- | 169,107 | ||||||||||||||||||
|
Total Cost of
Goods Sold
|
71,663 | 40,593 | 52,662 | 7,178 | --- | 172,096 | ||||||||||||||||||
|
Contribution:
|
||||||||||||||||||||||||
|
Intersegment
|
--- | (636 | ) | 2,982 | --- | --- | 2,346 | |||||||||||||||||
|
External
|
107,288 | 126,514 | 55,620 | 18,953 | --- | 308,375 | ||||||||||||||||||
|
Total
contribution
|
107,288 | 125,878 | 58,602 | 18,953 | --- | 310,721 | ||||||||||||||||||
|
Less
SG&A
|
76,819 | 35,542 | 35,793 | 10,796 | --- | 158,950 | ||||||||||||||||||
|
Plus
share-based compensation
|
2,081 | 2,478 | 1,337 | 469 | --- | 6,365 | ||||||||||||||||||
|
Plus other
income
|
--- | --- | --- | 463 | --- | 463 | ||||||||||||||||||
|
Adjusted
EBITDA
|
$ | 32,550 | 93,450 | 21,164 | 9,089 | --- | 156,253 |
(Continued)
133
GENERAL
COMMUNICATION, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
A
reconciliation of reportable segment revenues to consolidated revenues follows
(amounts in thousands):
|
Years ended
December 31,
|
2008
|
2007
|
2006
|
|||||||||
|
Reportable
segment revenues
|
$ | 582,407 | 528,760 | 482,817 | ||||||||
|
Less
intersegment revenues eliminated in consolidation
|
6,965 | 8,449 | 5,335 | |||||||||
|
Consolidated
revenues
|
$ | 575,442 | 520,311 | 477,482 | ||||||||
A
reconciliation of reportable segment earnings from adjusted EBITDA, as adjusted
to consolidated net income (loss) before income taxes and cumulative effect of a
change in accounting principle follows (amounts in thousands):
|
Years ended
December 31,
|
2008
|
2007
|
2006
|
|||||||||
|
Reportable
segment adjusted EBITDA
|
$ | 171,122 | 153,740 | 156,253 | ||||||||
|
Less
depreciation and amortization expense
|
114,369 | 87,615 | 82,099 | |||||||||
|
Less
share-based compensation expense
|
7,278 | 4,944 | 6,365 | |||||||||
|
Less non-cash
contribution expense
|
480 | --- | --- | |||||||||
|
Less other
income
|
1,503 | 36 | 463 | |||||||||
|
Plus other
expense
|
217 | --- | --- | |||||||||
|
Consolidated
operating income
|
47,709 | 61,145 | 67,326 | |||||||||
|
Less other
expense, net
|
48,501 | 35,250 | 33,073 | |||||||||
|
Consolidated
income (loss) before income taxes and cumulative effect of a change in
accounting principle
|
$ | (792 | ) | 25,895 | 34,253 | |||||||
Assets at December
31, 2008, 2007 and 2006 and capital expenditures for the years ended December
31, 2008, 2007 and 2006 are not allocated to reportable segments as our Chief
Operating Decision Maker does not review a balance sheet or capital expenditures
by segment to make decisions about resource allocations or to evaluate segment
performance.
We
earn revenues included in the Network Access segment from a major customer. We
earned revenues from our major customer, net of discounts, of $65.0 million,
$71.6 million and $93.4 million for the years ended December 31, 2008, 2007 and
2006, respectively. As a percentage of total revenues, our major customer’s
revenues totaled 11.3%, 13.8% and 19.6% for the years ended December 31, 2008,
2007 and 2006, respectively
|
(11)
|
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. At December 31, 2008 and 2007 the
fair values of cash and cash equivalents, net receivables,
current portion of notes receivable, accounts payable, accrued 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. The carrying amounts and estimated fair
values of our financial instruments at December 31, 2008 and 2007 follow
(amounts in thousands):
(Continued)
134
GENERAL
COMMUNICATION, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
|
2008
|
2007
|
||||||||||
|
Carrying
Amount
|
Fair
Value
|
Carrying
Amount
|
Fair
Value
|
||||||||
|
Current and
long-term debt and capital lease obligations
|
$
|
817,160
|
723,403
|
541,249
|
512,853
|
||||||
|
Other
liabilities
|
63,867
|
63,727
|
11,596
|
11,380
|
|||||||
The following
methods and assumptions were used to estimate fair values:
|
|
Current and
long-term debt and capital lease obligations: The fair value of
our Senior Notes is estimated based on the quoted market price for the
same issue. The fair value of our Senior Credit Facility is estimated to
approximate the carrying value because these instruments are subject to
variable interest rates. The fair value of the Rural Utilities Services
Debt and CoBank Mortgage Note Payable are valued at the discounted amount
of future cash flows using our current incremental rate of borrowing on
our Senior Credit Facility. The fair value of our capital
leases and capital leases due to related party are estimated based upon
the discounted amount of future cash flows using our current incremental
rate of borrowing on our Senior Credit
Facility.
|
|
|
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. Lease escalation liabilities are valued at the
discounted amount of future cash flows using the Senior Credit Facility
interest rate at December 31, 2008. Our non-employee share-based
compensation awards are reported at their fair value at each reporting
period.
|
Fair
Value Measurements
On
January 1, 2008, we partially adopted SFAS No. 157 “Fair Value Measurements,”
which did not have a material impact on our consolidated financial statements.
We partially adopted SFAS No. 157 due to the issuance of FSP FASB 157-2,
“Effective Date of FASB Statement No. 157.” SFAS No. 157 defines fair
value, establishes a common framework for measuring fair value under U.S. GAAP,
and expands disclosures about fair value measurements for assets and
liabilities. SFAS No. 157 does not require additional assets or liabilities to
be accounted for at fair value beyond that already required under other U.S.
GAAP accounting standards. FSP No. 157-2 deferred the effective date of SFAS No.
157 for all nonfinancial assets and nonfinancial liabilities that are not
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). Included in the scope of FSP No. 157-2 are
nonfinancial assets and liabilities acquired in business combinations and
impaired assets. The effective date for nonfinancial assets and nonfinancial
liabilities has been delayed by one year to fiscal years beginning after
November 15, 2008, and interim periods within those fiscal years. We continue to
assess the deferred portion of SFAS No. 157.
In
accordance with the provisions of FSP No. 157-2, we have applied the provisions
of SFAS No. 157 only to our financial assets and liabilities recorded at fair
value, which consist of trading securities and interest rate caps. SFAS No. 157
establishes a three-tiered fair value hierarchy that prioritizes inputs to
valuation techniques used in fair value calculations. Level 1 inputs, the
highest priority, are quoted prices in active markets for identical assets or
liabilities. Level 2 inputs reflect other than quoted prices included in Level 1
that are either observable directly or through corroboration with observable
market data. Level 3 inputs are unobservable inputs, due to little or no market
activity for the asset or liability, such as internally-developed valuation
models.
(Continued)
135
GENERAL
COMMUNICATION, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
Assets and
liabilities measured at fair value on a recurring basis as of December 31, 2008
were as follows (amounts in thousands):
|
|
Observable
Inputs Level 1
|
Other
Observable Inputs Level 2
|
Unobservable
Inputs Level 3
|
Total
|
|||||
|
Assets
|
|||||||||
|
Money market
funds and U.S. government securities
|
$
|
1,563
|
---
|
---
|
1,563
|
||||
|
Derivative
financial instruments
|
---
|
7
|
---
|
7
|
|||||
|
Total assets
at fair value
|
$
|
1,563
|
7
|
---
|
1,570
|
The valuation of
our marketable securities is determined using quoted market prices utilizing
market observable inputs. Derivative financial instruments are determined using
mid-market quotations that are based on actual bid/ask quotations shown on
reliable electronic information screens as of December 31, 2008.
|
(12)
|
Related
Party Transactions
|
We
entered into a long-term capital lease agreement in 1991 with the wife of our
President and CEO 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
April 2008 and we have increased our existing capital lease asset and liability
by $1.3 million to record the extension of this capital lease. The amended lease
terminates on September 30, 2026.
In
January 2001 we entered into an aircraft operating lease agreement with a
company owned by our President and CEO. The lease was amended effective January
1, 2002 and February 25, 2005. The lease term is month-to-month and may be
terminated at any time upon one hundred and twenty days written notice. The
monthly lease rate is $75,000. 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, of which 150,000 shares remain and were exercisable at December 31, 2008.
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
intrinsic value of the right to purchase all or a portion of the stock option to
repay the deposit, if allowed by our debt instruments in effect at such
time.
|
(13)
|
Commitments
and Contingencies
|
Operating
Leases as Lessee
We lease business offices, have
entered into site lease agreements and use satellite transponder and fiber
capacity and certain equipment pursuant to operating lease arrangements. Many of
our leases are for multiple years and contain renewal options. Rental
costs, including immaterial amounts of contingent rent expense, under such
arrangements amounted to $35.7 million, $34.6 million and $32.8 million for the
years ended December 31, 2008, 2007 and 2006,
respectively.
Capital
Leases
We
entered into a long-term capital lease agreement in 1991 with the wife of our
President and CEO for property occupied by us as further described in note
12.
On
March 31, 2006, through our subsidiary GCI Communication Corp. we entered into
an agreement to lease transponder capacity on Intelsat, Ltd.’s (“Intelsat”)
Galaxy 18 spacecraft that successfully
(Continued)
136
GENERAL
COMMUNICATION, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
launched on May 21,
2008. We are also leasing capacity on the Horizons 1 satellite, which is owned
jointly by Intelsat and JSAT International, Inc. The leased capacity replaced
our existing transponder capacity on Intelsat’s Galaxy XR
satellite.
|
|
The Intelsat
Galaxy 18 C-band and Ku-Band transponders are being leased over an
expected term of 14 years. The present value of the lease payments,
excluding telemetry, tracking and command services and back-up protection,
is $98.6 million. We have recorded a capital lease obligation and an
addition to our Property and Equipment at December 31,
2008.
|
In
June 2008 Galaxy XR was taken out of service resulting in the removal of the
remaining $8.8 million net book value and the recognition of an $8.8 million
warranty receivable. We applied $8.4 million of the warranty
receivable to offset our cash obligation relating to the capital lease during
the year ended December 31, 2008, resulting in an outstanding warranty
receivable of $465,000 as of December 31, 2008.
A
summary of future minimum lease payments (amounts in thousands):
|
Years ending
December 31:
|
Operating
|
Capital
|
||||||
|
2009
|
$ | 16,401 | 11,646 | |||||
|
2010
|
8,703 | 11,656 | ||||||
|
2011
|
7,387 | 11,672 | ||||||
|
2012
|
5,601 | 11,732 | ||||||
|
2013
|
4,797 | 11,742 | ||||||
|
2014 and
thereafter
|
17,429 | 101,983 | ||||||
|
Total minimum
lease payments
|
$ | 60,318 | 160,431 | |||||
|
Less amount
representing interest
|
60,102 | |||||||
|
Less current
maturity of obligations under capital leases
|
4,432 | |||||||
|
Long-term
obligations under capital leases, excluding current
maturity
|
$ | 95,897 | ||||||
The leases
generally provide that we pay the taxes, insurance and maintenance expenses
related to the leased assets. Several of our leases include renewal options,
escalation clauses and immaterial amounts of contingent rent expense. We have no
leases that include rent holidays. We expect that in the normal course of
business leases that expire will be renewed or replaced by leases on other
properties.
Operating
Lease and IRU Revenue
We
enter into lease or service arrangements for IRU capacity on our fiber optic
cable systems with third parties and for many of these leases or service
arrangements, we received up-front cash payments. We have $52.6
million in deferred revenue at December 31, 2008 representing cash received from
customers for which we will recognize revenue in the future. The
arrangements under operating lease or service arrangements expire on various
dates through 2029. The revenue will be recognized over the term of
the agreements.
(Continued)
137
GENERAL
COMMUNICATION, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
A
summary of minimum future lease or service arrangement cash receipts including
IRUs and the provision of certain other service are as follows (amounts in
thousands):
|
Years ending
December 31,
|
||||
|
2009
|
$ | 18,902 | ||
|
2010
|
7,356 | |||
|
2011
|
5,399 | |||
|
2012
|
4,940 | |||
|
2013
|
4,936 | |||
|
2014 and
thereafter
|
46,586 | |||
|
Total minimum
future service revenues
|
$ | 88,119 | ||
The cost of assets
that are leased to customers is $226.0 million and $22.9 million as of December
31, 2008 and 2007, respectively. The carrying value of assets leased
to customers is $152.1 million and $13.1 million as of December 31, 2008 and
2007, respectively.
Letters
of Credit
We
have letters of credit totaling $4.0 million outstanding under our Senior Credit
Facility as follows:
|
|
·
|
$3.4 million
to secure payment of certain access charges associated with our provision
of telecommunications services within the State of
Alaska,
|
|
|
·
|
$529,000 to
meet obligations associated with our insurance arrangements,
and
|
|
|
·
|
$100,000 to
secure right of way access.
|
Wireless
Service Equipment Obligation
We
have entered into an agreement to purchase hardware and software capable of
providing wireless service to small markets in rural Alaska as a reliable
substitute for standard wire line service. The agreement has a total
remaining commitment of $13.3 million. We paid $3.8 million in 2008
and expect to pay $4.8 million, $5.1 million, and $3.4 million during the years
ended December 31, 2009, 2010, and 2011, respectively.
IRU
Purchase Commitment
On
July 31, 2006, through our subsidiary GCI Communication Corp. we entered into an
agreement to purchase IRU capacity in the Kodiak-Kenai Cable Company, LLC’s
marine-based fiber optic cable system linking Anchorage to Kenai, Homer, Kodiak
and Seward, Alaska. The new system was placed into service in December 2006. We
accepted the first installment of our IRU capacity in December 2006 and the
second installment in January 2009. We have committed to purchase a minimum of
$5.0 million to $5.5 million in additional IRU capacity in two installments
through 2011.
Guaranteed
Service Levels
Certain customers
have guaranteed levels of service with varying terms. 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 damage or loss to certain of our transmission facilities,
including our buried, undersea, 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,
Disputes, and Regulatory Matters
We
are involved in various lawsuits, billing disputes, legal proceedings, and
regulatory matters that have arisen from time to time in the normal course of
business. While the ultimate results of these items
(Continued)
138
GENERAL
COMMUNICATION, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
cannot be predicted
with certainty we do not expect, at this time, that the resolution of them will
have a material adverse effect on our financial position, results of operations
or liquidity.
In
the third quarter of 2008, Alaska DigiTel received a request for documents
pursuant to a notification of investigation from the FCC’s Office of the
Inspector General in connection with its review of Alaska DigiTel’s compliance
with program rules and requirements under certain USF programs. The request
covers the period beginning January 1, 2004 through August 31, 2008, and relates
to amounts received by Alaska DigiTel and its affiliates during that
period. We have been and intend to continue fully complying with this
request on behalf of Alaska DigiTel and the GCI companies as
affiliates. This request has not had a material impact on our
statement of operations, financial position or cash flows but given the
preliminary nature of this request we are unable to assess the ultimate
resolution of this matter.
Alaska
Communications Systems (“ACS”) Access Service Pricing
On
May 22, 2006, the ACS subsidiary serving Anchorage filed a petition with the
FCC, seeking forbearance from regulation of interstate broadband and access
services. On August 20, 2007, the FCC granted in part and denied in part the
requested relief, requiring that ACS comply with certain safeguards to ensure
the relief granted would not result in harm to consumers or
competition. On September 19, 2007, GCI and ACS both filed petitions
for reconsideration on discrete findings in the order. The petitions
are pending and we cannot predict the final outcome of the proceeding at this
time. On October 22, 2008, ACS filed a petition to convert to price
cap regulation the access services it provides in each of its operating
areas. We cannot predict at this time the outcome of the proceeding
or the effect on our cost of purchasing ACS access services.
Universal
Service
The USF pays
subsidies to ETCs to support the provision of local access service in high-cost
areas. Under FCC regulations, we have qualified as a competitive ETC in the
Anchorage, Fairbanks, Juneau, MTA, Mukluk, Ketchikan, Fort Wainwright/Eielson,
and Glacier State study areas. Without ETC status, we would not qualify for USF
subsidies in these areas or other rural areas where we propose to offer local
access services, and our revenue for providing local access services in these
areas would be materially adversely affected.
On
May 1, 2008, the FCC issued an order adopting the recommendation of the Federal
State Joint Board on Universal Service (“Joint Board”) to impose a
state-by-state interim cap on high cost funds to be distributed to competitive
ETCs. As part of the revised policy, the FCC adopted a limited
exception from the cap for competitive ETCs serving tribal lands or Alaska
Native regions. While the operation of the cap will generally reduce
the high cost fund amounts available to competitive ETCs as new competitive ETCs
are designated and as existing competitive ETCs acquire new customers, providers
like us who serve tribal lands or Alaska Native regions were provided some
relief. On March 5, 2009, the FCC issued an additional order waiving
a previously adopted limitation to the exception, the result of which is to
provide uncapped support for all lines served by competitive ETCs for tribal
lands or Alaska Native regions during the time the interim cap is in
effect. The uncapped support for tribal lands or Alaska Native
regions and the cap for all other regions will be in place until the FCC takes
action on proposals for long term reform.
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, 2008, 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% of our total
basic service subscribers at December 31, 2008.
Dobson
Resale Agreement
We
had a distribution agreement with Dobson allowing us to resell Dobson wireless
services. AT&T Mobility acquired Dobson, including its Alaska
properties, on November 15, 2007. In December 2007 we
(Continued)
139
GENERAL
COMMUNICATION, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
signed an agreement
with AT&T Mobility that provides for an orderly transition of our wireless
customers from the Dobson/AT&T Mobility network in Alaska to our wireless
facilities to be built in 2008 and 2009. The agreement allows our
current and future customers to use the AT&T Mobility network for local
access and roaming during the transition period. The four-year
transition period, which expires June 30, 2012, provides us adequate time to
replace the Dobson/AT&T Mobility network in Alaska with our own wireless
facilities. Under the agreement AT&T Mobility’s obligation to purchase
network services from us terminated as of July 1, 2008. AT&T Mobility has
agreed to provide us with a large block of wireless network usage at no charge
to facilitate the transition of our customers. We will pay for usage
in excess of that base transitional amount. This grant of service
will reduce the Cost of Goods Sold during the four-year period ended June 30,
2012, that we would have otherwise recognized in accordance with the new
agreement, however we are unable to estimate the impact this agreement will have
on our Cost of Goods Sold.
CDMA
Network Expansion
During 2007 Alaska
DigiTel and GCI signed an agreement with a customer to build-out Alaska
DigiTel's CDMA network to provide expanded roaming area coverage. If
we fail to meet the schedule, the customer has the right to terminate the
agreement and we may be required to pay up to $16.0 million as liquidated
damages. We expect to meet the deadlines imposed by the build-out
schedule and therefore expect our expenditures to result in an expansion of our
wireless facilities rather than payment of the liquidated damages. We spent
$28.1 million in 2008 to partially complete the CDMA network
build-out.
|
|
(14) Fluctuations
in Fourth Quarter Results of Operations
(Unaudited)
|
The following is a
summary of unaudited quarterly results of operations for the years ended
December 31, 2008 and 2007(amounts in thousands, except per share
amounts):
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
|||||||||||||
|
2008
|
||||||||||||||||
|
Total
revenues
|
$ | 134,674 | 142,461 | 151,660 | 146,647 | |||||||||||
|
Operating
income
|
$ | 9,714 | 14,045 | 15,980 | 7,970 | |||||||||||
|
Net income
(loss)
|
$ | 436 | 1,832 | 265 | (4,402 | ) | ||||||||||
|
Basic net
income (loss) per share
|
$ | 0.01 | 0.04 | 0.01 | (0.08 | ) | ||||||||||
|
Diluted net
income (loss) per share
|
$ | 0.00 | 0.03 | 0.00 | (0.08 | ) | ||||||||||
|
2007
|
||||||||||||||||
|
Total
revenues
|
$ | 125,031 | 129,890 | 134,090 | 131,300 | |||||||||||
|
Operating
income
|
$ | 12,570 | 19,444 | 15,172 | 13,959 | |||||||||||
|
Net
income
|
$ | 2,306 | 5,918 | 2,956 | 2,553 | |||||||||||
|
Basic net
income per share
|
$ | 0.04 | 0.11 | 0.06 | 0.05 | |||||||||||
|
Diluted net
income per share
|
$ | 0.04 | 0.11 | 0.05 | 0.04 | |||||||||||
During the fourth
quarter of 2008, we recognized additional expense of $1.6 million related to the
conversion of customer wireless phones to our facilities, $1.8 million in
compensation related costs, additional depreciation due to the build out of our
wireless facilities, and a reduction in revenues due to continuing
implementation of the new distribution agreement with AT&T
Mobility.
No
significant, unusual or infrequently occurring items were recognized in the
fourth quarter of 2007.
140
Item
15(b). 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 August 20, 2007
(37)
|
||
|
3.2
|
Amended and
Restated Bylaws of the Company dated August 20, 2007
(36)
|
||
|
4.1
|
Certified
copy of the General Communication, Inc. Amendment No. 1, dated as of June
25, 2007, to the Amended and Restated 1986 Stock Option Plan
(33)
|
||
|
10.3
|
Westin
Building Lease (3)
|
||
|
10.4
|
Duncan and
Hughes Deferred Bonus Agreements (4)
|
||
|
10.5
|
Compensation
Agreement between General Communication, Inc. and William C. Behnke dated
January 1, 1997 (13)
|
||
|
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 (2)
|
||
|
10.13
|
MCI Carrier
Agreement between MCI Telecommunications Corporation and General
Communication, Inc. dated January 1, 1993 (5)
|
||
|
10.14
|
Contract for
Alaska Access Services Agreement between MCI Telecommunications
Corporation and General Communication, Inc. dated January 1, 1993
(5)
|
||
|
10.15
|
Promissory
Note Agreement between General Communication, Inc. and Ronald A. Duncan,
dated August 13, 1993 (6)
|
||
|
10.16
|
Deferred
Compensation Agreement between General Communication, Inc. and Ronald A.
Duncan, dated August 13, 1993 (6)
|
||
|
10.17
|
Pledge
Agreement between General Communication, Inc. and Ronald A. Duncan, dated
August 13, 1993 (6)
|
||
|
10.20
|
The GCI
Special Non-Qualified Deferred Compensation Plan (7)
|
||
|
10.21
|
Transponder
Purchase Agreement for Galaxy X between Hughes Communications Galaxy, Inc.
and GCI Communication Corp. (7)
|
||
|
10.25
|
Licenses:
(3)
|
||
|
10.25.1
|
214
Authorization
|
||
|
10.25.2
|
International
Resale Authorization
|
||
|
10.25.3
|
Digital
Electronic Message Service Authorization
|
||
|
10.25.11
|
Certificate
of Convenience and Public Necessity – Telecommunications Service (Local
Exchange) dated July 7, 2000 (29)
|
||
|
10.26
|
ATU
Interconnection Agreement between GCI Communication Corp. and Municipality
of Anchorage, executed January 15, 1997 (12)
|
||
|
10.29
|
Asset
Purchase Agreement, dated April 15, 1996, among General Communication,
Inc., ACNFI, ACNJI and ACNKSI (8)
|
||
|
10.30
|
Asset
Purchase Agreement, dated May 10, 1996, among General Communication, Inc.,
and Alaska Cablevision, Inc. (8)
|
||
|
10.31
|
Asset
Purchase Agreement, dated May 10, 1996, among General Communication, Inc.,
and McCaw/Rock Homer Cable System, J.V. (8)
|
||
|
10.32
|
Asset
Purchase Agreement, dated May 10, 1996, between General Communication,
Inc., and McCaw/Rock Seward Cable System, J.V. (8)
|
||
|
10.33
|
Amendment No.
1 to Securities Purchase and Sale Agreement, dated October 31, 1996, among
General Communication, Inc., and the Prime Sellers Agent
(9)
|
||
|
10.34
|
First
Amendment to Asset Purchase Agreement, dated October 30, 1996, among
General Communication, Inc., ACNFI, ACNJI and ACNKSI
(9)
|
||
|
10.36
|
Order
Approving Arbitrated Interconnection Agreement as Resolved and Modified by
Order U-96-89(5) dated January 14, 1997 (12)
|
||
|
10.37
|
Amendment to
the MCI Carrier Agreement executed April 20, 1994 (12)
|
||
|
10.38
|
Amendment No.
1 to MCI Carrier Agreement executed July 26, 1994 (11)
|
||
|
10.39
|
MCI Carrier
Addendum—MCI 800 DAL Service effective February 1, 1994
(11)
|
||
|
10.40
|
Third
Amendment to MCI Carrier Agreement dated as of October 1, 1994
(11)
|
||
141
|
10.41
|
Fourth
Amendment to MCI Carrier Agreement dated as of September 25, 1995
(11)
|
||
|
10.42
|
Fifth
Amendment to the MCI Carrier Agreement executed April 19, 1996
(12)
|
||
|
10.43
|
Sixth
Amendment to MCI Carrier Agreement dated as of March 1, 1996
(11)
|
||
|
10.44
|
Seventh
Amendment to MCI Carrier Agreement dated November 27, 1996
(14)
|
||
|
10.45
|
First
Amendment to Contract for Alaska Access Services between General
Communication, Inc. and MCI Telecommunications Corporation dated April 1,
1996 (14)
|
||
|
10.46
|
Service Mark
License Agreement between MCI Communications Corporation and General
Communication, Inc. dated April 13, 1994 (13)
|
||
|
10.47
|
Radio Station
Authorization (Personal Communications Service License), Issue Date June
23, 1995 (13)
|
||
|
10.50
|
Contract No.
92MR067A Telecommunications Services between BP Exploration (Alaska), Inc.
and GCI Network Systems dated April 1, 1992 (14)
|
||
|
10.51
|
Amendment No.
03 to BP Exploration (Alaska) Inc. Contract No. 92MRO67A effective August
1, 1996 (14)
|
||
|
10.52
|
Lease
Agreement dated September 30, 1991 between RDB Company and General
Communication, Inc. (2)
|
||
|
10.54
|
Order
Approving Transfer Upon Closing, Subject to Conditions, and Requiring
Filings dated September 23, 1996 (13)
|
||
|
10.55
|
Order
Granting Extension of Time and Clarifying Order dated October 21, 1996
(13)
|
||
|
10.58
|
Employment
and Deferred Compensation Agreement between General Communication, Inc.
and John M. Lowber dated July 1992 (13)
|
||
|
10.59
|
Deferred
Compensation Agreement between GCI Communication Corp. and Dana L. Tindall
dated August 15, 1994 (13)
|
||
|
10.60
|
Transponder
Lease Agreement between General Communication Incorporated and Hughes
Communications Satellite Services, Inc., executed August 8, 1989
(6)
|
||
|
10.61
|
Addendum to
Galaxy X Transponder Purchase Agreement between GCI Communication Corp.
and Hughes Communications Galaxy, Inc. dated August 24, 1995
(13)
|
||
|
10.62
|
Order
Approving Application, Subject to Conditions; Requiring Filing; and
Approving Proposed Tariff on an Inception Basis, dated February 4, 1997
(13)
|
||
|
10.66
|
Supply
Contract Between Submarine Systems International Ltd. And GCI
Communication Corp. dated as of July 11, 1997. (15)
|
||
|
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.
(15)
|
||
|
10.71
|
Third
Amendment to Contract for Alaska Access Services between General
Communication, Inc. and MCI Telecommunications Corporation dated February
27, 1998 (16)
|
||
|
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. (17)
|
||
|
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 #
(18)
|
||
142
|
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 #
(18)
|
||
|
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 #
(18)
|
||
|
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 # (21)
|
||
|
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. (22)
|
||
|
10.103
|
Agreement and
plan of merger of GCI American Cablesystems, Inc. a Delaware 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 (22)
|
||
|
10.104
|
Articles of
merger between GCI Cablesystems of Alaska, Inc. and GCI Cable, Inc.,
adopted as of December 10, 2002 (22)
|
||
|
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
(22)
|
||
|
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 (22)
|
||
|
10.108
|
Bonus
Agreement between General Communication, Inc. and Wilson Hughes
(23)
|
||
|
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. # (23)
|
||
|
10.110
|
Settlement
and Release Agreement between General Communication, Inc. and WorldCom,
Inc. (23)
|
||
|
10.112
|
Waiver letter
agreement dated as of February 13, 2004 for Credit, Guaranty, Security and
Pledge Agreement (24)
|
||
|
10.113
|
Indenture
dated as of February 17, 2004 between GCI, Inc. and The Bank of New York,
as trustee (24)
|
||
|
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 (24)
|
||
|
10.121
|
First
amendment to contract for Alaska Access Services between Sprint
Communications Company L.P. and General Communication, Inc. and its wholly
owned subsidiary GCI Communication Corp. dated July 24, 2002
# (26)
|
||
|
10.122
|
Second
amendment to contract for Alaska Access Services between Sprint
Communications Company L.P. and General Communication, Inc. and its wholly
owned subsidiary GCI Communication Corp. dated December 31, 2003
(26)
|
||
|
10.123
|
Third
amendment to contract for Alaska Access Services between Sprint
Communications Company L.P. and General Communication, Inc. and its wholly
owned subsidiary GCI Communication Corp. dated February 19, 2004
# (26)
|
||
|
10.124
|
Fourth
amendment to contract for Alaska Access Services between Sprint
Communications Company L.P. and General Communication, Inc. and its wholly
owned subsidiary GCI Communication Corp. dated June 30, 2004
# (26)
|
||
|
10.126
|
Audit
Committee Charter (as revised by the board of directors of General
Communication, Inc. effective as of February 3,
2005) (27)
|
||
|
10.127
|
Nominating
and Corporate Governance Committee Charter (as revised by the board of
directors of General Communication, Inc. effective as of February 3,
2005) (27)
|
||
|
10.128
|
Fifth
amendment to contract for Alaska Access Services between Sprint
Communications Company L.P. and General Communication, Inc. and its wholly
owned subsidiary GCI Communication Corp. dated January 22, 2005
# (27)
|
||
|
10.129
|
Ninth
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. #
(28)
|
||
143
|
10.130
|
Amended and
Restated Credit Agreement among GCI Holdings, Inc. and Calyon New York
Branch as Administrative Agent, Sole Lead Arranger, and Co-Bookrunner, The
Initial Lenders and Initial Issuing Bank Named Herein as Initial Lenders
and Initial Issuing Bank, General Electric Capital Corporation as
Syndication Agent, and Union Bank of California, N.A., CoBank, ACB, CIT
Lending Services Corporation and Wells Fargo Bank, N.A. as
Co-Documentation Agents, dated as of August 31, 2005
(28)
|
||
|
10.131
|
Amended and
Restated 1986 Stock Option Plan of General Communication, Inc. as of June
7, 2005 (28)
|
||
|
10.132
|
Amendment No.
1 to $150 Million EBITDA Incentive Program dated December 30, 2005
(29)
|
||
|
10.134
|
Full-time
Transponder Capacity Agreement with PanAmSat Corporation dated March 31,
2006 # (30)
|
||
|
10.135
|
Tenth
Amendment to Contract for Alaska Access Services between General
Communication, Inc. and its wholly owned subsidiary GCI Communication
Corp., and MCI Communications Services, Inc. d/b/a Verizon Business
Services (successor-in-interest to MCI Network Services, Inc., which was
formerly known as MCI WorldCom Network Services)
# (31)
|
||
|
10.136
|
Reorganization
Agreement among General Communication, Inc., Alaska DigiTel, LLC, The
Members of Alaska DigiTel, LLC, AKD Holdings, LLC and The Members of
Denali PCS, LLC dated as of June 16, 2006 (Nonmaterial schedules and
exhibits to the Reorganization Agreement have been omitted pursuant to
Item 601b.2 of Regulation S-K. We agree to furnish supplementally to the
Commission upon request a copy of any omitted schedule or exhibit.)
# (32)
|
||
|
10.137
|
Second
Amended and Restated Operating Agreement of Alaska DigiTel, LLC dated as
of January 1, 2007 (We agree to furnish supplementally to the Commission
upon request a copy of any omitted schedule or exhibit.)
# (32)
|
||
|
10.138
|
Sixth
amendment to contract for Alaska Access Services between Sprint
Communications Company L.P. and General Communication, Inc. and its wholly
owned subsidiary GCI Communication Corp. dated September 20, 2006
(33)
|
||
|
10.139
|
Seventh
amendment to contract for Alaska Access Services between Sprint
Communications Company L.P. and General Communication, Inc. and its wholly
owned subsidiary GCI Communication Corp. dated January 17, 2007 #
(33)
|
||
|
10.140
|
General
Communication, Inc. Director Compensation Plan dated June 29, 2006
(33)
|
||
|
10.141
|
Eleventh
Amendment to Contract for Alaska Access Services between General
Communication, Inc. and its wholly owned subsidiary GCI Communication
Corp., and MCI Communications Services, Inc. d/b/a Verizon Business
Services (successor-in-interest to MCI Network Services, Inc., which was
formerly known as MCI WorldCom Network Services) # (35)
|
||
|
10.142
|
Third
Amendment to the Amended and Restated Credit Agreement among GCI Holdings,
Inc., GCI Communication Corp., GCI Cable, Inc., GCI Fiber Communication
Co., Potter View Development Co., Inc., and Alaska United Fiber System
Partnership, GCI, Inc., the banks, financial institutions, and other
lenders party hereto and Calyon New York Branch as Administrative Agent,
dated as of September 14, 2007 (36)
|
||
|
10.143
|
Joinder
Agreement dated as of September 28, 2007 among BNP Paribas, U.S. Bank
National Association, GCI Holdings, Inc., GCI Communication Corp., GCI
Cable, Inc., GCI Fiber Communication Co., Potter View Development Co.,
Inc., and Alaska United Fiber System Partnership, GCI, Inc., and Calyon
New York Branch as Administrative Agent (36)
|
||
|
10.144
|
Strategic
Roaming Agreement dated as of October 30, 2007 between Alaska DigiTel,
LLC. And WirelessCo L.P. # (37)
|
||
|
10.145
|
CDMA
Build-out Agreement dated as of October 30, 2007 between Alaska DigiTel,
LLC. and WirelessCo L.P. (Nonmaterial schedules and exhibits to the
Reorganization Agreement have been omitted pursuant to Item 601b.2 of
Regulation S-K. We agree to furnish supplementally to the Commission upon
request a copy of any omitted schedule or exhibit.) # (37)
|
||
144
|
10.146
|
Long-term de
Facto Transfer Spectrum Leasing agreement between Alaska DigiTel,
LLC. and SprintCom, Inc. # (37)
|
||
|
10.147
|
Twelfth
Amendment to Contract for Alaska Access Services between General
Communication, Inc. and its wholly owned subsidiary GCI Communication
Corp., and MCI Communications Services, Inc. d/b/a Verizon Business
Services (successor-in-interest to MCI Network Services, Inc., which was
formerly known as MCI WorldCom Network Services) dated November 19, 2007
(Nonmaterial schedules and exhibits to the Reorganization Agreement have
been omitted pursuant to Item 601b.2 of Regulation S-K. We agree to
furnish supplementally to the Commission upon request a copy of any
omitted schedule or exhibit.) # (37)
|
||
|
10.148
|
Stock
Purchase Agreement dated as of October 12, 2007 among GCI Communication
Corp., United Companies, Inc., Sea Lion Corporation and Togiak Natives
LTD. (Nonmaterial schedules and exhibits to the Reorganization Agreement
have been omitted pursuant to Item 601b.2 of Regulation S-K. We agree to
furnish supplementally to the Commission upon request a copy of any
omitted schedule or exhibit.) (37)
|
||
|
10.149
|
Fourth
Amendment to the Amended and Restated Credit Agreement dated as of May 2,
2008 by and among GCI Holdings, Inc., the other parties thereto and Calyon
New York Branch, as administrative agent, and the other Lenders party
thereto (38)
|
||
|
10.150
|
Second
Amendment to Lease Agreement dated as of April 8, 2008 between RDB Company
and GCI Communication Corp. as successor in interest to General
Communication, Inc. (39)
|
||
|
10.151
|
Audit
Committee Charter (as revised by the board of directors of General
Communication, Inc. effective as of April 27, 2007) (39)
|
||
|
10.152
|
Nominating
and Corporate Governance Committee Charter (as revised by the board of
directors of General Communication, Inc. effective as of April 27, 2007)
(39)
|
||
|
10.153
|
Thirteenth
Amendment to Contract for Alaska Access Services between General
Communication, Inc. and its wholly owned subsidiary GCI Communication
Corp., and MCI Communications Services, Inc. d/b/a Verizon Business
Services (successor-in-interest to MCI Network Services, Inc., which was
formally known as MCI WorldCom Network Services) dated January 16, 2008 #
(39)
|
||
|
10.154
|
Fourteenth
Amendment to Contract for Alaska Access Services between General
Communication, Inc. and its wholly owned subsidiary GCI Communication
Corp., and MCI Communications Services, Inc. d/b/a Verizon Business
Services (successor-in-interest to MCI Network Services, Inc., which was
formally known as MCI WorldCom Network Services) dated May 15, 2008
(40)
|
||
|
10.155
|
Contract for
Alaska Access Services between the Company and Verizon, dated January 1,
1993 (41)
|
||
|
10.156
|
Third
Amendment to Contract for Alaska Access Services between the Company and
Verizon, dated February 27, 1998 (41)
|
||
|
10.157
|
Fourth
Amendment to Contract for Alaska Access Services between the Company and
Verizon, dated January 1, 1999 (41)
|
||
|
10.158
|
Fifth
Amendment to the Amended and Restated Credit Agreement dated as of October
17, 2008 by and among Holdings, Inc. the other parties thereto and Calyon
New York Branch, as administrative agent, and the other Lenders party
thereto (42)
|
||
|
10.159
|
Amendment to
Deferred Bonus Agreement dated December 31, 2008 by and among the Company,
the Employer and Mr. Duncan (43)
|
||
|
10.160
|
Amendment to
Deferred Compensation Agreement dated December 31, 2008 by and among the
Company, the Employer and Mr. Duncan (43)
|
||
|
14
|
Code Of
Business Conduct and Ethics (originally reported as exhibit 10.118)
(25)
|
||
|
18.1
|
Letter
regarding change in accounting principle (39)
|
||
|
21.1
|
Subsidiaries
of the Registrant *
|
||
145
|
23.1
|
Consent of
KPMG LLP (Independent Public Accountant for
Company) *
|
||
|
31
|
Certifications
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. (1)
|
||
|
99.2
|
The Bylaws of
GCI Communication Corp. (1)
|
||
|
99.7
|
The Bylaws of
GCI Cable, Inc. (10)
|
||
|
99.8
|
The Articles
of Incorporation of GCI Cable, Inc. (10)
|
||
|
99.15
|
The Bylaws of
GCI Holdings, Inc. (13)
|
||
|
99.16
|
The Articles
of Incorporation of GCI Holdings, Inc. (13)
|
||
|
99.17
|
The Articles
of Incorporation of GCI, Inc. (12)
|
||
|
99.18
|
The Bylaws of
GCI, Inc. (12)
|
||
|
99.27
|
The
Partnership Agreement of Alaska United Fiber System (15)
|
||
|
99.28
|
The Bylaws of
Potter View Development Co., Inc. (19)
|
||
|
99.29
|
The Articles
of Incorporation of Potter View Development Co., Inc. (19)
|
||
|
99.34
|
The Bylaws of
GCI Fiber Communication, Co., Inc. (20)
|
||
|
99.35
|
The Articles
of Incorporation of GCI Fiber Communication, Co., Inc.
(20)
|
||
|
________________
|
|
|
#
|
CONFIDENTIAL
PORTION has been omitted pursuant to a request for confidential treatment
by us to, and the material has been separately filed with, the Securities
and Exchange Commission. Each omitted Confidential Portion is
marked by three asterisks.
|
|
*
|
Filed
herewith.
|
|
________________
|
|
|
Exhibit
Reference
|
Description
|
|
1
|
Incorporated
by reference to The Company’s Annual Report on Form 10-K for the year
ended December 31, 1990
|
|
2
|
Incorporated
by reference to The Company’s Annual Report on Form 10-K for the year
ended December 31, 1991
|
|
3
|
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
|
|
4
|
Incorporated
by reference to The Company’s Annual Report on Form 10-K for the year
ended December 31, 1989.
|
|
5
|
Incorporated
by reference to The Company’s Current Report on Form 8-K dated June 4,
1993.
|
|
6
|
Incorporated
by reference to The Company’s Annual Report on Form 10-K for the year
ended December 31, 1993.
|
|
7
|
Incorporated
by reference to The Company’s Annual Report on Form 10-K for the year
ended December 31, 1995.
|
|
8
|
Incorporated
by reference to The Company’s Form S-4 Registration Statement dated
October 4, 1996.
|
|
9
|
Incorporated
by reference to The Company’s Current Report on Form 8-K dated November
13, 1996.
|
|
10
|
Incorporated
by reference to The Company’s Annual Report on Form 10-K for the year
ended December 31, 1996.
|
146
|
11
|
Incorporated
by reference to The Company’s Current Report on Form 8-K dated March 14,
1996, filed March 28, 1996.
|
|
12
|
Incorporated
by reference to The Company’s Form S-3 Registration Statement (File No.
333-28001) dated May 29, 1997.
|
|
13
|
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.
|
|
14
|
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.
|
|
15
|
Incorporated
by reference to The Company’s Annual Report on Form 10-K for the year
ended December 31, 1997.
|
|
16
|
Incorporated
by reference to The Company’s Annual Report on Form 10-K for the year
ended December 31, 1998.
|
|
17
|
Incorporated
by reference to The Company’s Quarterly Report on Form 10-Q for the period
ended June 30, 1999.
|
|
18
|
Incorporated
by reference to The Company’s Quarterly Report on Form 10-Q for the period
ended March 31, 2001.
|
|
19
|
Incorporated
by reference to The Company’s Quarterly Report on Form 10-Q for the period
ended June 30, 2001.
|
|
20
|
Incorporated
by reference to The Company’s Annual Report on Form 10-K for the year
ended December 31, 2001.
|
|
21
|
Incorporated
by reference to The Company’s Quarterly Report on Form 10-Q for the period
ended June 30, 2002.
|
|
22
|
Incorporated
by reference to The Company’s Annual Report on Form 10-K for the year
ended December 31, 2002.
|
|
23
|
Incorporated
by reference to The Company’s Quarterly Report on Form 10-Q for the period
ended June 30, 2003.
|
|
24
|
Incorporated
by reference to The Company’s Annual Report on Form 10-K for the year
ended December 31, 2003.
|
|
25
|
Incorporated
by reference to The Company’s Quarterly Report on Form 10-Q for the period
ended March 31, 2004.
|
|
26
|
Incorporated
by reference to The Company’s Quarterly Report on Form 10-Q for the period
ended June 30, 2004.
|
|
27
|
Incorporated
by reference to The Company’s Quarterly Report on Form 10-Q for the period
ended March 31, 2005.
|
|
28
|
Incorporated
by reference to The Company’s Quarterly Report on Form 10-Q for the period
ended September 30, 2005.
|
|
29
|
Incorporated
by reference to The Company’s Annual Report on Form 10-K for the year
ended December 31, 2005 filed March 16, 2006.
|
|
30
|
Incorporated
by reference to The Company’s Quarterly Report on Form 10-Q for the period
ended March 31, 2006.
|
|
31
|
Incorporated
by reference to The Company’s Quarterly Report on Form 10-Q for the period
ended June 30, 2006.
|
|
32
|
Incorporated
by reference to The Company’s Annual Report on Form 10-K for the year
ended December 31, 2006 filed March 19, 2007.
|
|
33
|
Incorporated
by reference to The Company’s Quarterly Report on Form 10-Q for the period
ended March 31, 2007.
|
|
34
|
Incorporated
by reference to The Company’s Form S-8 filed with the SEC on July 27,
2007.
|
|
35
|
Incorporated
by reference to The Company’s Quarterly Report on Form 10-Q for the period
ended June 30, 2007.
|
|
36
|
Incorporated
by reference to The Company’s Quarterly Report on Form 10-Q for the period
ended September 30, 2007.
|
|
37
|
Incorporated
by reference to The Company’s Annual Report on Form 10-K for the year
ended December 31, 2007 filed March 7,
2008.
|
|
38
|
Incorporated
by reference to the Company's Report on Form 8-K for the period May 2,
2008 filed May 8, 2008.
|
|
39
|
Incorporated
by reference to The Company’s Quarterly Report on Form 10-Q for the period
ended March 31, 2008.
|
|
40
|
Incorporated
by reference to The Company’s Quarterly Report on Form 10-Q for the period
ended June 30, 2008.
|
|
41
|
Incorporated
by reference to The Company's Report on Form 8-K for the period September
19, 2008 filed on September 22, 2008.
|
|
42
|
Incorporated
by reference to The Company’s Quarterly Report on Form 10-Q for the period
ended September 30, 2008.
|
|
43
|
Incorporated
by reference to The Company's Report on Form 8-K for the period December
31, 2008 filed January 6, 2009.
|
147
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 20, 2009 |
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.
148
|
Signature
|
Title
|
Date
|
||
|
/s/ Stephen
M. Brett
|
Chairman of
Board and Director
|
March 20, 2009 | ||
|
Stephen M.
Brett
|
||||
|
/s/ Ronald A.
Duncan
|
President and
Director
|
March 20, 2009 | ||
|
Ronald A.
Duncan
|
(Principal
Executive Officer)
|
|||
| /s/ Jerry A. Edgerton |
Director
|
March 11, 2009 | ||
|
Jerry A.
Edgerton
|
||||
|
/s/ Scott M.
Fisher
|
Director
|
March 3, 2009 | ||
|
Scott M.
Fisher
|
||||
|
/s/ William
P. Glasgow
|
Director
|
March 20, 2009 | ||
|
William P.
Glasgow
|
||||
|
Director
|
||||
|
Mark W.
Kroloff
|
||||
|
/s/ Stephen
R. Mooney
|
Director
|
March 20, 2009 | ||
|
Stephen R.
Mooney
|
||||
|
/s/ James M.
Schneider
|
Director
|
March 20, 2009 | ||
|
James M.
Schneider
|
||||
|
/s/ John M.
Lowber
|
Senior Vice
President, Chief Financial
|
March 20, 2009 | ||
|
John M.
Lowber
|
Officer,
Secretary and Treasurer
(Principal
Financial Officer)
|
|||
|
/s/ Lynda L.
Tarbath
|
Vice
President, Chief Accounting
|
March 20, 2009 | ||
|
Lynda L.
Tarbath
|
Officer
(Principal
Accounting Officer)
|
149