FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(√) ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
Or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-15279
GENERAL COMMUNICATION, INC.
(Exact name of registrant as specified in its charter)
ALASKA
(State or other jurisdiction of
incorporation or organization)
92-0072737
(I.R.S. Employer
Identification No.)
2550 Denali Street Suite 1000 Anchorage, Alaska
(Address of principal executive offices)
99503
(Zip Code)
Registrant’s telephone number, including area code: (907) 265-5600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A common stock
(Title of class)
Class B common stock
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.
Yes √ No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K.
[ ]
The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the average bid
and asked prices of such stock as of the close of trading on as of the last business day of the registrant's most recently completed
second fiscal quarter of June 30, 2002 was approximately $266,243,000.
The number of shares outstanding of the registrant’s common stock as of February 28, 2003, was:
Class A common stock – 51,888,120 shares; and,
Class B common stock – 3,874,607 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant’s definitive Proxy Statement to be filed pursuant to Regulation 14A of the Securities Exchange
Act of 1934, as amended, in connection with the Annual Meeting of Stockholders of the registrant to be held on June 5, 2003 are
incorporated by reference into Part III of this report.
1
GENERAL COMMUNICATION, INC.
2002 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
Glossary............................................................................................................................................................ 3
Cautionary Statement Regarding Forward-Looking Statements.................................................................... 10
Part I ............................................................................................................................................................... 12
Item 1. Business........................................................................................................................................ 12
Item 2. Properties ...................................................................................................................................... 63
Item 3. Legal Proceedings......................................................................................................................... 66
Item 4. Submissions of Matters to a Vote of Security Holders.................................................................. 66
Part II.............................................................................................................................................................. 66
Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters .......................... 66
Item 6. Selected Financial Data ................................................................................................................ 68
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations....... 69
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................................................... 95
Item 8. Consolidated Financial Statements and Supplementary Data ...................................................... 95
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure. .... 95
Part III ............................................................................................................................................................ 95
Items 10, 11, 12 and 13 are incorporated herein by reference from our Proxy Statement for our 2003
Annual Shareholders’ meeting................................................................................................................... 95
Item 14. Controls and Procedures............................................................................................................. 96
Part IV ............................................................................................................................................................ 97
Item 15. Exhibits, Consolidated Financial Statement Schedules, and Reports on Form 8-K................... 97
Item 15(b). Exhibits ................................................................................................................................ 140
Independent Auditors’ Report.................................................................................................................. 145
Schedule VIII........................................................................................................................................... 146
Signatures..................................................................................................................................................... 147
Certifications ................................................................................................................................................ 148
This Annual Report on Form 10-K is for the year ending December 31, 2002. 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.
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Glossary
Access Charges -- Expenses incurred by an IXC and paid to LECs for accessing the local networks of the LECs in
order to originate and terminate long-distance calls and provide the customer connection for private line services.
ACS -- Alaska Communications Systems, Inc., previously ALEC Holdings, Inc. -- ACS, one of our competitors,
includes acquired properties from Century Telephone Enterprises, Inc. and the Anchorage Telephone Utility
(“ATU”). ATU provided local telephone and long distance services primarily in Anchorage and cellular
telephone services in Anchorage and other Alaska markets.
Alaska United -- Alaska United Fiber System Partnership -- an Alaska partnership wholly owned by The
Company. Alaska United was organized to construct and operate a new fiber optic cable connecting various
locations in Alaska and the Lower 49 states and foreign countries through Seattle, Washington.
AT&T -- AT&T Corp. -- Acquired Tele-Communications, Inc. (“TCI”) in a 1999 merger; one of our competitors.
AT&T Alascom -- Alascom, Inc. -- a wholly owned subsidiary of AT&T and one of our competitors.
Basic Service -- The basic service tier includes, at a minimum, signals of local television broadcast stations, any
public, educational, and governmental programming required by the franchise to be carried on the basic tier, and
any additional video programming service added to the basic tier by the cable operator.
BOC -- Bell System Operating Company -- A LEC owned by any of the remaining Regional Bell Operating
Companies, which are holding companies established following the AT&T Divestiture Decree to serve as parent
companies for the BOCs.
Backbone -- A centralized high-speed network that interconnects smaller, independent networks.
Bandwidth -- The number of bits of data that can move through a communications medium in a given amount of
time.
Broadband -- A high-capacity communications circuit/path, usually implying speeds of 256 kbps or better.
CAP -- Competitive Access Provider -- A company that provides its customers with an alternative to the LEC for
local transport of private line and special access telecommunications services.
Central Offices -- The switching centers or central switching facilities of the LECs.
CLEC -- Competitive Local Exchange Carrier. -- A company that provides its customers with an alternative to the
ILEC for local transport of telecommunications services, as allowed under the 1996 Telecom Act.
Co-Carrier Status -- A regulatory scheme under which the incumbent LEC is required to integrate new, competing
providers of local exchange service, into the systems of traffic exchange, inter-carrier compensation, and other
inter-carrier relationships that already exist among LECs in most jurisdictions.
Collocation -- The ability of a CAP or CLEC to connect its network to the LEC's central offices. Physical
collocation occurs when a connecting carrier places its network connection equipment inside the LEC's central
offices. Virtual collocation is an alternative to physical collocation pursuant to which the LEC permits a CAP or
CLEC to connect its network to the LEC's central offices on comparable terms, even though the CAP's or CLEC’s
network connection equipment is not physically located inside the central offices.
The Company -- GCI and its direct and indirect subsidiaries, also referred to as “we,” “us” and “our.”
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Compression / Decompression -- A method of encoding/decoding signals that allows transmission (or storage) of
more information than the medium would otherwise be able to support. Both compression and decompression
require processing capacity, but with many products, the time is not noticeable.
DAMA -- Demand Assigned Multiple Access -- The Company’s digital satellite earth station technology that
allows calls to be made between remote villages using only one satellite hop thereby reducing satellite delay and
capacity requirements while improving quality.
Dark Fiber -- An inactive fiber-optic strand without electronics or optronics. Dark fiber is not connected to
transmitters, receivers and regenerators.
DBS -- Direct Broadcast Satellite -- Subscription television service obtained from satellite transmissions using
frequency bands that are internationally allocated to the broadcast satellite services. Direct-to-home service such
as DBS has its origins in the large direct-to-home satellite antennas that were first introduced in the 1970's for the
reception of video programming transmitted via satellite. Because these first-generation direct-to-home satellites
operated in the C-band frequencies at low power, direct-to-home satellite antennas, or dishes, as they are also
known, generally needed to be seven to ten feet in diameter in order to receive the signals being transmitted. More
recently, licensees have been using the Ku and extended Ku-bands to provide direct-to-home services enabling
subscribers to use a receiving home satellite parabolic dish less than one meter in diameter. The major providers
of DBS are currently DirecTV and EchoStar (marketed as the DISH Network).
DS-3 -- A data communications circuit that is equivalent to 28 multiplexed T-1 channels capable of transmitting
data at 44.736 mbps (sometimes called a T-3).
Dedicated -- Telecommunications lines dedicated or reserved for use by particular customers.
Digital -- A method of storing, processing and transmitting information through the use of distinct electronic or
optical pulses that represent the binary digits 0 and 1. Digital transmission and switching technologies employ a
sequence of these pulses to represent information as opposed to the continuously variable analog signal. The
precise digital numbers minimize distortion (such as graininess or snow in the case of video transmission, or static
or other background distortion in the case of audio transmission).
DLC -- Digital Loop Carrier -- A digital transmission system designed for subscriber loop plant. Multiplexes a
plurality of circuits onto very few wires or onto a single fiber pair.
DOCSIS 1.1 -- Data-Over-Cable Service Interface Specification 1.1 -- An industry specification that provides for
high-speed Internet service tiers, using techniques known as data fragmentation and quality of service. Under this
specification, which is compatible with the existing DOCSIS 1.0 specification, cable operators can deliver high-
speed Internet services simultaneously over the same plant and in a path parallel to core video services.
DSL – Digital Subscriber Line -- Technology that allows Internet access at data transmission speeds greater than
those of modems over conventional telephone lines.
Equal Access -- Connection provided by a LEC permitting a customer to be automatically connected to the IXC
of the customer's choice when the customer dials “1”. Also refers to a generic concept under which the BOCs
must provide access services to AT&T's competitors that are equivalent to those provided to AT&T.
FCC -- Federal Communications Commission -- A federal regulatory body empowered to establish and enforce
rules and regulations governing public utility companies and others, such as the Company.
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Frame Relay -- A wideband (64 kilobits per second to 1.544 mbps) packet-based data interface standard that
transmits bursts of data over WANs. Frame-relay packets vary in length from 7 to 1024 bytes. Data oriented, it is
generally not used for voice or video.
FTC -- Federal Trade Commission -- A federal regulatory body empowered to establish and enforce rules and
regulations governing companies involved in trade and commerce.
GCC -- GCI Communication Corp., an Alaska corporation and a wholly owned subsidiary of Holdings.
GCI -- General Communication, Inc., an Alaska corporation and the Registrant.
GCI, Inc. -- a wholly owned subsidiary of GCI, an Alaska corporation and issuer of $180 million of publicly
traded bonds.
GFCC -- GCI Fiber Communication Co., Inc., an Alaska corporation and a wholly owned subsidiary of Holdings.
Holdings acquired all minority ownership interests in GFCC in the third and fourth quarters of 2002. GFCC owns
and operates a fiber optic cable system constructed along the trans-Alaska oil pipeline corridor extending from
Prudhoe Bay to Valdez, Alaska. See Kanas.
Holdings -- a wholly owned subsidiary of GCI, Inc., an Alaska corporation and party to the Company’s Senior
Holdings Loan.
ILEC -- Incumbent Local Exchange Carrier -- with respect to an area, the LEC that -- (A) on the date of
enactment of the Telecommunications Act of 1996, provided telephone exchange service in such area; and (B)(i)
on such date of enactment, was deemed to be a member of the exchange carrier association pursuant to section
69.601(b) of the FCC's regulations (47 C.F.R. 69.601(b)); or (ii) is a person or entity that, on or after such date of
enactment, became a successor or assign of a member described in clause (i).
Interexchange -- Communication between two different LATAs or, in Alaska, between two different local
exchange serving areas.
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 range.
ISP -- Internet Service Provider -- a company providing retail and/or wholesale Internet services.
Internet -- A global collection of interconnected computer networks which use TCP/IP, a common
communications protocol.
IXC -- Interexchange Carrier -- A long-distance carrier providing services between local exchanges.
Kanas -- Kanas Telecom, Inc. -- an Alaska corporation that was renamed to GFCC in 2001.
LAN -- Local Area Network -- The interconnection of computers for sharing files, programs and various devices
such as printers and high-speed modems. LANs may include dedicated computers or file servers that provide a
centralized source of shared files and programs.
5
LATA -- Local Access and Transport Area -- The approximately 200 geographic areas defined pursuant to the
AT&T Divestiture Decree. The BOCs were historically prohibited from providing long-distance service between
the LATA in which they provide local exchange services, and any other LATA.
LEC -- Local Exchange Carrier -- A company providing local telephone services. Each BOC is a LEC.
LMDS -- Local Multipoint Distribution System -- LMDS uses microwave signals (millimeterwave signals) in the
28 GHz spectrum to transmit voice, video, and data signals within small cells 3-10 miles in diameter. LMDS
allows license holders to control up to 1.3 GHz of wireless spectrum in the 28 GHz Ka-band. The 1.3 GHz can be
used to carry digital data at speeds in excess of one gigabit per second. LMDS uses a specific band in the
microwave spectrum, known as millimeter waves or the 28 GHz “Ka-band.” 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. Incumbent LECs and cable companies may not obtain the in-region
1150 MHz license for three years following the date of the license grant. Within 10 years following the date of
the license grant, licensees will be required to provide 'substantial service' in their service regions.
Local Exchange -- A geographic area generally determined by a PUC, in which calls generally are transmitted
without toll charges to the calling or called party.
Local Number Portability -- The ability of an end user to change Local Exchange Carriers while retaining the
same telephone number.
Lower 48 States or Lower 48 -- refers to the 48 contiguous states south of or below Alaska.
Lower 49 States or Lower 49 -- refers to Hawaii and the Lower 48 States.
MAN -- Metropolitan Area Network -- LANs interconnected within roughly a 50-mile radius. MANs typically
use fiber optic cable to connect various wire LANs. Transmission speeds may vary from 2 to 100 Mbps.
MDU -- Multiple Dwelling Unit -- MDUs include multiple-family buildings, such as apartment and condominium
complexes.
MMDS -- Multichannel Multipoint Distribution Service – also known as wireless cable. The FCC established the
Multipoint Distribution Service (MDS) in 1972. Originally, the Commission thought MDS would be used
primarily to transmit business data. However, the service became increasingly popular in transmitting
entertainment programming. Unlike conventional broadcast stations whose transmissions are received universally,
MDS programming is designed to reach only a subscriber based audience. In 1983, the Commission reassigned
eight channels from the Instructional Television Fixed Service (ITFS) to MDS. These eight channels make up the
MMDS. Frequently, MDS and MMDS channels are used in combination with ITFS channels to provide video
entertainment programming to subscribers.
MVPD -- Multi-channel Video Programming Distribution -- The distribution of video programming over multiple
platforms, such as cable and satellite.
NPT -- a New Product Tier -- a cable programming service tier offered to subscribers at prices set by the cable
operator.
OCC -- Other Common Carrier -- A long-distance carrier other than the Company.
6
PCS -- Personal Communication Services -- PCS encompasses a range of advanced wireless mobile technologies
and services. It promises to permit communications to anyone, anywhere and anytime while on the move. The
Cellular Telecommunications Industry Association (CTIA) defines PCS as a “wide range of wireless mobile
technologies, chiefly cellular, paging, cordless, voice, personal communications networks, mobile data, wireless
PBX, specialized mobile radio, and satellite-based systems.” The FCC defines PCS as a “family of mobile or
portable radio communications services that encompasses mobile and ancillary fixed communications services to
individuals and businesses and can be integrated with a variety of competing networks.”
PBX -- Private Branch Exchange -- A customer premise communication switch used to connect customer
telephones (and related equipment) to LEC central office lines (trunks), and to switch internal calls within the
customer's telephone system. Modern PBXs offer numerous software-controlled features such as call forwarding
and call pickup. A PBX uses technology similar to that used by a central office switch (on a smaller scale). (The
acronym PBX originally stood for “Plug Board Exchange.”)
POP -- Point of Presence -- The physical access location interface between a LEC and an IXC network. The point
to which the telephone company terminates a subscriber's circuit for long-distance service or leased line
communications.
PRI -- Primary Rate Interface -- An ISDN circuit transmitting at T1 (DS-1) speed (equivalent to 24 voice-grade
channels). One of the channels (“D”) is used for signaling, leaving 23 (“B”) channels for data and voice
communication.
Private Line -- Uses dedicated circuits to connect customer's equipment at both ends of the line. Does not provide
any switching capability (unless supported by customer premise equipment). Usually includes two local loops and
an IXC circuit.
Private Network -- A communications network with restricted (controlled) access usually made up of private lines
(with some PBX switching).
RCA –– Regulatory Commission Of Alaska -- A state regulatory body empowered to establish and enforce rules
and regulations governing public utility companies and others, such as the Company, within the State of Alaska
(sometimes referred to as Public Service Commissions, or PSCs, or Public Utility Commissions, or PUCs).
Previously known as the Alaska Public Utilities Commission (APUC).
Reciprocal Compensation -- The same compensation of a new CLEC for termination of a local call by the ILEC
on its network, as the new competitor pays the ILEC for termination of local calls on the ILEC network.
SchoolAccess -- The Company’s Internet and related services offering to schools in Alaska. The federal
mandate through the 1996 Telecom Act to provide universal service resulted in schools across Alaska qualifying
for varying levels of discounts to support the provision of Internet services. The Universal Service Administrative
Company through its Schools and Libraries Division administers this federal program.
SDN -- Software Defined Network -- A switched long-distance service for very large users with multiple
locations. Instead of putting together their own network, large users can get special usage rates for calls carried
on regular switched long-distance lines.
Securities Reform Act – The Private Securities Litigation Reform Act of 1995.
Senior Holdings Loan -- Holding’s $225,000,000 credit facility. On November 1, 2002 we closed a $225.0
million bank facility to refinance the previously outstanding Holding’s loans ($120.1 million) and the Alaska
United loan ($60.0 million) facility. The Senior Holdings Loan includes a term loan of $175.0 million and a
revolving credit facility of $50.0 million. The Senior Facility matures on November 1, 2004 and bears interest at
7
LIBOR plus 6.50%. You should see note 6(b) to the accompanying Notes to Consolidated Financial Statements
included in Part II of this Report for more information.
SMATV -- Satellite Master Antenna Television -- (also known as “private cable systems”) are multichannel video
programming distribution systems that serve residential, multiple-dwelling units (“MDUs”), and various other
buildings and complexes. A SMATV system typically offers the same type of programming as a cable system,
and the operation of a SMATV system largely resembles that of a cable system -- a satellite dish receives the
programming signals, equipment processes the signals, and wires distribute the programming to individual
dwelling units. The primary difference between the two is that a SMATV system typically is an unfranchised,
stand-alone system that serves a single building or complex, or a small number of buildings or complexes in
relatively close proximity to each other.
SONET -- Synchronous Optical Network -- A 1984 standard for optical fiber transmission on the public network.
52 mbps to 13.22 Gigabits per second, effective for ISDN services including Asynchronous Transfer Mode.
Sprint -- Sprint Corporation -- one of our significant customers.
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.
T-1 -- A data communications circuit capable of transmitting data at 1.5 Mbps.
Tariff -- The schedule of rates and regulations set by communications common carriers and filed with the
appropriate federal and state regulatory agencies; the published official list of charges, terms and conditions
governing provision of a specific communications service or facility, which functions in lieu of a contract
between the subscriber or user and the supplier or carrier.
UNE -- Unbundled Network Element -- A discrete piece part of a telephone network. Unbundled network
elements are the basic network functions, i.e., the piece parts needed to provide a full range of
telecommunications services. They are physical facilities as well as all the features, and capabilities provided by
those facilities.
VSAT -- Very Small Aperture Terminal -- A portable satellite terminal that allows connection via a satellite link.
WAN -- Wide Area Network – A remote computer communications system. WANs allow file sharing among
geographically distributed workgroups (typically at higher cost and slower speed than LANs or MANs). WANs
typically use common carriers' circuits and networks. WANs may serve as a customized communication backbone
that interconnects all of an organization's local networks with communications trunks that are designed to be
appropriate for anticipated communication rates and volumes between nodes.
World Wide Web or Web -- A collection of computer systems supporting a communications protocol that permits
multi-media presentation of information over the Internet.
WorldCom -- WorldCom, Inc. -- owns approximately 9% of our common stock, presently has one representative
on our Board, and is a major customer. Prior to May 1, 2000, the Company was named MCI WorldCom, Inc. On
July 21, 2002 WorldCom and substantially all of its active U.S. subsidiaries filed voluntary petitions for
reorganization under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court. You should
see note 11 to the accompanying Notes to Consolidated Financial Statements included in Part II of this Report for
more information.
1984 Cable Act -- The Cable Communications Policy Act of 1984.
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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 knocked down; co-carrier status for CLECs was
ratified; and the physical collocation of competitors' facilities in LECs central offices was allowed.
The legislation breaks down the old barriers that prevented three groups of companies, the LECs, including the
BOCs, the long-distance carriers, and the cable TV operators, from competing head-to-head with each other. The
Act requires LECs to let new competitors into their business. It also requires the LECs to open up their networks
to ensure that new market entrants have a fair chance of competing. The bulk of the legislation is devoted to
establishing the terms under which the LECs, and more specifically the BOCs, must open up their networks.
The 1996 Telecom Act substantially changed the competitive and regulatory environment for telecommunications
providers by significantly amending the Communications Act 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
and FCC rulemaking and enforcement activity in respect of the 1992 Cable Act and the completion of a
significant number of FCC rulemakings under the 1996 Telecom Act.
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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 outlined below. Those factors
may cause our actual results to differ materially from any of our forward-looking statements. For these
statements, we claim the protection of the safe harbor for forward-looking statements provided by the Securities
Reform Act. Such risks, uncertainties and other factors include but are not limited to those identified below and
those further described in Part I, Item 1. Factors That May Affect Our Business and Future Results.
(cid:130) Material adverse changes in the economic conditions in the markets we serve and in general economic
conditions, including the continuing impact of the current depressed telecommunications industry due to
high levels of competition in the long-distance market resulting in pressures to reduce prices, an oversupply
of long-haul capacity, excessive debt loads; several high-profile company failures and potentially fraudulent
accounting practices by some companies;
(cid:130) The efficacy of laws enacted by Congress; rules and regulations to be adopted by the FCC and state public
regulatory agencies to implement the provisions of the 1996 Telecom Act; the outcome of litigation relative
thereto; and the impact of regulatory changes relating to access reform;
(cid:130) Our responses to competitive products, services and pricing, including pricing pressures, technological
developments, alternative routing developments, and the ability to offer combined service packages that
include long-distance, local, cable and Internet services;
(cid:130) The extent and pace at which different competitive environments develop for each segment of our business;
(cid:130) The extent and duration for which competitors from each segment of the telecommunication industries are
able to offer combined or full service packages prior to our being able to do so;
(cid:130) The degree to which we experience material competitive impacts to our traditional service offerings prior to
achieving adequate local service entry;
(cid:130) Competitor responses to our products and services and overall market acceptance of such products and
services;
(cid:130) The outcome of our negotiations with ILECs and state regulatory arbitrations and approvals with respect to
interconnection agreements;
(cid:130) Our ability to purchase network elements or wholesale services from ILECs at a price sufficient to permit
the profitable offering of local telephone service at competitive rates;
(cid:130) Success and market acceptance for new initiatives, many of which are untested;
(cid:130) The level and timing of the growth and profitability of new initiatives, particularly local telephone services
expansion, Internet (consumer and business) services expansion and wireless services;
(cid:130) Start-up costs associated with entering new markets, including advertising and promotional efforts;
(cid:130) Risks relating to the operations of new systems and technologies and applications to support new initiatives;
(cid:130) Local conditions and obstacles;
(cid:130) The impact of oversupply of capacity resulting from excessive deployment of network capacity;
(cid:130) Uncertainties inherent in new business strategies, new product launches and development plans, including
local telephone services, Internet services, wireless services, digital video services, cable modem services,
digital subscriber line services, transmission services, and yellow page directories, and the offering of these
services in geographic areas with which we are unfamiliar;
10
(cid:130) The risks associated with technological requirements, technology substitution and changes and other
technological developments;
(cid:130) Prolonged service interruptions which could affect our business;
(cid:130) Development and financing of telecommunication, local telephone, wireless, Internet and cable networks
and services;
(cid:130) Future financial performance, including the availability, terms and deployment of capital; the impact of
regulatory and competitive developments on capital outlays, and the ability to achieve cost savings and
realize productivity improvements and the consequences of increased leverage;
(cid:130) Availability of qualified personnel;
(cid:130) Changes in, or failure, or inability, to comply with, government regulations, including, without limitation,
regulations of the FCC, the RCA, and adverse outcomes from regulatory proceedings;
(cid:130) Uncertainties in federal military spending levels and military base closures in markets in which we operate;
(cid:130) The ongoing global and domestic trend towards consolidation in the telecommunications industry, which
trend may be the effect of making the competitors larger and better financed and afford these competitors
with extensive resources and greater geographic reach, allowing them to compete more effectively;
(cid:130) The financial, credit and economic impacts of the WorldCom bankruptcy filing on the industry in general
and on us in particular;
(cid:130) A conversion of WorldCom’s bankruptcy petition to Chapter 7, unfavorable reaffirmation of our pre-filing
contracts and agreements with WorldCom, or a migration of WorldCom’s traffic off our network without it
being replaced by other common carriers that interconnect with our network;
(cid:130) The effect on us of pricing pressures, new program offerings and market consolidation in the markets
served by our major customers, WorldCom and Sprint;
(cid:130) Under Statement of Financial Accounting Standard (“SFAS”) 142, we must test our intangibles for
impairment at least annually, which may result in a material, non-cash write-down of goodwill and could
have a material adverse impact on our results of operations and shareholders’ equity; and
(cid:130) Other risks detailed from time to time in our periodic reports filed with the SEC.
You should not place undue reliance on any such forward-looking statements. Further, any forward-looking
statement, and such risks, uncertainties and other factors speak, only as of the date on which they were originally
made and we expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any
forward-looking statement to reflect any change in our expectations with regard to those statements or any other
change in events, conditions or circumstances on which any such statement is based, except as required by law.
New factors emerge from time to time, and it is not possible for us to predict what factors will arise or when. In
addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those contained in any forward-looking
statements.
11
Item 1. Business
Part I
General
In this Annual Report, “we,” “us” and “our” refer to General Communication, Inc. and its direct and indirect
subsidiaries.
GCI was incorporated in 1979 under the laws of the state of Alaska and has its principal executive offices at 2550
Denali Street, Suite 1000, Anchorage, AK 99503 (telephone number 907-265-5600).
GCI is primarily a holding company and together with its direct and indirect subsidiaries, is a diversified
telecommunications provider with a leading position in facilities-based long-distance service in the state of
Alaska and is Alaska's leading cable television and Internet services provider.
We are a significant provider in Alaska of an integrated package of long-distance, local and wireless
telecommunications services, cable television services and Internet services and are well positioned to take
advantage of growth opportunities in the communications, data and entertainment markets.
Availability of Reports and Other Information
Internet users can access information about GCI and its services at http://www.gci.com/,
http://www.gcinetworksolutions.com/, and http://www.alaskaunited.com/. The Company hosts Internet services
at http://www.gci.net/ and SchoolAccess services at http://www.gcisa.net/. We make available on the
http://www.gci.com/ website, free of charge, access to our Annual Report on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K, Proxy Statement on Schedule 14A and amendments to those materials
filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934 as soon as
reasonably practicable after we electronically submit such material to the SEC. In addition, the SEC’s website is
http://www.sec.gov/. The SEC makes available on this website, free of charge, reports, proxy and information
statements, and other information regarding issuers, such as us, that file electronically with the SEC. Information
on our website or the SEC’s website is not part of this document.
Financial Information About Industry Segments
We have four reportable segments: long-distance services, cable services, local access services and Internet
services. For information required by this section, you should see Part II, Item 7, Management’s Discussion and
Analysis of Financial Condition and Results of Operations. Also refer to Note 9 included in Part II, Item 8,
Consolidated Financial Statements and Supplementary Data.
Historical Development of our Business During the Past Fiscal Year
20th Year Anniversary
Thanksgiving 2002 marked the 20th anniversary of the first long-distance call we carried on our network,
bringing telecommunications competition to the State of Alaska.
Properties Expansion
We completed the first phase of a project in February 2002 to connect Palmer and Wasilla, Alaska to our fiber
optic network in Anchorage. This phase connected our network in Anchorage to our Eagle River earth station and
our Wasilla Call Center with fiber optic cable facilities. The second phase will connect and expand our facilities
to provide cable and entertainment services to the Palmer-Wasilla area. We expect that work to be complete in
early 2003. Upon completion, we will provide cable television programming content from our Anchorage head
end facility to Palmer and Wasilla.
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We purchased a second 5ESS digital host switch manufactured by Lucent Technologies to accommodate
Anchorage area customer and traffic growth. We expect to place the new switch into service in 2003. We have
similar Lucent 5E switches in Anchorage and Seattle, and smaller remote Lucent 5E switches in Fairbanks and
Juneau. We shut down our Seattle, Fairbanks and Juneau Alcatel DSC DEX switches upon installation of the
Lucent 5E switches. DEX is a trade name for an Alcatel (previously Digital Switch Corporation) electronic
digital switching system.
Cable Services Expansion
We continued to upgrade and expand our cable infrastructure in 2002. These efforts increased the capacity and
reliability of our systems, making possible further deployment of two-way applications such as cable modems and
digital cable television programming, and provided capacity for additional program and service offerings.
We continued to extend our digital cable service in the Anchorage, Juneau, Kenai and Soldotna, Alaska markets
in 2002. Digital cable service allows us to use digital compression to substantially increase the capacity of our
cable communications systems, improve picture quality and provide CD quality audio. Digital cable subscriber
counts in all locations totaled approximately 30,500 in 2002, an increase of 24.3% as compared to 2001.
To meet future bandwidth requirements in the Anchorage and Matanuska-Susitna valley markets, efforts began in
2002 to move all programming services above the basic service level to a digital platform. A plant upgrade for
the Matanuska-Susitna valley system began in 2002 and is expected to be completed in 2004.
Approximately 96.1% of our cable customers are able to receive cable modem service. Cable modems are
deployed in approximately 19.1% of the homes passed by our cable systems in markets offering such service,
which we believe is well above the national average. Cable modem services provide high-speed, dedicated access
to the Internet through our coaxial cable network.
We launched video-on-demand service to certain of our Anchorage commercial customers and added additional
customers in 2002. This service passed 1,389 hotel rooms at December 31, 2002, an increase of 54.5% as
compared to 2001.
We initiated digital cable entertainment services in 2002 to 1,050 rooms at the Kuparuk Oil Field living quarters
facilities in Prudhoe Bay, Alaska. This service includes 100 channels of video, music and pay-per-view choices,
including one Anchorage broadcast television station.
Our Anchorage cable channel lineup was realigned in 2002, allowing us to begin swapping all of our existing
analog boxes for digital boxes. Moving to digital allows us offer better service, more channels and better quality.
We are also able to reclaim bandwidth for other services, including cable telephony, cable modems, and
additional cable video services.
We signed new seven-year retransmission agreements with five local Anchorage broadcasters and began up
linking and distributing that programming to all of our cable systems. These agreements allow other locations in
Alaska to receive local Anchorage broadcasting service in addition to programming received from non-Alaska
markets, providing additional value to our cable subscribers and allowing us to differentiate our programming
from that of our DBS competitors.
We continue to evaluate technology and the feasibility of using our cable plant for telephone services that will
enable us to deliver local telephone access services on our own network. Testing and design is underway with
regard to chosen equipment, cable plant, power delivery, and operational support systems. Upgrades have been
made to a node in our Anchorage plant to create a test deployment platform for cable telephony. Our upgraded
cable plant node was certified compliant with DOCSIS 1.1 standards in 2002.
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You should see Part I, Item 1. Business, Narrative Description of our Business - Cable Services, and Part I, Item
1. Regulation, Franchise Authorizations and Tariffs – Cable Services Operations for more information.
Local Access Services Expansion
We had approximately 96,100 local access services lines in service in Anchorage, Fairbanks and Juneau, Alaska
at December 31, 2002, a 21.3% increase from December 31, 2001. In late 2001 we began selling GCI local
services in Juneau with conversions beginning in the first quarter of 2002. We continue to evaluate expanded
implementation of wireless local loop and cable telephony technologies.
We filed a bona fide request with the ILEC, ACS of the Northland, Inc, in 2001 to negotiate rates and services in
order to provide competitive local access services in Nenana, Ft. Greely, North Pole, Delta Junction, Kenai,
Soldotna, Ninilchik, Homer, Seldovia and Kodiak, Alaska. The RCA has approved an interconnection agreement
and GCI can now apply for approval to enter these markets, which must be granted by the RCA before we begin
to provide local access services.
You should see Part I, Item 1. Business, Narrative Description of our Business - Local Access Services, and Part
I, Item 1. Regulation, Franchise Authorizations and Tariffs – Telecommunication Operations for more
information.
Internet and Broadband Services Expansion
We provided Internet service to approximately 70,700 dial-up subscribers at December 31, 2002, a 2.5% increase
from December 31, 2001. We provided service to approximately 36,200 cable modem subscribers at December
31, 2002, a 36.7% increase from December 31, 2001.
Approximately 96.1% of our cable customers are able to receive cable modem service. Cable modems are
deployed in approximately 19.1% of the homes passed by our cable systems in markets offering such service,
which we believe is well above the national average. Cable modem services provide high-speed, dedicated access
to the Internet through our coaxial cable network. After significant plant upgrades to handle reverse feed and
higher bandwidth requirements, we initiated cable modem services in 2002 in Petersburg, Wrangell, Cordova,
Homer, Bethel, Nome, and Kodiak, Alaska.
We initiated cable modem service in the Kenai and Soldotna, Alaska communities in 2002. All locations that
implemented cable modems in 2002 use the new DOCSIS 1.1 platform. We also upgraded cable modem
customers in the Wasilla, Alaska service area in 2002 to the DOCSIS 1.1 platform. We believe that we are the
first company in North America to successfully deploy the DOCSIS 1.1 platform. This new non-proprietary
platform allows us to provide a higher level of service, helps us eliminate network congestion and run a cleaner
network that is more efficient to manage. It also protects customers from hackers and helps us reduce the risk of
high speed internet theft.
We increased the speeds of our DoubleUp and Gold cable modem product offerings in certain markets in 2002, at
no cost to our customers. Our premium cable modem service, The Diamond service package, offers 2.4 megabits
per second which is twice as fast as our competitor’s best package DSL offering.
We began offering our PrudhoeNet dialup Internet service to Prudhoe Bay, Alaska oilfield workers in early 2003.
We believe our product offers both lower price and high quality for oilfield workers who want to stay in touch
with family, friends and business during their off work hours.
Our SchoolAccess program was first deployed successfully in Alaska where we provide satellite-delivered
voice, video and data services to many of the state’s rural communities. More than 80,000 Alaska students are
now connected to the Internet with SchoolAccess. We provide e-mail service, a custom user interface, a help
desk, onsite training, security, network optimization, network management, content filtering services and website
hosting for 195 schools in rural Alaska using SchoolAccess, and provide Internet only services to approximately
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100 additional schools. We signed three-year contracts in 2002 with each of the 64 Alaska schools that re-bid
their SchoolAccess service.
We provide our SchoolAccess services to nine school districts comprising 25 schools in rural New Mexico and
Arizona, serving more than 10,500 students. We began providing SchoolAccess services to two school districts
in Montana in the third quarter of 2002.
During the 3rd Quarter of 2002, we launched our SchoolAccess Distance Learning Service (“DLS”) to
approximately 80 rural Alaskan schools. SchoolAccess DLS allows schools to conduct two-way
videoconferences by providing each of the six school districts with an autonomous videoconferencing network.
Schools not only have the ability to videoconference within the district, but have the ability to conference with
other schools or entities worldwide. SchoolAccess DLS also gives teachers and students access to a course
management system that compliments the interactive service. Circuits for the service are provided over our
broadband satellite network, and all of the hardware and software is included as part of the managed service.
We continued to deploy high-speed broadband TeleHealth services in 2002 using an advanced satellite network to
an additional 28 villages served by the Bristol Bay Health Corporation in the Dillingham, Alaska area; eight
villages for the Yukon-Kuskokwim Health Corporation in the Bethel, Alaska area; 16 villages for the Norton
Sound Health Corporation in the Nome, Alaska area; and six villages in the Eastern Aleutian area. At the end of
2002 we provided TeleHealth services to approximately 70 western Alaska communities. This broadband service
allows remote communities to access health specialists and others in Alaska and elsewhere for consultation and
diagnostic services using a combination of video, voice and data services.
We announced in 2001 our intent to provide Internet services to 152 Alaska communities that we currently serve
by 2004. The estimated $15 million project will deliver high-speed Internet by cable modem, DSL and wireless
technologies. A considerable expansion of facilities was made in 2001 to support cable modem Internet service
launches in Valdez, Sitka, Nome and Seward, Alaska, and in Kenai and Soldotna, Alaska in January 2002. We
deployed cable modem service in Wasilla/Palmer, Petersburg and Wrangell, Alaska by the end of the second
quarter 2002; and Bethel, Cordova, Homer, and Kodiak, Alaska by the end of 2002. We believe the Kenai and
Soldotna launches were the first U.S. deployment of a cable modem platform using the new DOCSIS 1.1
standard. This new standard supports tiered levels of service, provides quality of service measurement, and
supports voice traffic over coaxial cable systems.
We provide 56 kbps and 256 kbps high-speed Internet access services to 15 rural villages in the Northwest Arctic,
Aleutian, and Yukon-Kuskokwim delta regions of Alaska. We deliver high-speed Internet services locally in the
villages through the ILEC’s DSL service or our unlicensed 2.4 GHz band fixed wireless service. All long-haul
transport is delivered through our satellite and associated facilities.
You should see Part I, Item 1. Business, Narrative Description of our Business - Internet Services, and Part I,
Item 1. Regulation, Franchise Authorizations and Tariffs – Internet Operations for more information.
PCS and LMDS Licenses
We have invested approximately $1.79 million in our PCS license at December 31, 2002. In June 2000 we began
providing fixed wireless dial-tone services in Anchorage over our PCS system, meeting the FCC requirement to
provide coverage of a commercial offering to at least one-third of our market population within five years of
being licensed. We presently offer our fixed wireless service to customers that are not connected to the ILEC or
our physical plant. We have invested approximately $275,000 in our LMDS license. LMDS licensees are
required to provide 'substantial service' in their service regions within 10 years.
Contract Extension
Our contract to provide interstate and intrastate long-distance services to Sprint was replaced in March 2002
extending its term to March 2007 with two one-year automatic extensions to March 2009. Beginning in April
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2002 the new contract reduced the rate to be charged by us for certain Sprint traffic over the extended term of the
contract.
Yellow-Pages Directory
We signed a contract in 2002 with Alltel Publishing Corporation to enter the directory listing and Yellow Pages
market. The first directory will be distributed in the Anchorage market in December 2003. We expect to
continue to expand our product offerings to other markets in 2004.
Retail Store Expansion
We opened new retail stores in 2002 serving our Wasilla and Anchorage markets. The new stores combine
certain of our customer service and payment centers and allow customers to pay their bills, sign up for new
services and experience our full range of products.
GCI Fiber Communication System
We reached a significant milestone in 2002 in our agreement with the company that operates the trans Alaska oil
pipeline with the signing of a complex design document for fiber and satellite circuits to support the pipeline
control system. These circuits operate the remote gate valves that stop the flow of oil in the event of an
emergency. They require an extremely high level of availability and reliability. The complex design included
eleven new earth stations and supporting equipment that are expected to be placed into service in 2003.
E-Bill Service
We launched an online bill presentment and payment service in 2002 at https://ebill.gci.com/. Over 27,000
accounts have signed up for the service through January 2003.
E-Mail Guard Service
We launched a virus and SPAM filtering service for our e-mail platform in July 2002. The service provides our e-
mail users with a capability to quarantine unsolicited e-mail and suspected virus infected e-mail in a safe location.
A highly customer-configurable service, it has been very well received and has significantly exceeded our 2002
acquisition forecast. Since we launched E-Mail Guard, an estimated 50 million e-mail messages have been
intercepted and quarantined. In the first week of January 2003, E-Mail Guard prevented 1.8 million messages --
roughly 84 percent of the total volume of e-mail -- from clogging electronic in-baskets and infecting computers
with viruses.
Narrative Description of our Business
General
We operate a broadband communications network that permits the delivery of a seamless integrated bundle of
communications, entertainment and information services. We offer a wide array of consumer and business
communications and entertainment services--including local telephone, long-distance and wireless
communications, cable television, consulting services, network and desktop computing outsourced services, and
dial-up, broadband (cable modem, wireless and DSL) and dedicated Internet access services at a wide range of
speeds--all under the GCI brand name.
We believe that the size and growth potential of the voice, video and data market, the increasing deregulation of
telecommunication services, and the increased convergence of telephony, wireless, and cable services offer us
considerable opportunities to continue to integrate our telecommunication, Internet and cable services and expand
into communications markets both within and, longer-term, possibly outside of Alaska.
Considerable deregulation has already taken place in the United States because of the 1996 Telecom Act with the
barriers to competition between long-distance, local exchange and cable providers being lowered. We believe our
acquisition of cable television systems and our development of local exchange service, Internet services,
broadband services, and wireless services leave us well positioned to take advantage of deregulated markets.
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We are one of Alaska's leading providers of telecommunication, Internet and cable television services and
maintain a strong competitive position. There is active competition in the sale of substantially all products and
services we offer.
Competition in the Communications Industry
There is substantial competition in the communications industry. The traditional dividing lines between providers
offering long-distance telephone service, local telephone service, wireless telephone service, Internet services and
video services are increasingly becoming blurred. Through mergers and various service integration strategies,
major providers, including us, are striving to provide integrated communications service offerings within and
across geographic markets.
Alaska Voice, Video and Data Markets
We estimate that the aggregate telecommunications, cable television, and Internet markets in Alaska generated
revenues in 2002 of approximately $1.1 billion. Of this amount, approximately $470 million was attributable to
interstate and intrastate long-distance service, $350 million was attributable to local exchange services, $92
million was attributed to cable television, and $188 million was attributable to all other services, including
wireless and Internet services.
The Alaskan voice, video and data markets are unique within the United States. Alaska is geographically distant
from the rest of the United States and is generally characterized by large geographical size and relatively small,
dense population clusters (with the exception of population centers such as Anchorage, Fairbanks and Juneau). It
lacks a well-developed terrestrial transportation infrastructure, and the majority of Alaska's communities are
accessible only by air or water. As a result, Alaska's telecommunication networks are different from those found
in the Lower 49 states.
Alaska continues to rely extensively on satellite-based long-distance transmission for intrastate calling between
remote communities where investment in a terrestrial network would be uneconomic or impractical. Also, given
the geographic isolation of Alaska's communities and lack, in many cases, of major civic institutions such as
hospitals, libraries and universities, Alaskans are dependent on telecommunications to access the resources and
information of large metropolitan areas in Alaska, the rest of the U.S. and elsewhere. In addition to satellite-
based communications, the telecommunications infrastructure in Alaska includes fiber optic cables between
Anchorage, Valdez, Fairbanks, Prudhoe Bay, and Juneau, traditional copper wire, and digital microwave radio on
the Kenai Peninsula and other locations. For interstate and international communication, Alaska is connected to
the Lower 48 states by three fiber optic cables.
Fiber optics is the preferred method of carrying Internet, voice, video, and data communications over long
distances, eliminating the delay commonly found in satellite connections. Widespread use of high capacity fiber
optic facilities is expected to allow continued expansion of business, government and educational infrastructure in
Alaska.
Long-Distance Services
Industry
Until the 1970s, AT&T had a virtual monopoly on long distance service in the United States. In the 1970s,
competitors such as MCI (now WorldCom) and Sprint began to offer long distance service. With the gradual
emergence of competition, basic rates dropped, calling surged, and AT&T’s dominance declined. More than 700
companies now offer long distance service. AT&T’s 1984 toll revenues were about 90% of those reported by all
long distance carriers. The FCC’s regulation of AT&T as a “dominant” carrier ended in 1995. By 2000, AT&T’s
revenues had declined to approximately 37% of those reported by all non-LEC long distance carriers. The two
largest market entrants, WorldCom and Sprint, have obtained a 31% combined market share through 2000.
Because of this competition, the cost of long distance calling dropped from 32 cents per minute in 1984 to 12
cents per minute in 2000. The average price of 12 cents per minute represents a mix of international calling (an
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average of 47 cents per minute) and domestic interstate calling (an average of 9 cents per minute). The decline in
prices since 1984 is more than 70% after adjusting for the impact of inflation.
The FCC reports that more than twenty-three million households have been added to the nation's telephone
system since November 1983. An estimated 1.5 million households were added between July 2001 and July 2002
as a result of an increasing number of households. As of November 2001, 102.2 million households had
telephone service. The FCC reports that approximately 2% of all consumer expenditures are devoted to telephone
service. This percentage has remained relatively constant over the past 15 years, despite major changes in the
telephone industry and in telephone usage. Average annual expenditures on telephone service increased from
$360 per household in 1981 to $877 in 2000.
The FCC reports that an estimated 95.1% of households and virtually all businesses in the United States
subscribed to telephone service in July 2002. Line growth over time, averaging about 3% per year, has
historically reflected growth in the population and the economy. In recent years, the growth in lines has increased
as households have added additional lines. The percentage of additional lines for households with telephone
service has increased from approximately 3% in 1988 to about 27% in 2000, but decreased from 29% in 1999.
The FCC reports that approximately $110 billion was derived from toll services in 2000. 102.2 million
households had telephone services, an increase of 23 million households since 1983. Approximately $33 billion
is derived from intrastate, $53 billion from interstate, and $24 billion from international toll services. Interstate
long distance toll revenues increased 103% from $26 billion in 1984, and intrastate toll revenues increased 58%
from $21 billion in 1984.
International telecommunications has become an increasingly important segment of the telecommunications
market. The FCC reports that international revenues increased over 500% from $4 billion in 1984 to $24 billion
in 2000. The FCC reports that the number of calls made from the United States to other countries increased from
200 million in 1980 to 6.6 billion in 2000. On average, carriers billed 51 cents per minute for international calls
in 2000, a decline of more than 60% since 1980. Five markets, the United Kingdom, Canada, Mexico, Japan and
Australia, are currently the top five destinations of U. S. activated circuits at December 31, 2001. The FCC’s
year-end 2001 report reflected slow growth in the use of U.S. international-facilities for international calls and
private line services from the United States. By service type, international message telephone service accounted
for 16% of the total circuits used; international private line services accounted for 76% of total circuits; and the
remaining 8% of total circuits were used for other data and video services. The percentage of idle circuits as
compared to the total circuit capacity increased from 48% in 2000 to 56% in 2001.
The United States Congress passed the 1996 Telecom Act that permitted the local phone companies, the long-
distance companies, and the cable service firms to compete in each other's market. Its purpose was to move from
a regulated monopoly model of telecommunications to a deregulatory competitive markets model. The 1996
Telecom Act has provided the telecommunications industry with new capabilities resulting in an industry that is
more competitive than ever before.
Advancements are expected to continue to combine wireline and wireless services directed toward voice
communication with other activities such as data sharing, on-screen collaboration, faxing, Internet access, and
game playing, among many other things.
While the 1996 Telecom Act has facilitated competition and rapid growth in the telecommunications market, the
last two years have been a tumultuous time for that marketplace. Industry analysts believe that overly optimistic
projections of data growth spurred companies to invest large amounts of capital to boost network capacity. While
demand for telecommunications services grew, it did not grow at a sufficient pace to justify the substantial build-
out of fiber capacity. A wide gap between the supply of network capacity and the demand for data transmission
occurred. Network owners refocused their efforts to demonstrate profitability over a much shorter time horizon
than initially projected. A downward spiral ensued, as many telecommunications carriers went bankrupt after
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failing to generate sufficient revenues to service their accelerating debt loads. The resultant slowdown in capital
expenditures left equipment manufacturers with surplus inventory and personnel. Additionally, several
companies appear to have resorted to financial deception to mask poor performance. This compounded the
downturn by reducing confidence in the truthfulness of financial statements.
Deteriorating conditions in the economy and in the telecommunications industry have led to reorganizations,
mergers and divestitures. AT&T and Comcast Corporation finalized their combination of AT&T Broadband with
Comcast in November 2002, in a transaction that values AT&T Broadband at an aggregate value of $72 billion
(approximately $4,500 per subscriber). The resulting AT&T Comcast Corporation is expected to develop and
deploy new broadband applications such as video-on-demand and interactive television.
Industry analysts believe companies will be successful in the long-term if they can minimize regulatory battles
and offer a full suite of integrated services to their customers, using a network that is largely under their control.
Growth in data is expected to continue to be a key component of industry revenue growth. We believe that the
data telecommunications business will eventually rival and perhaps become larger than the traditional voice
telephony market. ISPs have become major customers and many long-distance companies have acquired ISPs
and web-hosting companies.
The U.S. House of Representatives in February 2002 adopted a measure that would allow LECs to offer long-
distance data services without first opening their networks to competitors as they must under the 1996 Telecom
Act. Local telephone carriers argue that the measure would accelerate the deployment of high-speed Internet
service using DSL technology. These dominant carriers compete with cable companies for high-speed Internet
access customers. Analysts report that cable operators have approximately 6.4 million subscribers compared to
3.1 million DSL customers. The U.S. Senate did not act on the measure before the close of the 107th Congress.
To date, the bill has not been reintroduced in the 108th Congress.
We believe that federal and state legislators, courts and regulators will continue to influence the
telecommunications industry in 2003. Consummation of mergers between and spin-offs from long-distance
companies, local access services companies, and cable television companies have occurred which blur the
distinction between product lines and competitors. Synergies developed through mergers and acquisitions and
obtaining end-to-end connectivity with customers is expected to continue to drive long-run profitability and
success in penetrating new markets.
General
We supply a full range of common carrier long-distance and other telecommunication products and services. We
operate a modern, competitive telecommunications network employing the latest digital transmission technology
based upon fiber optic facilities within and between Anchorage, Fairbanks and Juneau, Alaska. Our facilities
include a self-constructed and financed digital fiber optic cable and additional owned capacity on another
undersea fiber optic cable, both linking Alaska to the networks of other carriers in the Lower 49 states. We use
satellite transponders to transmit voice and data traffic to remote areas of Alaska. We operate digital microwave
systems to link Anchorage with the Kenai Peninsula, and our Prudhoe Bay Earth Station with Deadhorse. Digital
microwave facilities are also used to backup our fiber facilities from Anchorage to our Eagle River earth station,
and to our Fairbanks earth station from our Fairbanks distribution center. Virtually all switched services are
computer controlled, digitally switched, and interconnected by a packet switched SS7 signaling network.
We provide interstate and intrastate long-distance services throughout Alaska using our own facilities or facilities
leased from other carriers. We also provide (or join in providing with other carriers) telecommunication services
to and from Alaska, Hawaii, the Lower 48 states, and many foreign nations and territories.
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We offer cellular services by reselling other cellular providers’ services. We offer wireless local access services
over our own facilities, and have purchased PCS and LMDS wireless broadband licenses in FCC auctions
covering markets in Alaska.
Products
Our long-distance services industry segment is engaged in the transmission of interstate and intrastate-switched
message telephone service and private line and private network communication service between the major
communities in Alaska, and the remaining United States and foreign countries. Our message toll services include
intrastate, interstate and international direct dial, toll-free 800, 888, 877 and 866 services, GCI calling card,
operator and enhanced conference calling, frame relay, SDN, ISDN technology based services, as well as
termination of northbound toll service for WorldCom, Sprint and several large resellers who do not have facilities
of their own in Alaska. We also provide origination of southbound calling card and toll-free 800, 888, 877 and
866 toll services for WorldCom, Sprint, and other IXCs. We offer our message services to commercial,
residential, and government subscribers. Subscribers may generally cancel service at any time. Toll, private line,
broadband and related services account for approximately 53.5%, 53.5% and 60.4% of our 2002, 2001 and 2000
revenues, respectively. Broadband services include our SchoolAccess and Rural Health initiatives. Private line
and private network services utilize voice and data transmission circuits, dedicated to particular subscribers,
which link a device in one location to another in a different location.
We have positioned ourselves as a price and customer service leader in the Alaska telecommunication market.
Rates charged for our long-distance services are generally designed to be equal to or below those for comparable
services provided by our competitors.
In addition to providing communication services, we also design, sell, install, service and operate, on behalf of
certain customers, communication and computer networking equipment and provide field/depot, third party,
technical support, telecommunications consulting and outsourcing services through our Network Solutions
business. We also supply integrated voice and data communication systems incorporating interstate and intrastate
digital private lines, point-to-point and multipoint private network and small earth station services. Our Network
Solutions sales and services revenue totaled $12.4 million, $16.3 million, and $9.2 million in the years ended
December 31, 2002, 2001 and 2000, respectively, or approximately 3.4%, 4.6% and 3.2% of total revenues,
respectively. Presently, there are a number of competing companies in Alaska that actively sell and maintain data
and voice communication systems.
Our ability to integrate telecommunications networks and data communication equipment has allowed us to
maintain our market position based on “value added” support services rather than price competition. These
services are blended with other transport products into unique customer solutions, including managed services and
outsourcing.
Facilities
Our telecommunication facilities include an undersea fiber optic cable connecting Whittier, Valdez and Juneau,
Alaska and Seattle, Washington, which was placed into service in February 1999. We also own a portion of a
second undersea fiber optic cable linking Alaska to the Lower 48 states. The fiber optic cables allow us to carry
our Anchorage, Eagle River, Wasilla, Palmer, military base, Kenai Peninsula, Girdwood, Valdez, Whittier, Delta
Junction, Prudhoe Bay, Glenallen, Healy, Fairbanks, Juneau, Ketchikan, and Sitka, Alaska traffic to and from the
contiguous Lower 48 states over terrestrial circuits, eliminating the one-quarter second delay associated with
satellite circuits. We own other terrestrial fiber optic cables to transport our traffic from Anchorage to Whittier
and from Whittier to Deadhorse, Alaska, including connectivity to intermediate communities of Valdez,
Glenallen, Delta Junction, and Fairbanks.
Other facilities include major earth stations at Eagle River, Kodiak, Dutch Harbor, Barrow, Bethel, Nome,
Dillingham, Kotzebue, King Salmon, and Cordova, 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
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major Alaska earth stations. The Eagle River earth station is linked to the Anchorage distribution center by fiber
optic facilities.
We completed construction of a fiber optic cable system from the Anchorage distribution center to the Eagle
River central office and to our major hub earth station in Eagle River in the second quarter of 2000. The Issaquah
earth station is connected with the Seattle distribution center by means of diversely routed leased fiber optic cable
transmission systems, each having the capability to restore the other in the event of failure. The Juneau earth
station and distribution centers are collocated. We have digital microwave facilities serving the Kenai Peninsula
communities. We maintain earth stations in Fairbanks (linked by digital microwave to the Fairbanks distribution
center), Juneau (collocated with the Juneau distribution center), Anchorage (Benson earth station), and in Prudhoe
Bay as fiber network restoration earth stations. Our Benson earth station also uplinks our statewide video service;
such service is pre-empted when earth station capacity is needed to restore our fiber network between Anchorage
and Prudhoe Bay.
In 2002, we constructed 6-meter earth stations at Unalakleet, Mountain Village, and Ft. Yukon. These stations
were constructed to support Distance Learning and Telemedicine networks and primarily serve surrounding
villages.
We use our DAMA facilities to serve 56 additional locations throughout Alaska. The digital DAMA system
allows calls to be made between remote villages using only one satellite hop thereby reducing satellite delay and
capacity requirements while improving quality. We obtained the necessary RCA and FCC approvals waiving
current prohibitions against construction of competitive facilities in certain rural Alaska communities, allowing
for deployment of DAMA technology in 56 sites in rural Alaska on a demonstration basis. In addition, over 90
Ku-band VSAT facilities, and 119 C-band facilities provide dedicated Internet access, Telehealth and private
network services to rural public schools, hospitals, health clinics, and natural resource development industries
throughout Alaska.
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 WorldCom, Sprint and other carriers to distribute
our southbound traffic to the remaining 49 states and international destinations. In Anchorage, a Lucent 5ESS
digital host switch is connected by fiber to seven remote facilities that are co-located in the ILEC’s switching
centers, to provide both local and long distance service. Our extensive metropolitan area fiber network in
Anchorage supports cable television, Internet and telephony services. The Anchorage, Fairbanks, and Juneau
facilities also include digital access cross-connect systems, frame relay data switches, Internet platforms, and in
Anchorage and Fairbanks, co-location facilities for interconnecting and hosting equipment for other carriers. We
also maintain an operator and customer service center in Wasilla, Alaska.
In 2001 we constructed a new switching center in Fairbanks and installed a new Lucent Technologies switch to
enable the provisioning of local telephony services in the Fairbanks market. The existing Fairbanks long distance
toll switch was decommissioned in December 2001. Substantially all toll traffic originating in Fairbanks is now
routed to Anchorage. The first ILEC collocation office was also constructed during 2001 to enable access to a
portion of the Fairbanks ILEC UNE loop facilities. Fairbanks UNE loop provisioning began in early 2002.
Construction of a second collocation office was completed in 2002.
We installed a new Lucent Technologies switch in our Juneau distribution center, also enabling local services to
be launched in the Juneau market in 2002. This new switch also replaced the existing toll switch in Juneau, which
we decommissioned in 2002. One collocation office and a second adjacent collocation facility were completed at
two of the Juneau ILEC central offices. We placed these collocation facilities in service in 2002 enabling UNE
loop access to a portion of the Juneau ILEC’s loop facilities.
Our Alcatel DSC DEX switch in Seattle was also decommissioned in 2002 after its traffic was transitioned to our
Lucent 5ESS switch in Seattle, which was placed into service in 2000.
21
Efforts continued in 2002 to decommission our digital operator platform. We expect to complete that work in
early 2003 to enable its turndown and to migrate its operator traffic to our Anchorage Lucent 5ESS host digital
switch.
We plan to install a second Lucent 5ESS in Anchorage in 2003 that will enable the turndown and
decommissioning of our Anchorage Alcatel DSC DEX toll switch as early as the fourth quarter of 2003.
We completed construction and placed into service in February 1999 a fiber optic cable system that interconnects
Anchorage, Whittier, Valdez, Fairbanks, Deadhorse and Juneau, Alaska and Seattle Washington. We also own a
portion of a second undersea fiber optic cable that links Alaska with the Lower 48 states. The fiber optic cables
allow us to carry our Anchorage, Eagle River, Wasilla, Palmer, Kenai Peninsula, Valdez, Whittier, Delta Junction,
Prudhoe Bay, Glenallen, Fairbanks, Juneau, Ketchikan, and Sitka area traffic to and from the Lower 48 states over
terrestrial circuits, eliminating the one-quarter second delay associated with satellite circuits. Our preferred
routing for this traffic is via undersea fiber optic cable, which makes available satellite capacity to carry our rural
interstate and intrastate traffic.
We employ satellite transmission for rural intrastate and interstate traffic and certain other major routes. We
acquired satellite transponders on PanAmSat Corporation (“PanAmSat”) Galaxy XR satellite in March 2000 to
meet our long-term satellite capacity requirements. We further augmented capacity on Galaxy XR with the lease
of a seventh C-band transponder in October, 2002.
As demand for redundant capacity on our network increases, we expect that we will need to further augment our
facilities between Alaska and the Lower 48 states. We may lease or acquire capacity from others, or we may
build another undersea fiber optic cable system. We completed design and sub sea survey efforts in 2002 for an
additional undersea system as part of our planning process. Expenditures through the 2002 totaled $1.6 million
and have been capitalized. We have not made a final decision as to whether we will construct additional capacity.
Acquisition or construction of such additional capacity will be dependent upon our obtaining the necessary
financing.
In 2000 we began deploying a new packet data satellite transmission technology for the efficient transport of
broadband data in support of our rural health and SchoolAccess initiatives. We continued to deploy and
upgrade this network during 2002 and expect to further expand and upgrade this network during 2003.
We employ advanced digital transmission technologies to carry as many voice circuits as possible through a
satellite transponder without sacrificing voice quality. Other technologies such as terrestrial microwave systems,
metallic cable, and fiber optics tend to be favored more for point-to-point applications where the volume of traffic
is substantial. With a sparse population spread over a wide geographic area, neither terrestrial microwave nor
fiber optic transmission technology is considered to be economically feasible in rural Alaska in the foreseeable
future.
Customers
We had approximately 88,200, 87,900 and 88,600 active Alaska message telephone service subscribers at
December 31, 2002, 2001 and 2000, respectively. Approximately 11,600, 12,200 and 12,200 of these were
business and government users at December 31, 2002, 2001 and 2000, respectively, and the remainder were
residential customers. Reductions in our business and government customer counts were primarily attributed to
continuing competitive pressures in Anchorage and other markets we serve. Message telephone service revenues
(excluding broadband, operator services and private line revenues) averaged approximately $11.6 million per
month during 2002.
22
Equal access conversions have been completed in all communities we serve with owned facilities. We estimate
that we carry over 45% of business and over 45% of residential traffic as a statewide average for both originating
interstate and intrastate message telephone service traffic.
A summary of our switched message telephone service traffic (in minutes) follows:
Interstate Minutes
For Quarter ended
South-
bound 1
North-
bound
March 31, 2000
June 30, 2000
September 30, 2000
December 31, 2000
143,659
149,095
157,993
129,091
69,678
67,754
73,802
76,202
Combined
Interstate
and Inter-
national
Minutes
Calling
Card
Inter-
national
Minutes
(Amounts in thousands)
1,577
2,847
1,610
2,616
1,698
2,493
1,429
2,467
217,761
221,075
235,986
209,189
Intra-
State
Minutes
37,414
38,546
39,329
35,729
Total
Minutes
255,175
259,621
275,315
244,918
Total 2000
579,838
287,436
10,423
6,314
884,011 151,018
1,035,029
March 31, 2001
June 30, 2001
September 30, 2001
December 31, 2001
126,681
141,091
160,600
130,638
74,252
76,256
87,230
90,812
2,087
1,926
1,961
1,946
1,424
1,530
1,634
1,362
204,444
220,803
251,425
224,758
38,763
40,407
39,355
39,246
243,207
261,210
290,780
264,004
Total 2001
559,010
328,550
7,920
5,950
901,430 157,771
1,059,201
March 31, 2002
June 30, 2002
September 30, 2002
December 31, 2002
133,455
144,143
159,564
138,735
91,061
105,001
90,839
78,483
1,683
1,582
1,463
1,341
1,413
1,462
1,527
1,506
227,612
252,188
253,393
220,065
40,781
44,528
46,860
43,595
268,393
296,716
300,253
263,660
Total 2002
575,897
__________________________
365,384
6,069
5,908
953,258 175,764
1,129,022
1 The 2000 Interstate Southbound minutes include traffic carried from Washington to Oregon by us on
behalf of an OCC customer. The 2001 Interstate Southbound minutes include traffic that originates and
terminates in Washington by us on behalf of an OCC customer.
All minutes data were taken from our internal billing statistics reports.
___________________________
We entered into a significant business relationship with MCI (now WorldCom) in 1993 that included the
following agreements, among others.
(cid:130) We agreed to terminate all Alaska-bound MCI long-distance traffic and MCI agreed to terminate all
of our long-distance traffic terminating in the Lower 49 states excluding Washington, Oregon and Hawaii.
(cid:130) The parties agreed to share some communications network resources and various marketing, engineering
and operating resources. We also carry MCI's 800, 888, 877 and 866 traffic originating in Alaska and
terminating in the Lower 49 states and handle traffic for MCI's calling card customers when they are in
Alaska.
23
Concurrently with these agreements, MCI purchased approximately 31% (approximately 9.1% as of December
31, 2002) of GCI's Common Stock and presently one representative serves on the Board. In conjunction with the
acquisition of certain cable television companies in 1996, MCI purchased an additional two million shares at a
premium to the then current market price for $13 million or $6.50 per share. WorldCom sold 4.5 million shares
of GCI Class A common stock in 2002.
Revenues attributed to WorldCom's message telephone traffic from these agreements (excluding private line and
other revenues) in 2002, 2001 and 2000 totaled $54.7 million, $44.8 million, and $47.9 million, or 14.9%, 12.6%,
and 16.4% of total revenues, respectively. The contract was amended in March 2001 extending its term five years
to March 2006. The amendment reduces the rate to be charged by us for certain traffic over the extended term of
the contract. On July 21, 2002 WorldCom and substantially all of its active U.S. subsidiaries filed voluntary
petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court.
See note 11 in the accompanying Notes to Consolidated Financial Statements for additional information.
In 1993 we entered into a long-term agreement with Sprint, pursuant to which we agreed to terminate all Alaska-
bound Sprint long-distance traffic and Sprint agreed to handle substantially all of our international traffic.
Services provided pursuant to the contract with Sprint resulted in message telephone service revenues (excluding
private line and other revenues) in 2002, 2001 and 2000 of approximately $23.5 million, $29.7 million, and $20.1
million, or approximately 6.4%, 8.3%, and 6.9% of total revenues, respectively. The contract was amended in
March 2002 extending its term five years to March 2007, with two one-year automatic extensions thereafter. The
amendment reduces the rate to be charged by us for certain traffic over the extended term of the contract.
With the contracts and amendment described above, we believe that WorldCom, subject to reaffirmation of our
contract through the bankruptcy process, and Sprint, our two largest customers, will continue to make use of our
services during the extended term. WorldCom was a major customer of our long-distance services industry
segment through 2002. Sprint met the threshold for classification as a major customer through 1998, and met the
threshold again in 2001.
Other common carrier traffic routed to us for termination in Alaska is largely dependent on traffic routed to our
carrier customers by their customers. Pricing pressures, new program offerings, revised business plans, and
market consolidation continue to evolve in the markets served by our carrier customers. If, as a result, their traffic
is reduced, or if their competitors’ costs to terminate or originate traffic in Alaska are reduced, our traffic will also
likely be reduced, and we may have to reduce our pricing to respond to competitive pressures. We are unable to
predict the effect of such changes on our business; however the loss of one or both of WorldCom or Sprint as
customers, a material adverse change in our relationships with them or a material loss of or reduction in their
long-distance customers would have a material adverse effect on our financial condition and results of operations.
We provide various services to BP Alaska, Wells Fargo Bank Alaska and Alyeska Pipeline Service Company.
Although these customers do not meet the threshold for classification as major customers, we do derive
significant revenues and gross profit from them. There are no other individual customers, the loss of which would
have a material impact on our revenues or gross profit.
We provided private line and private network communication products and services, including SchoolAccess
private line facilities, to approximately 363 commercial and government customers in 2002. These products and
services generated approximately 9.8%, 9.7% and 9.9% of total revenues during the years ended December 31,
2002, 2001 and 2000, respectively.
Although we have several agreements to facilitate the origination and termination of international toll traffic, we
have neither foreign operations nor export sales (see Part I, Item 1. Business, Foreign and Domestic Operations
and Export Sales).
24
Competition
The long-distance industry is intensely competitive and subject to constant technological change. Competition is
based upon price and pricing plans, the type of services offered, customer service, billing services, performance,
perceived quality, reliability and availability. A number of our competitors are substantially larger than we are
and have greater financial, technical and marketing resources than we have.
In the long-distance market, we compete against AT&T Alascom, ACS, the Matanuska Telephone Association
and certain smaller rural local telephone carrier affiliates. There is also the possibility that new competitors will
enter the Alaska market. In addition, wireless services continue to grow as an alternative to wireline services as a
means of reaching customers.
Historically, we have competed in the long-distance market by offering discounts from rates charged by our
competitors and by providing desirable packages of services. Discounts have been eroded in recent years due to
lowering of prices by AT&T Alascom and entry of other competitors into the long-distance markets we serve. In
addition, our competitors have also begun to offer their own packages of services. If competitors lower their rates
further or develop more attractive packages of services, we may be forced to reduce our rates or add additional
services, which would have a material adverse effect on our revenues and net income.
Under the terms of AT&T's acquisition of Alascom, AT&T Alascom rates and services must mirror those offered
by AT&T, so changes in AT&T prices indirectly affect our rates and services. AT&T'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 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 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 us.
ACS and other LECs have entered the interstate and international long-distance market, and pursuant to RCA
authorization, entered the intrastate long-distance market. ACS and other LECs generally lease or buy long-haul
capacity on long-distance carriers’ facilities to provide their interstate and intrastate long-distance services.
Another carrier completed construction of fiber optic facilities connecting points in Alaska to the Lower 48 states
in 1999. The additional fiber system provides direct competition to services we provide on our owned fiber optic
facilities, however the fiber system provides an alternative routing path for us in case of a major fiber outage in
our systems. This carrier filed for Chapter 11 bankruptcy in 2001 its assets were sold in 2002.
In the wireless communications services market, we expect our PCS business license in the future may be used to
compete against the cellular subsidiaries of AT&T Wireless Services, Inc. (“AT&T Wireless”) and ACS and
resellers of those services in Anchorage and other markets. The wireless communications industry continues to
experience significant consolidation. AT&T Wireless has acquired wireless companies and negotiated roaming
arrangements that give it a national presence. Mergers and joint ventures in the industry have created large, well-
capitalized competitors with substantial financial, technical, marketing and other resources. These competitors
may be able to offer nationwide services and plans more quickly and more economically than we can, and obtain
roaming rates that are more favorable than those that we obtain. We currently resell AT&T Wireless analog and
digital cellular services and provide limited wireless local access services on our own facilities. AT&T Wireless
has recently announced that it plans to exchange with Dobson Communications Corporation (“Dobson”) its
Anchorage wireless properties for properties currently owned by Dobson in California.
Our long-distance services sales efforts are primarily directed toward increasing the number of subscribers we
serve, selling bundled services, and generating incremental revenues through product and feature up-sale
opportunities. We sell our long-distance communications services through telemarketing, direct mail advertising,
door-to-door selling, up-selling by our customer contact personnel, and local media advertising.
25
We expect competition to increase as new technologies, products and services continue to develop. We cannot
predict which of many possible future technologies, products or services will be important to maintain our
competitive position or what expenditures will be required to develop and provide these technologies, products or
services. Our ability to compete successfully will depend on marketing and on our ability to anticipate and
respond to various competitive factors affecting the industry, including new services that may be introduced,
changes in consumer preferences, economic conditions, market and competitor consolidation, and pricing
strategies by competitors. To the extent we do not keep pace with technological advances or fail to timely
respond to changes in competitive factors in our industry and in our markets we could lose market share or
experience a decline in our revenue and net income. Competitive conditions create a risk of market share loss and
the risk that customers shift to less profitable lower margin services. Competitive pressures also create challenges
to our ability to grow new businesses or introduce new services successfully and execute on our business plan.
Each of our business segments also faces the risk of potential price cuts by our competitors that could materially
adversely affect our market share and gross margins.
Cable Services
Industry
The programmed video services industry includes traditional broadcast television, cable television, DBS systems,
private cable operators, LEC entry, broadband service providers, wireless cable, open video systems, home video
sales and rentals, Internet video, and electric and gas utilities. Cable television providers have added non-
broadcast programming, utilized improved technology to increase channel capacity and expanded service markets
to include more densely populated areas and those communities in which off-air reception is not problematic.
Broadcast television stations including network affiliates and independent stations generally serve the urban
centers. One or more local television stations may serve smaller communities. Rural communities may not
receive local broadcasting or have cable systems but may receive direct broadcast programming via a satellite
dish.
Advancements in technology, facility upgrades and plant expansions to enable migration to digital programming
are expected to continue to have a significant impact on cable services in the future. We expect that changing
federal, state and local regulations, intense competition, and developing technologies and standards will continue
to challenge the industry.
The FCC has reported that although competitive alternatives continue to develop, cable television still is the
dominant technology for the delivery of video programming to consumers in the MVPD marketplace. As of June
2002, 76.5 percent of MVPD subscribers received their video programming from a franchised cable operator,
compared to 78 percent a year earlier. The total number of subscribers to both cable and non-cable MVPDs
continues to increase. A total of 89.9 million households subscribe to multichannel video programming services
as of June 2002, an increase of 1.8 percent over the 88.3 million households subscribing to MVPDs in June 2001.
This subscriber growth accompanied a 1.2 percentage point decrease in MVPDs’ penetration of television
households to 85.3 percent as of June 2002.
The FCC reports that the number of cable subscribers grew to almost 68.8 million as of June 2002, up
approximately 0.4 percent from 68.6 million cable subscribers as of June 2001. The total number of non-cable
MVPD subscribers grew from 19.3 million as of June 2001 to 21.1 million as of June 2002, an increase of more
than nine percent. This subscriber growth accompanied a 1.2% decrease in MVPDs’ penetration of television
households to 85.3% as of June 2002, indicating that television households are increasing at a faster rate than
MVPD subscriber growth. Although industry data reflect continued growth through June 2002, the FCC reports
that a number of major cable system operators have experienced significant subscriber losses during this period
and calendar year 2002 may be the first year in which the industry as a whole has had a net loss of subscribers.
The FCC further reports that DBS subscribership has grown significantly and represented 20.3 percent of all
MVPD subscribers as of June 2002. Between June 2001 and June 2002, the number of DBS subscribers grew
from approximately 16 million households to approximately 18 million households, which is significantly higher
26
than the cable subscriber growth rate. The growth of DBS is still, in part, attributable to the authority granted to
DBS operators to distribute local broadcast television stations in their local markets by the Satellite Home Viewer
Improvement Act of 1999 (“SHVIA”). Continued DBS subscriber growth is expected as local programming is
offered in more markets. See Part I, Item 1. Business, Regulation, Franchise Authorizations and Tariffs – Cable
Services for more information.
According to the Bureau of Labor Statistics, cable prices rose 6.3 percent compared to a 1.1 percent increase in
the Consumer Price Index between June 2001 and June 2002. The FCC reports that concurrently with these rate
increases, the number of video and non-video services offered increased, and programming costs increased.
As a converged platform, cable is a viable competitive alternative outside its traditional video space, not only in
the broadband space as a competitor with technology such as DSL, but also in traditional telephony services.
These developments continue to move forward and will be enhanced as voice becomes another application that is
carried on data centric networks.
The most significant convergence of service offerings over cable plant continues to be the pairing of Internet
service with other service offerings. Cable operators continue to build-out the broadband infrastructure that
permits them to offer high-speed Internet access. The most popular way to access the Internet over cable is still
through the use of a cable modem and personal computer, though a small number of users continue to access the
Internet through their television and a specially designed set-top box, rather than a personal computer. Virtually
all of the major multiple system operators offer Internet access via cable modems in portions of their service
areas. Like cable, the DBS industry is developing ways to bring advanced services to their customers. Many
MMDS and private cable operators also offer Internet access services. In addition, broadband services providers
continue to build advanced systems specifically to offer a bundle of services, including video, voice, and high-
speed Internet access. We currently offer high-speed cable modem access in Anchorage, Bethel, Cordova,
Juneau, Eielson Air Force Base, Elmendorf Air Force Base, Fairbanks, Fort Richardson, Fort Wainwright, Homer,
Kenai, Kodiak, Nome, North Pole, Palmer, Petersburg, Seward, Sitka, Soldotna, Wasilla, Wrangell, and Valdez.
The cable industry has expanded its competitive offerings to include business and residential telephone services
delivered over its fiber optic infrastructure. Cable-delivered telephone service is a natural extension of a network
already capable of delivering digital and broadband services and products. Once upgraded to a two-way
capability, a cable system can offer telephone service over the same cable line that already carries digital video,
high speed Internet, and other advanced services to consumers. The FCC reports that several cable multiple
system operators continue to offer telephone service. Cable operators are beginning to deploy Internet Protocol
(“IP”) telephony in addition to circuit-switched telephony offerings. Cable operators such as Cox and AT&T
continue to deploy circuit-switched cable telephony. Circuit-switched service requires large capital expenditures
for switching equipment in addition to facility upgrades. Others, like Cablevision and Comcast, continue to offer
cable telephony where it has already been deployed, but generally are waiting for IP technology to become widely
available before accelerating their rollout of telephone service. AT&T, AOL Time Warner, Comcast, Cox, and
Charter are currently offering or continuing to test IP telephony products. Voice over IP is more modular and
does not require the large upfront cost needed to deploy circuit-switched service. Voice over IP utilizes the data
path already built, and is expected to allow for easy software changes and additions to service packages including
innovative combinations of voice, data, and fax services.
The National Cable and Telecommunications Association (“NCTA”) reports that cable-delivered residential
telephone service subscribers totaled an estimated 2.5 million through December 2002, with analysts projecting
15.4 million subscribers in 2005.
With digital transmissions and compression, cable operators are better able to offer a variety and quality of
channels to rival DBS, with pay-per-view choices that can approximate video-on-demand. In 2000 we installed a
commercial version of video-on-demand for the Anchorage hotel market and continue to evaluate the feasibility
27
of deploying this technology in the residential market. With this service, customers can access a wide selection of
movies and other programming at any time, with digital picture quality.
The FCC reports that consolidation within the cable industry continues as cable operators acquire and trade
systems. Excluding mergers which involve the transfer and exchange of systems, twelve system transactions
occurred during the first six months of 2002 affecting over 388,000 subscribers. The average dollar value per
subscriber totaled $2,196 as compared to $4,872 per subscriber for the 36 transactions that occurred in 2001,
affecting over 17.9 million subscribers. The ten largest operators served approximately 85 percent of all U.S.
cable subscribers. In terms of one traditional economic measure, national concentration among the top MVPDs
has decreased since last year as the largest MSOs continue to become more equal in size, and it remains below the
levels reported in earlier years. DBS operators DirecTV and EchoStar rank among the five largest MVPDs in
terms of nationwide subscribership along with three cable multiple system operators. As of June 2002, more than
52 million of the nation’s cable subscribers were served by systems that are included in regional clusters.
The FCC reported that estimated 2002 total cable industry revenue reached $49.4 billion, an estimated 12.3%
increase over 2001, and that revenue per subscriber per year reached approximately $716, an increase of 11.7%
over 2001. Revenue growth in 2002 occurred primarily in the high speed Internet access, cable telephony and
interactive services category (97.6% increase), the advanced analog and digital tier category (42.9% increase), and
the pay-per-view category (15.1% increase). Revenues in the premium pay tiers category decreased 1.5%.
The escalation of programming costs continues to adversely impact the economics of cable operators.
Programming costs are reported to be the largest cost item for major system operators, and the fastest growing
operating cost item for most. Operators face constant pressure to keep rate increases at a minimum. Over the past
several years, operators have averaged annual rate increases in the 5% range; with escalating programming costs
the most often cited principal cause. While many public-interest groups and press reports note that cable rates
have increased at factors in excess of the general rate of inflation, cable rates are reported to have lagged national
inflation on a per channel basis.
The FCC reports that basic cable penetration as compared to homes passed was 66.9% at June 2002. Our overall
penetration of homes passed was 62.2% at December 31, 2002 with individual systems ranging from 51.2% to
92.4%.
In Alaska, cable television was introduced in the 1970s to provide television signals to communities with few or
no available off-air television signals and to communities with poor reception or other reception difficulties
caused by terrain interference. Since that time, as on the national level, the cable television providers in Alaska
have added non-broadcast programming.
The market for programmed video services in Alaska includes traditional broadcast television, cable television,
wireless cable, and DBS systems. Broadcast television stations including network affiliates and independent
stations serve the urban centers in Alaska. Eight, six and two broadcast stations serve Anchorage, Fairbanks and
Juneau, respectively. In addition, several smaller communities such as Bethel are served by one local television
station that is typically a PBS affiliate. Other rural communities without cable systems receive a single state
sponsored channel of television by a satellite dish and a low power transmitter.
See Part I, Item I, Business, Regulation, Franchise Authorizations and Tariffs – Cable Service for more
information.
General
We are the largest operator of cable systems in Alaska, serving approximately 136,100 residential, commercial
and government basic subscribers. Our cable television systems serve 33 communities and areas in Alaska,
including the state's three largest urban areas, Anchorage, Fairbanks, and Juneau. Our statewide cable systems
consist of approximately 2,230 miles of installed cable plant having 330 to 550 MHz of channel capacity.
28
Products
Programming services offered to our cable television systems subscribers differ by system (all information as of
December 31, 2002).
Anchorage system. The Anchorage system, which is located in the urban center for Alaska, is fully addressable
and offers a basic analog service that includes 18 channels and 2 additional analog tiers offering 33 and 6
channels. This system also carries digital service, offering enhanced picture and audio quality, over 20 digital
special interest channels, 45 channels of digital music, and over 50 channels of premium and pay-per-view
products. Pay TV services are available either individually or as part of a value package. Commercial subscribers
such as hospitals, hotels and motels are charged negotiated monthly service fees. Apartment and other multi-unit
dwelling complexes receive basic service at a negotiated bulk rate.
Fairbanks, Juneau, Kenai, and Soldotna systems. These systems offer a basic analog service with 12 to 18
channels and an additional analog tier with 34 to 42 channels. These systems also carry digital service, offering
enhanced picture and audio quality, over 18 special interest channels, 45 channels of digital music, and over 40
channels of premium and pay-per-view products.
Sitka System. This location offers an advanced analog service with a 15 channel basic service, a 37 channel
expanded basic service, five channels of premium service, four channels of pay-per-view and 32 music channels.
Other systems. We own systems in the Alaska communities and areas of Bethel, Cordova, Homer, Ketchikan,
Kodiak, Kotzebue, Palmer, Wasilla, Nome, Petersburg, Seward, Valdez, and Wrangell. These analog systems
offer a basic service with nine to 15 channels and an expanded basic service with 35 to 49 channels. Several
channels of premium service are also available in all systems. Music service is available in Ketchikan, Kodiak,
Petersburg, Valdez and Wrangell. Pay-per-view is available in Homer, Ketchikan, Kodiak, Petersburg, Seward
and Wrangell.
Facilities
Our cable television businesses are located in Anchorage, Palmer, Wasilla, Bethel, Chugiak, Cordova, Douglas,
Eagle River, Eielson AFB, Elmendorf AFB, Fairbanks, Fort Greely, Fort Richardson, Fort Wainwright, Homer,
Juneau, Kachemak, Kenai, Ketchikan, Kodiak, Kodiak Coast Guard Air Station, Kotzebue, Mount Edgecombe,
Nome, North Pole, Palmer, Petersburg, Peters Creek, Saxman, Seward, Sitka, Soldotna, Ward Cove, Wasilla, and
Wrangell Alaska. Our facilities include cable plant and head-end distribution equipment. Certain of our head-end
distribution centers are co-located with customer service, sales and administrative offices.
Customers
Our cable systems passed approximately 197,000, 192,000 and 177,000 homes at December 31, 2002, 2001 and
2000, respectively, and served approximately 136,100, 132,000 and 120,400 basic subscribers at December 31,
2002, 2001 and 2000, respectively. Revenues derived from cable television services totaled $88.7 million, $76.6
million and $67.9 million in 2002, 2001 and 2000, respectively.
Competition
The 1996 Telecom Act removed barriers to telephone company or LEC entry into the video marketplace to
facilitate competition between incumbent cable operators and telephone companies. At the time of the 1996
Telecom Act, it was expected that LECs would compete in the video delivery market and that cable operators
would provide local telephone exchange service. The FCC reports that the four largest ILECs have largely exited
the video business. A few smaller LECs continue to offer, or are preparing to offer, MVPD service over existing
telephone lines.
Our cable television systems face competition from alternative methods of receiving and distributing television
signals, including DBS, wireless and private SMATV systems, and from other sources of news, information and
29
entertainment such as off-air television broadcast programming, newspapers, movie theaters, live sporting events,
interactive computer services, Internet services and home video products, including videotape cassette and video
disks. Our cable television systems also face competition from potential overbuilds of our existing cable systems
by other cable television operators and alternative methods of receiving and distributing television signals.
We believe our greatest source of competition comes from the DBS industry. Two major companies, DirecTV
and Echostar are currently offering nationwide high-power DBS services. Due to the existing structure of satellite
orbital slots, satellite transmission power and lack of local signals, competition from DBS providers has been
limited.
In the past, the majority of Alaska DBS subscribers were required to install larger satellite dishes (generally three
to six feet in diameter) because of the weaker satellite signals currently available in northern latitudes, particularly
in communities surrounding, and north of, Fairbanks. In addition, the satellites had a relatively low altitude above
the horizon when viewed from Alaska, making their signals subject to interference from mountains, buildings and
other structures. Recent satellite placements provide Alaska and Hawaii residents with a DBS package that
requires a smaller satellite dish (typically 18 inches); however, a second larger dish is required if the subscriber
wants to receive a channel line-up similar to that provided by our cable systems. In addition to the dish size and
cost deterrents, DBS signals are subject to degradation from atmospheric conditions such as rain and snow.
We expect the potential launch of new satellites, the addition of local stations, and the changing nature of
technology and of the DBS business will result in greater satellite coverage and competition in Alaska.
Several other cable operators provide cable service in Alaska. All of these companies are relatively small, with
the largest having fewer than 1,500 subscribers. 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.
Competitive forces will be counteracted by offering expanded programming through digital services and by
providing high-speed data services. By December 31, 2003, system upgrades will be completed to make systems
reverse activated, thus creating the necessary infrastructure to offer cable modem service to 99.5% of our homes
passed. Over the succeeding two years, we expect to establish a digital platform in the majority of our systems.
These plant upgrades combined with local broadcast programming are expected to provide an attractive product in
comparison to competitive offerings. In 2002, seven-year retransmission agreements were signed with Anchorage
broadcasters. These agreements provide for the uplink/downlink of their signals into all our systems, assuring
local programming is available for the foreseeable future.
High-speed data access competition takes two primary forms: cable modem access service and DSL service. DSL
service allows Internet access to subscribers at data transmission speeds equal to cable modems over traditional
telephone lines. Numerous companies, including telephone companies, have introduced DSL service and certain
telephone companies are seeking to provide high-speed broadband services, including interactive online services,
without regard to present service boundaries and other regulatory restrictions. Companies in the lower-49 states,
including telephone companies and ISP's, have asked local, state and federal governments to mandate that cable
communications systems operators provide capacity on their cable infrastructure so that these companies and
others may deliver Internet services directly to customers over cable facilities. The FCC determined in March
2002 that cable system operators will not be required to provide such “open access” to others. See Part I, Item 1,
Business, Regulation, Franchise Authorizations and Tariffs – Cable Services for more information.
Other new technologies may become competitive with non-entertainment services that cable television systems
can offer. The FCC has authorized television broadcast stations to transmit textual and graphic information useful
to both consumers and businesses. The FCC also permits commercial and non-commercial FM stations to use
their subcarrier frequencies to provide non-broadcast services including data transmissions. The FCC established
an over-the-air interactive video and data service that will permit two-way interaction with commercial and
educational programming along with informational and data services. LECs and other common carriers also
30
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. PCS will enable license holders, including cable operators, to provide voice
and data services. We own a statewide license to provide PCS services in Alaska.
Cable television systems generally operate pursuant to franchises granted on a non-exclusive basis. The 1992
Cable Act gives local franchising authorities jurisdiction over basic cable service rates and equipment in the
absence of "effective competition," prohibits franchising authorities from unreasonably denying requests for
additional franchises and permits franchising authorities to operate cable systems. Well-financed businesses from
outside the cable industry (such as the public utilities that own certain of the poles on which cable is attached)
may become competitors for franchises or providers of competing services.
Our cable services sales efforts are primarily directed toward increasing the number of subscribers we serve,
selling bundled services, and generating incremental revenues through product and feature up-sale opportunities.
We sell our cable services through telemarketing, direct mail advertising, door-to-door selling, up-selling by our
customer contact personnel, and local media advertising.
Advances in communications technology as well as changes in the marketplace are constantly occurring. We
cannot predict the effect that ongoing or future developments might have on the telecommunications and cable
television industries or on us specifically.
Local Access Services
Industry
The FCC reported that end-user customers obtained local service by means of 167 million ILEC switched access
lines, 22 million CLEC switched access lines, and 129 million mobile wireless telephone service subscriptions.
Total CLEC switched access lines increased by 10% during the first half of 2002, from 19.7 million to 21.6
million lines.
The FCC reported that CLECs provided 11.4% of the approximately 189 million nationwide switched-access
lines in service at the end of June 2002, compared to 9.0% at the end of June 2001. The FCC further reported that
slightly over half of reported CLEC switched access lines serve residential and small business customers,
compared to over three-quarters of ILEC lines. CLECs reported 7.8% of total residential and small business
switched access lines, compared to 5.5% a year earlier.
During the first half of 2002, the FCC reported that cable telephony lines increased by 16% to 2.6 million lines,
from 2.2 million lines at the end of June 2001. The 2.6 million reported cable-telephony lines constituted about
12% of switched access lines provided by CLECs and about 1% of total switched access lines. CLECs reported
providing about 21% (a decline from 43% in December 1999) of their switched access lines by reselling the
services of other carriers and about 50% (an increase from 24% in December 1999) by means of UNE loops
leased from other carriers. The remainder of CLEC lines was provided over local loop facilities owned by the
CLECs.
Emerging from the new competitive landscape are CLECs who offer Internet access and data services to medium
and large size businesses. They obtain interconnection agreements with ILECs for DSL-qualified unbundled
network element loops. One loop, so qualified and equipped with appropriate access devices, enables the delivery
of high speed (generally less than 768 kbps but sometimes faster rates), always-connected Internet access,
LAN/WAN interconnectivity, and private line and private network circuits.
Cable telephony deployments in the US continue to expand using proprietary, circuit switched technology. The
standardized, packet (IP) technology made significant progress in 2002, however, significant deployments have
not yet occurred. In 2002, more hardware became available that is DOCSIS 1.1 qualified, which provides quality
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of service necessary for voice services. We continue to prepare for deployment of a cable telephony solution that
meets our needs and the needs of our customers.
Wireless local loop access technologies (other than fixed rate cellular telephone service), while developing for
international applications, have not yet developed a significant market presence in the United States. AT&T
Wireless' fixed wireless plan, called Project Angel – was test-marketed in the Anchorage area. Initially conceived
as AT&T's proprietary strategy for bypassing local phone carriers, industry analysts believe AT&T reconfigured it
to primarily deliver always-on high-speed Internet access at 512 kbps where the carrier lacks cable system
facilities in markets such as Anchorage. AT&T Wireless announced in October 2001 that it intended to close its
fixed wireless operations, citing the high cost of expanding a business that does not fit into the company’s core
strategy.
The telecommunications industry has been weighed down by regulatory uncertainty as a result of successive court
reversals of the FCC’s core local competition rules. These court actions have left providers with little guidance
about the network elements that will be available at regulated cost-based rates and have put at risk some current
business plans that were developed around the challenged rules. The Supreme Court of the United States, on May
13, 2002, upheld the FCC’s rules, including the important pricing rules, in its Verizon Communications Inc. et al.
v. Federal Communications Commission, decision.
General
Our local access services segment entered the local services market in Anchorage in 1997, providing services to
residential, commercial, and government users. We can access approximately 92% of Anchorage area local loops
from our collocated remote facilities and DLC installations. We can access approximately 71% of Fairbanks area
and 48% of Juneau area local loops from our collocated remote facilities and DLC installations.
Products
Our collocated remote facilities access the ILEC’s unbundled network element loops, allowing us to offer full
featured, switched-based local service products to both residential and commercial customers. In areas where we
do not have access to ILEC loop facilities, we offer service using total service resale of the ILEC’s local service in
Anchorage, and either total service resale or UNE platform in Fairbanks and Juneau.
Our package offerings are competitively priced and include popular features, such as the following.
(cid:130) Enhanced call waiting
(cid:130) Caller ID on call waiting
(cid:130) Anonymous call rejection
(cid:130) Call forward busy
(cid:130) Enhanced call waiting
(cid:130) Follow me call
(cid:130) Multi-distinctive ring
(cid:130) Selective call forwarding
(cid:130) Selective call rejection
(cid:130) Speed calling
(cid:130) Voice mail
(cid:130) Non-listed number
Intercom service forwarding
(cid:130) Caller ID
(cid:130) Free caller ID box
(cid:130) Call forwarding
(cid:130) Call forward no answer
(cid:130) Fixed call forwarding
(cid:130)
(cid:130) Per line blocking
(cid:130) Selective call acceptance
(cid:130) Selective distinctive alert
(cid:130) Three way calling
(cid:130)
Inside wire repair plan
(cid:130) Non-published number
Facilities
In Anchorage we utilize a centrally located Lucent Technologies 5ESS host switching system, have collocated six
remote facilities adjacent to or within the ILEC’s local switching offices to access unbundled loop network
elements, and have installed a DLC system adjacent to a smaller, seventh ILEC wire center for access to
unbundled loop network elements. Remote and DLC facilities are interconnected to the host switch via our
diversely routed fiber optic links. Additionally, we provided our own facilities-based services to many of
32
Anchorage’s larger business customers through further expansion and deployment of SONET fiber transmission
facilities, DLC facilities, and leased HDSL and T-1 facilities.
In Fairbanks and Juneau we employ Lucent Technologies Distinctive Remote Module switching systems (5ESS)
and have collocated DLC systems adjacent to the ILEC’s local switching office and within the ILEC’s wire center
to access unbundled loop network elements.
Customers
We had approximately 96,100, 79,200 and 62,100 local lines in service from Anchorage, Fairbanks, and Juneau,
Alaska subscribers at December 31, 2002, 2001 and 2000, respectively. We began providing local access services
in Fairbanks in 2001 and in Juneau in 2002. The 2002 line count consists of approximately 52,700 residential
access lines and 43,400 business access lines, including 7,900 Internet service provider access lines. We ended
2002 with market share gains in all market segments.
Revenues derived from local access services in 2002, 2001 and 2000 totaled $32.1 million, $25.2 million and
$20.2 million, respectively, representing approximately 8.7%, 7.1% and 6.9% of our total revenues in 2002, 2001
and 2000, respectively.
Competition
In the local access services market the 1996 Telecom Act, judicial decisions, and state legislative and regulatory
developments have increased the likelihood that barriers to local telephone competition will be 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 unbundled network elements, to establish dialing parity, to obtain access to rights-of-way and to resell
services offered by the incumbent local exchange carrier.
We have been able to obtain interconnection, access and related services from the local exchange carriers at rates
that allow us to offer competitive services. However, if we are unable to continue to obtain these services and
access at acceptable rates, our ability to offer local telephone services, and our revenues and net income, could be
materially adversely affected. To date, we have been successful in capturing a significant portion of the local
telephone market in the locations where we are offering these services.
The 1996 Telecom Act also provides ILECs with new competitive opportunities. We believe that we have certain
advantages over these companies in providing telecommunications services, including awareness by Alaskan
customers of the GCI brand-name, our facilities-based telecommunications network, and our prior experience in,
and knowledge of, the Alaskan market.
The RCA reports that there are 22 ILECs and five CLECs certified to operate in the state of Alaska. We compete
against ACS, the ILEC in Anchorage, Juneau and Fairbanks. We also compete against AT&T in the Anchorage
service area. AT&T offers local exchange service only to residential customers through total service resale.
The RCA has issued an order terminating rural exemptions for the ILECs operating in the Fairbanks and Juneau
markets and the markets served by ACS of the Northland, Inc., in Nenana, Ft. Greely, North Pole, Delta Junction,
Kenai, Soldotna, Ninilchik, Homer, Seldovia and Kodiak, Alaska . ACS has appealed these decisions. The
appeal has been argued before the Alaska Supreme court and a decision is pending. As described above, GCI has
entered the Fairbanks and Juneau markets. GCI also filed a bona fide request with ACS of the Northland, Inc, in
2001 to negotiate rates and services in order to provide competitive local access services in its markets. The RCA
approved an integrated Interconnection Agreement with ACS of the Northland, Inc. on January 31, 2003. GCI
can now apply for an amendment to our certificate and the RCA must approve such amendment before we can
begin to provide local access services in these additional service areas. We may file bona fide requests for
interconnection and applications with regulatory agencies to provide local telephone service in other markets and
in other locations in the future where we would face other competitors. You should see Part I, Item 1.
33
Regulation, Franchise Authorizations and Tariffs – Telecommunications Operations – Rural Exemption for more
information.
We expect further competition in the Anchorage, Fairbanks and Juneau marketplaces, as DSLnet has received
certification for various markets. The Company expects competition in business customer telephone access,
Internet access, DSL and private line markets.
We continue to offer local exchange services to substantially all consumers in the Anchorage, Juneau and
Fairbanks service areas, primarily through our own facilities and unbundled local loops leased from ACS.
Our local services sales efforts continue to focus on increasing the number of subscribers we serve, selling
bundled services, and generating incremental revenues through product and feature up-sale opportunities. We sell
our local services through telemarketing, direct mail advertising, up selling by our customer contact personnel,
and door-to-door selling.
You should see Part I, Item 1. Business, Regulation, Franchise Authorizations and Tariffs – Telecommunications
Operations for more information.
Internet Services
Industry
Dial-up Internet service continues to be the most widely used method to access the Internet. As of July 2001, the
FCC reported that 58% of the U.S. population had Internet access at home. As of year-end 2002, an estimated
75% of all Internet households were accessing the Internet using dial-up modems. Industry analysts project that
telephone dial-up will remain the principal means of accessing the Internet until about 2006, when it is expected
that 47% of Internet households will use dial-up access, with the remaining 53% accessing the Internet through
broadband facilities, principally through the use of cable modems.
The Internet continues to expand at a significant rate. The Internet Software Consortium reports that
approximately 171.6 million web sites were hosted at the end of January 2003, an increase of 16.5% from 147.3
million at the end of January 2002. The FCC reported that high-speed lines (those that provide services at speeds
exceeding 200 kbps in at least one direction) connecting homes and businesses to the Internet increased by 27%
during the first half of 2002, from 12.8 million to 16.2 million lines, compared to a 33% increase, from 9.6
million to 12.8 million lines, during the second half of 2001. 14.0 million of the 16.2 million total lines served
residential and small business subscribers, a 27% increase from the 11.0 million lines reported six months earlier.
The FCC further reported that of the 16.2 million high-speed lines, 10.4 million provided advanced services, i.e.,
services at speeds exceeding 200 kbps in both directions. Advanced services lines increased 41%, from 7.4
million to 10.4 million lines, during the first half of 2002. Approximately 8.7 million of the 10.4 million advanced
services lines served residential and small business subscribers.
DSL is the most significant broadband competitor to cable modem service, with an estimated 6.7 million
subscribers through December 2002. Industry analysts report that cable modem subscribers totaled an estimated
11.7 million through December 2002, an increase of 216% as compared to 3.7 million in 2000. Satellite
technologies currently have less than one percent of the market and are not expected to appreciably increase
market share over the next several years. The FCC reported that high-speed asymmetric DSL lines in service
increased by 29% during the first half of 2002, from 3.9 million to 5.1 million lines, compared to a 47% increase,
from nearly 2.7 million to 3.9 million lines, during the preceding six months. High-speed service using cable
modems increased by 30% during the first six months of 2002, from 7.1 million to 9.2 million lines. By
comparison, cable modem service increased by 36%, from nearly 5.2 million to 7.1 million lines, during the
second half of 2001.
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Cable modem Internet access has recently been able to maintain and widen its lead over DSL as the primary
means of accessing the Internet in the United States over broadband networks. Industry analysts believe that a
cable network upgrade is more efficient than is a DSL network upgrade, largely because of the individual local
loops that must be provisioned for DSL, with central office proximity a severe mitigating factor. In contrast,
cable networks are upgraded into smaller discrete nodes. Less costly and more efficient upgrades required for
cable modem usage lead to greater scalability. Analysts believe that cable operators have more incentive to
upgrade networks and have potentially higher returns due to the potential for new sources of revenue from digital
cable, telephony and other products that are made possible from such upgrades.
Industry analysts estimate that cable modems and DSL combined account for 95 percent of all business
broadband connections in the United States. Their research suggests that United States businesses are likely to
continue to adopt cable or DSL in the future and that total subscription may rise from more than 4.8 million
business subscribers in 2001 to 15 million in 2006. In 2001, approximately 71 percent of business broadband
subscribers were at-home workers. Analysts predict that at-home workers will continue to account for a
significant portion of business subscribers, particularly in the case of cable modems, where availability is greater
in residential areas.
Industry analysts believe that broadband deployment will bring valuable new services to consumers, stimulate
economic activity, improve national productivity, and advance many other objectives, such as improving
education, and advancing economic opportunities. With an estimated 75 million cable households in the United
States and an estimated 50 million of those owning a computer, broadband cable Internet access growth is
expected to continue as new advanced services are deployed.
General
Our Internet services division entered the Internet services market in 1998, providing retail services to residential,
commercial, and government users and providing wholesale carrier services to other ISPs. We were the first
provider in Anchorage to offer commercially available DSL products.
Products
We primarily offer three types of Internet access for residential use: dial-up, fixed wireless and high-speed cable
modem Internet access. Our residential high-speed cable modem Internet service offers up to 2.4 Mbps access
speeds as compared with up to 56 kbps access through standard copper wire dial-up modem access. Our fixed
wireless offers low speed 64 kbps and higher speed 256 kbps versions. We provide 24-hour customer service and
technical support via telephone or online. The entry-level cable modem service also offers free data transfer up to
five gigabytes per month and can be connected 24-hours-a-day, 365-days-a-year, allowing for real-time
information and e-mail access. Cable modems use our coaxial cable plant that provides cable television service,
instead of the traditional ILEC copper wire. Coaxial cable has a much greater carrying capacity than telephone
wire and can be used to simultaneously deliver both cable television (analog or digital) and Internet access
services.
At the end of 2002 we launched a plan to increase the speed of our entry level cable modem level service from
256 kbps to 384 kbps for new and current customers. The project was completed in January 2003. We also
adjusted the speed including data transfer for all of our cable modem packages to meet the demand for higher
speed access. Additional cable modem service packages tailored to both heavy residential and commercial
Internet users are also available.
We currently offer several Internet service packages for commercial use: dial-up access, DSL, T1 and fractional
T1 leased line, frame relay, multi-megabit and high-speed cable modem Internet access. Our business high-speed
cable modem Internet service offers access speeds ranging from 384 kbps to 2.4 Mbps, free monthly data transfers
of up to 30 gigabytes and free 24-hour customer service and technical support. Our DSL offering can support
speeds of up to 768 kbps over the same copper line used for phone service. Business services also include a
personalized web page, domain name services, and e-mail addressing.
35
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 the Conoco Phillips
Alaska and the Anchorage School District. We have hundreds of other enterprise customers, both large and
small, using this service.
Bandwidth is made available to our Internet segment through our Alaska United undersea fiber cable and our
Galaxy XR transponders as previously described. Our Internet offerings are coupled with our long-distance and
local services offerings and provide free basic Internet services if certain long-distance plans are selected. Value-
added Internet features are available for additional charges.
We provide Internet access for schools and health organizations using a platform including many of the latest
advancements in technology. Services are delivered through a locally available circuit, our existing lines, and/or
satellite earth stations.
Facilities
The Internet is an interconnected global public computer network of tens of thousands of packet-switched
networks using the Internet protocol. The Internet is effectively a network of networks routing data throughout
the world. We provide access to the Internet using a platform that includes many of the latest advancements in
technology. The physical platform is concentrated in Anchorage and is extended into many remote areas of the
state. Our Internet platform includes:
(cid:130) Circuits connecting our Anchorage facilities to multiple Internet access points in Seattle through multiple,
diversely routed networks.
(cid:130)
(cid:130)
(cid:130) Multiple routers on each end of the circuits to control the flow of data and to provide resiliency.
(cid:130) 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 fabrics for
intercommunications and broadband services (cable modem and DSL), and access servers for dial-in users.
SchoolAccess™ Internet service delivery to over 195 schools in rural Alaska and 25 schools in Montana,
New Mexico and Arizona is accomplished by three variations on primary delivery systems:
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 telecommunications 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.
In communities or remote locations where we have not extended telecommunications services,
SchoolAccess™ is provided via a dedicated (usually on premise) DAMA VSAT satellite station. The
DAMA connects to an intermediate distribution facility located in Anchorage.
(cid:130)
(cid:130)
Dedicated Internet access is delivered to a router located at the service point. Our Internet management platform
constantly monitors this router; continual communication is maintained with all of the routers in the network. The
availability and quality of service, as well as statistical information on traffic loading, are continuously monitored
for quality assurance. The management platform has the capability to remotely access routers, permitting changes
in router configuration without the need to physically be at the service point. This management platform allows
us to offer outsourced network monitoring and management services to commercial businesses. Many of the
largest commercial networks in the State of Alaska use this service.
GCI.net offers a unique combination of innovative network design and aggressive performance management. Our
Internet platform has received a certification that places it in the top one percent of all service providers
worldwide and is the only ISP in Alaska with such a designation. We operate and maintain what we believe is the
largest, most reliable, and highest performance Internet network in the state of Alaska.
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Customers
We had approximately 71,700, 69,900 and 62,500 active residential and commercial dial-up Internet subscribers
at December 31, 2002, 2001 and 2000, respectively. We had approximately 36,200, 26,500 and 16,100 active
residential and commercial cable modem Internet subscribers at December 31, 2002, 2001 and 2000, respectively.
Revenues derived from Internet services totaled $15.6 million, $12.0 million and $8.4 million, in 2002, 2001 and
2000, respectively, representing approximately 4.2%, 3.4% and 2.9% of our total revenues in 2002, 2001 and
2000, respectively.
Our Internet services sales efforts are primarily directed toward increasing the number of subscribers we serve,
selling bundled services, and generating incremental revenues through product and feature upsale opportunities.
We sell our Internet services through telemarketing, direct mail advertising, door-to-door selling, up-selling by
our customer contact and technical support personnel, and local media advertising.
Competition
The Internet industry is highly competitive, rapidly evolving and subject to constant technological change.
Competition is based upon price and pricing plans, service packages, the types of services offered, the
technologies used, customer service, billing services, perceived quality, reliability and availability. As of
December 31, 2002, we competed with more than seven Alaska based Internet providers, and competed with
other domestic, non-Alaska based providers that provide national service coverage. Several of the providers have
substantially greater financial, technical and marketing resources than we do.
With respect to our high-speed cable modem service, ACS and other Alaska telephone service providers are
providing competitive high-speed DSL services. Direct broadcast satellite providers and others could 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.
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 U.S. Forest Service, and the National Park Service are required by the National
Environmental Policy Act of 1969 to consider the environmental impact before the commencement of facility
construction. We believe that compliance with such regulations has no material effect on our consolidated
operations. The principal effect of our facilities on the environment would be in the form of construction of
facilities and networks at various locations in Alaska and between Alaska and Seattle Washington. 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 project consists, in part, of deploying land-based and undersea fiber optic cable facilities
between Anchorage, Whittier, Valdez, and Juneau, Alaska, and Seattle, Washington. The engineered route passes
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 US Army Corps of Engineers, The National Marine Fisheries
Service, US Fish & Wildlife, US Coast Guard, National Oceanic and Atmospheric Administration, Alaska
37
Department of Natural Resources, and the Alaska Office of the Governor - Governmental Coordination. We are
unaware of any violations of federal, state or local regulations or permits pertaining to preservation or protection
of the environment.
In the course of operating the cable television and telecommunications systems, we have used various materials
defined as hazardous by applicable governmental regulations. These materials have been used for insect
repellent, locate paint and pole treatment, and as heating fuel, transformer oil, cable cleaner, batteries, diesel fuel,
and in various other ways in the operation of those systems. We do not believe that these materials, when used in
accordance with manufacturer instructions, pose an unreasonable hazard to those who use them or to the
environment.
Patents, Trademarks, Licenses, Certificates of Public Convenience and Necessity, and Military
Franchises
We do not hold patents, franchises or concessions for telecommunications services or local access services. We
do hold registered service marks for the Digistar™ logo and letters GCI™, and for the terms SchoolAccess™,
Free Fridays for Business™ and Unlimited Weekends™. The Communications Act of 1934 gives the FCC the
authority to license and regulate the use of the electromagnetic spectrum for radio communication. We hold
licenses through our long-distance services industry segment for our satellite and microwave transmission
facilities for provision of long-distance services.
We acquired a license for use of a 30-MHz block of spectrum for providing PCS services in Alaska. We are
required by the FCC to provide adequate broadband PCS service to at least two-thirds of the population in our
licensed areas within ten years of being licensed. The PCS license has an initial duration of 10 years. At the end
of the license period, a renewal application must be filed. We believe renewal will generally be granted on a
routine basis upon showing of compliance with FCC regulations and continuing service to the public. Licenses
may be revoked and license renewal applications may be denied for cause. We expect to renew the PCS license
for an additional 10-year term under FCC rules.
We acquired a LMDS license in 1998 for use of a 150-MHz block of spectrum in the 28 GHz Ka-band for
providing wireless services. The LMDS license has an initial duration of 10 years. Within 10 years, licensees
will be required to provide 'substantial service' in their service regions. Our operations may require additional
licenses in the future.
Earth stations are licensed generally for 10 years. The FCC also issues a single blanket license for a large number
of technically identical earth stations (e.g., VSATs).
Applications for transfer of control of 15 certificates of public convenience and necessity held by the acquired
cable companies were approved in an RCA order dated September 23, 1996, with transfers to be effective on
October 31, 1996. Such transfer of control allowed us to take control and operate the cable systems of the
acquired cable companies located in Alaska. The approval of the transfer of these 15 certificates of public
convenience and necessity is not required under federal law, with one area of limited exception. The cable
companies operate in part using several radio-band frequencies licensed through the FCC. These certificates were
transferred to us before October 31, 1996.
Application for transfer of control of two certificates of public convenience and necessity associated with the
acquired GC Cablevision, Inc. assets and the Rogers American Cablesystems, Inc. (“Rogers”) cable companies
were approved in RCA orders in 2001. The certificates were transferred to us following closing of the
transactions.
We obtained consent of the military commanders at the military bases serviced by the acquired cable systems to
the assignment of the respective franchises for those bases.
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Regulation, Franchise Authorizations and Tariffs
The following summary of regulatory developments and legislation does not purport to describe all present and
proposed federal, state, and local regulation and legislation affecting our businesses. Other existing federal and
state regulations are currently the subject of judicial proceedings, legislative hearings and administrative
proposals that could change, in varying degrees, the manner in which these industries operate. We cannot predict
at this time the outcome of these proceedings and legislation, their impact on the industries in which we operate,
or their impact on us.
Every two years, the FCC is required (1) to review its rules governing telecommunications service providers and
broadcast ownership, (2) to determine whether economic competition has made those rules unnecessary in the
public interest, and (3) to modify or repeal any such regulations. On September 18, 2000, the FCC issued its Staff
Report summarizing extensive review of the rules and recommending that no further changes in the broadcast and
crossownership rules were warranted at that time. On December 29, 2000, the FCC adopted its 1998 Biennial
Review Regulatory Report and left ownership rules unchanged. This report stated that the FCC would institute a
proceeding on modification of the newspaper/broadcast crossownership rule. That occurred on September 13,
2001, in a Notice of Proposed Rulemaking to consider the rule's fate. The next Biennial Review began in 2001.
Before taking action on this proceeding, however, the FCC released a notice of proposed rulemaking on
September 23, 2002, to conduct a comprehensive Biennial Review of the FCC’s media ownership policies (the
“third Biennial Review”). The 2001 Biennial Review was consolidated with the third Biennial Review. In
connection with the third Biennial Review, the FCC also commissioned and released a series of empirical studies
examining the current media marketplace. Comments were filed on January 2, 2003, and replies were filed on
February 3, 2003.
Telecommunications Operations
General. We are subject to regulation by the FCC and by the RCA as a non-dominant provider of long-distance
services. We file tariffs with the FCC for interstate access and operator services, and limited international long-
distance services, subject to the FCC’s mandatory detariffing policies, and with the RCA for intrastate service.
Such tariffs routinely become effective without intervention by the FCC, RCA or other third parties since we are a
non-dominant carrier. Military franchise requirements also affect our ability to provide telecommunications and
cable television services to military bases.
Our success in the local telephone market depends on our continued ability to obtain interconnection, access and
related services on terms that are just and reasonable and that are based on the cost of providing these services.
Our local telephone services business faces the risk of the impact of implementing current regulations and
legislation, unfavorable changes in regulation or legislation, or the introduction of new regulations. Our ability to
enter into the local telephone market depends on our negotiation or arbitration with ILECs to allow
interconnection to the carrier’s existing local telephone network, to allow the purchase, at cost-based rates, of
access to unbundled network elements, to establish dialing parity, to obtain access to rights-of-way and to resell
services offered by the local exchange carrier. We have in the past been successful in these arbitration
proceedings as to the material terms, including prices and technical and competitive issues. Future arbitration
proceedings with respect to new or existing markets could result in a change in our cost of serving these markets
via ILEC facilities or via wholesale offerings.
The FCC, the courts of the state of Alaska, the Federal District Court of Alaska and the Ninth Circuit Court of
Appeals also have before them several appeals by one of our competitors relating to the interpretation by the
RCA, of various provisions of the 1996 Telecom Act. These appeals include the provisions and FCC regulations
dealing with the pricing of unbundled network elements, including the results of arbitration proceedings before
the RCA and the decision of the RCA to remove an exemption from certain of its rules available to ACS known
as the “rural exemption.” We have been largely successful in the appeals of these arbitration proceedings as to the
material terms, including prices and technical issues, through the current stages. These appeals could also result
in a change in our costs of serving new and existing markets via ILEC facilities or via wholesale offerings.
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We have recently qualified under FCC regulations as an “eligible telecommunications carrier” (“ETC”), with
respect to our provision of local telephone service in Fairbanks and Juneau. ETCs are entitled to receive a
subsidy paid by the Universal Service Fund. If we do not continue to qualify for this status in Fairbanks and
Juneau or if we do not qualify for this status in rural areas where we propose to offer new services, we would not
receive this subsidy and our net cost of providing local telephone services in these areas could be materially
adversely impacted.
We received approval from the RCA in February 1997 permitting us to provide local access services throughout
ACS’s existing Anchorage service area, and in July 1999 permitting us to provide local access services in ACS’s
existing service areas in Fairbanks, Juneau, Ft. Wainwright and Eielson Air Force Base service areas. We filed a
bona fide request with the ILEC, ACS of the Northland, Inc., in 2001 to negotiate rates and services in order to
provide competitive local access services in Nenana, Ft. Greely, North Pole, Delta Junction, Kenai, Soldotna,
Ninilchik, Homer, Seldovia and Kodiak, Alaska. The request has been negotiated in part, and arbitrated in part
before the RCA under the terms of the 1996 Telecom Act and an integrated Interconnection Agreement has been
approved. GCI can now apply for an amendment to our certificate and the RCA must approve such amendment
before we can begin to provide local access services in these additional service areas.
The 1996 Telecom Act preempts state statutes and regulations that restrict the provision of competitive local
telecommunications services. State commissions can, however, impose reasonable terms and conditions upon the
provision of telecommunications service within their respective states. Because we are authorized to offer local
access services, we are regulated as a CLEC by the RCA. In addition, we will be subject to other regulatory
requirements, including certain requirements imposed by the 1996 Telecom Act on all LECs, which requirements
include permitting resale of LEC services, local number portability, dialing parity, and reciprocal compensation.
As a PCS and LMDS licensee, we are subject to regulation by the FCC, and must comply with certain build-out
and other conditions of the license, as well as with the FCC's regulations governing the PCS and LMDS services.
On a more limited basis, we may be subject to certain regulatory oversight by the RCA (e.g., in the areas of
consumer protection), although states are not permitted to regulate the rates of PCS, LMDS and other commercial
wireless service providers. PCS and LMDS licensees may also be subject to regulatory requirements of local
jurisdictions pertaining to, among other things, the location of tower facilities.
1996 Telecom Act and Related Rulings. A key industry development was passage of the 1996 Telecom Act. The
Act was intended by Congress to open up the marketplace to competition and has had a dramatic impact on the
telecommunications industry. The intent of the legislation was to break down the barriers that have prevented
three groups of companies, LECs, including RBOCs, long-distance carriers, and cable TV operators, from
competing head-to-head with each other. The Act expressly prohibits any legal barriers to competition in
intrastate or interstate communications service under state and local laws, and empowers the FCC, after notice
and an opportunity for comment, to preempt the enforcement of any statute, regulation or legal requirement that
prohibits, or has the effect of prohibiting, the ability of any entity to provide any intrastate or interstate
telecommunications service.
The Act requires incumbent LECs to let new competitors into their business. It also requires incumbent LECs to
open up their networks to ensure that new market entrants have a fair chance of competing. The bulk of the
legislation is devoted to establishing the terms under which incumbent LECs must open up their networks.
The FCC’s Wireline Competition Bureau (previously known as the Common Carrier Bureau) has focused in
recent years on adopting market-opening and universal service rules for the local exchange and long distance
markets to provide meaningful opportunities for competition. The Wireline Competition Bureau has also focused
on review of applications by BOCs to provide long distance service as well as review of telecommunications
company mergers. In addition, they continue to consider regulatory reforms that could occur as competition in
the provision of telecommunications services develops.
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Enactment of the 1996 Telecom Act immediately affected local exchange service markets by requiring states to
authorize local exchange service competition. Competitors, including resellers, are able to market new bundled
service packages to attract customers. Over the long term, the requirement that incumbent LECs unbundle access
to their networks may lead to increased price competition. Local exchange service competition has not yet
occurred in all markets on a national basis because interconnection arrangements are not yet in place in many
areas.
The 1996 Telecom Act requires the FCC to establish rules and regulations to implement its local competition
provisions. In August 1996, the FCC issued rules governing interconnection, resale, unbundled network
elements, the pricing of those facilities and services, and the negotiation and arbitration procedures that would be
utilized by states to implement those requirements. These rules rely on state public utilities commissions to
develop the specific rates and procedures applicable to particular states within the framework prescribed by the
FCC. These rules were vacated in part by a July 1997 ruling of the United States Court of Appeals for the Eighth
Circuit. On January 25, 1999, the United States Supreme Court issued an opinion upholding the authority of the
FCC to establish rules, including pricing rules, to implement statutory provisions governing both interstate and
intrastate services under the 1996 Telecom Act and remanded the proceeding back to the Eighth Circuit for
further proceedings. The Supreme Court also upheld rules allowing carriers to select provisions from among
different interconnection agreements approved by state commissions for the carriers' own agreements and a rule
allowing carriers to obtain combinations of unbundled network elements. On remand, the Eighth Circuit
overturned various interconnection and pricing portions of the FCC regulations under the 1996 Telecom Act, but
stayed the application of its pricing decision pending review by the Supreme Court of the United States. On May
13, 2002, the Supreme Court issued an opinion upholding the FCC’s pricing methodology and the requirement for
ILECs to combine elements of their networks at the request of CLECs who cannot combine the elements
themselves.
The 1996 Telecom Act provides that registered utility holding companies and subsidiaries may provide
telecommunications services, including cable television, notwithstanding the Public Utility Holding Company
Act. Electric utilities must establish separate subsidiaries, known as "exempt telecommunications companies" and
must apply to the FCC for operating authority. Like telephone companies, electric utilities have substantial
resources at their disposal, and could be formidable competitors to traditional cable systems. Several such utilities
have been granted broad authority by the FCC to engage in activities that could include the provision of video
programming.
A number of LECs, long-distance companies and others have appealed some or all of the FCC's orders. The
effective date of the orders generally has not been delayed, but appeals can be expected to take a year or more to
conclude. Some BOCs have also challenged the 1996 Telecom Act restrictions on their entry into long distance
markets as unconstitutional. We are unable to predict the outcome of such rulemakings or litigation or the effect
(financial or otherwise) of the 1996 Telecom Act and the rulemakings on us. The BOCs continue to challenge the
substance of the FCC rules, arguing that the rules do not allow them to fully recover the money they spent
building their networks.
Critics are becoming increasingly vocal asking Congress to modify if not altogether rework the 1996 Telecom
Act, citing a lack of competition in the local phone and broadband sectors. There is a lack of consensus on what
changes are needed, however, or who is to blame for the Act's perceived failures. The strongest momentum
appears to be in support of loosening regulations on ILECs so they can better compete in broadband, a move
CLECs say could diminish local phone competition.
Rural Exemption. ACS, through subsidiary companies, provides local telephone services in Fairbanks and
Juneau, Alaska. The ACS subsidiaries are classified as Rural Telephone Companies under the 1996 Telecom Act,
which entitles them to an exemption of certain material interconnection terms of the 1996 Telecom Act, until and
unless such “rural exemption” is examined and not continued by the RCA. We requested that continuation of the
rural exemption of the ACS subsidiaries relating to the Fairbanks and Juneau markets be examined. In January
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1998, the APUC denied our request to terminate the rural exemption. The basis of the APUC’s decision was
primarily that various rulemaking proceedings (including universal service and access charge reform) must be
completed before the exemption would be revoked. Those rulemaking proceedings have been largely completed.
On March 4, 1999, an Alaska Superior Court Judge determined that the APUC erred in reaching its decision to
deny our request to provide full local telephone service in Fairbanks and Juneau, Alaska. This service would be
provided in competition against the existing monopoly providers. Among other things, the Court instructed the
APUC to correctly assign the burden of proof to the ILECs rather than us, as a requesting CLEC, and to decide on
our requests to provide service in Fairbanks and Juneau based on criteria established in the 1996 Telecom Act.
The Court stated “this must be accomplished cognizant of the intent of the 1996 Telecom Act to promote
competition in the local market.” The Court remanded the case back to the APUC for proceedings leading to their
ruling.
On July 1, 1999, the APUC ruled that the rural exemptions from local competition for the ILECs operating in
Juneau, Fairbanks and North Pole would not be continued, which allowed us to negotiate for unbundled elements
for the provision of competitive local service. ACS requested reconsideration of this decision and on October 11,
1999, the RCA issued an order terminating rural exemptions for the ILECs operating in the Fairbanks and Juneau
markets. ACS has appealed these decisions. The appeal presently is before the Alaska Supreme Court.
On February 11, 2003, the Alaska Supreme Court heard oral argument. One of the principal issues in dispute
concerns the assignment of the burden of proof. In accordance with instructions from the Alaska Superior Court,
the APUC assigned the burden to ACS at the remand proceeding. At the oral argument, several Justices
expressed concern with the assignment of the burden. At this time, we cannot reasonably predict what the
outcome of the case will be or even what relief the Court might order if it were to find that the burden of proof
was improperly assigned to ACS. An adverse decision from the Court, however, has the potential to disrupt our
ability to provide service to our Fairbanks and Juneau customers over our facilities. We expect a decision from
the Court within six months from the date of oral argument. In the end, we are confident that competition will be
allowed to continue in Juneau and Fairbanks.
On the basis of the rural exemption decision, we have arbitrated interconnection agreements with ACS for
unbundled network elements for the provisioning of competitive local assess services in Juneau and Fairbanks.
The RCA approved these interconnection agreements in October 2000. ACS has sought judicial review of these
decisions.
Internet Service Providers Regulated as Telecommunications Carriers. The FCC affirmed in a report adopted on
April 10, 1998, that Internet service providers would not be subject to regulation as telecommunications carriers
under the 1996 Telecom Act. They thus will not be subject to universal service subsidies and other regulations.
Further, in August 1998, the FCC proposed new rules that would allow ILECs to provide their own DSL services
through separate affiliates that are not subject to ILEC regulation. On November 18, 1999, the FCC decided to
require ILECs to share telephone lines with DSL providers, an action that may foster competition by allowing
competitors to offer DSL services without their customers having to lease a second telephone line. In a public
meeting on February 20, 2003, the FCC indicated that it was eliminating the line sharing requirement by majority
vote; however, the text of that decision has not been issued, so it is not possible to determine the scope of the
decision at this time. We do not rely on line sharing in the provision of any of our services.
Access Fees. The FCC regulates the fees that local telephone companies charge long distance companies for
access to their local networks. In 2001, the FCC adopted a plan to restructure access charges for rate-of-return
regulated carriers, which has the effect of shifting certain charges from IXCs to end users. The FCC is continuing
to monitor the access charge regime and could consider other proposals that would restructure and could reduce
access charges. Changes in the access charge structure could fundamentally change the economics of some
aspects of our business.
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Access to Unbundled Network Elements. The Supreme Court vacated an FCC rule setting forth the specific
unbundled network elements that ILECs must make available, finding that the FCC had failed to apply the
appropriate statutory standard. On November 5, 1999, the FCC responded to the Court's decision by issuing a
decision that maintains competitors' access to a wide variety of unbundled network elements (the “UNE Remand
Order”). Six of the seven unbundled elements the FCC had originally required carriers to provide in its 1996
order implementing the 1996 Telecom Act remain available to competitors. These elements are loops, including
loops used to provide high-capacity and advanced telecommunications services; network interface devices; local
circuit switching, subject to restrictions in major urban markets; dedicated and shared transport; signaling and
call-related databases; and operations support systems. The FCC removed access to operator and directory
assistance service from the list of available unbundled network elements. In addition, the FCC added to its list
certain unbundled network elements that were not at issue in 1996. These elements include subloops, or portions
of loops, and dark fiber loops and transport. The FCC later required ILECs to unbundle facilities used to provide
DSL service. The FCC did not decide, but sought additional information on, the question of whether carriers may
combine certain unbundled network elements to provide special access services to compete with those provided
by the ILECs. In addition, on December 20, 2001, the FCC initiated its first triennial review of the rules
governing unbundled network elements, to consider the circumstances under which ILECs are required to make
parts of their network available to CLECs subject to the terms of the 1996 Telecom Act. While that proceeding
was pending, the D.C. Circuit issued its decision in response to appeals of the UNE Remand Order. The D.C.
Circuit remanded the FCC’s decision on unbundled network elements and vacated and remanded the FCC’s
decision on unbundling facilities used to provide DSL service. The FCC incorporated its resulting remand
proceeding into the pending Triennial Review. On February 20, 2003, the FCC adopted an order in the Triennial
Review proceeding in a public meeting, in which the FCC reported changes to the rules governing unbundled
network elements; however, the text of the order has not yet been released.
The ability to obtain unbundled network elements is an important element of our local access services business,
and we believe that the FCC's actions in this area have generally been positive. However, we cannot predict the
extent to which the existing rules will be sustained in the face of additional legal action and the scope of the rules
that are yet to be determined by the FCC.
Recurring and non-recurring charges for telephone lines and other unbundled network elements may increase
based on the rates proposed by the ILECs and approved by the RCA from time to time, which could have an
adverse effect on the results of our operations. We are currently involved in arbitration to revise the
interconnection rates and the terms in the existing interconnection agreement with ACS for the Anchorage service
area. The cost-based methodology for determining these rates remains subject to the FCC’s continuing
rulemaking authority, and future regulatory changes could adversely affect our operations.
Universal Service. In 1997, the FCC issued important decisions on universal service establishing new funding
mechanisms for high-cost, low-income service areas to ensure that certain subscribers living in rural and high-cost
areas, as well as certain low-income subscribers, continue to have access to telecommunications and information
services at prices reasonably comparable to those charged for similar services in urban areas.
These mechanisms also are meant to foster the provision of advanced communications services to schools,
libraries and rural health-care facilities. Under the rules adopted by the FCC to implement these requirements, we
and all other telecommunications providers are required to contribute to a fund to support universal service. The
amount that we contribute to the federal universal service subsidy will be based on our share of specified defined
telecommunications end-user revenues. On December 13, 2002, the FCC revised the contribution methodology
on an interim basis and required carriers to calculate contributions based on projected, rather than historic defined
telecommunications end-user revenues. The FCC also issued a Second Further Notice of Proposed Rulemaking
to consider adopting a revised methodology for determining carrier contributions to the universal service fund.
Because of the pending change in methodology, we are uncertain about how the contribution will be set in the
future.
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The 1997 order also established significant discounts to be provided to eligible schools and libraries for all
telecommunications services, internal connections and Internet access. It also established support for rural health
care providers so that they may pay rates comparable to those that urban health care providers pay for similar
services. The FCC estimates that first quarter 2003 net costs to be funded out of the Universal Service Fund will
total approximately $1.5 billion. The fund administrator, based on their interstate end-user revenues, assesses
local and long distance carriers’ contributions to the education and health care funds. The first quarter 2003
contribution factor is 0.072805. We contribute to the funds and are allowed to recover our contributions through
increased interstate charges.
Local Regulation. We may be required to obtain local permits for street opening and construction permits to
install and expand fiber optic networks. Local zoning authorities often regulate our use of towers for microwave
and other telecommunications sites. We also are subject to general regulations concerning building codes and
local licensing. The 1996 Telecom Act requires that fees charged to telecommunications 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.
Reciprocal Compensation. The FCC had determined that calls to ISPs within a caller's local calling area were
non-local. To support this conclusion, the FCC found that calls to ISPs are predominately interstate in nature
because the calls ultimately extend beyond the ISP to websites around the world. However, in 2000 the D.C.
Circuit Court rejected the FCC's analysis and found that the “mere fact that the ISP originates further
telecommunications does not imply that the original telecommunication does not ‘terminate' at the ISP.”
Accordingly, the D.C. Circuit Court vacated and remanded the FCC's ISP-Bound Traffic Order.
The FCC, in response by its April 27, 2001 Order on Remand and Report and Order, (“ISP Remand Order”),
explained why the reciprocal compensation requirements of Section 251(b)(5) of the 1996 Telecom Act do not
apply to ISP-bound traffic. The FCC concluded that section 251(b)(5) is not limited solely to local traffic, but
rather applies to all “telecommunications” traffic, except the categories specifically enumerated in section 251(g).
The FCC concluded that ISP-bound traffic falls within one of the section 251(g) exceptions - “information
access” - and is thus exempt from the section 251(b)(5) reciprocal compensation requirements. In order to retain
jurisdiction over ISP-bound traffic, the FCC also found that such traffic is interstate in nature.
The FCC in its ISP Remand Order established a new “hybrid” interim mechanism for intercarrier compensation of
ISP-bound traffic that “serves to limit, if not end, the opportunity for regulatory arbitrage, while avoiding a
market-disruptive ‘flash-cut’ to a pure bill and keep regime.”
The FCC also held that in cases where carriers are not exchanging traffic pursuant to interconnection agreements
before the adoption of the ISP Remand Order, such carriers would be required to exchange ISP-bound traffic on a
bill and keep basis during the interim period. However, the FCC stated that the ISP Remand Order “does not alter
existing contractual obligations, except to the extent that parties are entitled to invoke contractual change-of-law
provisions.” Additionally, the FCC held that state commissions would no longer have authority to address ISP-
bound traffic issues. On May 3, 2002, the D.C. Circuit vacated the FCC’s decision, finding fault with the FCC’s
reliance on section 251(g); however, the D.C. Circuit did not vacate the ISP Remand Order. The FCC currently
has a proceeding pending to consider issues of intercarrier compensation, including the delivery of ISP-bound
traffic, in CC Docket No. 01-92.
Cable Services Operations
General. 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. In
particular, FCC regulations limit our ability to set and increase rates for our basic cable television service package
and for the provision of cable television-related equipment. 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 permitted
44
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, basic cable rates in Juneau are the only rates in Alaska subject to regulation by
the local franchising authority, and the rates in Juneau were reviewed and approved by the RCA in October 2000.
In addition, the FCC has recently adopted rules that will require cable operators to carry the digital signals of
broadcast television stations. However, the FCC has tentatively decided that cable operators should not be
required to carry both the analog and digital services of broadcast television stations while broadcasters are
transitioning from analog to digital transmission. Carrying both the analog and digital services of broadcast
television stations would consume additional cable capacity. As a result, a requirement to carry both analog and
digital services of broadcast television stations could require the removal of popular programming services with
materially adverse results for cable operators, including us. Should the FCC mandate dual carriage, we will carry
the broadcast signals in both analog and digital formats.
Principal responsibility for implementing the policies of the 1984 and 1992 Cable Acts, and the 1996 Telecom
Act is allocated between the FCC and state or local franchising authorities. The FCC and state regulatory
agencies are required to conduct numerous rulemaking and regulatory proceedings to implement the 1996
Telecom Act, and such proceedings may materially affect the cable industry.
The FCC has the authority to enforce its regulations through the imposition of substantial fines, the issuance of
cease and desist orders and/or the imposition of other administrative sanctions, such as the revocation of FCC
licenses needed to operate certain transmission facilities used in connection with cable operations. The 1996
Telecom Act removed barriers to competition in the cable television market as well as the local telephone market.
Among other things, it also reduced the scope of cable rate regulation and encourages additional competition in
the video programming industry by allowing local telephone companies to provide video programming in their
own telephone service areas.
The 1996 Telecom Act required the FCC to undertake a number of rulemakings. Moreover, Congress and the
FCC have frequently revisited the subject of cable regulation. Future legislative and regulatory changes could
adversely affect our operations, and there have been calls in Congress and at the FCC to maintain or even tighten
cable regulation in the absence of widespread effective competition.
Subscriber Rates. The 1992 Cable Act authorized rate regulation for cable communications services and
equipment in communities that are not subject to “effective competition,” as defined by federal law, which limited
the ability of cable companies to increase subscriber fees. Most cable communications systems are now subject to
rate regulation by local officials for basic cable service, which typically contains local broadcast stations and
public, educational, and government access channels. Such local regulation is subject to the oversight of the FCC,
which has prescribed detailed criteria for such rate regulation. Before a local franchising authority begins basic
service rate regulation, it must certify to the FCC that it will follow applicable federal rules. In Alaska, the local
franchising authority certified to regulate basic cable rates is the RCA. Under state law, however, the cable
television service is exempt from regulation unless subscribers petition the state commission for regulation under
the procedures set forth in AS 42.05.712. At present, the only community where regulation of the basic rate
occurs is in Juneau.
The 1992 Cable Act also requires the FCC to resolve complaints about rates for Cable Programming Service
(“CPS”) tiers (other than programming offered on a per channel or per program basis, which programming is not
subject to rate regulation) and to reduce any such rates found to be unreasonable. The 1996 Telecom Act
eliminates the right of individuals to file CPS tier rate complaints with the FCC and requires the FCC to issue a
final order within 90 days after receipt of CPS tier rate complaints filed by any franchising authority. The 1992
Cable Act limits the ability of cable television systems to raise rates for basic and certain cable programming
services (collectively, the “Regulated Services”).
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Rate regulation of non-basic cable programming service tiers ended after March 31, 1999. The 1996 Telecom Act
also modifies the uniform rate provision of the 1992 Cable Act by prohibiting regulation of non-predatory bulk
discount rates offered to subscribers in commercial and residential developments and permits regulated equipment
rates to be computed by aggregating costs of broad categories of equipment at the franchise, system, regional or
company level. We believe elimination of the cable programming service tier regulation affords us greater pricing
flexibility.
FCC regulations govern rates that may be charged to subscribers for Regulated Services. The FCC uses a
benchmark methodology as the principal method of regulating rates for Regulated Services. Cable operators are
also permitted to justify rates using a cost-of-service methodology, which contains a rebuttable presumption of an
industry-wide 11.25% rate of return on an operator's allowable rate base. Cost-of-service regulation is a
traditional form of rate regulation, under which a company is allowed to recover its costs of providing the
regulated service, plus a reasonable profit. Franchising authorities are empowered to regulate the rates charged
for monthly basic service, for additional outlets and for the installation, lease and sale of equipment used by
subscribers to receive the basic cable service tier, such as converter boxes and remote control units. The FCC's
rules require franchising authorities to regulate these rates based on actual cost plus a reasonable profit, as defined
by the FCC. Cable operators required to reduce rates may also be required to refund overcharges with interest.
The FCC has also adopted comprehensive and restrictive regulations allowing operators to modify their regulated
rates on a quarterly or annual basis using various methodologies that account for changes in the number of
regulated channels, inflation and increases in certain external costs, such as franchise and other governmental
fees, copyright and retransmission consent fees, taxes, programming fees and franchise-related obligations. We
cannot predict whether the FCC will modify these “going forward” regulations in the future.
Anti-Buy Through Provisions. The 1992 Cable Act requires cable systems to permit subscribers to purchase video
programming offered by the operator on a per channel or a per program basis without the necessity of subscribing
to any tier of service, other than the basic cable service tier, unless the system's lack of addressable converter
boxes or other technological limitations does not permit it to do so. The statutory exemption for cable systems
that do not have the technological capability to offer programming in the manner required by the statute expired
in December 2002. Our systems comply with these anti-buy through provisions.
Cable Entry into Telecommunications. The 1996 Telecom Act creates a more favorable environment for us to
provide telecommunications services beyond traditional video delivery. It provides that no state or local laws or
regulations may prohibit or have the effect of prohibiting any entity from providing any interstate or intrastate
telecommunications service. A cable operator is authorized under the 1996 Telecom Act to provide
telecommunications services without obtaining a separate local franchise. States are authorized, however, to
impose “competitively neutral” requirements regarding universal service, public safety and welfare, service
quality, and consumer protection. State and local governments also retain their authority to manage the public
rights-of-way and may require reasonable, competitively neutral compensation for management of the public
rights-of-way when cable operators provide telecommunications service.
Cable System Delivery of Internet Service. Although there is at present no significant federal regulation of cable
system delivery of Internet services, and the FCC has issued several reports finding no immediate need to impose
such regulation, this situation may change as cable systems expand their broadband delivery of Internet services.
In particular, proposals have been advanced at the FCC and Congress that would require cable operators to
provide access to unaffiliated Internet service providers and online service providers. The FCC rejected a petition
by certain Internet service providers attempting to use existing modes of access that are commercially leased to
gain access to cable system delivery. Some states and local franchising authorities are considering the imposition
of mandatory Internet access requirements as part of cable franchise renewals or transfers and a few local
jurisdictions have adopted these requirements. The Federal Trade Commission and the FCC recently imposed
certain "open-access" requirements on Time Warner and AOL in connection with their merger, but those
requirements are not applicable to other cable operators.
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In June 2000, the Federal Court of Appeals for the Ninth Circuit rejected an attempt by the City of Portland,
Oregon to impose mandatory Internet access requirements on the local cable operator. In reversing a contrary
ruling by the lower court, the Ninth Circuit court held that Internet service was not a cable service, and therefore
could not be subject to local cable franchising. At the same time, the Court suggested that at least the transport
component of broadband Internet service could be subject to regulation as a “telecommunications” service.
Although regulation of this form of telecommunications service would presumably be reserved for the FCC
(which has so far resisted requests for active regulation), some states may argue that they are entitled to impose
“open-access” requirements pursuant to their authority over intrastate telecommunications. In addition, some local
governments may argue that a cable operator must secure a local telecommunications franchise before providing
Internet service.
In response to the Ninth Circuit decision, the FCC has initiated a new proceeding to determine what regulatory
treatment, if any, should be accorded to cable modem service and the cable modem platform used in providing
this service. More specifically, the FCC notice seeks comment on the parameters the Commission should use in
determining the appropriate level of access to cable networks for the provision of high-speed data services. The
Ninth Circuit decision is the leading case on cable-delivered Internet service at this point, but the Federal District
Court for the Eastern District of Virginia reached a similar result in a May 2000 ruling, concluding that broadband
Internet service was a cable service, but that multiple provisions of the 1996 Telecom Act preempted local
regulation. A Federal district court in Florida recently addressed a similar “open-access” requirement in a local
franchise and struck down the requirement as unconstitutional. There are other instances where “open-access”
requirements have been imposed and judicial challenges are pending.
On March 14, 2002, the FCC took steps toward ensuring a light regulatory touch on broadband services delivered
through the use of cable facilities (such as our cable modem services). In a 3-1 vote, the FCC defined high-speed
Internet over cable as an “information service” not subject to local cable-franchise fees, like cable service is, or
any explicit requirements for “open access,” as telecommunications service is. The “information service”
designation for cable broadband reportedly sends a strong signal that cable-Internet services will be able to
continue to develop in a business environment that favors competition over regulation. The FCC traditionally
hasn't regulated information services. Industry analysts believe the policy of regulatory restraint is particularly
appropriate, given the strong competition among cable, satellite and digital-subscriber-line service via telephone
lines.
If regulators are allowed to impose Internet access requirements on cable operators, it could burden the capacity
of cable systems and complicate our own plans for providing expanded Internet access services. These access
obligations could adversely affect our profitability.
LEC Ownership of Cable Systems. The 1996 Telecom Act made far-reaching changes in the regulation of LECs
that provide cable services. The 1996 Telecom Act eliminated federal legal barriers to competition in the local
telephone and cable communications businesses, preempted legal barriers to competition that previously existed
in state and local laws and regulations, and set basic standards for relationships between telecommunications
providers. The 1996 Telecom Act eliminated the statutory telephone company/cable television cross-ownership
prohibition, thereby allowing LECs to offer video services in their telephone service areas. LECs may provide
service as traditional cable operators with local franchises or they may opt to provide their programming over
unfranchised “open video systems,” subject to certain conditions, including, but not limited to, setting aside a
portion of their channel capacity for use by unaffiliated program distributors on a non-discriminatory basis. The
1996 Telecom Act generally limits acquisitions and prohibits certain joint ventures between LECs and cable
operators in the same market.
A federal appellate court overturned various parts of the FCC's open video rules, including the FCC's preemption
of local franchising requirements for open video operators. The FCC has modified its open video rules to comply
with the federal court’s decision. It is unclear what effect this ruling will have on the entities pursuing open video
system operation.
47
Although local exchange carriers and cable operators can now expand their offerings across traditional service
boundaries, the general prohibition remains on local exchange carrier buyouts of co-located cable systems. Co-
located cable systems are cable systems serving an overlapping territory. Cable operator buyouts of co-located
local exchange carrier systems, and joint ventures between cable operators and local exchange carriers in the same
market are also prohibited. The 1996 Telecom Act provides a few limited exceptions to this buyout prohibition,
including a carefully circumscribed "rural exemption." The 1996 Telecom Act also provides the FCC with the
limited authority to grant waivers of the buyout prohibition.
Ownership Limitations. The 1996 Telecom Act generally prohibits us from owning or operating a SMATV or
wireless cable system in any area where we provide franchised cable service. We may, however, acquire and
operate SMATV systems in our franchised service areas if the programming and other services provided to
SMATV subscribers are offered according to the terms and conditions of our franchise agreement.
In February 2002, a U.S. appeals court set aside a FCC rule that bars a company from owning television stations
that reach more than 35% of U.S. homes. A three-judge panel concluded the FCC's “decision to retain the rules
was arbitrary and capricious and contrary to law.” The court overturned altogether an FCC ban on a company
owning a cable TV system in a market where it also operates a broadcast television station. This limitation was
held on March 2, 2001 to violate the First Amendment. The U.S. Court of Appeals for the District of Columbia
Circuit ruled that the limit must either be justified by the FCC “as not burdening substantially more speech than
necessary,” or rewritten by the FCC. In addition, the D.C. Circuit panel vacated on constitutional grounds the
FCC rule limiting to 40% the number of channels on which a cable operator can offer operator-affiliated
programming.
A petition for certiorari was filed with the U.S. Supreme Court asking for review of the D.C. Circuit Court’s
ruling on the 30% cap but did not challenge the court’s ruling striking down the 40% cap on the channels that a
cable operator may use to offer affiliated programmers. The FCC adopted a Further Notice of Proposed
Rulemaking on September 13, 2001 concerning its horizontal (30% of national audience reach) and vertical (40%
of channels showing operator-affiliated programming) limits and certain aspects of its attribution rules.
Comments and reply comments were due on January 4, 2002, and February 4, 2002, respectively. This
proceeding was consolidated with the third Biennial Review of media ownership rules in September 2002.
Similar to the broadcast and cable prohibition, the broadcast and newspaper crossownership rule bans common
ownership of a radio or television station and a daily newspaper if certain conditions are met. Acquisition of a
daily newspaper in conflict with this rule requires divestiture of one of the properties before the next license
expiration date of the broadcast station, or in one year, whichever is later. In its 1998 Broadcast Ownership
Biennial Review Report adopted May 30, 2000, the FCC recommended a rulemaking to consider changes, but
kept the rule in place. At its September 13, 2001 meeting, the FCC adopted a Notice of Proposed Rulemaking
seeking comment on modification of its newspaper/broadcast crossownership rule and waiver policies.
Comments were due December 3, 2001, and reply comments were due January 7, 2002. This proceeding also
was consolidated with the third Biennial Review of media ownership rules on September 23, 2002.
Under the FCC’s TV duopoly rule, no one may hold an attributable interest in two television stations under
certain circumstances. In December 2000, the FCC terminated its 1998 Biennial Review of the television
duopoly rules and affirmed the ban on owning a second television station in a market having fewer than eight
separately owned TV stations. On February 20, 2001, Sinclair Broadcast Group filed a Petition for Review with
the U.S. Court of Appeals for the District of Columbia Circuit. Sinclair also sought a court stay of an FCC
decision ordering Sinclair to terminate local marketing agreements it had entered after the November 5, 1996,
start of an FCC rulemaking examining TV local marketing agreements. The Court granted the stay pending
completion of the appeal. On April 2, 2002, the Court granted the appeal and remanded the proceeding to the
FCC. On August 12, 2002, the Court denied petitions for rehearing and rehearing en banc. The FCC’s further
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consideration of these issues has been incorporated with the third Biennial Review of media ownership rules,
issued on September 23, 2002.
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.
Broadcast signal carriage is the transmission of broadcast television signals over a cable system to cable
customers. A cable system generally is required to devote up to one-third of its activated channel capacity for the
carriage of local commercial television stations whether pursuant to the mandatory carriage or retransmission
consent requirements of the 1992 Cable Act. Local non-commercial television stations are also given mandatory
carriage rights; however, such stations are not given the option to negotiate retransmission consent for the carriage
of their signals by cable systems. Additionally, cable systems are required to obtain retransmission consent for all
distant commercial television stations (except for commercial satellite-delivered independent “superstations” such
as WGN), commercial radio stations and certain low-power television stations carried by such systems.
Must carry requests can dilute the appeal of a cable system's programming offerings because a cable system with
limited channel capacity may be required to forego carriage of popular channels in favor of less popular broadcast
stations electing must carry. Retransmission consent demands may require substantial payments or other
concessions.
The FCC tentatively decided against imposition of dual digital and analog must carry in a January 2001 ruling.
The ruling resolved a number of technical and legal matters, and clarifies that a digital-only TV station,
commercial or non-commercial, can immediately assert its right to carriage on a local cable system. The FCC also
said that a TV station that returns its analog spectrum and converts to digital operations must be carried by local
cable systems. At the same time, however, it initiated further fact gathering that ultimately could lead to a
reconsideration of the tentative conclusion.
Satellite Home Viewer Improvement Act of 1999. A major change introduced by the SHVIA was a “local into
local” provision allowing satellite carriers, for the first time, to retransmit the signals of local television stations
by satellite back to viewers in their local markets. The intent was to promote multichannel video competition by
removing the prohibition on satellite retransmission of local signals, which cable operators already offered to their
subscribers under the must-carry/retransmission consent scheme of regulation described above.
SHVIA applies a similar scheme to satellite carriage. Television stations had until July 1, 2001, to elect must-
carry or retransmission consent on satellite carriers in their markets. Beginning January 1, 2002, a satellite
company that has chosen to provide any local-into-local service in a market will be required to provide
subscribers with the signals of all qualified television stations assigned to that designated market area and that ask
to be carried on the satellite system. To qualify, stations must meet conditions such as providing, at station
expense, a good-quality signal to the carrier’s local receive facility.
On November 29, 2000, the FCC adopted rules governing satellite signal carriage. These rules bar carriers from
charging subscribers more for must-carry stations than for stations that elect to be carried under retransmission
consent. Rules also prevent carriers from requiring subscribers to purchase additional equipment (e.g., a second
dish) to receive stations that insist on carriage. The FCC allowed satellite carriers to sell local stations to
subscribers a la carte, rather than only as a package. But a satellite carrier that carries at least one local station
under the new local-into-local copyright compulsory license without which DBS operators would not carry the
signals at all, contained in the SHVIA, must-carry all qualifying stations in the market; this is the carry one/carry
all provision that is among those on appeal.
FCC reconsideration of the rules was petitioned for by DirecTV and the Association of Local Television Stations,
and supported and opposed by several others. In an Order on Reconsideration released September 5, 2001, the
49
Commission affirmed its rules for the most part, but also clarified, on its own motion, important aspects of carrier
obligations to implement station elections of must-carry.
Various court appeals have been consolidated in the Fourth Circuit, where oral argument was held September 25,
2001, focusing on carry one/carry all and a la carte. The FCC, in its Reconsideration Order of September 5, 2001,
addressed complaints by broadcasters that satellite carriers, particularly EchoStar, have not complied with SHVIA
must-carry implementation requirements, and ordered the carriers to comply. On December 7, 2001, the Court
upheld the a la carte rule and affirmed that the carry one, carry all rule was a reasonable, content-neutral
restriction on satellite carriers’ speech. On June 17, 2002, the Supreme Court declined to consider the case. In
the 11th Circuit Echostar injunction case, the broadcast plaintiffs will provide new evidence of nationwide
noncompliance to the U.S. District Court in Miami. By statute and FCC rule, satellite carriage of eligible local
stations must begin January 1, 2002.
Designated Access Channels. The 1996 Telecom Act permits local franchising authorities to require cable
operators to set aside certain channels for public, educational and governmental access programming. The 1984
Cable Act also requires cable systems to designate a portion of their channel capacity, up to 15 percent in some
cases, for commercial leased access by unaffiliated third parties to provide programming that may compete with
services offered by the cable operator. The FCC has adopted rules regulating the terms, conditions and maximum
rates a cable operator may charge for commercial leased access use. The FCC recently rejected a request that
unaffiliated Internet service providers be found eligible for commercial leased access.
Access to Programming. To spur the development of independent cable programmers and competition to
incumbent cable operators, the 1992 Cable Act imposed restrictions on the dealings between cable operators and
cable programmers. Of special significance from a competitive business posture, the 1992 Cable Act precludes
video programmers affiliated with cable companies from favoring their cable operators over new competitors and
requires such programmers to sell their programming to other multichannel video distributors. This provision
limits the ability of vertically integrated cable programmers to offer exclusive programming arrangements to cable
companies. This prohibition was scheduled to expire on October 5, 2002. On June 13, 2002, the FCC adopted an
order extending the prohibition until October 5, 2007. There also has been interest expressed in further restricting
the marketing practices of cable programmers, including subjecting programmers who are not affiliated with cable
operators to all of the existing program access requirements, and subjecting terrestrially delivered programming to
the program access requirements. Terrestrially delivered programming is programming delivered other than by
satellite. Pursuant to the Satellite Home Viewer Improvement Act, the FCC has adopted regulations governing
retransmission consent negotiations between broadcasters and all multichannel video programming distributors,
including cable and DBS.
Inside Wiring; Subscriber Access. In an order issued in 1997, the FCC established rules that require an incumbent
cable operator upon expiration of a multiple dwelling unit service contract to sell, abandon, or remove home run
wiring that was installed by the cable operator in a multiple dwelling unit building. These inside wiring rules are
expected to assist building owners in their attempts to replace existing cable operators with new programming
providers who are willing to pay the building owner a higher fee, where such a fee is permissible. The FCC has
also proposed abrogating all exclusive multiple dwelling unit service agreements held by incumbent operators, but
allowing such contracts when held by new entrants. In another proceeding, the FCC has preempted restrictions on
the deployment of private antennas on rental property within the exclusive use of a tenant, such as balconies and
patios. We have no agreements containing such restrictions.
Video Description. On July 21, 2000, the FCC ruled that top-25-market affiliates of the four major national
networks, and MVPDs having 50,000 or more subscribers, must provide video descriptions to make television
programs more accessible to people with visual impairments. Such broadcasters and MVPDs must provide, in
prime time or children’s programming, 50 hours per calendar quarter of video description. Other television
stations and MVPDs must pass through video descriptions contained in programs, and must add an aural tone
crawl or scroll to local emergency messages. Video description, which is in addition to closed captioning for the
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hearing impaired, includes voice descriptions of a program’s visual elements inserted in audio pauses in the
program. The FCC generally affirmed its video description rules on reconsideration on January 4, 2001. On
March 28, 2001, the Motion Picture Association of America, National Association of Broadcasters and NCTA
filed a joint Petition for Review, and on April 2, 2001, the National Federation of the Blind filed a Petition for
Review with the U.S. Court of Appeals for the District of Columbia Circuit of the FCC’s January 4, 2001,
reconsideration decision. On November 8, 2002, the Court reversed and vacated the FCC’s order to the extent
that it required broadcasters to implement video descriptions.
Franchise Procedures. The 1984 Cable Act affirms the right of franchising authorities (state or local, depending
on the practice in individual states) to award one or more franchises within their jurisdictions and prohibits non-
grandfathered cable systems from operating without a franchise in such jurisdictions. The 1992 Cable Act
encourages competition with existing cable systems by:
(cid:130)
(cid:130)
(cid:130)
Allowing municipalities to operate their own cable systems without franchises;
Preventing franchising authorities from granting exclusive franchises or from unreasonably
refusing to award additional franchises covering an existing cable system's service area; and
Prohibiting (with limited exceptions) the common ownership of cable systems and
collocated MMDS or SMATV systems.
The FCC has relaxed its restrictions on ownership of SMATV systems to permit a cable operator to acquire
SMATV systems in the operator's existing franchise area so long as the programming services provided through
the SMATV system are offered according to the terms and conditions of the cable operator's local franchise
agreement. The 1996 Telecom Act provides that the cable/SMATV and cable/MMDS cross-ownership rules do
not apply in any franchise area where the operator faces effective competition as defined by federal law.
The Cable Acts also provide that in granting or renewing franchises, local authorities may establish requirements
for cable-related facilities and equipment, but not for video programming or information services other than in
broad categories. The Cable Acts limit the payment of franchise fees to 5 percent of revenues derived from cable
operations and permit the cable operator to obtain modification of franchise requirements by the franchise
authority or judicial action if warranted by changed circumstances. A federal appellate court held that a cable
operator's gross revenue includes all revenue received from subscribers, without deduction, and overturned an
FCC order which had held that a cable operator's gross revenue does not include money collected from
subscribers that is allocated to pay local franchise fees. We cannot predict the ultimate resolution of these
matters. The 1996 Telecom Act generally prohibits franchising authorities from:
(cid:130)
(cid:130)
(cid:130)
Imposing requirements in the cable franchising process that require, prohibit or restrict
the provision of telecommunications services by an operator;
Imposing franchise fees on revenues derived by the operator from providing telecommunications
services over its cable system; or
Restricting an operator’s use of any type of subscriber equipment or transmission technology.
The 1984 Cable Act contains renewal procedures designed to protect incumbent franchisees against arbitrary
denials of renewal. The 1992 Cable Act made several changes to the renewal process that could make it easier for
a franchising authority to deny renewal. Moreover, even if the franchise is renewed, the franchising authority
may seek to impose new and more onerous requirements such as significant upgrades in facilities and services or
increased franchise fees as a condition of renewal. Similarly, if a franchising authority's consent is required for
the purchase or sale of a cable system or franchise, such authority may attempt to impose more burdensome or
onerous franchise requirements in connection with a request for such consent. Historically, franchises have been
renewed for cable operators that have provided satisfactory services and have complied with the terms of their
franchises. We believe that we have generally met the terms of our franchises and have provided quality levels of
service. Furthermore, our franchises are issued by the state public utility commission (the RCA) and do not
require periodic renewal.
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Various courts have considered whether franchising authorities have the legal right to limit the number of
franchises awarded within a community and to impose certain substantive franchise requirements (e.g. access
channels, universal service and other technical requirements). These decisions have been inconsistent and, until
the US Supreme Court rules definitively on the scope of cable operators' First Amendment protections, the
legality of the franchising process generally and of various specific franchise requirements is likely to be in a state
of flux.
Pole Attachment. The Communications Act requires the FCC to regulate the rates, terms and conditions imposed
by public utilities for cable systems' use of utility pole and conduit space unless state authorities can demonstrate
that they adequately regulate pole attachment rates. In the absence of state regulation, the FCC administers pole
attachment rates on a formula basis.
The FCC has concluded that, in the absence of state regulation, it has jurisdiction to determine whether utility
companies have justified their demand for additional rental fees and that the Communications Act does not permit
disparate rates based on the type of service provided over the equipment attached to the utility's pole. The FCC's
existing pole attachment rate formula, which may be modified by a pending rulemaking, governs charges for
utilities for attachments by cable operators providing only cable services. The 1996 Telecom Act and the FCC's
implementing regulations modify the current pole attachment provisions of the 1984 Cable Act by immediately
permitting certain providers of telecommunications services to rely upon the protections of the current law and by
requiring that utilities provide cable systems and telecommunications carriers with nondiscriminatory access to
any pole, conduit or right-of-way controlled by the utility.
The FCC's new rate formula, effective in 2001, governs the maximum rate certain utilities may charge for
attachments to their poles and conduit by companies providing telecommunications services, including cable
operators. Several parties have requested the FCC to reconsider its new regulations and several parties have
challenged the new rules in court. On December 20, 2002, the D.C. Circuit affirmed the FCC’s rules in large
measure. The Court did not address the merits of certain rules for which the Court concluded that petitioners’
challenge was not ripe.
The favorable pole attachment rates afforded cable operators under federal law can be gradually increased by
utility companies owning the poles if the operator provides telecommunications service, as well as cable service,
over its plant. The FCC clarified that a cable operator's favorable pole rates are not endangered by the provision
of Internet access, but a decision by the 11th Circuit Court of Appeals disagreed and suggested that Internet traffic
is neither cable service nor telecommunications service and might leave cable attachments that carry Internet
traffic ineligible for Pole Attachment Act protections. This decision could have lead to substantial increases in
pole attachment rates. The cable industry sought review by the United States Supreme Court, which issued an
opinion reversing a decision from the United States Court of Appeals for the Eleventh Circuit. The Eleventh
Circuit court held that commingled services are not covered by the Pole Attachment Act; and the Pole Attachment
Act does not grant the FCC authority to regulate wireless communications.
Shortly after the Eleventh Circuit, opinion was issued, the U.S. Supreme Court granted writ of certiorari and
issued an order staying the Eleventh Circuit's decision pending further review. The U.S. Supreme Court reversed
the Eleventh Circuit's ruling. While the Supreme Court's decision does not mean an end to arbitrations and
litigation over similar issues, it does mean that the FCC's Pole Attachment rules remain in effect.
In 2002, the RCA concluded a rulemaking in Docket R-00-5 that examined whether to change state regulations
governing interconnection and joint use of utility facilities. These regulations include a default pricing
methodology for determining pole attachment rates that cable providers would pay pole owners in the event the
parties cannot agree to rates on their own. The state formula, which the APUC adopted in 1987, is patterned after
the maximum cable rate formula adopted by Congress in the 1978 Pole Attachment Act. With the passage of the
1996 Telecommunications Act, Congress amended the 1978 Pole Attachment Act in several respects, which
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included providing a different pole attachment rate methodology for telecommunication carriers and their pole
attachments than the methodology used for cable companies. These changes prompted some pole owners in
Alaska (principally electric companies) to file a petition with the RCA to adopt the new federal formula for
setting pole attachment rates. The RCA concluded the rulemaking proceeding in 2002 and made minor changes
to the regulations but largely retained the existing pole attachment formula that has been in state regulation since
1987.
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 U.S. copyright office adopted an industry
agreement providing for an increase in the copyright royalty rates. The possible modification or elimination of
this compulsory copyright license is the subject of continuing legislative review and could adversely affect our
ability to obtain desired broadcast programming. We cannot predict the outcome of this legislative activity.
Copyright clearances for nonbroadcast programming services are arranged through private negotiations.
Cable operators distribute locally originated programming and advertising that use music controlled by the two
principal major music performing rights organizations, the American Society of Composers, Authors and
Publishers and Broadcast Music, Inc. The cable industry has had a long series of negotiations and adjudications
with both organizations. A prior voluntarily negotiated agreement with Broadcast Music has now expired, and is
subject to further proceedings. The governing rate court recently set retroactive and prospective cable industry
rates for American Society of Composers music based on the previously negotiated Broadcast Music rate.
Although we cannot predict the ultimate outcome of these industry proceedings or the amount of any license fees
we may be required to pay for past and future use of association-controlled music, we do not believe such license
fees will be significant to our business and operations.
Other Statutory and FCC Provisions. The 1992 Cable Act requires cable operators to block fully both the video
and audio portion of sexually explicit or indecent programming on channels that are primarily dedicated to
sexually oriented programming or alternatively to carry such programming only at “safe harbor” time periods
currently defined by the FCC as the hours between 10 p. m. to 6 a. m. A three-judge federal district court
determined that this provision was unconstitutional. The United States Supreme Court is currently reviewing the
lower court's ruling. The Communications Act also includes provisions, among others, concerning customer
service, subscriber privacy, marketing practices, equal employment opportunity, regulation of technical standards
and equipment compatibility.
The FCC has various rulemaking proceedings pending that will implement the 1996 Telecom Act; it also has
adopted regulations implementing various provisions of the 1992 Cable Act and the 1996 Telecom Act that are
the subject of petitions requesting reconsideration of various aspects of its rulemaking proceedings. The FCC has
the authority to enforce its regulations through the imposition of substantial fines, the issuance of cease and desist
orders and/or the imposition of other administrative sanctions, such as the revocation of FCC licenses needed to
operate certain transmission facilities often used in connection with cable operations.
Other Regulations of the FCC. In addition to the FCC regulations noted above, there are other regulations of the
FCC covering such areas as the following.
(cid:130) Programming practices, including, among other things:
(cid:130) Syndicated program exclusivity, which is a FCC rule which requires a cable system to delete particular
programming offered by a distant broadcast signal carried on the system which duplicates the
programming for which a local broadcast station has secured exclusive distribution rights
(cid:130) Network program nonduplication
(cid:130) Local sports blackouts
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(cid:130) Indecent programming
(cid:130) Lottery programming
(cid:130) Political programming
(cid:130) Sponsorship identification
(cid:130) Children’s programming advertisements
(cid:130) Closed captioning
(cid:130) Registration of cable systems and facilities licensing
(cid:130) Maintenance of various records and public inspection files
(cid:130) Aeronautical frequency usage
(cid:130) Lockbox availability
(cid:130) Antenna structure notification
(cid:130) Tower marking and lighting
(cid:130) Emergency alert systems
The FCC has ruled that cable customers must be allowed to purchase cable converters from third parties and
established a multi-year phase-in during which security functions, which would remain in the operator's exclusive
control, would be unbundled from basic converter functions, which could then be satisfied by third party vendors.
The first phase implementation date was July 1, 2000. Compliance was technically and operationally difficult in
our locations, so we and several other cable operators filed a request with the FCC that the requirement be waived
in those systems. The request resulted in a temporary deferral of the compliance deadline for those systems. The
necessary changes were implemented in 2002 to comply with these requirements.
The FCC recently initiated an inquiry to determine whether the cable industry's future provision of interactive
services should be subject to regulations ensuring equal access and competition among service vendors. The
inquiry is another indication of regulatory concern regarding control over cable capacity.
Other bills and administrative proposals pertaining to cable communications have previously been introduced in
Congress or have been considered by other governmental bodies over the past several years. It is possible that
Congress and other governmental bodies will make further attempts to regulate cable communications services.
State and Local Regulation. Because our cable communications systems use local streets and rights-of-way, our
systems are subject to state and local regulation. Cable communications systems generally are operated pursuant
to franchises, permits or licenses granted by a municipality or other state or local government entity. In Alaska,
the RCA is the franchising authority for the state. We provide cable television service throughout Alaska
pursuant to various certificates of authority issued by the RCA. These certificates are not subject to terms of
renewal and continue in effect until and unless the state commission were to seek to modify or revoke them for
good cause.
Internet Operations
General. With significant growth in Internet activity and commerce over the past several years the FCC and other
regulatory bodies have been challenged to develop new models that allow them to achieve the public policy goals
of competition and universal service. Many aspects of regulation and coordination of Internet activities and
traffic are evolving and are facing unclear regulatory futures. Changes in regulations and in the regulatory
environment, including changes that affect communications costs or increase competition from the ILEC or other
communications service providers, could adversely affect the prices at which we sell ISP services.
The Internet has been able to grow and develop outside the existing regulatory structure because the FCC has
made conscious decisions to limit the application of its rules. The federal government's efforts have been directed
away from burdening the Internet with regulation. ISPs and other companies in the Internet industry have not
been required to gain regulatory approval for their actions. The 1996 Telecom Act adopts such a position. The
1996 Act states that it is the policy of the United States “to preserve the vibrant and competitive free market that
presently exists for the Internet and other interactive computer services, unfettered by Federal or State regulation.”
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Regulatory policy approaches toward the Internet have focused on several areas: avoiding unnecessary regulation,
questioning the applicability of traditional rules, Internet governance (such as the allocation of domain names),
intellectual property, network reliability, privacy, spectrum policy, standards, security, and international
regulation.
Government may influence the evolution of the Internet in many ways, including directly regulating, participating
in technical standards development, providing funding, restricting anti-competitive behavior by dominant firms,
facilitating industry cooperation otherwise prohibited by antitrust laws, promoting new technologies, encouraging
cooperation between private parties, representing the United States in international intergovernmental bodies, and
large-scale purchasing of services.
There are many ways Internet growth could be negatively impacted which may require future regulation and
oversight. Moving toward proprietary standards or closed networks would reduce the degree to which new
services could leverage the existing infrastructure. The absence of competition in the ISP market, or the
telecommunications infrastructure market, could reduce incentives for innovation. Excessive or misguided
government intervention could distort the operation of the marketplace, and lead companies to expend valuable
resources working through the regulatory process. Insufficient government involvement may also, however, have
negative consequences. Some issues may require a degree of central coordination, even if only to establish the
initial terms of a distributed, locally-controlled system. The final result, in the absence of collective action, may
be an outcome that no one favors. In addition, the failure of the federal government to identify Internet-related
areas that should not be subject to regulation leaves open opportunities for state, local, or international bodies to
regulate excessively and/or inconsistently.
Internet Governance and Standards. There is no one entity or organization that governs the Internet. Each
facilities-based network provider that is interconnected with the global Internet controls operational aspects of
their own network. Certain functions, such as domain name routing and the definition of the TCP/IP protocol, are
coordinated by an array of quasi-governmental, intergovernmental, and non-governmental bodies. The United
States government, in many cases, has handed over responsibilities to these bodies through contractual or other
arrangements.
In other cases, entities have emerged to address areas of need such as the Internet Society (“ISOC”), a non-profit
professional society founded in 1992. ISOC organizes working groups and conferences, and coordinates some of
the efforts of other Internet administrative bodies. The Internet Engineering Task Force (“IETF”), an open
international body mostly comprised of volunteers, is primarily responsible for developing Internet standards and
protocols. The work of the IETF is coordinated by the Internet Engineering Steering Group, and the Internet
Architecture Board, which are affiliated with ISOC. The Internet Assigned Numbers Authority handles Internet
addressing matters under a contract between the Department of Defense and the Information Sciences Institute at
the University of Southern California.
The legal authority of any of these bodies is unclear. Most of the underlying architecture of the Internet was
developed under the auspices, directly or indirectly, of the United States government. The government has not,
however, defined whether it retains authority over Internet management functions, or whether these
responsibilities have been delegated to the private sector. The degree to which any existing body can lay claim to
representing “the Internet community” is also unclear. Membership in the existing Internet governance entities is
drawn primarily from the research and technical communities.
1996 Telecom Act. The 1996 Telecom Act provides little direct guidance as to whether the FCC has authority to
regulate Internet-based services. Section 223 concerns access by minors to obscene, harassing, and indecent
material over the Internet and other interactive computer networks, and sections 254, 706, and 714 address
mechanisms to promote the availability of advanced telecommunications services, possibly including Internet
access. None of these sections, however, specifically addresses the FCC's jurisdiction.
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Nothing in the 1996 Telecom Act expressly limits the FCC's authority to regulate services and facilities connected
with the Internet, to the extent that they are covered by more general language in any section of the Act.
Moreover, it is not clear what such a limitation would mean even if it were adopted. The Communications Act
directs the FCC to regulate “interstate and foreign commerce in communication by wire and radio,” and the FCC
and state public utility commissions indisputably regulate the rates and conditions under which ISPs purchase
services and facilities from telephone companies. Given the absence of clear statutory guidance, the FCC must
determine whether it has the authority or the obligation to exercise regulatory jurisdiction over specific Internet-
based activities. The FCC may also decide whether to forebear from regulating certain Internet-based services.
Forbearance allows the FCC to decline to adopt rules that would otherwise be required by statute. Under section
401 of the 1996 Telecom Act, the FCC must forbear if regulation would not be necessary to prevent
anticompetitive practices and to protect consumers, and forbearance would be consistent with the public interest.
Finally, the FCC could consider whether to preempt state regulation of Internet services that would be
inconsistent with achievement of federal goals.
FCC Regulations. The FCC has not attempted to regulate the companies that provide the software and hardware
for Internet telephony, or the access providers that transmit their data, as common carriers or telecommunications
service providers. In March 1996, America's Carriers Telecommunication Association (“ACTA”), a trade
association primarily comprised of small and medium-size interexchange carriers, filed a petition with the FCC
asking the FCC to regulate Internet telephony. ACTA argues that providers of software that enables real-time
voice communications over the Internet should be treated as common carriers and subject to the regulatory
requirements of Title II. The FCC has sought comment on ACTA's request. Other countries are considering
similar issues. In addition, the FCC is considering a proposal to classify broadband Internet access service
provided over the wireline network as an “information service,” and thus, potentially excluding such services
from Title II regulation.
The FCC has not considered whether any of the rules that relate to radio and television broadcasters should also
apply to analogous Internet-based services. The vast majority of Internet traffic today travels over wire facilities,
rather than the radio spectrum. As a policy matter, however, a continuous, live, generally-available music
broadcast over the Internet may appear similar to a traditional radio broadcast, and the same arguments may be
made about streaming video applications. The FCC will need to consider the underlying policy principles that, in
the language of the Act and in FCC decisions, have formed the basis for regulation of the television and radio
broadcast industries.
The FCC does not regulate the prices charged by ISPs or Internet backbone providers. However, the vast majority
of users connect to the Internet over facilities of existing telecommunications carriers. Those telecommunications
carriers are subject to varying levels of regulation at both the federal and the state level. Thus, regulatory
decisions exercise a significant influence over the economics of the Internet market. Economics is expected to
drive the development of both the Internet and of other communications technologies.
Internet access is understood to be an enhanced service under FCC rules; therefore, ISPs are treated as end users,
rather than carriers, for purposes of the FCC's interstate access charge rules. This distinction was created when the
FCC established the access charge system in 1983. Thus, when ISPs purchase lines from LECs, the ISPs buy
those lines under the same tariffs that any business customer would use. Although these services generally
involve a per-minute usage charge in addition to a monthly fee, the usage charge is assessed only for outbound
calls. ISPs, however, exclusively use these lines to receive calls from their customers, and thus effectively pay
flat monthly rates. By contrast, IXCs that interconnect with LECs are considered carriers, and thus are required to
pay interstate access charges for the services they purchase. Most of the access charges that carriers pay are
usage-sensitive in both directions. Thus, IXCs are assessed per-minute charges for both originating and
terminating calls. The FCC concluded in their Local Competition Order that the rate levels of access charges
appear to significantly exceed the incremental cost of providing these services. The FCC in December 1996
launched a comprehensive proceeding to reform access charges in a manner consistent with economic efficiency
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and the development of local competition. The FCC has adopted access charge reform for carriers regulated
under price cap and rate-of-return regulation, which reforms are subject to periodic review and adjustment.
State and Local Regulations. The revenue effects of Internet usage today depend to a significant extent on the
structure of state and local tariffs. Internet usage generates less revenue for LECs in states and jurisdictions where
flat local service rates have been set low, with compensating revenues in the form of per-minute intrastate toll
charges. Because ISPs only receive local calls, they do not incur these usage charges. By contrast, in states and
jurisdictions where flat charges make up a higher percentage of LEC revenues, ISPs will have a less significant
revenue effect. ISP usage is also affected by the relative pricing of services such as ISDN PRI, frame relay, and
fractional T-1 connections, which are alternatives to analog business lines. Prices for these services, and the price
difference on a per-voice-channel basis between the options available to ISPs, vary widely across different states
and jurisdictions. In many cases, tariffs for these and other data services are based on assumptions that do not
reflect the realities of the Internet access market today. The scope of local calling areas also affects the
architecture of Internet access services. In states and jurisdictions with larger unmeasured local calling areas,
ISPs need fewer POPs in order to serve the same customers through a local call.
Court Decisions and Legislative Action. We believe major court decisions and legislative and FCC action will
shape the worldwide Internet in 2003 and beyond, including:
(cid:130) The February 20, 2003 FCC decision to deregulate new networks for high-speed Internet access and
expected legal challenges.
(cid:130) Continuing concerns and litigation over alleged copyright infringement.
(cid:130) Minimum-regulation approaches to information privacy.
(cid:130) The impact of more Internet patents preventing others from doing certain things, such as designing and
maintaining certain types of Web sites.
(cid:130) The legality of hyperlinking without permission.
(cid:130) Decisions regarding whether cryptographic source code is First Amendment speech, and hence exportable,
or that no program is covered by the First Amendment.
(cid:130) Continuing calls for domestic controls of obscenity-related cryptography.
Financial Information about our Foreign and Domestic Operations and Export Sales
Although we have several agreements to help originate and terminate international toll traffic, we do not have
foreign operations or export sales. We conduct our operations throughout the western contiguous United States
and Alaska and believe that any subdivision of our operations into distinct geographic areas would not be
meaningful. Revenues associated with international toll traffic were $3.5 million, $4.4 million and $4.9 million
for the years ended December 31, 2002, 2001 and 2000, respectively.
Seasonality
Our long-distance revenues have historically been highest in the summer months because of temporary population
increases attributable to tourism and increased seasonal economic activity such as construction, commercial
fishing, and oil and gas activities. Our cable television revenues, on the other hand, are higher in the winter
months because consumers tend to watch more television, and spend more time at home, during these months.
Our local service and Internet operations are not expected to exhibit significant seasonality, with the exception of
SchoolAccess Internet services that are reduced during the summer months. Revenues and cost of sales for
yellow-page directories are recognized upon publication of directories, which for the Anchorage directory is
expected to occur in the fourth quarter, beginning in 2003. Our ability to implement construction projects is also
reduced during the winter months because of cold temperatures, snow and short daylight hours.
Customer-Sponsored Research
We have not expended material amounts during the last three fiscal years on customer-sponsored research
activities.
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Backlog of Orders and Inventory
As of December 31, 2002 and 2001, our long-distance services segment had a backlog of private line orders of
approximately $318,000 and $450,000, respectively, which represents recurring monthly charges for private line
and broadband services. The decreased backlog is due to decreased private line circuit orders pending at
December 31, 2002 as compared to 2001. As of December 31, 2002 and 2001, we had a backlog of equipment
sales orders of approximately $601,000 and $85,000, respectively for services included in the All Other category
described in note 9 to the Notes to Consolidated Financial Statements included in Part II of this Report. The
increase in backlog as of December 31, 2002 can be attributed to increased outstanding sales orders at December
31, 2002 as compared to 2001. We expect that all of the private line orders and equipment sales in backlog at the
end of 2002 will be delivered during 2003.
Geographic Concentration and Alaska Economy
We offer voice and data telecommunication and video services to customers primarily throughout Alaska.
Because of this geographic concentration, growth of our business and our operations depend upon economic
conditions in Alaska. The economy of State of Alaska is dependent upon the natural resource industries, and in
particular oil production, as well as investment earnings (including earnings from the State of Alaska Permanent
Fund), tourism, government, and United States military spending. Any deterioration in these markets could have
an adverse impact on us. Oil revenues are now the second largest source of state revenues, following funds from
federal sources. The economic stagnation in the lower 48 states appears to have dampened demand for services
provided by our large common carrier customers. To the extent that these customers experience reduced demand
for traffic destined for and originating in Alaska, it could adversely affect our common carrier traffic and
associated revenues. You should see 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.
Factors That May Affect Our Business and Future Results
Our use of leverage will reduce cash flow from operations available to fund our business and may cause a decline
in our credit rating and/or limit our ability to raise additional capital. As of December 31, 2002, we had total
outstanding debt of $404.3 million. We may incur additional indebtedness in the future as we implement our
business plan, subject to limitations imposed by our credit agreements. In connection with the execution of our
business strategies, we routinely evaluate acquisition opportunities with respect to each of our business segments
and we may elect to finance acquisitions by incurring additional indebtedness. We must use a portion of our
future cash flow from operations to pay the principal and interest on our indebtedness, which will reduce the
funds available for our operations, including capital investments and business expenses. This could hinder our
ability to adjust to changing market and economic conditions. If we incur significant additional indebtedness, our
credit rating could be adversely affected. As a result, our borrowing costs would likely increase and our access to
capital may be adversely affected.
Our credit facilities restrict our ability to incur additional indebtedness and make capital expenditures, and
contain certain other restrictions on our business operations. Our existing credit facilities restrict our and certain
of our subsidiaries’ ability to incur additional indebtedness, make certain capital expenditures, pay dividends or
make certain other restricted payments, consummate certain asset sales, enter into certain transactions with
affiliates and incur liens. These credit facilities also impose restrictions on the ability of a subsidiary to pay
dividends or make certain payments to us, merge or consolidate with any other person or sell, assign, transfer,
lease, convey or otherwise dispose of all or substantially all of our assets. These credit facilities also require that
we maintain certain financial ratios. A breach of any of these covenants could result in a default under the credit
facilities. Our current business strategy includes the acquisition of additional assets and the expansion of our
existing businesses and service offerings. In addition, our business strategy may in the future be expanded to
include activities outside the state of Alaska. It is possible that our current and future expansion and growth plans
will require significant additional capital in excess of capital generated from operations and will result in
significant capital expenditures. If we are unable to negotiate modifications to these restrictions, they could
hinder our ability to follow through with expansion and growth plans.
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We have a history of operating losses. If we do not maintain profitability, we may be unable to make capital
expenditures necessary to implement our business plan, meet our debt service requirements or otherwise conduct
our business in an effective and competitive manner. This would require us to divert cash from other uses, which
may not be possible or may detract from the growth of our businesses. These events could limit our ability to
increase our revenues and net income or cause these amounts to decline.
We depend on a small number of customers for a substantial portion of our revenue and business. As previously
described (see Part I, Item 1. Business, Long Distance Services, Customers), services that we provide to
WorldCom and to Sprint contribute significantly to our total revenues. These two customers are free to seek out
long-distance communication services from our competitors upon expiration of their contracts (in March 2006, in
the case of WorldCom, subject to reaffirmation of the contract in the bankruptcy process, and in March 2007, in
the case of Sprint) or earlier upon a default or the occurrence of certain events. These events are a force majeure
event or a substantial change in applicable law or regulation under the applicable contract.
The impact of WorldCom’s Bankruptcy filing on us. We provide long-distance and other services to WorldCom, a
related party and a major customer, as further described in notes 9 and 11 to the Notes to Consolidated Financial
Statements included in Part II of this Report. On July 21, 2002 WorldCom and substantially all of its active U.S.
subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the
United States Bankruptcy Court. Chapter 11 allows a company to continue operating in the ordinary course of
business in order to maximize recovery for the company’s creditors and shareholders. The filings have enabled
WorldCom to continue to conduct business while it develops a reorganization plan. Through December 31, 2002
we have recognized a $11.6 million bad debt reserve for uncollected balances due from WorldCom as of July 21,
2002. We currently cannot predict the timing or amount that WorldCom will pay on outstanding balances due us
as of their bankruptcy filing date. A conversion of WorldCom’s bankruptcy petition to Chapter 7, unfavorable
reaffirmation or cancellation of our pre-filing contracts and agreements with WorldCom, or a migration of
WorldCom’s traffic off our network without it being replaced by other common carriers that interconnect with our
network could have a material adverse effect on our financial condition and results of operations.
We expect that our contract with WorldCom will ultimately be reaffirmed and that we will work out some form of
agreement with respect to the pre-petition receivables balance and that WorldCom will ultimately exit bankruptcy
with their business intact. We cannot predict how long it may take WorldCom to work their way through the
bankruptcy process or what effect the process or the economy may have on their traffic levels and ultimately, their
requirements for service in Alaska.
Mergers and acquisitions in the telecommunications industry are relatively common. If a change in control of
WorldCom or Sprint were to occur, it would not permit them to terminate their existing contracts with us, but
could in the future result in the termination of or a material adverse change in our relationships with WorldCom or
Sprint. In addition, WorldCom and Sprint’s need for our long-distance services depends directly upon their
ability to obtain and retain their own long-distance customers and upon the needs of those customers for long-
distance services.
The loss of one or both of WorldCom or Sprint as customers, a material adverse change in our relationships with
them or a material loss of or reduction in their long-distance customers would have a material adverse effect on
our financial condition and results of operations.
We depend on a limited number of third-party vendors to supply telecommunications equipment. We depend on a
limited number of third-party vendors to supply cable, Internet 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.
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Prolonged service interruptions could affect our business. We rely heavily on our network equipment,
telecommunications 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 telecommunication 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.
Certain of our major switching centers and transmission hubs carry significant concentrations of our traffic.
While we have followed industry practices to construct, secure and protect these facilities from extended power
outages, fire, earthquakes, and other natural or man-made disasters, such an event could result in an extended
outage for a significant portion of our traffic. Such an extended outage could have a material impact on our
business and results of operations.
If a failure occurs in our undersea fiber optic cable, our ability to immediately restore the entirety of our service
may be limited. Our telecommunications facilities include an undersea fiber optic cable that carries a large
portion of our Internet voice and data traffic to and from the contiguous Lower 48 states. We have obtained what
we believe is adequate backup capacity through early 2004 and continue to seek arrangements to obtain
alternative telecommunications facilities as backup facilities. If a failure of our undersea fiber optic facilities
occurs before we are able to secure adequate backup facilities, some of the telecommunications services we offer
to our customers could be interrupted, which could have a material impact on our business and results of
operations.
We serve many rural and remote Alaska locations solely via satellite communications. Each of our C- and Ku-
band satellite transponders is backed up on the same spacecraft with multiple backup transponders. We have
arranged for backup satellite capacity on another spacecraft for all of our current C-band satellite transponders in
the unlikely event of a total primary spacecraft failure. If such a failure occurs, service may not be fully restored
for up to a week or longer. Due to variations in satellite earth coverage and other technical performance
differences between the primary satellite and the backup satellite, a small percentage of our services may not be
restorable on the backup satellite. We own one Ku-band satellite transponder on the same primary spacecraft that
provides our C-band service. In the event of total primary spacecraft failure, we would not be able to restore our
Ku-band transponder traffic, as no other spacecraft offering is presently suitable and similar performance
coverage of Alaska on which we have prior arranged restoration services. PanAmSat has announced plans to
launch and place in service during 2003 a spacecraft with identical performance to our current primary spacecraft
which could provide us with Ku-band and additional C-band backup capacity at that time.
Our businesses are currently geographically concentrated in Alaska. We offer a variety of voice, video and data
services to residential, commercial and governmental customers in the state of Alaska. Because of this
geographic concentration, our growth and operations depend in part upon economic conditions 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. You should see Part II, Item 7, Management’s Discussion and
Analysis of Financial Condition and Results of Operations for more information.
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Our best growth opportunities may be in geographic areas that differ from those of our existing businesses. We
have achieved significant market penetration in the state of Alaska for many of the services we offer. However,
opportunities for expanding our market geographically in the state of Alaska or attaining significant additional
market penetration in the State of Alaska are limited. As a result, the best opportunities for expanding our
business may arise in other geographic areas such as the contiguous Lower 48 states. There can be no assurance
that we will find attractive opportunities to grow our businesses outside the State of Alaska or that we will have
the necessary expertise to take advantage of such opportunities. The Alaska voice, video and data
telecommunications markets are unique and distinct within the United States due to Alaska’s large geographical
size and its distance from the rest of the United States. The expertise we have developed in operating our
businesses in the State of Alaska may not provide us with the necessary expertise to successfully enter other
geographic markets.
We may fail to develop our wireless services. We offer wireless mobile services by reselling other providers’
wireless mobile services. We offer wireless local telephone services over our own facilities, and have purchased
PCS and LMDS wireless broadband licenses in FCC auctions covering markets in Alaska. We have fewer
subscribers to our wireless services than to our other service offerings. The geographic coverage of our wireless
services is also smaller than the geographic coverage of our other services. Some of our competitors offer or
propose to offer an integrated bundle of communications, entertainment and information services, including
wireless services. If we are unable to expand and further develop our wireless services, we may not be able to
meet the needs of customers who desire packaged services, and our competitors who offer theses services would
have an advantage. This could result in the loss of market share for our other service offerings.
Our efforts to develop cable telephony may be unsuccessful. An element of our business strategy is to develop
voice telephone service utilizing our coaxial cable facilities. If we are able to develop this service, we will be able
to utilize our own cable facilities to provide local access to our customers and avoid paying local loop charges to
ILECs. In order to successfully develop and market this new service, we must integrate new technology with our
existing facilities. The viability of this service depends on the availability of the equipment necessary to provide
the service at cost-effective prices. The development and marketing of this service will require a substantial
capital investment. If we are unable to successfully develop and market voice telephone service, we will not be
able to fully recover any capital investment we may make and the margins on our local telephone services
business will not improve.
We do not have insurance to cover certain risks to which we are subject. We are self-insured for damage or loss
to certain of our transmission facilities, including our buried, under sea, and above-ground transmission lines. 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. If we become subject to substantial uninsured
liabilities, our financial results may be adversely affected.
Economic and Security Impacts on Telecommunications. The economic stagnation in the United States began
with a decline in business capital spending and investment. Businesses continue to limit spending on equipment,
software, real estate, inventories and other investments. The terrorist attacks on America on September 11, 2001
and their aftermath worsened already deteriorating economic conditions. Recent economic indicators reflect an
improving economy, however concerns over war and renewed terrorist threats continue to mute economic growth
and optimism.
The telecommunications sector has been significantly impacted by the recent economic downturn. The NASDAQ
Telecommunications Index through February 2003 has dropped 90% from the high reached in February 2000,
including a 54% drop during 2002. Investors reportedly fear that carriers with high debt loads may face liquidity
crises. The telecommunications sector has been affected by such liquidity concerns, bankruptcy filings of
WorldCom, Global Crossing Ltd. and McLeodUSA Inc., and concerns about the possibility of improper
accounting.
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The economic stagnation in the lower 48 states appears to have dampened demand for services provided by our
large common carrier customers. To the extent that these customers experience reduced demand for traffic
destined for and originating in Alaska, it could adversely affect our common carrier traffic. A protracted
economic malaise in the lower 48 states or a further disruption in the economy resulting from a war or renewed
terrorist activity could affect our carrier customers which, in turn, could affect our revenues and cash flows. If the
economic conditions in the United States worsen or if a wider or global economic slowdown occurs, our results of
operations and financial condition may be adversely affected.
As our business has grown, we have become increasingly subject to adverse changes in general economic
conditions and economic conditions in the State of Alaska, which can result in reductions in capital expenditures
by customers, longer sales cycles, deferral or delay of purchase commitments for products or services and
increased price competition. Although these factors have not materially affected us in recent years, if the current
economic slowdown continues or worsens, these factors could adversely affect our business and results of
operations.
With the terrorist events of September 11, the FCC and the communications community are determining their
respective roles in ensuring homeland security. The FCC’s principal objectives are reportedly to secure the U.S.’s
communications infrastructure and to enhance emergency response through communications. Expected FCC
actions include re-chartering the Network Reliability and Interoperability Council (“NRIC”), consideration of a
media counter-part to NRIC, working with other agencies to ensure network protection, reliability and
redundancy, continuing efforts to solve remaining public safety spectrum issues, continuing to work on
interoperability restraints, continuing to address emergency 911 issues, and working with other agencies on
wireless priority access that balances the need for government response and critical needs of subscribers.
Sales of a substantial number of shares of Class A common stock, or the perception that such sales may occur,
could cause the market price of Class A common stock to decline and impede our ability to raise capital through
sales of Class A common stock or securities convertible into or exercisable for Class A common stock. A
significant percentage of our voting securities are held by a small number of shareholders and these shareholders
can control stockholder decisions on very important matters. As of December 31, 2002, WorldCom owned
approximately 9% and our executive officers and directors and their affiliates owned approximately 21% of our
combined outstanding Class A and Class B common stock. Because 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, WorldCom and our executive
officers and directors and their affiliates have approximately 42% of the combined voting power of that stock
(including outstanding series B preferred stock voting with Class A common stock on an as-converted basis).
These shareholders can significantly influence if not control our management policy and all fundamental
corporate actions, including mergers, substantial acquisitions and dispositions, and election of directors to the
Board. This concentration of ownership may have the effect of discouraging third parties from making bids for us,
delaying or preventing a change of control, or reducing premiums paid to our shareholders for their stock and
could have an adverse effect on the market price of our Class A common stock.
It may be difficult for a third party to acquire us, even if doing so may be beneficial to our shareholders. Certain
provisions of our Restated Articles of Incorporation may discourage, delay or prevent a change in control of our
company that a shareholder may consider favorable. These provisions include the following:
(cid:130)
(cid:130)
Authorizing our board of directors to issue preferred stock under terms developed by the board,
which could increase the number of outstanding shares and thwart a takeover attempt; and
Classifying our board of directors with staggered three-year terms, which may lengthen the time
required to gain control of our board of directors.
It is unlikely shareholders will receive a return on their shares through the payment of a cash dividend. We have
never declared or paid cash dividends on any of our common stock and have no intention of doing so in the
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foreseeable future. As a result, it is unlikely that shareholders will receive a return on their shares through the
payment of cash dividends.
If we are required to account for the market value of stock options as compensation expense, our net income and
earnings per share will be significantly reduced. This topic is currently under reexamination by accounting
standards setters and regulators. Some companies have begun to account for stock options as a compensation
expense thus resulting in a reduction of their net income and earnings per share. We currently record
compensation expense to the extent that stock options are priced below market value at the time of grant. It is
possible that future laws and regulations will require us to record the full fair market value of all stock options as
a compensation expense in our consolidated financial statements. If such a change occurs, our net income and
earnings per share would be significantly reduced. See notes 1(t), 1(u) and 8 to the Notes to Consolidated
Financial Statements included in Part II of this Report.
Employees
We employed 1,230 persons as of January 31, 2003, and are not parties to union contracts with our employees.
We believe our future success will depend upon our continued ability to attract and retain highly skilled and
qualified employees. We believe that relations with our employees are satisfactory.
Other
No material portion of our businesses is subject to renegotiation of profits or termination of contracts at the
election of the federal government.
Item 2. Properties
General
Our properties do not lend themselves to description by character or location of principal units. Our investment in
property, plant and equipment in our consolidated operations consisted of the following at December 31:
Telephone distribution systems
Cable television distribution systems
Support equipment
Property and equipment under capital leases
Construction in progress
Transportation equipment
Land and buildings
Total
2002
56.4%
24.4%
6.5%
8.5%
2.8%
0.9%
0.5%
2001
57.5%
23.1%
7.9%
8.7%
1.4%
0.9%
0.5%
100.0%
100.0%
These properties are divided among our operating segments at December 31, 2002 as follows: long-distance
services, 55.3%; cable services, 26.0%; local access services, 7.7%; Internet services, 5.7%; and all other, 5.3%.
These properties consist primarily of switching equipment, satellite earth stations, fiber-optic networks,
microwave radio and cable and wire facilities, cable head-end equipment, coaxial distribution networks, routers,
servers, transportation equipment, computer equipment and general office equipment. Substantially all of our
properties secure our new Senior Credit Facility. You should see note 6 to the Notes to Consolidated Financial
Statements included in Part II of this Report for more information.
Our construction in progress totaled $17.0 million at December 31, 2002, consisting of telecommunications,
cable, local service and support system projects that were incomplete at December 31, 2002. Our construction in
progress totaled $11.0 million at December 31, 2001, consisting of telecommunications, cable, Internet and
support systems projects that were incomplete at December 31, 2001.
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Long-Distance Services
We operate a modern, competitive telecommunications network employing the latest digital transmission
technology based upon fiber optic and digital microwave facilities within and between Anchorage, Fairbanks and
Juneau, Alaska. Our network includes digital fiber optic cables linking Alaska to the contiguous 48 states and
providing access to other carriers’ networks for communications around the world. We use satellite transmission
to remote areas of Alaska and for certain interstate and intrastate traffic, and to provide backup facilities for
certain portions of our long-haul fiber networks.
Our long-distance services segment owns properties and facilities including satellite earth stations, and
distribution, transportation and office equipment. Additionally, in December 1992 we acquired access to capacity
on an undersea fiber optic cable from Seward, Alaska to Pacific City, Oregon. We completed construction of an
additional fiber optic cable facility linking Alaska to Seattle, Washington in February 1999.
We entered into a purchase and lease-purchase option agreement in August 1995 for the acquisition of satellite
transponders on the PanAmSat Galaxy XR satellite to meet our long-term satellite capacity requirements. We use
the satellite transponders pursuant to a long-term capital lease arrangement with a leasing company. The purchase
and lease-purchase option agreement provided for the interim lease of transponder capacity on the PanAmSat
Galaxy IX satellite through the delivery of the purchased transponders on Galaxy XR in March 2000.
Effective June 30, 2001, we acquired, through the issuance of preferred stock, a controlling interest in the
corporation owning the 800-mile fiber optic cable system that extends from Prudhoe Bay, Alaska to Valdez,
Alaska via Fairbanks.
We lease our long-distance services industry segment’s executive, corporate and administrative facilities in
Anchorage, Fairbanks and Juneau, Alaska. Our operating, executive, corporate and administrative properties are
in good condition. We consider our properties suitable and adequate for our present needs and they are being
fully utilized.
Cable Services
The Cable Systems serve 33 communities and areas in Alaska including Anchorage, Fairbanks and Juneau, the
state's three largest urban areas. As of December 31, 2002, the Cable Systems consisted of approximately 2,230
miles of installed cable plant having between 330 to 550 MHz of channel capacity. Our principal physical assets
consist of cable television distribution plant and equipment, including signal receiving, encoding and decoding
devices, headend reception facilities, distribution systems and customer drop equipment for each of our cable
television systems.
Our cable television plant and related equipment are generally attached to utility poles under pole rental
agreements with local public utilities and telephone companies, and in certain locations are buried in underground
ducts or trenches. We own or lease real property for signal reception sites and business offices in many of the
communities served by our systems and for our principal executive offices.
We own the receiving and distribution equipment of each system. In order to keep pace with technological
advances, we are maintaining, periodically upgrading and rebuilding the physical components of our cable
communications systems. Such properties are in good condition. We own all of our service vehicles. We
consider our properties suitable and adequate for our present and anticipated future needs.
Local Access Services
We operate a modern, competitive local access telecommunications network employing the latest digital
transmission technology based upon fiber optic facilities within Anchorage, Fairbanks and Juneau, Alaska. Our
outside plant consists of connecting lines (aerial, underground and buried cable), the majority of which is on or
under public roads, highways or streets, while the remainder is on or under private property. Central office
64
equipment primarily consists of digital electronic switching equipment and circuit carrier transmission equipment.
Operating equipment consists of motor vehicles and other equipment.
Substantially all of our local access services’ central office equipment, administrative and business offices, and
customer service centers are in leased facilities. Such properties are in good condition. We consider our
properties suitable and adequate for our present and anticipated future needs.
Internet Services
We operate a modern, competitive Internet network employing the latest available technology. We provide
access to the Internet using a platform that includes many of the latest advancements in technology. The physical
platform is concentrated in Anchorage and is extended into many remote areas of the state. Our Internet platform
includes trunks connecting our Anchorage, Fairbanks, and Juneau facilities to Internet access points in Seattle
through multiple, diversely routed upstream Internet networks, and various other routers, servers and support
equipment.
We lease our Internet services industry segment’s operating facilities, located primarily in Anchorage. Such
properties are in good condition. We consider our properties suitable and adequate for our present and anticipated
future needs.
Capital Expenditures
Capital expenditures consist primarily of (a) gross additions to property, plant and equipment having an estimated
service life of one year or more, plus the incidental costs of preparing the asset for its intended use, and (b) gross
additions to capitalized software.
The total investment in property, plant and equipment has increased from $242.9 million at January 1, 1998 to
$611.2 million at December 31, 2002, including construction in progress and not including deductions of
accumulated depreciation. Significant additions to property, plant and equipment will be required in the future to
meet the growing demand for communications, Internet and entertainment services and to continually modernize
and improve such services to meet competitive demands.
Our capital expenditures for 1998 through 2002 were as follows (in millions):
1998
1999
2000
2001
2002
$ 149.0
36.6
$
48.9
$
68.0
$
66.1
$
We project capital expenditures of $40 million to $55 million for 2003 for which we have made no significant
purchase commitments through February 28, 2003. A majority of the expenditures will expand, enhance and
modernize our current networks, facilities and operating systems, and will develop other businesses. Additional
capital expenditures will be incurred if we acquire backup or standby facilities. You should see note 12 to the
accompanying Notes to Consolidated Financial Statements included in Part II of this Report for more
information.
During 2002, we funded our normal business capital requirements substantially through internal sources and, to
the extent necessary, from external financing sources. We expect expenditures for 2003 to be financed in the
same manner.
Insurance
We have insurance to cover risks incurred in the ordinary course of business, including general liability, property
coverage, director and officers and employment practices liability, auto, crime, fiduciary, aviation, and business
65
interruption insurance in amounts typical of similar operators in our industry and with reputable insurance
providers. Central office equipment, buildings, furniture and fixtures and certain operating and other equipment
are insured under a blanket property insurance program. This program provides substantial limits of coverage
against “all risks” of loss including fire, windstorm, flood, earthquake and other perils not specifically excluded
by the terms of the policies. As is typical in the communications industry, we are self-insured for damage or loss
to certain of our transmission facilities, including our buried, under sea, and above-ground transmission lines. We
self-insure with respect to employee health insurance and workers compensation, subject to stop-loss insurance
with other parties that caps our liability at specified limits. We believe our insurance coverage is adequate,
however if we become subject to substantial uninsured liabilities due to damage or loss to such facilities, our
financial results may be adversely affected.
Item 3. Legal Proceedings
Except as set forth in this item, neither the Company, its property nor any of its subsidiaries or their property is a
party to or subject to any material pending legal proceedings. We are parties to various claims and pending
litigation as part of the normal course of business. We are also involved in several administrative proceedings and
filings with the FCC, Department of Labor and state regulatory authorities. In the opinion of management, the
nature and disposition of these matters are considered routine and arising in the ordinary course of business.
Except as previously disclosed concerning rural exemption proceedings (see Part I, Item 1. Regulation, Franchise
Authorizations and Tariffs), even if resolved unfavorably to us, management believes these matters would not
have a materially adverse affect on our business or financial position, results of operations or liquidity.
Item 4. Submissions of Matters to a Vote of Security Holders
No matters were submitted during the fourth quarter of 2002 to a vote of security holders, through the solicitation
of proxies or otherwise.
Part II
Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters
Market Information for Common Stock
Shares of GCI's Class A common stock are traded on the Nasdaq National Market tier of The Nasdaq Stock
Market under the symbol GNCMA. Shares of GCI's Class B common stock are traded on the Over-the-Counter
market. Each share of Class B common stock is convertible, at the option of the holder, into one share of Class A
common stock. The following table sets forth the high and low sales price for the above-mentioned common
stock for the periods indicated. Market price data for Class A shares were obtained from the Nasdaq Stock
Market quotation system. Market price data for Class B shares were obtained from reported Over-the-Counter
market transactions. The prices represent prices between dealers, do not include retail markups, markdowns, or
commissions, and do not necessarily represent actual transactions.
66
2001:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2002:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Class A
Class B
High
Low
High
Low
9.031
12.150
12.450
12.320
9.700
10.260
7.250
7.800
5.875
8.250
8.450
8.250
7.050
6.400
2.600
2.990
8.750
12.000
11.950
12.000
9.000
12.000
7.000
7.000
6.500
8.050
9.600
9.250
7.300
7.000
3.500
3.100
Holders
As of December 31, 2002 there were 1,970 holders of record of GCI's Class A common stock and 465 holders of
record of GCI's Class B common stock (amounts do not include the number of shareholders whose shares are held
of record by brokers, but do include the brokerage house as one shareholder).
Dividends
GCI has never paid cash dividends on its common stock and has no present intention of doing so. Payment of
cash dividends in the future, if any, will be determined by GCI's Board of Directors in light of our earnings,
financial condition and other relevant considerations. Our existing bank loan agreements contain provisions that
prohibit payment of dividends on common stock, other than stock dividends (you should see note 6 to the
Consolidated Financial Statements included in Part II of this Report for more information).
Stock Transfer Agent and Registrar
Mellon Investor Services LLC is our stock transfer agent and registrar.
67
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.
Revenues
Net earnings (loss) before income taxes,
extraordinary item and cumulative effect of a
change in accounting principle
Cumulative effect of a change in accounting
principal, net of income tax benefit of $245
Net earnings (loss)
Basic net earnings (loss) per common share
Diluted net earnings (loss) per common share
Total assets
Long-term debt, including current portion
Obligations under capital leases, including current
portion
Redeemable preferred stock:
Series B
Series C
Years ended December 31,
2002
1998
1999
2000
2001
(Amounts in thousands except per share amounts)
$ 367,842
357,258
292,605
279,179 246,795
$
$
$
$
$
12,322
8,659
(21,649)
(14,866)
(10,920)
0
0
0
344
0
6,663
4,589
(13,234)
(9,527)
(6,797)
0.08
0.08
0.05
0.05
(0.29)
(0.29)
(0.21)
(0.21)
(0.14)
(0.14)
$ 738,782
734,679
679,007
643,151 649,445
$ 357,700
351,700
334,400
339,400 351,657
$
$
$
46,632
47,282
48,696
1,674
2,186
16,907
16,907
16,907
16,907
10,000
10,000
0
0
0
0
Total stockholders’ equity
$ 208,220
202,392
183,480
192,548 200,007
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.
68
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
In the following discussion, General Communication, Inc. and its direct and indirect subsidiaries are referred to as
“we,” “us” and “our.”
Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our
consolidated financial statements, which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. On an on-going basis, we evaluate our estimates and judgments, including those related to
unbilled revenues, long-distance cost of sales and services accruals, allowance for doubtful accounts, depreciation
and amortization periods, intangible assets, income taxes, and contingencies and litigation. We base our estimates
and judgments on historical experience and on various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under
different assumptions or conditions. See also our Cautionary Statement Regarding Forward-Looking Statements.
General Overview
We have experienced significant growth in recent years through strategic acquisitions, deploying new business
lines and expansion of our existing businesses. We have historically met our cash needs for operations, regular
capital expenditures and maintenance capital expenditures through our cash flows from operating activities. Cash
requirements for significant acquisitions and major capital expenditures have been provided largely through our
financing activities.
Consolidated revenues increased by more than $10 million in 2002 as compared to 2001, or almost $30 million
from core operations if the $19.5 million 2001 fiber sale is excluded. Our operating income increased by 11.6%
in 2002. This increase occurred in spite of our recording bad debt expense in 2002 of $11.6 million related to our
WorldCom receivables, and because we discontinued the amortization of goodwill and cable certificates upon the
adoption of SFAS 142, “Goodwill and Other Intangible Assets” on January 1, 2002. Adoption of SFAS 142
resulted in a decrease in 2002 amortization expense of approximately $6.5 million as compared to 2001. Our pre-
tax income increased by 42.3% and our net income increased by 45.2%. Excluding the 2001 fiber sale, our four
business segments experienced year over year growth in units and revenues as we continued to strengthen our
position in the markets we serve. Operating income increased in the long-distance services and cable services
segments, and decreased in the local access services and Internet services segments. Basic and diluted earnings
per share increased by 60.0% in 2002 as compared to 2001.
Long-Distance Services Overview
During 2002 long-distance services revenue represented 55.7% of consolidated revenues. Our provision of
interstate and intrastate long-distance services, private line and leased dedicated capacity services, and broadband
services accounted for 96.0% of our total long-distance services revenues during 2002.
Factors that have the greatest impact on year-to-year changes in long-distance services revenues include the rate
per minute charged to customers, usage volumes expressed as minutes of use, and the number of private line,
leased dedicated service and broadband products in use.
Our long-distance services segment faces significant competition from AT&T Alascom, Inc., long-distance
resellers, and local telephone companies that have entered the long-distance market. We believe our approach to
developing, pricing, and providing long-distance services and bundling different business segment services will
continue to allow us to be competitive in providing those services.
69
Our contract to provide interstate and intrastate long-distance services to Sprint was replaced in March 2002
extending its term to March 2007 with two one-year automatic extensions to March 2009. Beginning in April
2002 the new contract reduced the rate to be charged by us for certain Sprint traffic over the extended term of the
contract.
Other common carrier traffic routed to us for termination in Alaska is largely dependent on traffic routed to
WorldCom and Sprint by their customers. Pricing pressures, general economic deterioration, new program
offerings, business failures, and market consolidation continue to evolve in the markets served by WorldCom and
Sprint. If, as a result, their traffic is reduced, or if their competitors’ costs to terminate or originate traffic in
Alaska are reduced, our traffic will also likely be reduced, and our pricing may be reduced to respond to
competitive pressures. 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. See note 11 in the accompanying Notes to
Consolidated Financial Statements for a discussion of WorldCom’s Chapter 11 bankruptcy filing.
Due in large part to the favorable synergistic effects of our integrated approach, the long distance segment
continues to be a significant contributor to our overall performance, although the migration of traffic from voice
to data continues.
Cable Services Overview
During 2002, cable television revenues represented 24.1% of consolidated revenues. Our cable systems serve 33
communities and areas in Alaska, including the state's three largest population centers, Anchorage, Fairbanks and
Juneau.
We generate cable services revenues from four primary sources: (1) digital and analog programming services,
including monthly basic or premium subscriptions and pay-per-view movies or other one-time events, such as
sporting events; (2) equipment rentals and installation; (3) cable modem services (shared with our Internet
services segment); and (4) advertising sales. During 2002 programming services generated 76.9% of total cable
services revenues, equipment rental and installation fees accounted for 9.3% of such revenues, cable services’
allocable share of cable modem services accounted for 9.0% of such revenues, advertising sales accounted for
3.9% of such revenues, and other services accounted for the remaining 0.9% of total cable services revenues.
The primary factors that contribute to year-to-year changes in cable services revenues are average monthly
subscription and pay-per-view rates, the mix among basic, premium and pay-per-view services and digital and
analog services, the average number of cable television and cable modem subscribers during a given reporting
period, and revenues generated from new product offerings.
Our cable services segment faces competition from alternative methods of receiving and distributing television
signals and from other sources of news, information and entertainment. We believe our cable television services
will continue to be competitive by providing, at reasonable prices, a greater variety of programming and other
communication services than are available off-air or through other alternative delivery sources and superior
technical performance and responsive local customer service.
Local Access Services Overview
We generate local access services revenues from three primary sources: (1) business and residential basic dial
tone services; (2) business private line and special access services; and (3) business and residential features and
other charges, including voice mail, caller ID, distinctive ring, inside wiring and subscriber line charges. During
2002 local exchange services revenues represented 8.7% of consolidated revenues.
The primary factors that contribute to year-to-year changes in local access services revenues are the average
number of business and residential subscribers to our services during a given reporting period, the average
70
monthly rates charged for non-traffic sensitive services, the number and type of additional premium features
selected, and the traffic sensitive access rates charged to carriers.
Our local access services segment faces significant competition in Anchorage, Fairbanks, and Juneau from the
ILEC ACS and from AT&T Alascom, Inc. We began providing service in the Juneau market in the first quarter
of 2002. We believe our approach to developing, pricing, and providing local access services and bundling
different business segment services will allow us to be competitive in providing those services.
Internet Services Overview
We generate Internet services revenues from three primary sources: (1) access product services, including
commercial, Internet service provider, and retail dial-up access; (2) network management services; and (3)
Internet services’ allocable share of cable modem services (a portion of cable modem revenue is also recognized
by our cable services segment). During 2002 Internet services segment revenues represented 4.3% of
consolidated revenues.
The primary factors that contribute to year-to-year changes in Internet services revenues are the average number
of subscribers to our services during a given reporting period, the average monthly subscription rates, and the
number and type of additional premium features selected.
Marketing campaigns continue to be deployed targeting residential and commercial customers featuring bundled
Internet products. Our Internet offerings are coupled with our long-distance and local access services offerings
and provide free basic Internet services or discounted premium Internet services if certain long-distance or local
access services plans are selected. 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.
All Other Services Overview
Revenues reported in the All Other category as described in note 9 in the accompanying Notes to Consolidated
Financial Statements include our managed services, product sales, and cellular telephone services.
Revenues included in the All Other category represented 7.2% of total revenues in 2002 and include managed
services revenues totaling $22.0 million and product sales and cellular telephone services revenues totaling $4.6
million.
Results of Operations
The following table sets forth selected Statement of Operations data as a percentage of total revenues for the
periods indicated (underlying data rounded to the nearest thousands):
Statement of Operations Data:
Revenues:
Long-distance services
Cable services
Local access services
Internet services
All other services
Total revenues
Year Ended December 31,
2002
2001
2000
Percentage Change 1
2001
vs.
2002
2000
vs.
2001
55.7%
24.1%
8.7%
4.3%
7.2%
100.0%
56.2%
21.4%
7.1%
3.3%
12.0%
100.0%
62.4%
23.2%
6.9%
2.9%
4.6%
100.0%
2.1%
15.9%
27.1%
29.9%
(37.9%)
3.0%
9.9%
12.7%
24.9%
42.4%
219.3%
22.1%
71
Cost of sales and services
Selling, general and administrative
expenses
Bad debt expense
Depreciation and amortization
Operating income
Net income (loss) before income
taxes
Net income (loss)
Other Operating Data 2:
Long-distance services operating income 3
Cable services operating income 4
Local access services operating income
(loss) 5
Internet services operating loss 6
Year Ended December 31,
2002
33.6%
2001
39.1%
2000
40.9%
Percentage Change 1
2001
vs.
2002
(11.6%)
2000
vs.
2001
16.8%
35.1%
3.6%
15.3%
12.4%
32.6%
1.2%
15.6%
11.5%
34.2%
1.7%
17.3%
5.9%
10.7%
206.7%
1.3%
11.6%
16.6%
(14.6%)
9.9%
136.6%
3.3%
1.8%
2.4%
1.3%
(7.4%)
(4.5%)
42.3%
45.2%
140.0%
134.7%
38.6%
28.8%
34.0%
18.1%
27.6%
16.3%
16.0%
84.2%
35.0%
25.5%
(2.3%)
5.8%
(11.7%)
(150.2%)
162.2%
(117.2%) (125.2%)
(164.4%)
(21.6%)
(8.5%)
__________________________
1 Percentage change in underlying data.
2 Includes customer service, marketing and advertising costs.
3 Computed as a percentage of total external long-distance services revenues.
4 Computed as a percentage of total external cable services revenues.
5 Computed as a percentage of total external local access services revenues.
6 Computed as a percentage of total external Internet services revenues.
__________________________
Year Ended December 31, 2002 (“2002”) Compared To Year Ended December 31, 2001 (“2001”).
Overview of Revenues and Cost of Sales and Services
Total revenues increased 3.0% from $357.3 million in 2001 to $367.8 million in 2002. Excluding the fiber optic
cable system capacity sale of $19.5 million in 2001 as described in note 1(o) in the accompanying Notes to
Consolidated Financial Statements, total revenues increased 8.9% in 2002. The long-distance services, cable
services, local access services and Internet services segments contributed to the increase in total revenues,
partially off-set by a decrease in revenues from All Other Services. See the discussions below for more
information by segment.
Total cost of sales and services decreased 11.6% to $123.6 million in 2002. As a percentage of total revenues,
total cost of sales and services decreased from 39.1% in 2001 to 33.6% in 2002. Excluding the 2001 fiber system
capacity sale, total cost of sales and services as a percentage of total revenues decreased from 38.2% in 2001 to
33.6% in 2002. The long-distance services segment and All Other Services contributed to the decrease in total
cost of sales and services, partially off-set by increases in cost of sales and services in the cable services, local
access services and Internet services segments. See the discussions below for more information by segment.
Long-distance Services Segment Revenues
Long-distance services segment revenues increased 2.1% to $204.9 million in 2002.
Message Telephone Service Revenue from Common Carrier Customers
Message telephone service revenues from other common carriers (principally WorldCom and Sprint) increased
10.9% to $88.8 million in 2002 resulting from a 14.7% increase in wholesale minutes carried to 819.8 million
minutes. After excluding certain 2001 low-margin wholesale minutes no longer carried for other common
72
carriers, comparable wholesale minutes carried for other common carriers increased 19.5% over the prior year.
Revenue increases resulting from increased wholesale minutes carried for other common carriers was partially
off-set by a 3.3% decrease in the average rate per minute on minutes carried for other common carriers. The
increase is also due to the reclassification of approximately 12.0 million minutes of traffic generated by a certain
customer from retail in 2001 to wholesale in 2002. The average rate per minute decrease is primarily due to a
reduced rate charged by us for certain Sprint traffic due to a new contract commencing April 2002. After
excluding certain 2001 low-margin wholesale minutes not carried in 2002 for other common carriers, the
comparable average rate per minute decreased 6.5% from the prior year.
Revenues from and minutes carried for WorldCom increased in 2002 as compared to 2001.
The economic stagnation in the lower 48 states appears to have dampened demand for services provided by our
large common carrier customers. To the extent that these customers experience reduced demand for traffic
destined for and originating in Alaska, it could adversely affect our common carrier traffic. A protracted economic
malaise in the lower 48 states or a further disruption in the economy resulting from a war or renewed terrorist
activity could affect our carrier customers which, in turn, could affect our revenues and cash flows.
We believe that our contract with WorldCom will ultimately be reaffirmed and that we will develop an agreement
with respect to the pre-petition receivables balance and that WorldCom may ultimately exit bankruptcy with their
business intact. We cannot predict how long it may take WorldCom to complete the bankruptcy process or what
effect the process or the economy may have on their traffic levels and ultimately, their requirements for service to
and from Alaska.
Message Telephone Service Revenue from Residential, Commercial and Governmental Customers
Message telephone service revenues from residential, commercial, and governmental customers decreased 12.2%
to $53.3 million in 2002 primarily due to the following:
(cid:130) A 10.2% decrease in retail minutes carried for these customers to 309.2 million minutes. The decrease is
primarily due to the loss of approximately 8.0 million to 10.0 million minutes earned annually from a
certain retail customer and the reclassification of approximately 12.0 million minutes of traffic generated by
a certain customer from retail in 2001 to wholesale in 2002, and
(cid:130) A 4.6% decrease in the average rate per minute to $0.124 per minute paid by these customers due to our
promotion of and customers' enrollment in calling plans offering a certain number of minutes for a flat
monthly fee.
Through May 2001 discounts recognized on revenue from certain private line and private network customers
totaling $2.8 million off-set 2001 message telephone service revenue from residential, commercial and
governmental customers. Beginning June 2001 these discounts off-set revenue from private line and private
network customers. If these discounts had not been recognized in the 2001 message telephone service revenue
from residential, commercial and governmental customers through May 2001, revenues would have decreased
16.1% to $53.3 million in 2002 as compared to 2001.
The decreases in message telephone service revenues from residential, commercial, and governmental customers
described above are partially off-set by a 0.3% increase in the number of active residential, commercial, and
governmental customers billed to 88,200 at December 31, 2002.
Revenue from Private Line and Private Network Customers
Private line and private network transmission services revenues increased 4.2% to $36.2 million in 2002. The
increase is partially off-set by the effect of a reclassification of discounts recognized on revenue from certain
private line and private network customers. Through May 2001 these discounts totaled approximately $2.8
million and off-set message telephone service revenue from residential, commercial and governmental customers,
beginning July 2001 these discounts off-set revenue from private line and private network customers. If the
73
discounts had been recognized in revenue from private line and private network customers during all of 2001 the
increase in revenue would be 13.4% to $36.2 million. The increase in revenue from private line and private
network customers in 2002 is primarily due to an increased number of circuits leased by governmental customers.
Revenue from Broadband Customers
Revenues from our packaged telecommunications offering to rural hospital and health clinic service and our
SchoolAccess offering to rural school districts increased 17.4% in 2002 to $18.4 million. The increase is
primarily due to the addition in the second quarter of 2001 of two new subscribers to our rural hospital and health
clinic service for which we recognized a full year of revenue in 2002, and our new SchoolAccess offering
called Distance Learning that started in late 2002. Distance Learning is a video-conference based service and is
used by six school districts in Alaska.
Long-distance Services Segment Cost of Sales and Services
Long-distance services segment cost of sales and services decreased 18.0% to $60.1 million in 2002. Long-
distance services segment cost of sales and services as a percentage of long-distance services segment revenues
decreased from 36.5% in 2001 to 29.3% in 2002 primarily due to the following:
(cid:130) Reductions in access costs due to distribution and termination of our traffic on our own local access services
network instead of paying other carriers to distribute and terminate our traffic. The statewide average cost
savings is approximately $.038 and $.078 per minute for interstate and intrastate traffic, respectively. We
expect cost savings to continue to occur as long-distance traffic originated, carried, and terminated on our
own facilities grows,
(cid:130) The FCC Multi-Association Group (“MAG”) reform order reducing the interstate access rates paid by
(cid:130)
interexchange carriers to LECs in January and again in July 2002, and
In the course of business we estimate unbilled long-distance services cost of sales and services based upon
minutes of use processed through our network and established rates. Such estimates are revised when
subsequent billings are received, payments are made, billing matters are researched and resolved, tariffed
billing periods lapse, or when disputed charges are resolved. In 2002 and 2001, we had favorable and
(unfavorable) adjustments of $4.7 million and ($2.8) million, respectively. Excluding the adjustments,
long-distance services cost of sales and services as a percentage of long-distance services revenues was
35.1% and 31.6% in 2001 and 2002, respectively.
Long-distance services cost of sales and services in 2001 included a reversal of $2.0 million in accrued costs upon
the conclusion of a dispute with ACS and a $450,000 non-recurring refund from ACS in respect of its earnings
that exceeded regulatory requirements.
Cable Services Segment Revenues and Cost of Sales and Services
Cable services segment revenues increased 15.9% to $88.7 million and average gross revenue per average basic
subscriber per month increased $3.38 or 6.4% in 2002. The increases in revenues and rates per subscriber were
accomplished without any meaningful rate increases during 2002 and are due primarily to continued deployment
of our high value services including digital cable television and cable modems. Programming services revenues
increased 11.9% to $68.2 million in 2002 resulting from the following:
(cid:130) Basic subscribers served increased approximately 4,100 to approximately 136,100 at December 31, 2002 as
compared to December 31, 2001,
(cid:130) New facility construction efforts in 2002 resulted in approximately 4,700 additional homes passed, a 2.5%
increase from 2001, and
(cid:130) Digital subscriber counts increased 24.0% to approximately 30,500 at December 31, 2002 as compared to
December 31, 2001. Programming services revenues from digital subscribers increased 59.8% or $2.6
million from 2001 to 2002.
74
Effective February 2003, we increased rates charged for certain cable services and premium packages in six
communities, including the state's three largest population centers Anchorage, Fairbanks and Juneau.
The cable services segment’s share of cable modem revenue (offered through our Internet services segment)
increased $3.1 million to $8.0 million in 2002 due to an increased number of cable modems deployed.
Approximately 96% of our cable homes passed are able to subscribe to our cable modem service. We expect that
that number will increase to approximately 99% when we complete our upgrade of the Ketchikan cable system
which we expect to accomplish in 2003.
We now offer digital programming in Anchorage, Fairbanks, Juneau, Kenai, and Soldotna, which markets
represent approximately 80% of our homes passed at December 31, 2002.
We signed new seven-year retransmission agreements with the five local Anchorage broadcasters and began up
linking and distributing the local Anchorage programming to all of our cable systems. This was done to provide
additional value to our cable subscribers and to allow us to differentiate our programming from that of our DBS
competitors. In addition, we have been successful in growing advertising revenues from our statewide advertising
platform. Our ad insertion revenues increased approximately 28.9% in 2002.
Cable services cost of sales and services increased 13.5% to $23.6 million in 2002. Cable services cost of sales
and services as a percentage of cable services revenues, which is less as a percentage of revenues than are long-
distance, local access and Internet services cost of sales and services, decreased from 27.2% in 2001 to 26.7% in
2002.
Revenues earned from equipment rental and installation, cable services’ allocable share of cable modem services
and advertising sales do not have significant corresponding costs of sales and services. The decrease in cable
services cost of sales and services as a percentage of cable services revenues is primarily due to an increase in the
percentage of cable services revenues earned from equipment rental and installation, cable services’ allocable
share of cable modem services and advertising sales from 20.4% in 2001 to 23.1% in 2002.
The decrease in cable services cost of sales and services as a percentage of cable services revenues described
above is off-set by an increase in cable programming services cost of sales and services as a percentage of cable
programming services revenue from 34.2% in 2001 to 34.7% in 2002. Cable services rate increases did not keep
pace with programming cost increases in 2002. Programming costs increased for most of our cable services
offerings, and we incurred additional costs on new programming introduced in 2001 and 2002.
Local Access Services Segment Revenues and Cost of Sales and Services
Local access services segment revenues increased 27.1% in 2002 to $32.1 million primarily due to growth in the
average number of customers served. At December 31, 2002 an estimated 96,100 lines were in service as
compared to approximately 79,200 lines in service at December 31, 2001. We estimate that our 2002 lines in
service total represents a statewide market share of approximately 20%. At December 31, 2002 approximately
1,700 additional lines were awaiting connection. The increase in local access services revenues described above
was partially off-set by the following:
(cid:130) The FCC MAG reform order reducing the interstate access rates paid by interexchange carriers to LECs in
January and again in July 2002, and
(cid:130) A reduction in interstate access rates charged by us to interexchange carriers in response to an FCC order
forcing a competitor to reduce their interstate access rates.
75
Local access services cost of sales and services increased 43.9% to $20.2 million in 2002. Local access services
cost of sales and services as a percentage of local access services revenues increased from 55.6% in 2001 to
63.0% in 2002, primarily due to the following:
(cid:130) Decreased network access services revenues from other carriers as the number of customers purchasing
both long-distance and local access services from us increases,
(cid:130) An increase in the Anchorage loop lease rates and residential wholesale rates paid to ACS as described
below,
(cid:130) The effect of offering one to two months of free service to significant numbers of new local access services
customers acquired in 2002 while continuing to incur cost of sales and services for such new customers, and
(cid:130) The lease of wholesale circuits from ACS in Fairbanks and Juneau pending completion of our facilities
enabling service transition to UNE facilities and pricing.
The increases in local access services cost of sales and services as a percentage of local access services revenues
described above are partially offset by further economies of scale and more efficient network utilization as the
number of local access services subscribers and resulting revenues increase.
Our access line mix continued to hold steady in 2002, with residential lines representing approximately 55% of
our lines, business customers representing approximately 37%, and Internet access customers representing
approximately 8%. Approximately 86% of our lines are provided on our own facilities or using leased local
loops.
In Anchorage, ACS requested and received permission for a 7.7% increase in the UNE loop rate to $14.92 per
month and a 24% increase in their retail residential rates, both effective in November 2001. The wholesale
service rate we pay is tied to the retail residential rate and increased approximately $2.25 per line per month.
Additionally, the cost of most residential features increased 24.0% to approximately $1.35 per line per month.
The increased rates resulted in an approximately $1.2 million increase in our local access services cost of sales
and services in 2002.
The size of the local access services segment operating loss is exacerbated by the allocation of the benefit of
access cost savings to the long-distance services segment. If the local access services segment received credit for
the access charge reductions recorded by the long distance services segment, the local access services segment
operating loss would have decreased by approximately $7.0 million and the long distance services segment would
be reduced by an equal amount in 2002. Avoided access charges totaled approximately $7.0 million during 2002
as compared to $6.3 in 2001. The local access services segment operating loss is affected by the expected start-up
losses we are experiencing in the new Fairbanks and Juneau markets and our continued evaluation and testing of
IP cable telephony technology.
Internet Services Segment Revenues and Cost of Sales and Services
Internet services segment revenues increased 29.9% to $15.6 million in 2002 primarily due to growth in the
number of customers served and the number of cable modems deployed. We had approximately 71,700 Internet
subscribers at December 31, 2002 as compared to approximately 69,900 at December 31, 2001, of which
approximately 36,200 are cable modem subscribers at December 31, 2002 as compared to approximately 26,500
at December 31, 2001. The Internet services segment’s allocable share of cable modem revenues increased
60.3% to $6.5 million in 2002 as compared to 2001.
The Internet services segment does not share in plan fee revenues associated with our bundled Internet and long
distance service package. Estimated annual plan fees related to this service offering is in excess of $4.0 million
per year and those revenues are included in the long distance services segment.
Internet services cost of sales and services increased 0.9% to $4.8 million in 2002, and as a percentage of Internet
services revenues, totaled 30.8% and 39.6% in 2002 and 2001, respectively. The decrease as a percentage of
76
Internet services revenues is primarily due to a $2.5 million increase in Internet’s portion of cable modem revenue
to $6.5 million that generally has higher margins than do other Internet services products. As Internet services
revenues increase, economies of scale and more efficient network utilization continue to result in reduced Internet
cost of sales and services as a percentage of revenues.
We enhanced the value of our Internet offerings in 2002 through the addition of electronic billing and presentment
capabilities and the rollout of a product called e-mail guard, which filters out e-mail spam and viruses. We
upgraded the download speeds of all of our cable modem Internet service offerings. These new services and
enhancements have proven to be very popular with our customers and are helping to further solidify our customer
relationships.
All Other Revenues and Costs of Sales and Services
The 37.9% decrease in All Other revenues to $26.6 million in 2002 is primarily due to the $19.5 million fiber
system capacity sale in 2001, as described in note 1(o) in the accompanying Notes to Consolidated Financial
Statements. The decrease in revenues is partially offset by a $3.0 million increase in managed services revenue to
$22.0 million in 2002 primarily due to the provision of additional services to and increased revenues from a
certain customer as performance criteria was met.
Revenues from our GCI Fiber system that runs along the pipeline corridor are continuing to increase and we
expect the annual revenue run rate to increase by an additional four to five million dollars per year by the end of
2003.
All Other costs of sales decreased 44.8% to $14.9 million in 2002, and as a percentage of All Other revenues,
totaled 56.0% and 62.9% in 2002 and 2001, respectively. The 2002 decrease is due to $10.9 million in costs of
sale for the fiber system capacity sale in 2001, as described in note 1(o) in the accompanying Notes to
Consolidated Financial Statements. Excluding the 2001 fiber system capacity sale, cost of sales and services as a
percentage of revenues totaled 56.0% and 68.9% in 2002 and 2001, respectively. The decrease is primarily due to
the provision of additional services to and increased revenues from a certain customer as performance criteria was
met without a corresponding increase in cost of sales and services.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 10.7% to $129.0 million in 2002 and, as a percentage of
total revenues, increased to 35.1% in 2002 from 32.6% in 2001. Excluding the fiber system capacity sale in 2001,
selling, general and administrative expenses, as a percentage of total revenues, increased from 34.1% in 2001 to
35.1% in 2002. The 2002 increase in selling, general and administrative expenses is primarily due to increased
labor and health insurance costs, incremental new costs to operate GFCC and Rogers, and costs incurred for our
unsuccessful bid to purchase certain of the assets of WCI Cable, Inc. and its subsidiaries (“WCIC”), partially
offset by a decreased accrual for company-wide success sharing bonus costs.
Marketing and advertising expenses as a percentage of total revenues decreased from 3.4% in 2001 to 3.3% in
2002. Excluding revenues from the fiber system capacity sale in 2001, marketing and advertising expenses as a
percentage of total revenues were 3.6% in 2001.
Bad Debt Expense
Bad debt expense increased 206.7% to $13.1 million in 2002 and, as a percentage of total revenues, increased to
3.6% in 2002 from 1.2% in 2001. Excluding revenues from the fiber system capacity sale in 2001, bad debt
expense as a percentage of total revenues was 1.3% in 2001. The 2002 increase is primarily due to the $11.0
million bad debt expense for uncollected accounts due from WorldCom as further described in note 11 in the
accompanying Notes to Consolidated Financial Statements.
77
Depreciation and Amortization
Depreciation and amortization expense increased 1.3% to $56.4 million in 2002. The increase is primarily
attributable to an increase of 15.1% to $55.6 million in depreciation expense due to our $68.0 million investment
in equipment and facilities placed into service during 2001 for which a full year of depreciation was recorded in
2002, and the $59.2 million investment in equipment and facilities placed into service during 2002 for which a
partial year of depreciation will be recorded in 2002.
Partially offsetting the depreciation expense increase described above is the discontinuation of amortization of
Goodwill and Cable Certificates upon the adoption of SFAS 142, “Goodwill and Other Intangible Assets” on
January 1, 2002, resulting in a decrease in 2002 amortization expense of approximately $6.5 million as compared
to 2001.
Other Expense, Net
Other expense, net of other income, increased 3.4% to $33.4 million in 2002. The increase is primarily due to the
following:
(cid:130) A $3.2 million increase in deferred loan fee expense to $4.6 million primarily due to the recognition of $2.3
million in unamortized deferred loan fees upon refinancing our Senior Holdings Loan and Fiber Facility,
and
Increased interest expense in November and December 2002 due to the increased interest rate paid on our
new Senior Facility starting November 1, 2002.
(cid:130)
Partially offsetting these increases were decreased 2002 interest rates on our Senior Holdings Loan and Fiber
Facility through November 1, 2002.
Income Tax Expense
Income tax expense was $5.7 million in 2002 and $4.1 million in 2001. The increase was due to increased net
income before income taxes in 2002 as compared to 2001. Our effective income tax rate decreased from 47.0% in
2001 to 45.9% in 2002 due to the effect of items that are nondeductible for income tax purposes.
At December 31, 2002, we have (1) tax net operating loss carryforwards of approximately $191.2 million that will
begin expiring in 2005 if not utilized, and (2) alternative minimum tax credit carryforwards of approximately $1.9
million available to offset regular income taxes payable in future years. Our utilization of remaining net operating
loss carryforwards is subject to certain limitations pursuant to Internal Revenue Code section 382.
Tax benefits associated with recorded deferred tax assets are considered to be more likely than not realizable
through future reversals of existing taxable temporary differences and future taxable income exclusive of
reversing temporary differences and carryforwards. The amount of deferred tax asset considered realizable,
however, could be reduced in the near term if estimates of future taxable income during the carryforward period
are reduced which would result in additional income tax expense. We estimate that our effective income tax rate
for financial statement purposes will be 42% to 45% in 2003.
Year Ended December 31, 2001 (“2001”) Compared To Year Ended December 31, 2000 (“2000”).
Overview of Revenues and Cost of Sales and Services
Total revenues increased 22.1% from $292.6 million in 2000 to $357.3 million in 2001. Excluding the fiber optic
cable capacity sale in 2001 as described in note 1(o) in the accompanying Notes to Consolidated Financial
Statements, total revenues increased 15.4%. All of our segments contributed to the increase in total revenues.
Total cost of sales and services increased 16.8% to $139.8 million in 2001. As a percentage of total revenues,
total cost of sales and services decreased from 40.9% in 2000 to 39.1% in 2001. Excluding the 2001 fiber
capacity sale, total cost of sales and services as a percentage of total revenues decreased from 40.9% in 2000 to
78
36.1% in 2001. The cable services, local access services, Internet services segments and All Other Services
contributed to the increase in total cost of sales and services, partially off-set by a decrease in cost of sales and
services in the long-distance services segment.
Long-distance Services Segment Revenues
Long-distance services segment revenues increased 9.9% to $200.7 million in 2001.
Message Telephone Service Revenue from Common Carrier Customers
Message telephone service revenues from other common carriers (principally WorldCom and Sprint) increased
11.5% to $80.1 million in 2001 resulting from a 4.8% increase in wholesale minutes carried for other common
carriers and a 6.5% increase in the average rate per minute on minutes carried for other common carriers. After
excluding certain 2000 low-margin wholesale minutes no longer carried for other common carriers, comparable
wholesale minutes increased 23.5% over the prior year. The increase in the average rate per minute is primarily
due to the discontinued carriage of certain low-margin wholesale minutes.
Message Telephone Service Revenue from Residential, Commercial and Governmental Customers
Message telephone service revenues from residential, commercial, and governmental customers decreased 9.7%
in 2001 to $60.7 million primarily due to the following:
(cid:130) A 2.8% decrease in retail minutes carried for these customers to 344.2 million minutes,
(cid:130) A 15.0% decrease in the average rate per minute to $0.130 per minute paid by these customers due to our
promotion of and customers' enrollment in calling plans offering a certain number of minutes for a flat
monthly fee, and
(cid:130) A 0.9% decrease in the number of active residential, commercial, and governmental customers billed to
87,900 at December 31, 2001.
Revenue from Private Line and Private Network Customers
Private line and private network transmission services revenues increased 19.7% to $34.7 million in 2001 due to
an increased number of leased circuits in service. The increase is partially off-set by the effect of a
reclassification of discounts recognized on revenue from certain private line and private network customers.
Through May 2001 these discounts totaled approximately $2.8 million and off-set message telephone service
revenue from residential, commercial and governmental customers, beginning July 2001 these discounts off-set
revenue from private line and private network customers. If the discounts had been recognized in revenue from
private line and private network customers during all of 2001 the increase in revenue would be 10.0% to $34.7
million.
Revenue from Broadband Customers
Revenues from our packaged telecommunications offering to rural hospitals and health clinics and our
SchoolAccess offering to rural school districts increased 82.7% to $15.7 million in 2001. The increase is
primarily due to an increase in circuits and services sold to rural hospitals and health clinics from 51 circuits at
December 31, 2000 to 74 circuits at December 31, 2001.
Long-distances Services Segment Cost of Sales and Services
Long-distance services segment cost of sales and services decreased 4.3% to $73.3 million in 2001. Long-
distance services segment cost of sales and services as a percentage of long-distance services segment revenues
decreased from 41.9% in 2000 to 36.5% in 2001 primarily due to the following:
(cid:130) Reduced satellite transponder cost of sales and services beginning April 2000 upon our acquiring owned
satellite transponder capacity,
(cid:130) Reductions in access costs due to distribution and termination of our traffic on our own local access services
network instead of paying other carriers to distribute and terminate our traffic,
(cid:130) The conclusion of a dispute with ACS which allowed us to reverse $2.0 million in accrued costs,
79
(cid:130) A $450,000 non-recurring refund in 2001 from ACS in respect of its earnings that exceeded regulatory
(cid:130)
requirements, and
In the course of business we estimate unbilled long-distance services cost of sales and services based upon
minutes of use processed through our network and established rates. Such estimates are revised when
subsequent billings are received, payments are made, billing matters are researched and resolved, tariffed
billing periods lapse, or when disputed charges are resolved. In 2001 and 2000 we had unfavorable
adjustments of $2.8 million and $781,000, respectively. Excluding the unfavorable adjustments, the long-
distance services cost of sales and services as a percentage of long-distance services revenues was 41.5%
and 35.1% in 2000 and 2001, respectively.
Cable Services Segment Revenues and Cost of Sales and Services
Cable services segment revenues increased 12.7% to $76.6 million in 2001 and average gross revenue per average
basic subscriber per month increased $3.87 or 7.9% in 2001. Programming services revenues increased 9.4% to
$60.9 million in 2001 resulting from the following:
(cid:130) Basic subscribers served increased approximately 11,600 to approximately 132,000 at December 31, 2001
as compared to December 31, 2000 (the 2001 increase includes approximately 1,000 basic subscribers
acquired from G.C. Cablevision, Inc. on March 31, 2001 and approximately 7,000 basic subscribers
acquired from Rogers on November 19, 2001),
(cid:130) Rates charged to subscribers in most systems increased as of February 2001,
(cid:130) New facility construction efforts in 2001 and the acquisition of GC Cablevision, Inc. and Rogers
subscribers resulted in approximately 14,800 additional homes passed, a 8.3% increase from 2000, and
(cid:130) Digital subscriber counts increased 81.8% to approximately 24,600 at December 31, 2001 as compared to
December 31, 2000.
The cable services segment’s share of cable modem revenue (offered through our Internet services segment)
increased $2.5 million to $4.9 million in 2001.
Cable services cost of sales and services increased 16.9% to $20.8 million in 2001. Cable services cost of sales
and services as a percentage of cable revenues, which is less as a percentage of revenues than are long-distance,
local access and Internet services cost of sales and services, increased from 26.2% in 2000 to 27.2% in 2001.
Cable services rate increases did not keep pace with increases in programming costs in 2001. Programming costs
increased for most of our cable services offerings, and we incurred additional costs on new programming
introduced in 2000 and 2001.
Revenues earned from equipment rental and installation, cable services’ allocable share of cable modem services
and advertising sales do not have corresponding costs of sales and services. The increase in cable services cost of
sales and services as a percentage of cable services revenues is partially off-set by an increase in the percentage of
cable services revenues earned from equipment rental and installation, cable services’ allocable share of cable
modem services and advertising sales from 17.9% in 2000 to 20.4% in 2001.
Local Access Services Segment Revenues and Cost of Sales and Services
Local access services segment revenues increased 24.9% in 2001 to $25.2 million due to growth in the average
number of customers served. At December 31, 2001 approximately 79,200 lines were in service as compared to
approximately 62,100 lines in service at December 31, 2000.
Local access services cost of sales and services increased 30.4% to $14.0 million in 2001. Local access services
cost of sales and services as a percentage of local access services revenues increased from 53.3% in 2000 to
55.6% in 2001. The local access services cost of sales and services increase as a percentage of local access
services revenues is due to decreased network access services revenues from other carriers as the number of
customers purchasing both long-distance and local access services from us increases. The increases in local
access services cost of sales and services as a percentage of local access services revenues described above are
80
partially off-set by economies of scale and more efficient network utilization as local access services revenues
increase.
In Anchorage, ACS requested and received permission for a 7.7% increase in the UNE loop rate to $14.92 and a
24% increase in their retail residential rates, both effective in November 2001. The wholesale service rate we pay
is tied to the retail residential rate and increased approximately $2.25 per line. Additionally, the cost of residential
features increased 24.0% to approximately $1.35 per line.
Internet Services Segment Revenues and Cost of Sales and Services
Internet services segment revenues increased 42.4% to $12.0 million in 2001 primarily due to growth in the
average number of customers served. We had approximately 69,900 Internet subscribers at December 31, 2001 as
compared to approximately 62,600 at December 31, 2000, of which approximately 26,500 are cable modem
subscribers at December 31, 2001 as compared to approximately 16,000 at December 31, 2000. Approximately
850 cable modem subscribers were acquired from Rogers on November 19, 2001. Internet services allocable
share of cable modem revenues increased $3.0 million to $4.1 million in 2001 as compared to 2000.
Internet services cost of sales and services increased 8.2% to $4.7 million in 2001. Internet services costs of sales
as a percentage of Internet services revenues totaled 39.6% and 52.1% in 2001 and 2000, respectively. The
Internet services costs of sales decrease as a percentage of Internet services revenues is primarily due to a $3.0
million increase in Internet’s portion of cable modem revenue that generally has higher margins than do other
Internet products. As Internet services revenues increase, economies of scale and more efficient network
utilization continue to result in reduced Internet cost of sales and services as a percentage of Internet services
revenues.
All Other Revenues and Cost of Sales and Services
All Other revenues increased $29.4 million to $42.8 million in 2001 primarily due to the $19.5 million fiber
capacity sale in 2001, as described in note 1(o) in the accompanying Notes to Consolidated Financial Statements,
and increased revenues from managed services to a certain customer and for management services sold to Kanas
through the six month period ended June 30, 2001.
All Other costs of sales and services increased approximately $16.8 million to $26.9 million in 2001. The
increase is primarily due to the $10.9 million in cost of sale for the fiber system capacity sale in 2001, as
described in note 1(o) in the accompanying Notes to Consolidated Financial Statements, and increased costs
associated with the sale of additional services to a certain customer.
All Other costs of sales and services as a percentage of All Other revenues, totaled 62.9% and 75.9% in 2001 and
2000, respectively. Excluding the 2001 fiber system capacity sale, cost of sales and services as a percentage of
revenues totaled 68.9% and 75.9% in 2001 and 2000, respectively. The decrease is primarily due to the provision
of management services to Kanas without a corresponding increase in cost of sales and services.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 16.6% to $116.5 million in 2001 and, as a percentage of
total revenues, decreased from 34.2% in 2000 to 32.6% in 2001. Excluding the fiber capacity sale in 2001,
selling, general and administrative expenses, as a percentage of total revenues, were 34.1% in 2001. The increase
in selling, general and administrative expenses in 2001 is due to increased labor and health insurance costs,
increased accrual of a company-wide success sharing bonus, and incremental new costs to operate GFCC (see
note 3 to the accompanying Notes to Consolidated Financial Statements).
Marketing and advertising expenses as a percentage of total revenues decreased from 4.0% in 2000 to 3.4% in
2001. Excluding the fiber capacity sale in 2001, marketing and advertising expenses as a percentage of total
revenues were 3.6% in 2001.
81
Bad Debt Expense
Bad debt expense decreased 14.6% to $4.3 million in 2002 and, as a percentage of total revenues, decreased from
1.7% in 2000 to 1.2% in 2001. Excluding revenues from the fiber system capacity sale in 2001, bad debt expense
as a percentage of total revenues was 1.3% in 2001.
Depreciation and Amortization
Depreciation and amortization expense increased 9.9% to $55.7 million in 2001. The increase is attributable to
our $43.7 million investment in equipment and facilities placed into service during 2000 for which a full year of
depreciation was recorded during the year ended December 31, 2001 and the $68.0 million investment in
equipment and facilities placed into service during the year ended December 31, 2001 for which a partial year of
depreciation was recorded during 2001.
Other Expense, Net
Other expense, net of other income, decreased 17.1% to $32.3 million primarily due to a 19.7% decrease in
interest expense to $31.2 million in 2001. This decrease resulted primarily from decreased interest rates in 2001
on our variable rate debt, a $943,000 net interest benefit earned in 2001 from our two interest rate swap
agreements, decreased average outstanding long-term debt balances during the first six months of 2001 and a
charge of $2.0 million to interest expense in 2000 to write-off previously capitalized interest expense. Partially
offsetting these decreases were an increase in average outstanding indebtedness in the last six months of 2001 and
an increase in our average outstanding capital lease obligation balances in the last six months of 2000.
Income Tax (Expense) Benefit
Income tax (expense) benefit was ($4.1) million in 2001 and $8.4 million in 2000. The change was due to our
generation of net income before income taxes in 2001 as compared to a net loss before income taxes in 2000. Our
effective income tax rate increased from 38.9% in 2000 to 47.0% in 2001 due to the effect of items that are
nondeductible for income tax purposes.
Fluctuations in Quarterly Results of Operations
The following chart provides selected unaudited statement of operations data from our quarterly results of operations
during 2002 and 2001:
(Amounts in thousands, except per share amounts)
Total
Third
First
Year
Quarter
Quarter
Fourth
Quarter
Second
Quarter
2002
Revenues:
Long-distance services
Cable services
Local access services
Internet services
All Other services
Total revenues
Operating income 1
Net income (loss) before income taxes 1
Net income (loss) 1
Basic and diluted net income (loss) per
common share 1
$
$
$
$
$
$
$
$
$
$
50,068
21,346
7,308
3,573
5,915
88,210
11,133
3,858
2,212
52,375
21,919
8,106
3,912
6,428
92,740
4,766
(1,686)
(1,103)
53,778
22,057
8,096
3,927
6,692
94,550
16,353
8,662
5,063
48,711 204,932
88,688
23,366
32,071
8,561
15,584
4,172
26,567
7,532
92,342 367,842
45,725
13,473
12,322
1,488
6,663
491
0.03
(0.03)
0.08
0.00
0.08
82
(Amounts in thousands, except per share amounts)
Total
Third
First
Year
Quarter
Quarter
Fourth
Quarter
Second
Quarter
2001
Revenues:
Long-distance services
Cable services
Local access services
Internet services
All Other services 2
Total revenues
Operating income 2
Net income before income taxes
Net income
Basic net income (loss) per common
share
Diluted net income (loss) per common
share 3
$
$
$
$
$
$
$
$
$
$
$
46,236
18,046
5,958
2,619
24,058
96,917
13,385
4,322
2,423
49,851
18,873
6,183
3,134
7,494
85,535
8,759
436
166
0.04
(0.01)
0.03
(0.01)
53,892
19,113
6,397
3,019
5,598
88,019
10,540
2,717
1,527
0.02
0.02
50,715 200,694
76,554
20,522
25,229
6,691
11,996
3,224
5,635
42,785
86,787 357,258
40,975
8,291
8,659
1,184
4,589
473
0.00
0.05
0.00
0.05
1 The second and third quarters of 2002 include the provision of $9.7 million and $1.2 million,
respectively, of bad debt expense for estimated uncollectible accounts from WorldCom.
2 The first quarter of 2001 includes $19.5 million of revenue and $7.3 million of operating income
(after deducting direct operating costs) from the sale of long-haul capacity in the Alaska United
undersea fiber optic cable system.
3 Due to rounding, the sum of quarterly net income (loss) per common share amounts does not
agree to total year net income per common share amounts.
Overview of Revenues and Cost of Sales and Services
Total revenues for the quarter ended December 31, 2002 (“fourth quarter”) were $92.3 million, representing a
2.3% decrease from $94.6 million for the quarter ended September 30, 2002 (“third quarter”). The long-distance
services segment contributed to the decrease in total revenues, partially off-set by an increase in revenues from the
cable services, local access services and Internet services segments and All Other Services.
Cost of sales and services increased from $30.4 million in the third quarter to $31.1 million in the fourth quarter.
As a percentage of revenues, third and fourth quarter cost of sales and services totaled 32.1% and 33.7%,
respectively. The cable services segment and All Other Services contributed to the increase in total cost of sales
and services, partially off-set by decreases in cost of sales and services in the long-distance services, local access
services and Internet services segments.
Long-distance Services Segment Revenues and Cost of Sales and Services
In the fourth quarter long-distance services segment revenues decreased 9.4% to $48.7 million. The decrease
primarily resulted from a decrease in long-distance services revenues from residential, commercial, governmental,
and other common carrier customers.
Revenues from other common carriers decreased 15.7% to $20.6 million primarily due to the following:
(cid:130) A decrease of approximately $1.6 million due to a loss of minutes carried for other common carriers. The
decline in revenues and minutes is due in part to the substitution effects that are being experienced by
other common carriers including WorldCom and Sprint. In the past, these effects on us were partially off-
set by the strong growth in our wholesale other common carrier traffic. During the fourth quarter of 2002,
83
in addition to expected seasonality, our wholesale other common carrier traffic was affected by the weak
lower 48 economy and changes in the carrier market,
(cid:130) A 15.4% decrease in minutes carried for other common carriers to 189.9 million minutes,
(cid:130) A 0.3% decrease in the average rate per minute on minutes carried for other common carriers, and
(cid:130) A $920,000 incentive credit provided to an other common carrier customer in the fourth quarter of 2002.
Revenues from residential, commercial, and governmental customers decreased 17.8% to $11.2 million primarily
due to the following:
(cid:130) A 7.4% decrease in the average rate per minute to $0.113 per minute paid by residential, commercial and
governmental customers, and
(cid:130) A 2.5% decrease in retail minutes carried for residential, commercial and governmental customers to 73.8
million minutes
Long-distance revenues have historically been highest in the summer months because of temporary population
increases attributable to tourism and increased seasonal economic activity such as construction, commercial
fishing, and oil and gas activities.
Long-distance services cost of sales and services decreased 0.3% to $14.3 million in the fourth quarter. Long-
distance services cost of sales and services as a percentage of long-distance services revenues increased from
26.8% in third quarter to 29.5% in fourth quarter primarily due to the following:
(cid:130) The $920,000 incentive credit provided during the fourth quarter as previously described,
(cid:130) The effect of seasonality which resulted in a decrease in long-distance service revenues in the fourth
(cid:130)
quarter with no corresponding decrease in certain fixed cost of sales and services,
Increased costs associated with additional transponder and network backup capacity incurred in the fourth
quarter, and
(cid:130) Reduced revenues from WorldCom and Sprint of approximately $1.6 million in the fourth quarter, as
described above. Some of these revenues have a lower cost of sales and services as a percentage of
revenues as compared to revenues from other traffic we carry.
Cable Services Segment Revenues and Cost of Sales and Services
Cable services segment revenues increased 5.9% to $23.4 million and average gross revenue per average basic
subscriber per month increased $3.16 or 5.7% in fourth quarter. Programming services revenues increased 4.2%
to $17.7 million in fourth quarter resulting from the following:
(cid:130) Basic subscribers served increased approximately 1,500 to approximately 136,100 at December 31, 2002 as
compared to September 30, 2002,
(cid:130) New facility construction efforts in 2002 resulted in approximately 1,000 additional homes passed, a 0.5%
increase from September 30, 2002, and
(cid:130) Digital subscriber counts increased 7.0% to approximately 30,500 at December 31, 2002 as compared to
September 30, 2002. Revenue from digital subscribers increased approximately 13.5% or $240,000 from
2001 to 2002.
The increase in number of basic subscribers is attributed primarily to the effects of normal seasonality.
Cable programming services revenues have historically been highest in the winter months because consumers
spend more time at home and tend to watch more television during these months.
The cable services segment’s share of cable modem revenue (offered through our Internet services segment)
increased $151,000 to $2.3 million in fourth quarter due to an increased number of cable modems deployed.
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Cable services cost of sales and services increased 2.6% to $5.9 million in fourth quarter as compared to the third
quarter. Cable services cost of sales and services as a percentage of cable revenues, which is less as a percentage
of revenues than are long-distance, local access and Internet services cost of sales and services, decreased from
26.1% in the third quarter to 25.3% in the fourth quarter. Equipment rental and installation, cable services’
allocable share of cable modem services and advertising sales revenues do not have corresponding costs of sales
and services. The decrease in cable services cost of sales and services as a percentage of cable revenues is
primarily due to an increase in the percentage of cable revenues earned from equipment rental and installation,
cable services’ allocable share of cable modem services, and advertising sales revenues from 23.1% in third
quarter to 24.4% in fourth quarter. Increasing revenues from our new high value services are helping mitigate the
effect of increasing programming costs on our margins.
Local Access Services Segment Revenues and Cost of Sales and Services
Local access services segment revenues increased $465,000 in the fourth quarter to $8.6 million primarily due to
growth in the average number of customers served. At December 31, 2002 an estimated 96,100 lines were in
service as compared to approximately 95,800 lines in service at September 30, 2002.
Local access services segment cost of sales and services decreased $90,000 to $5.2 million in the fourth quarter.
Local access services segment cost of sales and services as a percentage of local access services segment revenues
decreased from 65.9% in the third quarter to 61.2% in the fourth quarter.
Internet Services Segment Revenues and Cost of Sales and Services
Internet services segment revenues increased $245,000 to $4.2 million in the fourth quarter primarily due to
growth in the number of customers served and the number of cable modems deployed. We had approximately
71,700 Internet subscribers at December 31, 2002 as compared to approximately 71,200 at September 30, 2002,
of which approximately 36,200 are cable modem subscribers at December 31, 2002 as compared to approximately
33,000 at September 30, 2002. The Internet services segment’s allocable share of cable modem revenues
increased $118,000 to $1.8 million in the fourth quarter as compared to the third quarter.
Internet services cost of sales and services was $1.2 million in the third and fourth quarters, and as a percentage of
Internet services revenues, totaled 31.3% and 29.2% in the third and fourth quarters, respectively.
All Other Revenues and Costs of Sales and Services
All Other revenues increased $840,000 to $7.5 million in the fourth quarter primarily due to the provision of
additional services to and increased revenues from a certain customer.
All Other costs of sales increased $713,000 to $4.4 million in the fourth quarter, and as a percentage of All Other
revenues, totaled 54.8% and 58.1% in the third and fourth quarters, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $725,000 to $32.9 million in the fourth quarter as
compared to the third quarter. As a percentage of revenues, fourth quarter selling, general and administrative
expenses were 35.7% as compared to 34.1% for the third quarter. The fourth quarter increase in selling, general
and administrative expenses as a percentage of revenues is primarily due to increased labor costs.
Bad Debt Expense
Bad debt expense decreased $1.4 million to $250,000 in the fourth quarter as compared to the third quarter. As a
percentage of revenues, fourth quarter bad debt expense was 0.3% as compared to 1.8% for the third quarter. The
third quarter included a $1.2 million bad debt expense for uncollected accounts due from WorldCom; no
additional bad debt expense for uncollected accounts due from WorldCom was recognized in the fourth quarter.
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Other Expense, Net
Other expense, net of other income, increased 55.8% to $12.0 million due to the following:
(cid:130) A 20.5% increase in interest expense to $9.0 million in the fourth quarter as compared to the third quarter
due to the increased interest rate paid on our new Senior Facility starting November 1, 2002,
(cid:130) Recognition of $2.3 million in unamortized deferred loan fees upon the refinance of our Senior Holdings
Loan and Fiber Facility on November 1, 2002, and
Increased deferred loan fees from our Senior Facility starting November 1, 2002.
(cid:130)
Net Income
We reported net income of $491,000 for the fourth quarter as compared to net income of $5.1 million for the third
quarter. The decrease is primarily due to seasonal and other decreases in revenues without a corresponding
decrease in cost of sales, and increased other expense, net of other income, in the fourth quarter as previously
described, partially off-set by decreased income tax expense in the fourth quarter.
Liquidity and Capital Resources
Cash flows from operating activities totaled $74.5 million in 2002 as compared to $79.9 million in 2001. The
decrease in 2002 is primarily due to the effect of the 2001 fiber system capacity sale partially offset by increased
cash flow in 2002 from some of our segments. Uses of cash during 2002 include $65.1 million of expenditures
for property and equipment, including construction in progress, principal payments of long-term borrowings and
capital lease obligations of $17.3 million, payment of $3.1 million in notes receivable issued to related parties,
and payment of preferred stock dividends of $2.0 million. Other sources of cash in 2002 include $14.8 million in
long-term borrowings and receipt of $946,000 in repayments of notes receivable issued to related parties.
Net receivables decreased $4.2 million from December 31, 2001 to December 31, 2002 primarily due to decreases
in trade receivables for broadband services provided to hospitals and health clinics and telecommunication
services provided to other common carriers. The decrease in broadband trade receivables is due to a payment
received in 2002 from the federal government. The decrease in other common carrier trade receivables is net of
the allowance for amounts due from WorldCom preceding their filing for Chapter 11 bankruptcy, and due to the
timing of payments received from a certain common carrier customer.
Working capital totaled $4.2 million at December 31, 2002, a $11.7 million increase in working capital as
compared to a deficit of ($7.5) million as of December 31, 2001. The increase is primarily attributed to
classification of $5.7 million of our Senior Holdings Loan as current maturities of long-term debt as of December
31, 2001. The Senior Holdings Loan and Fiber Facility were subject to a refinancing agreement on November 1,
2002 as further described below, resulting in the classification of all such debt as long-term at December 31,
2002.
On November 1, 2002 we closed our $225.0 million bank facility (“Senior Facility”) to refinance the Senior
Holdings Loan and Fiber Facility. The Senior Holdings Loan and Fiber Facility had balances of approximately
$120.1 million and $60.0 million, respectively, at November 1, 2002. The Senior Facility includes a term loan of
$175.0 million and a revolving credit facility of $50.0 million. The Senior Facility matures on November 1, 2004
and bears interest at LIBOR plus 6.50%. We are required to pay a commitment fee equal to 1.5% per annum on
the unused portion of the commitment. If the unused revolver is more than $25.0 million the commitment fee
increases to 2.0% per annum on the unused portion of the commitment. We recognized $116,000 in commitment
fee expense during the year ended December 31, 2002.
On November 30, 2003 we are required to prepay the term loan in an amount equal to 50% of the amount by
which earnings before interest, taxes, depreciation, and amortization exceeds certain fixed charges as defined in
the Senior Facility agreement (“Excess Cash Flow”) during the year ended September 30, 2003. On May 30,
2004 we are required to prepay the term loan in an amount equal to 50% of the Excess Cash Flow during the six
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months ended March 31, 2004. The prepayment required on November 30, 2003, if any, may be funded by a
draw on the revolving credit facility.
The Senior Facility contains, among others, covenants limiting additional indebtedness and except for cash
dividends on existing outstanding preferred stock, prohibits any direct or indirect distribution, dividend,
redemption or other payment to any person on account of any general or limited partnership interest in, or shares
of capital stock or other securities of GCI, Inc. and subsidiaries. Under the Senior Facility we may not allow the:
(cid:130) Ratio of total indebtedness to annualized operating cash flow to be greater than 4.5:1,
(cid:130) Ratio of senior secured indebtedness to annualized operating cash flow to be greater than 2.25:1, and
(cid:130) Ratio of annualized operating cash flow to total interest expense to be less than 2.50:1.
Capital expenditures, other than those incurred to build additional fiber optic cable system capacity, in any of the
years ended September 30, 2003, March 31, 2004 and September 30, 2004 may not exceed:
(cid:130)
(cid:130)
$25.0 million, plus
50% of any Excess Cash Flow during the applicable period less certain permitted investments of up to
$5.0 million during the applicable period.
The Senior Facility allows the issuance of up to $58 million of subordinated debt, the proceeds of which could be
used for the acquisition of backup fiber facilities.
We expect our 2003 expenditures for property and equipment for our core operations, including construction in
progress, will total $40 million to $55 million.
$3.0 million of the Senior Facility has been used to provide a letter of credit to secure payment of certain access
charges associated with our provision of telecommunications services within the State of Alaska.
The term loan is fully drawn and we have drawn $2.7 million against the revolving credit facility plus a $3.0
million letter of credit, which leaves $44.3 million available at December 31, 2002 to draw under the revolving
credit facility if needed. The new facility provides us the flexibility to continue to pursue opportunities in the
marketplace, however we are not planning to draw down the facility as we expect to continue investing only a
portion of what we generate in cash flow in additional capital expenditures for our core business operations.
In connection with the funding of the Senior Facility, we paid bank fees and other expenses of approximately
$7,141,000 during the year ended December 31, 2002 which will be charged to Deferred Loan Fee Expense over
the life of the agreement. We funded $6,809,000 of the bank fees and other expenses by a draw on the Senior
Facility.
On January 3, 2001 we entered into an interest rate swap agreement to convert $50 million in 9.75% fixed rate to
variable rate debt. This interest rate swap agreement was called by the counter party at no cost and terminated on
August 1, 2002.
Effective September 21, 2001, we entered into an interest rate swap agreement to convert $25 million of variable
interest rate debt equal to the 90 day LIBOR rate plus 334 basis points to 3.98% fixed rate debt plus applicable
margins. Terms of the interest rate swap mirror the underlying variable rate debt, except the interest rate swap
terminates on September 21, 2004.
We were in compliance with all loan covenants at December 31, 2002.
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Our semi-annual Senior Notes interest payment of $8.8 million was due February 1, 2003 and was paid in full at
that time out of existing cash balances. Our next Senior Notes interest payment of $8.8 million is due August 1,
2003.
Our expenditures for property and equipment, including construction in progress, totaled $65.1 million and $65.6
million during 2002 and 2001, respectively. Our capital expenditures requirements are largely success driven and
are a result of the progress we are making in the marketplace. We expect our 2003 expenditures for property and
equipment for our core operations, including construction in progress, to total $40 million to $55 million,
depending on available opportunities and the amount of cash flow we generate during 2003. That number
excludes any investment we may make with respect to additional undersea fiber capacity. Planned capital
expenditures over the next five years include those necessary for continued expansion of our long-distance, local
exchange and Internet facilities, supplementation of our existing network backup facilities, continuing
development of our Personal Communication Services, or PCS, network, cable telephony, and upgrades to our
cable television plant.
The financial, credit and economic impacts of WorldCom’s bankruptcy filing on the industry in general and on us
in particular are not yet fully understood and are not predictable. We currently cannot predict the timing or
amount that WorldCom will pay on outstanding balances due us as of their bankruptcy filing date of July 21,
2002. Unpaid balances due from WorldCom for services rendered prior to their filing date total approximately
$12.9 million at December 31, 2002, against which we have reserved $11.6 million. We believe that payment for
services provided to WorldCom subsequent to their bankruptcy filing date will continue to be made timely,
consistent with our status in WorldCom’s filing as a key service provider or utility to WorldCom.
A conversion of WorldCom’s bankruptcy petition to Chapter 7, unfavorable reaffirmation of our pre-filing
contracts and agreements with WorldCom, or a migration of WorldCom’s traffic off our network without it being
replaced by other common carriers that interconnect with our network, could have a materially adverse impact on
our financial position, results of operations and liquidity.
Dividends earned on our Series B preferred stock are payable at the semi-annual payment dates of April 30 and
October 31 of each year. The determination of whether the dividend due on April 30, 2003 will be paid in cash or
additional fully paid shares of Series B preferred stock will be made on or before the due date. Dividends earned
on our Series B preferred stock are payable in cash only beginning October 31, 2003. Redemption is required on
April 30, 2011.
Dividends earned on our Series C preferred stock are payable in cash quarterly. We may redeem the Series C
preferred stock at any time in whole but not in part. Mandatory redemption is required at any time after June 30,
2005 at the option of holders of 80% of the outstanding shares of the Series C preferred stock. The redemption
price is $1,000 per share plus the amount of all accrued and unpaid dividends, whether earned or declared,
through the redemption date.
The long-distance, local access, cable, Internet and wireless services industries continue to experience substantial
competition, regulatory uncertainty, and continuing technological changes. Our future results of operations will
be affected by our ability to react to changes in the competitive and regulatory environment and by our ability to
fund and implement new or enhanced technologies. We are unable to determine how competition, economic
conditions, and regulatory and technological changes will affect our ability to obtain financing.
The telecommunications industry in general is depressed due to high levels of competition in the long-distance
market resulting in pressures to reduce prices, an oversupply of long-haul capacity, excessive debt loads, several
high-profile company failures and potentially fraudulent accounting practices by some companies. Our ability to
refinance existing debt and to obtain new debt under acceptable terms and conditions in the short-term and long-
term may be diminished as a result.
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We believe that we will be able to meet our current and long-term liquidity and capital requirements, fixed
charges and preferred stock dividends through our cash flows from operating activities, existing cash, cash
equivalents, short-term investments, credit facilities, and other external financing and equity sources. Should cash
flows be insufficient to support additional borrowings and principal payments scheduled under our existing credit
facilities, capital expenditures will likely be reduced.
New Accounting Standards
In July 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations”. SFAS No. 143
provides accounting and reporting standards for costs associated with the retirement of long-lived assets. This
statement requires entities to record the fair value of a liability for an asset retirement obligation in the period in
which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying
amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity
either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. We will adopt this
statement January 1, 2003. Upon adoption, we expect to record a cumulative effect of approximately $910,000 as
a decrease in equity due to a change in accounting principle, and expect to record an asset retirement obligation of
approximately $1.6 million and capitalized costs of approximately $650,000.
In July 2002, the FASB issued SFAS No 146, “Accounting for Costs Associated with Exit or Disposal
Activities”. Upon adoption of SFAS 146, enterprises may only record exit or disposal costs when they are
incurred and can be measured at fair value. The recorded liability will be subsequently adjusted for changes in
estimated cash flows. SFAS 146 revises accounting for specified employee and contract terminations that are part
of restructuring activities. We will adopt this statement January 1, 2003 and do not expect it to have a material
effect on our results of operations, financial position and cash flows.
On December 31, 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition
and Disclosure”. This Statement amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to
provide alternative methods of transition for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS
No. 123 to require prominent disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method used on reported results. The
transition provisions and annual statement disclosure requirements of SFAS No. 148 have been adopted for the
year ended December 31, 2002. The interim statement disclosure requirements are effective for the first interim
statement that includes financial information after December 15, 2002. We have elected to continue to apply the
intrinsic-value method.
Critical Accounting Policies
Our accounting and reporting policies comply with accounting principles generally accepted in the United States.
The preparation of financial statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions. The financial position and results of operations can be affected
by these estimates and assumptions, which are integral to understanding reported results. Critical accounting
policies are those policies that management believes are the most important to the portrayal of the Company’s
financial condition and results, and require management to make estimates that are difficult, subjective or
complex. Most accounting policies are not considered by management to be critical accounting policies. Several
factors are considered in determining whether or not a policy is critical in the preparation of financial statements.
These factors include, among other things, whether the estimates are significant to the financial statements, the
nature of the estimates, the ability to readily validate the estimates with other information including third parties
or available prices, and sensitivity of the estimates to changes in economic conditions and whether alternative
accounting methods may be utilized under generally accepted accounting principles. For all of these policies,
management cautions that future events rarely develop exactly as forecast, and the best estimates routinely require
adjustment. Management has discussed the development and the selection of critical accounting policies with the
Company’s Audit Committee.
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Those policies considered to be critical accounting policies for the year ended December 31, 2002 are described
below.
(cid:130) We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our
customers to make required payments. We base our estimates on the aging of our accounts receivable
balances, financial health of specific customers, and our historical write-off experience, net of recoveries.
If the financial condition of our customers were to deteriorate or if they are unable to emerge from
reorganization proceedings, resulting in an impairment of their ability to make payments, additional
allowances may be required. If their financial condition improves or they emerge successfully from
reorganization proceedings, allowances may be reduced. Such allowance changes could have a material
effect on our consolidated financial condition and results of operations. Refer to Note 11 in the
accompanying Notes to Consolidated Financial Statements for additional information regarding our
provision of a $11.6 million allowance for WorldCom receivable balances.
(cid:130) We record all assets and liabilities acquired in purchase acquisitions, including goodwill and other
intangibles, at fair value as required by SFAS 141. Goodwill and indefinite-lived assets such as our cable
segment franchise agreements are no longer amortized but are subject, at a minimum, to annual tests for
impairment. Other intangible assets are amortized over their estimated useful lives using the straight-line
method, and are subject to impairment if events or circumstances indicate a possible inability to realize
the carrying amount. The initial goodwill and other intangibles recorded and subsequent impairment
analysis requires management to make subjective judgments concerning estimates of how the acquired
asset will perform in the future using a discounted cash flow analysis. Additionally, 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 reportable operating
segments, we may consider other information to validate the reasonableness of our valuations including
public market comparables, multiples of recent mergers and acquisitions of similar businesses and third-
party assessments. These evaluations could result in a change in useful lives in future periods and could
result in write-down of the value of intangible assets. Because of the significance of the identified
intangible assets and goodwill to our consolidated balance sheet, the annual impairment analysis will be
critical. Any changes in key assumptions about the business and its prospects, or changes in market
conditions or other externalities, could result in an impairment charge and such a charge could have a
material adverse effect on our consolidated financial condition and results of operations. Refer to Note 4
in the accompanying Notes to Consolidated Financial Statements for additional information regarding
intangible assets.
(cid:130) We estimate unbilled long-distance segment cost of sales based upon minutes of use carried through our
network and established rates. We estimate unbilled costs for new circuits and services, and when
network changes occur that result in traffic routing changes or a change in carriers. Carriers that provide
service to us regularly change their networks which can lead to new, revised or corrected billings. Such
estimates are revised or removed when subsequent billings are received, payments are made, billing
matters are researched and resolved, tariffed billing periods lapse, or when disputed charges are resolved.
Revisions to previous estimates could either increase or decrease costs in the year in which the estimate is
revised which could have a material effect on our consolidated financial condition and results of
operations.
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(cid:130) Our income tax policy provides for deferred income taxes to show the effect of temporary differences
between the recognition of revenue and expenses for financial and income tax reporting purposes and
between the tax basis of assets and liabilities and their reported amounts in the financial statements in
accordance with SFAS No. 109, “Accounting for Income Taxes.” We have recorded deferred tax assets
of approximately $76.9 million associated with income tax net operating losses that were generated from
1980 to 2002, and that expire from 2005 to 2022. Pre-acquisition income tax net operating losses
associated with acquired companies are subject to additional deductibility limits. We have recorded
deferred tax assets of approximately $1.9 million associated with alternative minimum tax credits that do
not expire. Significant management judgment is required in developing our provision for income taxes,
including the determination of deferred tax assets and liabilities and any valuation allowances that may be
required against the deferred tax assets. In conjunction with certain 1996 acquisitions, we determined that
approximately $20 million of the acquired net operating losses would not be utilized for income tax
purposes, and elected with our December 31, 1996 income tax returns to forego utilization of such
acquired losses. Deferred tax assets were not recorded associated with the foregone losses and,
accordingly, no valuation allowance was provided. We have not recorded a valuation allowance on the
deferred tax assets as of December 31, 2002 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 condition and results of operations. Refer to Note 7
in the accompanying Notes to Consolidated Financial Statements for additional information regarding
income taxes.
Other significant accounting policies, not involving the same level of measurement uncertainties as those
discussed above, are nevertheless important to an understanding of the financial statements. Polices related to
revenue recognition (including fiber sales transactions) and financial instruments require difficult judgments on
complex matters that are often subject to multiple sources of authoritative guidance. Certain of these matters are
among topics currently under reexamination by accounting standards setters and regulators. Although no specific
conclusions reached by these standard setters appear likely to cause a material change in our accounting policies,
outcomes cannot be predicted with confidence. Significant accounting policies are discussed in Note 1 in the
accompanying Notes to Consolidated Financial Statements.
Geographic Concentration and the Alaska Economy
We offer voice and data telecommunication and video services to customers primarily throughout Alaska.
Because of this geographic concentration, growth of our business and of our operations depends upon economic
conditions in Alaska. The economy of Alaska is dependent upon the natural resource industries, and in particular
oil production, as well as investment earnings, tourism, government, and United States military spending. Any
deterioration in these markets could have an adverse impact on us. In fiscal 2002 the State’s preliminary actual
results indicate that Alaska’s oil revenues and federal funding supplied 47% and 44%, respectively, of the state’s
total revenues. All of the federal funding is dedicated for specific purposes, leaving oil revenues as the primary
funding source of general operating expenditures. In fiscal 2003 state economists forecast that Alaska’s federal
funding and oil revenues will supply 44% and 35%, respectively, of the state’s total projected revenues.
The volume of oil transported by the TransAlaska Oil Pipeline System over the past 20 years has been as high as
2.0 million barrels per day in fiscal 1988. Production has been declining over the last several years with an
average of 1.003 million barrels produced per day in fiscal 2002. The state forecasts the production of 0.994
million barrels per day in fiscal 2003, and a production rate slightly above 1.0 million barrels per day starting in
fiscal 2008. The state attributes the production rate increase to future development of recent discoveries in the
National Petroleum Reserve Alaska and other new fields.
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Market prices for North Slope oil averaged $21.78 in fiscal 2002 and are forecasted to average $25.94 in fiscal
2003. State economists forecast the average price of North Slope oil to decline to $23.25 in fiscal 2004. The
closing price per barrel was $35.61 on February 25, 2003. The state’s forecasted 2003 average oil price assumes
there will not be a war with Iraq. If there is a war, the state expects oil prices to increase to over $30 per barrel in
2003 with a price decrease after a war, as Iraq may increase its own oil production to raise needed cash to rebuild
the country. To the extent that actual oil prices vary materially from the state’s projected prices the state’s
projected revenues and deficits will change. Every $1 change in the price of oil results in a $50.0 to $60.0 million
change in the state’s revenue. The production policy of the Organization of Petroleum Exporting Countries and
its ability to continue to act in concert represents a key uncertainty in the state’s revenue forecast.
The State of Alaska maintains the Constitutional Budget Reserve Fund that is intended to fund budgetary
shortfalls. If the state’s current projections are realized, the Constitutional Budget Reserve Fund will be depleted
in 2005. The date the Constitutional Budget Reserve Fund is depleted is highly influenced by the price of oil. If
the fund is depleted, aggressive state action will be necessary to increase revenues and reduce spending in order to
balance the budget. The governor of the State of Alaska and the Alaska legislature continue to pursue cost cutting
and revenue enhancing measures. The governor submitted a budget proposal to the Alaska Legislature on March
5, 2003 that includes a number of cost reductions totaling over $189 million, and proposes increased revenues
totaling over $100 million through, among other things, increased user fees, license fees, motor fuel tax, gaming
fees, and filing fees.
In 2002 the Alaska Legislature passed and the Governor signed legislation that, among other things, increased
certain alcohol beverage taxes, increased the state minimum wage to $7.15 per hour (adjusted for inflation in
future years), and extended the termination date of the RCA one year to June 30, 2003. The Governor has
proposed legislation to the Alaska Legislature requesting that the RCA be extended for an additional four years.
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. Funds from federal sources totaling $2.3 billion are expected
to be distributed to the State of Alaska for highways and other federally supported projects in fiscal 2003.
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. In the past year, there has been a renewed effort to allow exploration
and development in the Arctic National Wildlife Refuge (“ANWR”). The U.S. Energy Information Agency
estimates it could take nine years to begin oil field drilling after approval of ANWR exploration.
Deployment of a natural gas pipeline from the State of Alaska’s North Slope to the Lower 48 states has been
proposed to supplement natural gas supplies. A competing natural gas pipeline through Canada has also been
proposed. The economic viability of a natural gas pipeline depends upon the price of and demand for natural gas.
Either project could have a positive impact on the State of Alaska’s revenues and the Alaska economy.
According to their public comments, neither Exxon Mobil, BP nor Conoco Phillips, Alaska’s large natural gas
owners, believe either natural gas pipeline makes financial sense based upon their preliminary analysis, though
BP and Conoco Phillips have proposed certain federal income tax incentives that would take effect if the price for
Alaska natural gas goes below a certain level. The governor of the State of Alaska and certain natural gas
transportation companies continue to support a natural gas pipeline from Alaska’s North Slope by trying to reduce
the project’s costs and by advocating for federal tax incentives to further reduce the project’s costs. In April 2002
the U.S. Senate passed an energy bill mandating, among other items, federal tax incentives for a natural gas
pipeline from the North Slope to the Lower 48. This energy bill lapsed during the subsequent congressional
adjournment.
Development of the ballistic missile defense system project may have a significant impact on Alaskan
telecommunication requirements and the Alaska economy. The proposed system would be a fixed, land-based,
92
non-nuclear missile defense system with a land and space based detection system capable of responding to limited
strategic ballistic missile threats to the United States. The preferred alternative is deployment of a system with up
to 100 ground-based interceptor silos and battle management command and control facilities at Fort Greely,
Alaska; and an X-Band Radar at Eareckson Air Station on Shemya Island, Alaska.
The U.S. Army Corps of Engineers awarded a construction contract in 2002 for test bed facilities. The contract is
reported to contain basic requirements and various options that could amount to $250 million in construction, or
possibly more, if all items are executed. Site preparation has been underway at Fort Greely since August of 2001
and construction began on the Fort Greely test bed shortly after the June 15, 2002 groundbreaking. The test bed is
due to be operational by September 30, 2004.
We have, since our entry into the telecommunication marketplace, aggressively marketed our services to seek a
larger share of the available market. The customer base in Alaska is limited, however, with a population of
approximately 644,000 people. The State of Alaska’s population is distributed as follows:
(cid:130)
(cid:130)
(cid:130)
(cid:130)
42% are located in the Municipality of Anchorage,
13% are located in the Fairbanks North Star Borough,
10% are located in the Matanuska-Susitna Borough, and
5% are located in the City and Borough of Juneau.
The remaining population is spread out over the vast reaches of Alaska. No assurance can be given that the
driving forces in the Alaska economy, and in particular, oil production, will continue at appropriate levels to
provide an environment for expanded economic activity.
No assurance can be given that oil companies doing business in Alaska will be successful in discovering new
fields or further developing existing fields which are economic to develop and produce oil with access to the
pipeline or other means of transport to market, even with a reduced level of royalties. We are not able to predict
the effect of changes in the price and production volumes of North Slope oil on Alaska’s economy or on us.
Seasonality
Long-distance revenues (primarily those derived from our other common carrier customers) have historically been
highest in the summer months because of temporary population increases attributable to tourism and increased
seasonal economic activity such as construction, commercial fishing, and oil and gas activities. Cable television
revenues, on the other hand, are higher in the winter months because consumers spend more time at home and
tend to watch more television during these months. Local access and Internet services are not expected to exhibit
significant seasonality. Our ability to implement construction projects is also hampered during the winter months
because of cold temperatures, snow and short daylight hours.
Off-Balance Sheet Arrangements
We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purpose of
raising capital, incurring debt or operating parts of our business that are not consolidated into our financial
statements. We do not have any arrangements or relationships with entities that are not consolidated into our
financial statements that are reasonably likely to materially affect our liquidity or the availability of our capital
resources.
93
Schedule of Certain Contractual Obligations
The following table details future projected payments associated with our significant contractual obligations as of
December 31, 2002 (amounts in thousands).
Payments Due by Period
Long-term debt
Interest on long-term debt
Capital lease obligations,
including interest
Operating lease commitments
Redeemable preferred stocks
Total contractual obligations
Total
$ 357,700
Less than
1 Year
1 to 3
Years
--- 177,700
87,750 17,550 35,100
4 to 5
Years
180,000
35,100
68,943 5,115 19,845
18,607
67,673 11,780
27,298
10,150
---
$ 609,364 34,445 261,402
18,536
12,878
---
246,514
More
Than 5
Years
---
---
25,447
24,408
17,148
67,003
For long-term debt included in the above table, we have included principal payments on our Senior Facility and
our Senior Notes. Interest on amounts outstanding under our Senior Facility is based on variable rates and
therefore the amount is not determinable. Our Senior Notes require semi-annual interest payments of
approximately $8.78 million through 2007. For a discussion of our long-term debt, see note 6 to the Notes to
Consolidated Financial Statements included in Part II of this Report.
For a discussion of our capital and operating leases, see note 12 to the Notes to Consolidated Financial Statements
included in Part II of this Report.
We have included only the maturity redemption amount on our Series B and C preferred stock (cash dividends are
excluded). Our Series B preferred stock is convertible at $5.55 per share into GCI Class A common stock.
Through April 30, 2003, dividends are payable semi-annually at the rate of 8.5%, plus accrued but unpaid
dividends, at our option, in cash or in additional fully-paid shares of Series B preferred stock. Dividends earned
after April 30, 2003, are payable semi-annually in cash only. Mandatory redemption is required 12 years from the
date of closing. Our Series C preferred stock is convertible at $12 per share into GCI Class A common stock, is
non-voting, and pays a 6% per annum quarterly cash dividend. We may redeem the Series C preferred stock at
any time in whole but not in part. Mandatory redemption is required at any time after the fourth anniversary date
at the option of holders of 80% of the outstanding shares of the Series C preferred stock. For more information
about our redeemable preferred stock, see note 1(e) to the Notes to Consolidated Financial Statements included in
Part II of this Report.
Regulatory Developments
You should read Part I, Item 1 Business, Regulation, Franchise Authorizations and Tariffs for more information
about regulatory developments affecting us.
Inflation
We do not believe that inflation has a significant effect on our operations.
Audit Committee
The Audit Committee, composed entirely of outside directors, meets periodically with our independent auditors
and management to review the Company's financial statements and the results of audit activities. The Audit
Committee, in turn, reports to the Board of Directors on the results of its review and recommends the selection of
independent auditors.
94
The Audit Committee has approved the independent auditor to provide the following services:
(cid:130) Audit (audit of financial statements filed with the SEC, quarterly reviews, comfort letters, consents,
review of registration statements, accounting consultations); and
(cid:130) Audit-related (employee benefit plan audits and accounting consultation on proposed transactions).
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to various types of market risk in the normal course of business, including the impact of interest
rate changes. We do not hold derivatives for trading purposes.
Our new Senior Facility carries interest rate risk. Amounts borrowed under this Agreement bear interest at Libor
plus 6.5%. Should the Libor rate change, our interest expense will increase or decrease accordingly. On
September 21, 2001, we entered into an interest rate swap agreement to convert $25.0 million of variable interest
rate debt to 3.98% fixed rate debt plus applicable margin. As of December 31, 2002, we have borrowed $177.7
million of which $152.7 million subject to interest rate risk. On this amount, a 1% increase in the interest rate
would cost us $1,527,000 in additional gross interest cost on an annualized basis.
Our Satellite Transponder Capital Lease carries interest rate risk. Amounts borrowed under this Agreement bear
interest at Libor plus 3.25%. Should the Libor rate change, our interest expense will increase or decrease
accordingly. As of December 31, 2002, we have borrowed $44.9 million subject to interest rate risk. On this
amount, a 1% increase in the interest rate would cost us $449,000 in additional gross interest cost on an
annualized basis.
Item 8. Consolidated Financial Statements and Supplementary Data
Our consolidated financial statements are filed under this Item, beginning on Page 98. The financial statement
schedules required under Regulation S-X are filed pursuant to Item 15 of this Report.
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Items 10, 11, 12 and 13 are incorporated herein by reference from our Proxy Statement for our 2003 Annual
Shareholders’ meeting.
Part III
95
Item 14. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Within the 90 days prior to the date of this report, we carried out an evaluation of the effectiveness of the design
and operation of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934
(“Exchange Act”) Rules 13a-14(c) and 15d-14(c)) under the supervision and with the participation of our
management, including our Chief Executive Officer and our Chief Financial Officer. Based upon that evaluation,
our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and
procedures are effective.
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information
required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to ensure that information required to be
disclosed in our reports filed under the Exchange Act is accumulated and communicated to management to allow
timely decisions regarding required disclosure.
Changes in Internal Controls
There were no significant changes in our internal controls or, to our knowledge, in other factors that could
significantly affect our disclosure controls and procedures subsequent to the date we carried out this evaluation.
We may enhance, modify, and supplement internal controls and disclosure controls and procedures based on
experience.
96
Item 15. Exhibits, Consolidated Financial Statement Schedules, and Reports on Form 8-K
Part IV
(a)(l) Consolidated Financial Statements
Included in Part II of this Report:
Independent Auditors’ Report
Consolidated Balance Sheets, December 31, 2002 and 2001
Consolidated Statements of Operations,
Years ended December 31, 2002, 2001 and 2000
Consolidated Statements of Stockholders’ Equity,
Years ended December 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows,
Years ended December 31, 2002, 2001 and 2000
Notes to Consolidated Financial Statements
(a)(2) Consolidated Financial Statement Schedules
Included in Part IV of this Report:
Independent Auditors’ Report
Schedule VIII - Valuation and Qualifying Accounts,
Years ended December 31, 2002, 2001 and 2000
(b)
Exhibits
Page No.
98
99 -- 100
101
102 -- 103
104
105 -- 139
145
146
140
Other schedules are omitted, as they are not required or are not applicable, or the required information is shown
in the applicable financial statements or notes thereto.
97
INDEPENDENT AUDITORS' REPORT
The Board of Directors
General Communication, Inc.:
We have audited the accompanying consolidated balance sheets of General Communication, Inc. and
subsidiaries as of December 31, 2002 and 2001, 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,
2002. These consolidated financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted in the United
States of America. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of General Communication, Inc. and subsidiaries as of December 31,
2002 and 2001, and the results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2002 in conformity with accounting principles generally
accepted in the United States of America.
Anchorage, Alaska
February 26, 2003
/s/
KPMG LLP
98
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
Current assets:
Cash and cash equivalents
Receivables:
Trade
Employee
Other
Less allowance for doubtful receivables
Net receivables
Prepaid and other current assets
Deferred income taxes, net
Property held for sale
Notes receivable from related parties
Inventories
Total current assets
Property and equipment in service, at cost:
Land and buildings
Telephony distribution systems
Cable television distribution systems
Support equipment
Transportation equipment
Property and equipment under capital leases
Less accumulated depreciation
Net property and equipment in service
Construction in progress
Net property and equipment
December 31,
2001
2002
(Amounts in thousands)
$
11,940
11,097
63,111
391
3,093
66,595
14,010
52,585
9,171
8,509
1,037
697
400
58,895
358
1,678
60,931
4,166
56,765
3,061
4,690
481
182
542
84,339
76,818
2,982
39,807
5,687
51,770
3,116
344,566 335,238
149,415 134,697
46,013
4,890
50,771
594,227 574,725
212,833 178,838
381,394 395,887
11,041
398,352 406,928
16,958
Cable certificates, net of amortization of $26,884,000 at December 31, 2002 and
2001
Goodwill, net of amortization of $7,200,000 at December 31, 2002 and
2001
Other intangible assets, net of amortization of $1,807,000 and $1,252,000 at
December 31, 2002 and 2001, respectively
Deferred loan and senior notes costs, net of amortization of $4,110,000 and
$5,568,000 at December 31, 2002 and 2001, respectively
Notes receivable from related parties
Other assets, at cost, net of amortization of $65,000 and $70,000 at
December 31, 2002 and 2001, respectively
Total other assets
Total assets
See accompanying notes to consolidated financial statements.
191,132
191,132
41,972
40,940
2,689
3,387
9,961
5,142
7,630
3,246
5,195
4,598
256,091 250,933
$ 738,782 734,679
99
(Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and obligations under capital leases
Accounts payable
Deferred revenue
Accrued payroll and payroll related obligations
Accrued interest
Accrued liabilities
Subscriber deposits
Total current liabilities
Long-term debt, excluding current maturities
Obligations under capital leases, excluding current maturities
Obligation under capital lease due to related party, excluding current maturities
Deferred income taxes, net of deferred income tax benefit
Other liabilities
Total liabilities
Redeemable preferred stock
Stockholders’ equity:
Common stock (no par):
December 31,
2002
2001
(Amounts in thousands)
$
1,857
33,605
18,290
11,821
7,938
5,763
889
80,163
357,700
44,072
703
16,061
4,956
503,655
7,346
36,464
11,129
15,289
8,049
4,938
1,121
84,336
346,000
44,933
703
25,069
4,339
505,380
26,907
26,907
Class A. Authorized 100,000,000 shares; issued 51,795,187 and
50,967,196 shares at December 31, 2002 and 2001, respectively
199,903 195,647
Class B. Authorized 10,000,000 shares; issued 3,874,607 and 3,882,843
shares at December 31, 2002 and 2001, respectively; convertible on a
share-per-share basis into Class A common stock
Less cost of 316,554 and 296,554 Class A common shares held in treasury
at December 31, 2002 and 2001, respectively
Paid-in capital
Notes receivable with related parties issued upon stock option exercise
Retained earnings (deficit)
Accumulated other comprehensive income (loss)
Total stockholders' equity
Commitments and contingencies
Total liabilities and stockholders' equity
See accompanying notes to consolidated financial statements.
3,274
3,281
(1,836)
(1,659)
11,222
(5,650)
1,847
(540)
10,474
(2,588)
(2,771)
8
208,220
202,392
$ 738,782
734,679
100
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002
2001
(Amounts in thousands, except per share amounts)
2000
Revenues
$
367,842
123,564
129,029
13,124
56,400
45,725
(29,316)
(4,612)
525
---
(33,403)
12,322
(5,659)
6,663
357,258
139,793
116,536
4,279
55,675
40,975
(31,208)
(1,402)
294
---
(32,316)
292,605
119,712
99,908
5,010
50,655
17,320
(38,845)
(1,317)
702
491
(38,969)
8,659
(21,649)
(4,070)
4,589
8,415
(13,234)
0.08
0.05
(0.29)
Cost of sales and services
Selling, general and administrative expenses
Bad debt expense
Depreciation and amortization expense
Operating income
Other income (expense):
Interest expense
Deferred loan and senior notes fee expense
Interest income
Gain on sale of property and equipment
Other expense, net
Net income (loss) before income taxes
Income tax (expense) benefit
Net income (loss)
Basic and diluted net income (loss) per common share:
$
$
See accompanying notes to consolidated financial statements.
101
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Class A
Common
Stock
Class B
Common
Stock
Class A
Shares
Held in
Treasury
Paid-in
Capital
Notes
Receivable
Issued to
Related
Parties
Retained
Earnings
(Deficit)
Accumulated
Other
Comprehensive
Income
$176,740
---
3,422
---
(1,607)
---
6,343
---
(2,167)
---
9,817
(13,234)
Purchase Plan
Purchase of treasury stock
Preferred stock series B dividends
Balances at December 31, 2000
3,249
---
---
$ 182,706
(Amounts in thousands)
Balances at December 31, 1999
Net loss
Tax effect of excess stock
compensation expense for tax
purposes over amounts recognized
for financial reporting purposes
Class B shares converted to Class A
Shares issued under stock option plan
and notes issued upon stock option
exercise
Amortization of the excess of GCI
stock market value over stock option
exercise cost on date of stock option
grant
Shares issued upon warrant exercise
Shares issued to Employee Stock
Net income
Change in fair value of cash flow
hedge, net of income tax expense of
$5
Comprehensive income
Tax effect of excess stock
compensation expense for tax
purposes over amounts recognized
for financial reporting purposes
Class B shares converted to Class A
Shares issued under stock option plan
Amortization of the excess of GCI
stock market value over stock option
exercise cost on date of stock option
grant
Shares issued to Employee Stock
Purchase Plan
Acquisition of G.C. Cablevision, Inc.
net assets and customer base
Series B preferred stock converted to
Class A common stock
Payment received on note issued upon
---
123
---
(123)
---
---
640
---
---
---
1,213
---
---
---
(809)
---
1,381
---
---
---
---
---
---
---
3,299
---
---
---
---
---
---
---
18
4,182
---
(18)
---
---
688
2,388
5,665
---
---
---
---
---
(52)
---
(1,659)
---
---
---
---
---
---
---
---
---
---
385
---
---
---
---
7,368
---
---
---
---
---
---
---
---
---
---
(2,976)
---
---
(1,841)
(5,258)
---
4,589
2,317
---
---
---
---
(300)
789
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
officer stock option exercise
Preferred stock series B dividends
Preferred stock series C dividends
Balances at December 31, 2001
---
---
---
$195,647
---
---
---
3,281
---
---
---
---
---
---
(1,659) 10,474
688
---
---
(2,588)
---
(1,801)
(301)
(2,771)
---
---
---
---
---
---
---
---
---
---
---
---
8
---
---
---
---
---
---
---
---
---
---
---
8
Total
192,548
(13,234)
640
---
404
385
1,381
3,249
(52)
(1,841)
183,480
4,589
8
4,597
2,317
---
3,882
789
688
2,388
5,665
688
(1,801)
(301)
202,392
102
(Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(Continued)
(Amounts in thousands)
Balances at December 31, 2001
Net income
Change in fair value of cash flow
hedge, net of income tax benefit of
$459
Comprehensive income
Tax effect of excess stock
compensation expense for tax
purposes over amounts recognized
for financial reporting purposes
Class B shares converted to Class A
Shares issued under stock option plan
Amortization of the excess of GCI
stock market value over stock option
exercise cost on date of stock option
grant
Shares issued to Employee Stock
Purchase Plan
Class A
Common
Stock
Class B
Common
Stock
Class A
Shares
Held in
Treasury
Paid-in
Capital
Notes
Receivable
Issued to
Related
Parties
Retained
Earnings
(Deficit)
Accumulated
Other
Comprehensive
Income (Loss)
$195,647
---
3,281
---
(1,659) 10,474
---
---
(2,588)
---
(2,771)
6,663
8
---
Total
202,392
6,663
---
---
---
---
---
7
3,372
---
791
---
(7)
---
---
---
---
---
---
---
---
---
---
---
---
---
---
319
---
---
---
---
(3,062)
429
---
---
---
---
---
---
---
---
---
---
(548)
---
(548)
6,115
---
---
---
---
---
319
---
310
429
791
Shares issued to acquire minority
shareholders’ interest in GFCC
---
---
Purchase of treasury stock
---
Preferred stock series B dividends
---
Preferred stock series C dividends
Balances at December 31, 2002
3,274
See accompanying notes to consolidated financial statements
86
---
---
---
$199,903
---
(177)
---
---
---
---
---
---
(1,836) 11,222
---
---
---
---
(5,650)
---
---
(1,445)
(600)
1,847
---
---
---
---
(540)
86
(177)
(1,445)
(600)
208,220
103
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002
2001
(Amounts in thousands)
2000
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating
$ 6,663
4,589
(13,234)
activities:
Depreciation and amortization
Amortization charged to selling, general and administrative expense
Deferred loan cost expense
Non-cash cost of sales
Deferred income tax expense (benefit)
Deferred compensation and compensatory stock options
Bad debt expense, net of write-offs
Employee Stock Purchase Plan expense funded with issuance of General
Communication, Inc. Class A common stock
Write-off of capitalized interest
Gain on sale of property and equipment
Other noncash income and expense items
Change in operating assets and liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of property and equipment, including construction period interest
Proceeds from sale of property and equipment
Acquisition of Rogers net of cash received
Advances and billings to Kanas
(Payment) refund of deposit
Purchases of other assets and intangible assets
Payments received on notes receivable from related parties
Notes receivable issued to related parties
Purchases of and additions to property held for sale
Net cash used in investing activities
Cash flows from financing activities:
Long-term borrowings - bank debt
Repayments of long-term borrowings and capital lease obligations
Proceeds from common stock issuance, net of notes receivable from related
parties issued upon stock option exercise
Payment of preferred stock dividends
Payment received on note receivable from related parties issued upon stock
option exercise
Payment of debt issuance costs
Purchase of treasury stock
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
56,400
---
4,612
---
5,754
978
9,844
791
---
---
90
(10,654)
74,478
(65,140)
---
---
---
---
(1,657)
946
(3,055)
(38)
(68,944)
55,675
---
1,402
10,877
3,958
1,191
1,294
50,655
554
1,317
---
(8,415)
982
983
---
170
---
(44)
815
79,927
2,773
1,955
(491)
356
5,919
43,354
(65,638)
---
(18,533)
(5,404)
(1,200)
(1,096)
1,065
(959)
(101)
(91,866)
(50,873)
802
---
---
9,100
(2,957)
455
(971)
(1,550)
(45,994)
14,766
(17,279)
29,000
(13,667)
5,000
(11,151)
396
(2,045)
3,882
(2,200)
1,706
---
---
(352)
(177)
(4,691)
843
11,097
688
(629)
---
17,074
5,135
5,962
---
(635)
(52)
(5,132)
(7,772)
13,734
Cash and cash equivalents at end of year
$ 11,940
11,097
5,962
See accompanying notes to consolidated financial statements.
104
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
(l) Business and Summary of Significant Accounting Principles
In the following discussion, General Communication, Inc. (“GCI”) and its direct and indirect subsidiaries are
referred to as “we,” “us” and “our”.
(a) Business
GCI, an Alaska corporation, was incorporated in 1979. We offer the following services:
(cid:130) Long-distance telephone service between Anchorage, Fairbanks, Juneau, and other communities in
Alaska and the remaining United States and foreign countries
Internet access services
(cid:130) Cable television services throughout Alaska
(cid:130) Facilities-based competitive local access services in Anchorage, Fairbanks and Juneau, Alaska
(cid:130)
(cid:130) Termination of traffic in Alaska for certain common carriers
(cid:130) Private line and private network services
(cid:130) Managed services to certain commercial customers
(cid:130) Broadband services, including our SchoolAccess offering to rural school districts and a similar
offering to rural hospitals and health clinics
(cid:130) Sales and service of dedicated communications systems and related equipment
(cid:130) Lease and sales of capacity on two undersea fiber optic cables used in the transmission of interstate
and intrastate private line, switched message long-distance and Internet services between Alaska and
the remaining United States and foreign countries
(b) Principles of Consolidation
The consolidated financial statements include the accounts of GCI, GCI’s subsidiary GCI, Inc., GCI,
Inc.’s subsidiary GCI Holdings, Inc. (“Holdings”), GCI Holdings, Inc.’s subsidiaries GCI
Communication Corp., GCI Cable, Inc., GCI Transport Co., Inc., GCI Fiber Communication Co., Inc.
(“GFCC,” formerly known as Kanas Telecom, Inc. (“Kanas”)), GCI Fiber Co., Inc. and Fiber Hold Co.,
Inc. and GCI Fiber Co., Inc.’s and Fiber Hold Co., Inc.’s partnership Alaska United Fiber System
Partnership (“Alaska United”), GCI Communication Corp.’s subsidiary Potter View Development Co.,
Inc., GCI Cable, Inc.’s subsidiary GCI American Cablesystems, Inc., GCI American Cablesystems,
Inc.’s subsidiary GCI Cablesystems of Alaska, Inc., and GCI Transport Co., Inc.’s subsidiary GCI
Satellite Co., Inc. All subsidiaries are wholly-owned at December 31, 2002.
Effective January 1, 2003 GCI American Cablesystems, Inc. and GCI American Cablesystems, Inc.’s
subsidiary GCI Cablesystems of Alaska, Inc. were merged with GCI Cable, Inc.
The consolidated financial statements include the consolidated accounts of GCI and its wholly owned
subsidiaries with all significant intercompany transactions eliminated.
105
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
(c) Net Income (Loss) per Common Share
Net income (loss) per common share (“EPS”) and common shares used to calculate basic and diluted EPS
consist of the following (amounts in thousands):
Year Ended December 31,
2002
Shares
(Denom-
inator)
Per-share
Amounts
Income
(Num-
erator)
$6,663
1,445
600
4,618
55,081
$ .08
---
584
---
$4,618
55,665
$ .08
Net income
Less preferred stock
dividends:
Series B
Series C
Basic EPS:
Income available to common
stockholders
Effect of Dilutive Securities:
Unexercised stock options
Diluted EPS:
Income available to
common stockholders
Years Ended December 31,
2001
Shares
(Denom-
inator)
Per-share
Amounts
Income
(Num-
erator)
$4,589
1,801
301
2000
Shares
(Denom-
inator)
Per-share
Amounts
Loss
(Num-
erator)
$(13,234)
---
1,841
2,487 53,091
$ .05
(15,075)
51,444
$ (.29)
---
1,381
---
---
---
---
$2,487 54,472
$ .05
$(15,075)
51,444
$ (.29)
Net income (loss)
Less preferred stock
dividends:
Series B
Series C
Basic EPS:
Income (loss) available to
common stockholders
Effect of Dilutive Securities:
Unexercised stock options
Diluted EPS:
Income (loss) available to
common stockholders
106
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
Common equivalent shares outstanding which are anti-dilutive for purposes of calculating EPS for the
years ended December 31, 2002, 2001 and 2000, are not included in the diluted EPS calculations, and
consist of the following (shares, in thousands):
Unexercised stock options
Series B redeemable preferred stock
Series C redeemable preferred stock
Anti-dilutive common shares outstanding
2002
---
3,062
833
3,895
2001
---
3,832
833
4,665
2000
527
4,070
---
4,597
Weighted average shares associated with outstanding stock options for the years ended December 31,
2002, 2001 and 2000 which have been excluded from the diluted EPS calculations because the options’
exercise price was greater than the average market price of the common shares consist of the following
(shares, in thousands):
Weighted average shares associated with
outstanding stock options
2002
2001
2000
2,545
36
3,123
Effective March 31, 2001 we acquired the assets and customer base of G.C. Cablevision, Inc. The
seller received 238,199 unregistered shares of GCI Class A common stock with a future payment in
additional shares contingent upon the market price of our common stock on a future date. At December
31, 2002 the market price condition was not met and approximately 183,200 shares of GCI Class A
common stock would be issuable if this date was the end of the contingency period. Additional shares,
if any, will be issued after March 31, 2003.
107
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
(d) Common Stock
Following is the statement of common stock at December 31, 2002, 2001 and 2000 (shares, in thousands):
Balances at December 31, 1999
Class B shares converted to Class A
Shares issued under stock option plan
Shares issued and issuable to
Employee Stock Purchase Plan
Warrant exercise
Balances at December 31, 2000
Class B shares converted to Class A
Shares issued under stock option plan
Conversion of preferred stock Series
B to Class A common stock
Shares issued upon acquisition of
G.C. Cablevision, Inc. net assets and
customer base
Balances at December 31, 2001
Class B shares converted to Class A
Shares issued under stock option plan
Shares issued to GCI Employee Stock
Purchase Plan
Shares issued to acquire minority
shareholders’ interest in GFCC
Balances at December 31, 2002
Class A
46,870
144
513
691
425
48,643
21
1,044
1,021
Class B
4,048
(144)
---
---
---
3,904
(21)
---
---
238
50,967
---
3,883
8
584
221
(8)
---
---
15
51,795
---
3,875
(e) Redeemable Preferred Stocks
Redeemable preferred stocks at December 31, 2002 and 2001 consist of (amounts in thousands):
Series B
Series C
2002
$ 16,907
10,000
$ 26,907
2001
16,907
10,000
26,907
We have 1,000,000 shares of preferred stock authorized with the following shares issued at December
31, 2002, 2001 and 2000 (shares, in thousands):
Series B
Series C
Balances at December 31, 1999 and
2000
Shares issued in lieu of cash dividend
payment
Shares converted to GCI Class A
common stock
Shares issued upon acquisition of
Kanas
Balances at December 31, 2001
and 2002
20
3
(6)
---
17
---
---
---
10
10
108
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
As of December 31, 2002, the combined aggregate amount of preferred stock mandatory redemption
requirements follow (amounts in thousands):
Years ending December 31:
2003
2004
2005
2006
2007
$
---
---
10,150
---
---
$ 10,150
Series B
We issued 20,000 shares of convertible redeemable accreting Series B preferred stock on April 30,
1999. Proceeds totaling $20 million (before payment of expenses) were used for general corporate
purposes, to repay outstanding indebtedness, and to provide additional liquidity. The Series B preferred
stock is convertible at $5.55 per share into GCI Class A common stock. Through April 30, 2003,
dividends are payable semi-annually at the rate of 8.5%, plus accrued but unpaid dividends, at our
option, in cash or in additional fully-paid shares of Series B preferred stock. Dividends earned after
April 30, 2003, are payable semi-annually in cash only. Mandatory redemption is required 12 years
from the date of closing. The redemption amount of our convertible redeemable accreting Series B
preferred stock at December 31, 2002 and 2001 was $17,148,000. The difference between the carrying
and redemption amounts is due to accrued dividends which are included in Accrued Liabilities until
either paid in cash or through the issuance of additional Series B preferred stock.
Series C
We issued 10,000 shares of convertible redeemable accreting Series C preferred stock as of June 30,
2001 to acquire a controlling interest in Kanas (see note 3). The Series C preferred stock is convertible
at $12 per share into GCI Class A common stock, is non-voting, and pays a 6% per annum quarterly
cash dividend. We may redeem the Series C preferred stock at any time in whole but not in part.
Mandatory redemption is required at any time after the fourth anniversary date at the option of holders
of 80% of the outstanding shares of the Series C preferred stock. The redemption price is $1,000 per
share plus the amount of all accrued and unpaid dividends, whether earned or declared, through the
redemption date. In the event of a liquidation of GCI, the holders of Series C preferred stock shall be
entitled to be paid an amount equal to the redemption price before any distribution or payment is made
upon our common stock and other shares of our capital stock hereafter issued which by its terms is
junior to the Series C preferred stock. Series B preferred stock is senior to Series C preferred stock. The
redemption amount of our convertible redeemable accreting Series C preferred stock on December 31,
2002 and 2001 was $10,000,000.
(f) Cash and Cash Equivalents
Cash equivalents consist of short-term, highly liquid investments that are readily convertible into cash.
(g) Inventories
Inventory of merchandise for resale and parts is stated at the lower of cost or market. Cost is determined
using the average cost method.
(h) Property and Equipment
Property and equipment is stated at cost. Construction costs of facilities are capitalized. Equipment
financed under capital leases is recorded at the lower of fair market value or the present value of future
minimum lease payments. Construction in progress represents distribution systems and support
equipment not placed in service on December 31, 2002; management intends to place this equipment in
service during 2003 and 2004.
109
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
Depreciation is computed on a straight-line basis based upon the shorter of the estimated useful lives of
the assets or the lease term, if applicable, in the following ranges:
Asset Category
Telephony distribution and fiber optic cable
systems
Cable television distribution systems
Support equipment
Transportation equipment
Property and equipment under capital leases
Asset Lives
10-20 years
10 years
3-5 years
5-10 years
5-15 years
Repairs and maintenance are charged to expense as incurred. Expenditures for major renewals and
betterments are capitalized. Gains or losses are recognized at the time of retirements, sales or other
dispositions of property.
(i)
Intangible Assets
Effective January 1, 2002, we adopted Statement of Financial Accounting Standard (“SFAS”) No. 142,
“Goodwill and Other Intangible Assets.” Cable certificates (certificates of convenience and public
necessity) represent certain perpetual operating rights to provide cable services and were amortized on a
straight-line basis over 20 to 40 years in the years ended December 31, 2001 and 2000. Goodwill
represents the excess of cost over fair value of net assets acquired and was amortized on a straight-line
basis over periods of 10 to 40 years in the years ended December 31, 2001 and 2000. We have not
recognized amortization expense for Cable certificates or goodwill in the year ended December 31,
2002.
Cable certificates and goodwill are tested for impairment annually. As of January 1, 2002 and
December 31, 2002 cable certificates and goodwill were tested for impairment by comparing the fair
values to the carrying amounts of the intangible assets. The fair values were greater than the carrying
amounts, therefore these intangible assets were determined not to be impaired at December 31, 2002.
The remaining useful lives of our Cable certificates and goodwill were evaluated as of December 31,
2002 and events and circumstances continue to support an indefinite useful life.
Intangible assets are recorded at unamortized cost. Management reviews the valuation and amortization
of amortizable intangible assets on a periodic basis, taking into consideration any events or
circumstances that might indicate diminished value. The assessment of recoverability is based on
whether the asset can be recovered through undiscounted future cash flows.
The cost of our Personal Communication Services license and related financing costs were capitalized as
an amortizable intangible asset. The associated assets were placed into service during 2000 and the
recorded cost of the license and related financing costs are being amortized over a 40-year period using
the straight-line method. All other amortizable intangible assets are being amortized over 2-10 year
periods using the straight-line method.
(j) Deferred Loan and Senior Notes Costs
Debt and Senior Notes issuance costs are deferred and amortized using the straight-line method, which
approximates the interest method, over the term of the related debt and notes. Amortization costs are
reported as a component of Other Income (Expense) in the Consolidated Statements of Operations.
(k) Other Assets
Other Assets are recorded at cost and are amortized on a straight-line basis over periods of 2-15 years.
Other Assets primarily include long-term deposits, non-trade accounts receivable and prepaid expenses.
110
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
(l) Accounting for Derivative Instruments and Hedging Activities
SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, as amended requires
companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. We
have adopted the provisions of SFAS No. 133. Our only derivative activity relates to interest rate
swaps (see note 10).
(m) Comprehensive Income
SFAS No. 130, “Reporting Comprehensive Income” requires us to report and display comprehensive
income or (loss) and its components in a financial statement that is displayed with the same prominence
as other financial statements. During the years ended December 31, 2002 and 2001 we had other
comprehensive income (loss) of approximately ($548,000) and $8,000, respectively, as a result of the
cash flow hedge discussed in note 10. Total comprehensive income at December 31, 2002 and 2001 is
$6,115,000 and $4,597,000, respectively. There were no components of other comprehensive income
(loss) during the year ended December 31, 2000.
(n) Revenue Recognition
All revenues are recognized when the earnings process is complete in accordance with Securities and
Exchange Commission (“SEC”) Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial
Statements.” Revenues generated from long-distance and managed services are recognized when the
services are provided. Revenues from the sale of equipment are recognized at the time the equipment
is delivered or installed. Technical services revenues are derived primarily from maintenance contracts
on equipment and are recognized on a prorated basis over the term of the contracts. Cable television
service, local access service, Internet service and private line telecommunication revenues are billed in
advance, recorded as Deferred Revenue on the balance sheet, and are recognized as the associated
service is provided. Revenues from yellow-page directories are recognized upon publication of
directories, which typically corresponds with distribution and is when the earnings process is complete.
Other revenues are recognized when the service is provided. We recognize unbilled revenues when the
service is provided based upon minutes of use processed or established rates, net of credits and
adjustments.
(o) Sale of Fiber Optic Cable System Capacity
During the first quarter of 2001 we completed a $19.5 million sale of long-haul capacity in the Alaska
United undersea fiber optic cable system (“fiber capacity sale”) in a cash transaction. The sale
included both capacity within Alaska, and between Alaska and the contiguous 48 states. We used the
proceeds from the fiber capacity sale to repay $11.7 million of the Fiber Facility debt and to fund
capital expenditures and working capital.
The fiber capacity sale was pursuant to a contract giving the purchaser an indefeasible right to use a
certain amount of fiber system capacity expiring on February 4, 2024. The term may be extended if the
actual useful life of the fiber system capacity extends beyond the estimated useful life of twenty-five
years. The fiber system capacity sold is integral equipment because it is attached to real estate.
Because all of the benefits and risks of ownership have been transferred to the purchaser upon full
receipt of the purchase price and other terms of the contract meet the requirements of SFAS No. 66,
“Accounting for Sales of Real Estate” we accounted for the fiber capacity sale as a sales-type lease.
We recognized $19.5 million in revenue from the fiber capacity sale. We recognized $10.9 million as
cost of sales during the year ended December 31, 2001.
The accounting for the sale of fiber system capacity is currently evolving and accounting guidance may
become available in the future which could require us to change our policy. If we are required to
change our policy, it is likely the effect would be to recognize the gain from future sales of fiber
capacity, if any, over the term the capacity is provided.
111
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
(p) Advertising Expense
We expense advertising costs in the fiscal year during which the first advertisement appears.
Advertising expenses were approximately $2,967,000, $3,168,000 and $3,438,000 for the years ended
December 31, 2002, 2001 and 2000, respectively.
(q) Interest Expense
Interest costs incurred during the construction period of significant capital projects, such as the
construction of an undersea fiber optic cable system, are capitalized. No interest was capitalized during
the years ended December 31, 2002, 2001 and 2000.
(r) 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
are recognized to the extent that the benefits are more likely to be realized than not.
(s) Incumbent Local Exchange Carrier (“ILEC”) Over-earnings Refunds
We receive refunds from time to time from ILECs with which we do business in respect of their
earnings that exceed regulatory requirements. Telephone companies that are rate regulated by the
Federal Communications Commission (“FCC”) using the rate of return method are required by the
FCC to refund earnings from interstate access charges assessed to long-distance carriers when their
earnings exceed their authorized rate of return. Such refunds are computed based on the regulated
carrier’s earnings in several access categories. Uncertainties exist with respect to the amount of their
earnings, the refunds (if any), their timing, and their realization. We account for such refundable
amounts as gain contingencies, and, accordingly, do not recognize them until realization is a certainty
upon receipt.
(t) Stock Option Plan
At December 31, 2002, we had one stock-based employee compensation plan, which is described more
fully in note 8. We account for this plan under the recognition and measurement principles of
Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,”
and related interpretations. We use the intrinsic-value method and compensation expense is recorded
on the date of grant only if the current market price of the underlying stock exceeds the exercise price.
We have adopted SFAS 123, “Accounting for Stock-Based Compensation,” which permits entities to
recognize as expense over the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS 123 also allows entities to continue to apply the provisions of APB Opinion
No. 25.
We have adopted SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and
Disclosure”. This Statement amends SFAS No. 123 to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based employee compensation.
In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of accounting for stock-
based employee compensation and the effect of the method used on reported results. We have elected
to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure as
required by SFAS 148.
Stock-based employee compensation cost is reflected over the options’ vesting period of generally 5
years and compensation cost for options granted prior to January 1, 1996 is not considered. The
112
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
following table illustrates the effect on net income (loss) and EPS for the years ended December 31,
2002, 2001 and 2000, if we had applied the fair-value recognition provisions of SFAS 123 to stock-
based employee compensation (amounts in thousands, except per share amounts):
Net income (loss), as reported
Total stock-based employee compensation
expense included in reported net income
(loss), net of related tax effects
Total stock-based employee compensation
expense under the fair-value based method for
all awards, net of related tax effects
Pro forma net income (loss)
2002
$ 6,663
2001
4,589
2000
(13,234)
257
472
255
(2,504)
4,416
$
(3,483)
1,578
(2,667)
(15,646)
Basic and diluted EPS, as reported
$
0.08
0.05
(0.29)
Basic and diluted EPS, pro forma
$
0.04
(0.01)
(0.34)
(u) Stock Options and Stock warrants Issued for Non-employee Services
We account for stock options and warrants issued in exchange for nonemployee services pursuant to
the provisions of SFAS 123, Emerging Issues Task Force (“EITF”) 96-3 and EITF 96-18, wherein such
transactions are accounted for at the fair value of the consideration or services received or the fair value
of the equity instruments issued, whichever is more reliably measurable.
When a stock option or warrant is issued for non-employee services where the fair value of such
services is not stated, we estimate the value of the stock option or warrant issued using the Black
Scholes method.
The fair value determined using these principles is charged to operating expense over the shorter of the term for
which non-employee services are provided, if stated, or the stock option or warrant vesting period.
(v) Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles
requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from those
estimates.
(w) 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, 2002 and 2001,
substantially all of our cash and cash equivalents were invested in short-term liquid money instruments
at one highly rated financial institution.
We have two major customers, WorldCom, Inc. (“WorldCom”) (see note 11) and Sprint Corporation
(“Sprint”) (see note 9). There is increased risk associated with these customers’ accounts receivable
balances. Our remaining customers are located primarily throughout Alaska. Because of this
geographic concentration, our growth and operations depend upon economic conditions in Alaska. The
economy of Alaska is dependent upon the natural resources industries, and in particular oil production,
as well as tourism, government, and United States military spending. Though limited to one
geographical area and except for WorldCom and Sprint, the concentration of credit risk with respect to
113
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
our receivables is minimized due to the large number of customers, individually small balances, and
short payment terms.
(x) Fair Value of Financial Instruments
SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” requires disclosure of the fair
value of financial instruments for which it is practicable to estimate that value (see note 10). SFAS No.
107 specifically excludes certain items from its disclosure requirements. The fair value of a financial
instrument is the amount at which the instrument could be exchanged in a current transaction between
willing parties, other than in a forced sale or liquidation.
(y) Accounting for the Impairment or Disposal of Long-lived Assets
Effective January 1, 2002, we adopted SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets”. SFAS No. 144 replaces SFAS No. 121, “Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of.” However it retains the fundamental
provisions of SFAS No. 121 for recognition and measurement of the impairment of long-lived assets to
be held and used and for measurement of long-lived assets to be disposed of by sale. This statement
applies to all long-lived assets, including discontinued operations, and replaces the provisions of APB
Opinion No. 30, “Reporting Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business,” for the disposal of segments of a business. This statement requires that those long-lived
assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in
continuing operations or in discontinued operations. Adoption of SFAS No. 144 has not had a
significant impact on our results of operations, financial position or cash flows.
(z) Business Combinations
SFAS No. 141, “Business Combinations,” requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001. We used the purchase method of accounting
for our November 19, 2001 acquisition of all of the common stock of Rogers American Cablesystems,
Inc. (“Rogers”) (see note 3).
(aa) 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 5 years. In accordance with Statement of Position
("SOP") 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use”, we capitalize certain costs associated with internally developed software such as payroll costs of
employees devoting time to the projects and external direct costs for materials and services. Costs
associated with internally developed software to be used internally are expensed until the point the
project has reached the development stage. Subsequent additions, modifications or upgrades to
internal-use software are capitalized only to the extent that they allow the software to perform a task it
previously did not perform. Software maintenance and training costs are expensed in the period in
which they are incurred. The capitalization of software requires judgment in determining when a
project has reached the development stage. Further, the recovery of software projects is periodically
reviewed and may result in significant write-offs.
(ab) Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections
In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections”. The following summarizes the
effects of SFAS No. 145:
(cid:130)
SFAS No. 4, “Reporting Gains and Losses from Extinguishment of Debt” is rescinded, which
required all gains and losses from extinguishment of debt to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect. Upon adoption of SFAS No.
114
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
145, companies will be required to apply the criteria in Accounting Principles Board Opinion No.
30, “Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions”
(“Opinion No. 30”), in determining the classification of gains and losses resulting from the
extinguishment of debt,
SFAS No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements”, amended
SFAS No. 4 and is no longer necessary since SFAS No. 4 has been rescinded,
SFAS No. 44, “Accounting for Intangible Assets of Motor Carriers”, was issued to establish
accounting requirements for the effects of the transition to the provisions of the Motor Carrier Act
of 1980. Those transitions are completed and, therefore, SFAS No. 44 is no longer needed, and
SFAS No. 13, “Accounting for Leases”, is amended to require that certain lease modifications that
have economic effects similar to sale-leaseback transactions be accounted for in the same manner
as sale-leaseback transactions.
(cid:130)
(cid:130)
(cid:130)
SFAS No. 145 will be effective for fiscal years beginning after May 15, 2002, with early adoption of
the provisions related to the rescission of Statement No. 4 encouraged. Upon adoption, prior period
items that do not meet the extraordinary item classification criteria in Opinion No. 30 must be
reclassified. Unamortized bank fees and other expenses totaling approximately $2.3 million associated
with the November 1, 2002 refinancing of the Senior Holdings Loan and the Fiber Facility (see note 6)
were not classified as an extraordinary item and were charged to Deferred Loan Fee Expense during the
year ended December 31, 2002.
(ac) Reclassifications
Reclassifications have been made to the 2000 and 2001 financial statements to make them comparable
with the 2002 presentation.
(2) Consolidated Statements of Cash Flows Supplemental Disclosures
Changes in operating assets and liabilities consist of (amounts in thousands):
Year ended December 31,
2002
2001
2000
Increase in accounts receivable
Increase in prepaid and other current assets
(Increase) decrease in inventories
Increase (decrease) in accounts payable
Increase in accrued liabilities
Increase (decrease) in accrued payroll and
payroll related obligations
Increase in deferred revenue
Increase (decrease) in accrued interest
Decrease in subscriber deposits
Increase (decrease) in components of other
long-term liabilities
$ (5,476)
(6,005)
446
(2,859)
825
(3,468)
6,161
(111)
(232)
(10,229)
(487)
(88)
5,701
1,091
4,872
1,519
(1,207)
(253)
(3,451)
(390)
14
3,773
982
2,260
2,178
1,271
(826)
65
$ (10,654)
(104)
815
108
5,919
We paid interest totaling approximately $29,427,000, $32,415,000 and $35,618,000 during the years ended
December 31, 2002, 2001 and 2000, respectively.
We paid income taxes totaling $112,000 during the year ended December 31, 2001. We paid no income taxes
during the years ended December 31, 2002 and 2000. Net income tax refunds received totaled $283,700 during the
year ended December 31, 2002. We received no income tax refunds during the years ended December 31, 2001 and
2000.
115
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
We recorded $319,000, $2,317,000 and $640,000 during the years ended December 31, 2002, 2001 and 2000,
respectively, in paid-in capital in recognition of the income tax effect of excess stock compensation expense for tax
purposes over amounts recognized for financial reporting purposes.
During the year ended December 31, 2002 we funded the employer match portion of Employee Stock Purchase Plan
contributions by issuing GCI Class A common stock valued at $791,000 and by purchasing GCI Class A common
stock on the open market. During the year ended December 31, 2001 all employer match shares were purchased on
the open market. During the year ended December 31, 2000 we funded all of the employer match portion by issuing
GCI Class A common stock valued at $2,773,000.
We financed the acquisition of satellite transponder capacity pursuant to a long-term capital lease arrangement with
a leasing company during the year ended December 31, 2000 at a cost of $48.2 million (see note 12).
We financed the acquisition of approximately $1.0 million of telephony distribution equipment pursuant to a
long-term capital lease arrangement with a leasing company during the year ended December 31, 2002.
We chose to issue 2,677 additional shares of Series B preferred stock in lieu of cash payments for dividends payable
thereon in 2000. The amount of dividends that would have been paid in cash totaled approximately $2,677,000.
The additional shares of Series B preferred stock were issued in 2001.
Effective March 31, 2001 we acquired the assets and customer base of G.C. Cablevision, Inc. The seller received
238,199 unregistered shares of GCI Class A common stock (see note 3).
Effective June 30, 2001 we issued $10.0 million of Series C preferred stock in exchange for WorldCom’s 85%
controlling interest in Kanas (renamed to GFCC, see note 3).
We acquired all minority shareholders’ ownership interests in GFCC by issuing 15,000 shares of GCI Class A
common stock in 2002.
(3) Acquisitions
Effective March 31, 2001 we acquired the assets and customer base of G.C. Cablevision, Inc. of Fairbanks. The
seller received 238,199 unregistered shares of GCI Class A common stock with a future payment in additional shares
contingent upon certain conditions (see note 1 (c)). The property and equipment was valued at $2,088,000 on the
date of acquisition. The value of the remaining assets and liabilities acquired was not material.
Effective June 30, 2001 we completed the acquisition of WorldCom’s 85 percent controlling interest in Kanas,
which owns the 800-mile fiber optic cable system that extends from Prudhoe Bay to Valdez via Fairbanks. The
corporation owning the fiber optic system was renamed and is now operated as GFCC. The fiber optic cable system
was valued at approximately $21,198,000 on the date of acquisition. On June 30, 2001 we issued to WorldCom, a
related party, shares of Series C preferred stock (see note 1(e)) valued at $10.0 million. The balance of the carrying
value consisted of payments to and services performed on behalf of Kanas to maintain its operations prior to June
30, 2001. The value of the remaining assets and liabilities acquired was not material. We acquired the remaining 15
percent ownership interest of GFCC by issuing 15,000 shares of GCI Class A common stock in 2002.
Effective November 19, 2001 we acquired all of the stock of Rogers, a cable television service provider in Palmer
and Wasilla, Alaska for $18.5 million in cash. Per the acquisition agreement $467,000 was withheld from the
original payment to account for the amount by which Rogers’ current liabilities exceeded current assets and for
certain capital expenditures incurred by the previous owners of Rogers through May 2001. The final settlement of
$345,000 was paid in the first quarter of 2003. This acquisition was funded through a $19.0 million draw on our
then existing Senior Holdings Loan. The results of Roger’s operations have been included in the consolidated
116
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
financial statements in the cable services segment since the acquisition date. This acquisition added approximately
10,000 homes passed and approximately 7,000 subscribers to our cable services segment in 2001.
The following table, updated to reflect refinements of original estimates, summarizes the estimated fair values of
assets acquired and liabilities assumed at the date of the Rogers acquisition (amounts in thousands):
Current assets
Property and equipment, net of
accumulated depreciation
Franchise agreement
Goodwill
Total assets
$
556
5,160
10,976
3,324
20,016
Current liabilities
Long-term deferred tax liability
Net assets acquired
642
374
$ 19,000
(4)
Intangible Assets
Effective with the adoption of SFAS No. 142, “Goodwill and Other Intangible Assets” on January 1, 2002,
goodwill and cable certificates (certificates of convenience and public necessity) are no longer amortized.
The following pro forma financial information reflects net income (loss) and basic and diluted EPS as if
goodwill and cable certificates were not subject to amortization for the years ended December 31, 2001 and
2000 (amounts in thousands, except per share amounts):
Year Ended
December 31, 2002
Basic and
Diluted
EPS
0.08
Net
Income
6,663
Net income (loss), as reported $
Add cable certificate
Year Ended
December 31, 2001
Basic and
Diluted
EPS
Net
Income
4,589
0.05
Year Ended
December 31, 2000
Basic and
Diluted
EPS
(0.29)
Net Loss
(13,234)
amortization, net of income
taxes
Add goodwill amortization, net
of income taxes
Adjusted net income
(loss)
---
---
---
---
3,113
0.06
3,087
0.06
756
0.01
755
0.01
$
6,663
0.08
8,458
0.12
(9,392)
(0.22)
Cable certificates are allocated to our cable services reportable segment. Goodwill is primarily allocated to
the cable services segment and the remaining amount is not allocated to a reportable segment, but is included
in the All Other category in note 9.
Amortization expense for amortizable intangible assets for the years ended December 31, 2002, 2001 and
2000 follow:
Years Ended December 31,
2000
2002
2001
Amortization expense for amortizable
intangible assets
$
790
7,372
6,951
117
(Continued)
GENERAL COMMUNICATION, INC.
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,
2003
2004
2005
2006
2007
$ 402
$ 278
$ 123
$ 119
$ 111
No intangible assets have been impaired based upon impairment testing performed as of December 31, 2002
(see note 1(i)) and no indicators of impairment have occurred since the impairment testing was performed.
(5) Notes Receivable from Related Parties
Notes receivable from related parties consist of the following (amounts in thousands):
Notes receivable from officers bearing interest up to
6.5% or at the rate paid by us on our senior
indebtedness, unsecured, due through February 8,
2007
Notes receivable from officers bearing interest up to
9.0% or at the rate paid by us on our senior
indebtedness, secured by GCI common stock, a life
insurance policy, and a personal residence, due
through August 26, 2004
Notes receivable from other related parties bearing
interest up to 8.305% or at the rate paid by us on
our senior indebtedness, unsecured and secured by
property, due through December 31, 2007
Interest receivable
Total notes receivable from related parties
Less notes receivable from related parties issued
upon stock option exercise, classified as a
component of stockholders’ equity
Less current portion, including current interest
receivable
Long-term portion, including long-term interest
December 31,
2002
2001
$
8,068
3,109
919
1,104
1,271
1,231
11,489
961
842
6,016
5,650
2,588
697
182
receivable
$
5,142
3,246
118
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
(6) Long-term Debt
Long-term debt consists of the following (amounts in thousands):
Senior Notes (a)
Senior Facility (b)
Senior Holdings Loan (c)
Fiber Facility (d)
Long-term debt, excluding current maturities
December 31,
2002
180,000
177,700
---
---
357,700
$
$
2001
180,000
---
106,000
60,000
346,000
(a) On August 1, 1997 GCI, Inc. issued $180,000,000 of 9.75% senior notes due 2007 (“Senior Notes”).
The Senior Notes were issued at face value. Net proceeds to GCI, Inc. after deducting underwriting
discounts and commissions totaled $174,600,000. Issuance costs of $6,496,000 are being charged to
Deferred Loan Fee Expense over the term of the Senior Notes.
The Senior Notes were not callable before August 1, 2002. After August 1, 2002, the Senior Notes are
callable at the option of GCI, Inc. under certain conditions and at stated redemption prices. The Senior
Notes include limitations on additional indebtedness and prohibit payment of dividends, payments for
the purchase, redemption, acquisition or retirement of GCI, Inc.’s stock, payments for early retirement
of debt subordinate to the notes, liens on property, and asset sales (excluding sales of Alaska United
assets). We currently have no plans to call the Senior Notes during the year ended December 31,
2003.
GCI, Inc. was in compliance with all covenants during the year ending December 31, 2002. The Senior
Notes are unsecured obligations.
(b) On November 1, 2002 we closed our $225.0 million Senior Facility to refinance the Holdings $150.0
million and $50.0 million credit facilities (“Senior Holdings Loan”) and the Alaska United $75.0
million project finance facility (“Fiber Facility”). The Senior Holdings Loan and Fiber Facility had
balances of approximately $120.1 million and $60.0 million, respectively, at November 1, 2002. The
Senior Facility includes a term loan of $175.0 million and a revolving credit facility of $50.0 million.
The Senior Facility matures on November 1, 2004 and bears interest at LIBOR plus 6.50%. We are
required to pay a commitment fee equal to 2.0% per annum on the unused portion of the commitment
unless the undrawn portion of the revolver is less than $25.0 million, in which case the commitment
fee decreases to 1.5% per annum on the unused portion of the commitment. We recognized $116,000
in commitment fee expense during the year ended December 31, 2002.
On November 30, 2003 we are required to prepay the term loan in an amount equal to 50% of the
amount by which earnings before interest, taxes, depreciation, and amortization exceeds certain fixed
charges as defined in the Senior Facility agreement (“Excess Cash Flow”) during the year ended
September 30, 2003. On May 30, 2004 we are required to prepay the term loan in an amount equal to
50% of the Excess Cash Flow during the six months ended March 31, 2004. The prepayment required
on November 30, 2003, if any, may be funded by a draw on the revolving credit facility.
The Senior Facility contains, among others, covenants limiting additional indebtedness and prohibits
any direct or indirect distribution, dividend, redemption or other payment to any person on account of
any general or limited partnership interest in, or shares of capital stock or other securities of GCI, Inc.
and subsidiaries. Under the Senior Facility we may not allow the:
(cid:130) Ratio of total indebtedness to annualized operating cash flow to be greater than 4.5:1,
119
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
(cid:130) Ratio of senior secured indebtedness to annualized operating cash flow to be greater than
2.25:1, and
(cid:130) Ratio of annualized operating cash flow to total interest expense to be less than 2.50:1.
Capital expenditures, other than those incurred to build additional fiber optic cable system capacity, in
any of the years ended September 30, 2003, March 31, 2004 and September 30, 2004 may not exceed:
(cid:130)
(cid:130)
$25.0 million, plus
50% of any Excess Cash Flow during the applicable period less certain permitted investments
of up to $5.0 million during the applicable period.
Substantially all of Holdings’ assets collateralize the Senior Holdings Loan.
$3.0 million of the Senior Facility has been used to provide a letter of credit to secure payment of
certain access charges associated with our provision of telecommunications services within the State
of Alaska.
In connection with the funding of the Senior Facility, we paid bank fees and other expenses of
approximately $7,141,000 during the year ended December 31, 2002 which will be charged to
Deferred Loan Fee Expense over the life of the agreement. We funded $6,809,000 of the bank fees
and other expenses by a draw on the Senior Facility.
(c)
The Senior Holdings Loan facilities were refinanced by the Senior Facility on November 1, 2002. The Senior
Holdings Loan facilities incurred interest, as amended, at either LIBOR plus 1.00% to 2.50%, depending on
the leverage ratio of Holdings and certain of its subsidiaries, or at the greater of the prime rate or the federal
funds effective rate (as defined) plus 0.05%, in each case plus an additional 0.00% to 1.375%, depending on
the leverage ratio of Holdings and certain of its subsidiaries. We were required to pay a commitment fee
equal to 0.50% per annum on the unused portion of the commitment. Commitment fee expense on the Senior
Holdings Loan totaled $189,000, $405,000 and $570,000 during the years ended December 31, 2002, 2001
and 2000, respectively.
We borrowed an additional $9.0 million on our Senior Holdings Loan in the first quarter of 2002 to fund our
Senior Notes interest payment.
The facilities contained, among others, covenants requiring maintenance of specific levels of operating cash
flow to indebtedness and to interest expense, and limitations on acquisitions and additional indebtedness. The
facilities prohibited any direct or indirect distribution, dividend, redemption or other payment to any person on
account of any general or limited partnership interest in, or shares of capital stock or other securities of Holdings
or any of its subsidiaries.
Holdings paid bank fees and other expenses of approximately $3,893,000 for the initial funding and
subsequent amendments to the Senior Holdings Loan facilities. Those fees and other expenses were charged
to Deferred Loan Fee Expense over the term of the facilities which ended October 31, 2002. Approximately
$438,000 of amendment fees were charged to Selling, General and Administrative Expense in the
Consolidated Statements of Operations during the year ended December 31, 2001. During the year ended
December 31, 2002, approximately $1.3 million in unamortized bank fees and other expenses were charged to
Deferred Loan Fee Expense upon refinancing the Senior Holdings Loan facilities.
(d) On January 27, 1998 Alaska United closed the Fiber Facility to construct a fiber optic cable system connecting
Anchorage, Fairbanks, Valdez, Whittier, Juneau and Seattle. The Fiber Facility was refinanced by the Senior
Facility on November 1, 2002. The Fiber Facility was a 10-year term loan that was interest only for the first 5
years. The Fiber Facility interest rate was either Libor plus 3.0%, or at the lender’s prime rate plus 1.75%
120
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
while the loan balance was greater than $60 million. The interest rate declined to Libor plus 2.5%-2.75%, or,
at our option, the lender’s prime rate plus 1.25%-1.5% when the loan balance was reduced to $60 million.
The Fiber Facility contained covenants requiring certain intercompany loans and advances in order to
maintain specific levels of cash flow necessary to pay operating costs and interest and principal installments.
In connection with the funding of the Fiber Facility, Alaska United paid bank fees and other expenses of
$2,183,000 since the initial funding through October 31, 2002. These fees and other expenses were charged
to Deferred Loan Fee Expense over the term of the agreement which ended October 31, 2002. During the
year ended December 31, 2002, approximately $1.0 million in unamortized bank fees and other expenses
were charged to Deferred Loan Fee Expense upon refinancing the Fiber Facility.
As of December 31, 2002 maturities of long-term debt were as follows (amounts in thousands):
Years ending December 31,
2003
2004
2005
2006
2007
$
---
177,700
---
---
180,000
$ 357,700
(7)
Income Taxes
Total income tax (expense) benefit was allocated as follows (amounts in thousands):
Net (income) loss from continuing operations
Stockholders’ equity, for stock option
compensation expense for tax purposes in
excess of amounts recognized for financial
reporting purposes
Years ended December 31,
2002
(5,659)
$
2001
(4,070)
2000
8,415
317
(5,342)
2,317
(1,753)
640
9,055
$
Income tax (expense) benefit consists of the following (amounts in thousands):
Years ended December 31,
2002
2001
2000
Current tax (expense):
Federal taxes
State taxes
Deferred tax (expense) benefit:
Federal taxes
State taxes
$
(1,754)
(536)
(2,290)
---
---
---
---
---
---
(2,580)
(789)
(3,369)
(3,115)
(955)
(4,070)
6,494
1,921
8,415
$
(5,659)
(4,070)
8,415
121
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
Total income tax (expense) benefit differed from the “expected” income tax (expense) benefit determined by
applying the statutory federal income tax rate of 34% as follows (amounts in thousands):
“Expected” statutory tax (expense) benefit
State income taxes, net of federal benefit
Income tax effect of goodwill amortization,
nondeductible expenditures and other items,
net
Other
Years ended December 31,
2000
2001
2002
7,361
(2,944)
$ (4,189)
1,268
(630)
(873)
(597)
---
(5,659)
$
(496)
---
(4,070)
(399)
185
8,415
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and
deferred tax liabilities at December 31, 2002 and 2001 are presented below (amounts in thousands):
December 31,
2002
2001
Current deferred tax assets:
Accounts receivable, principally due to allowance
for doubtful accounts
$
5,649
1,351
Compensated absences, accrued for financial
reporting purposes
Workers compensation and self insurance reserves,
principally due to accrual for financial reporting
purposes
Inventory expense for financial reporting purposes
in excess of amounts recognized for tax purposes
Other
Total current deferred tax assets
1,914
1,599
805
637
141
---
8,509
$
1,323
(220)
4,690
122
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
Long-term deferred tax assets:
Net operating loss carryforwards
Alternative minimum tax credits
Deferred compensation expense for financial
reporting purposes in excess of amounts
recognized for tax purposes
Employee stock option compensation expense for
financial reporting purposes in excess of
amounts recognized for tax purposes
Sweepstakes award in excess of amounts
recognized for tax purposes
State income taxes
Charitable contributions expense for financial
reporting in excess of amount recognized for tax
purposes
Deferred loan fees for financial reporting purposes
in excess of amounts recognized for tax
purposes
Cost of sales and services for financial reporting in
excess of amounts recognized for tax purposes
Cash flow hedge expense for financial reporting
purposes in excess of amounts recognized for
tax purposes
Other
Total long-term deferred tax assets
Long-term deferred tax liabilities:
Property and equipment, principally due to
differences in depreciation
Amortizable assets
Costs recognized for tax purposes in excess of
amounts recognized for book purposes
Other
Total gross long-term deferred tax liabilities
Net combined long-term deferred tax liabilities
$
December 31,
2002
2001
$
76,855
1,892
62,760
2,081
1,239
1,913
411
145
184
1,555
188
1,755
586
423
---
181
347
402
464
360
83,727
5
345
70,364
90,522
8,920
---
346
99,788
16,061
80,516
13,670
891
356
95,433
25,069
We recorded net deferred tax assets of $15.8 million in 2002 associated with the Rogers and Kanas
acquisitions (see note 3), resulting in adjustments to the recorded financial statement cost basis of associated
goodwill and property and equipment.
In conjunction with the 1996 Cable Companies acquisition, we incurred a net deferred income tax liability of
$24.4 million and acquired net operating losses totaling $57.6 million. We determined that approximately
$20 million of the acquired net operating losses would not be utilized for income tax purposes, and elected
with our December 31, 1996 income tax returns to forego utilization of such acquired losses under Internal
Revenue Code section 1.1502-32(b)(4). Deferred tax assets were not recorded associated with the foregone
losses and, accordingly, no valuation allowance was provided. At December 31, 2002, we have (1) federal
and state tax net operating loss carryforwards of approximately $191 million that will begin expiring in 2005
if not utilized, and (2) alternative minimum tax credit carryforwards of approximately $1.9 million available
to offset regular income taxes payable in future years.
123
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
The following schedule shows our tax net operating loss carryforwards by year of expiration (amounts in
thousands):
$
Years ending December 31,
2005
2006
2007
2008
2009
2010
2011
2018
2019
2020
2021
2022
Total tax net operating loss
Federal
292
393
4,017
8,077
11,767
9,134
6,919
19,995
27,910
45,403
32,740
24,534
State
---
---
3,006
7,509
11,482
8,935
6,685
19,390
27,905
45,400
33,420
27,074
carryforwards
$
191,181
190,806
Our utilization of remaining acquired net operating loss carryforwards is subject to annual limitations
pursuant to Internal Revenue Code section 382 which could reduce or defer the utilization of these losses.
Tax benefits associated with recorded deferred tax assets are considered to be more likely than not realizable
through taxable income earned in 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 in the near term if estimates of future
taxable income during the carryforward period are reduced.
(8)
Stockholders' Equity
Common Stock
GCI's Class A common stock and Class B common stock are identical in all respects, except that each share
of Class A common stock has one vote per share and each share of Class B common stock has ten votes per
share. In addition, each share of Class B common stock outstanding is convertible, at the option of the
holder, into one share of Class A common stock.
WorldCom owned 3,751,509 and 8,251,509 shares of GCI's Class A common stock that represented
approximately 7 and 16 percent of the issued and outstanding Class A shares at December 31, 2002 and 2001,
respectively. WorldCom owned 1,275,791 shares of GCI's Class B common stock that represented
approximately 33 percent of the issued and outstanding Class B shares at December 31, 2002 and 2001.
Certain subsidiaries of WorldCom filed a Schedule 13D with the SEC on November 13, 2001 disclosing their
intention to monitor their investments in us, to take actions consistent with their best interests, and, subject to
market conditions and other factors, to explore opportunities to sell up to one-half of their interest in us. On
February 13, 2002 we filed a Form S-3 with the SEC on behalf of WorldCom to register for resale 4,500,000
shares of our Class A common stock. In the Schedule 13D WorldCom disclosed their intention to maintain
strategic and commercial relationships with us for the foreseeable future and their expectation that they would
maintain representation on our Board of Directors subject to nomination and election at our annual meetings
of shareholders. We also intend to maintain strategic and commercial relationships with WorldCom and its
subsidiaries for the foreseeable future. WorldCom completed the sale of 4,500,000 shares of our Class A
common stock in April 2002.
124
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
In October 2001, a Series B preferred stockholder converted 5,665 shares of Series B preferred stock to GCI
Class A common stock resulting in the issuance of approximately 1,021,000 shares of GCI Class A common
stock.
Stock Option Plan
In December 1986, GCI adopted a Stock Option Plan (the “Option Plan”) in order to provide a special
incentive to our officers, non-employee directors, and employees by offering them an opportunity to acquire
an equity interest in GCI. The Option Plan, as amended in 1999, provides for the grant of options for a
maximum of 10,700,000 shares of GCI Class A common stock, subject to adjustment upon the occurrence of
stock dividends, stock splits, mergers, consolidations or certain other changes in corporate structure or
capitalization. If an option expires or terminates, the shares subject to the option will be available for further
grants of options under the Option Plan. The Option Committee of GCI’s Board of Directors administers the
Option Plan.
The Option Plan provides that all options granted under the Option Plan must expire not later than ten years
after the date of grant. If at the time an option is granted the exercise price is less than the market value of the
underlying common stock, the difference in these amounts at the time of grant is expensed ratably over the
vesting period of the option. Options granted pursuant to the Option Plan are only exercisable if at the time of
exercise the option holder is our employee, non-employee director, or a consultant or advisor working on our
behalf.
Information for the years 2000, 2001 and 2002 with respect to the Option Plan follows:
Outstanding at December 31, 1999
Granted
Exercised
Forfeited
Outstanding at December 31, 2000
Granted
Exercised
Forfeited
Outstanding at December 31, 2001
Granted
Exercised
Forfeited
Outstanding at December 31, 2002
Weighted
Average
Exercise Price
$4.94
Range of
Exercise Prices
$0.01-$7.63
$5.96
$2.37
$5.18
$5.54
$7.34
$4.01
$6.53
$6.11
$6.90
$5.78
$7.42
$6.34
$3.00-$7.50
$0.01-$6.50
$0.01-$7.63
$0.01-$7.63
$2.84-$11.25
$0.01-$7.50
$6.00-$10.98
$0.01-$11.25
$3.11-$7.52
$3.00-$7.50
$3.25-$11.25
$0.01-$11.25
Shares
4,354,715
1,970,599
(513,289)
(398,460)
5,413,565
755,277
(1,044,511)
(24,200)
5,100,131
1,995,700
(583,888)
(223,177)
6,288,766
Available for grant at December 31, 2002
886,757
Stock Warrants Not Pursuant to a Plan
We entered into a stock warrant agreement in exchange for services in December 1998 with certain of our
legal counsel which provides for the purchase of 16,667 shares of GCI Class A common stock, vesting in
December 1999, with an exercise price of $3.00 per share, and expiring December 2003. The fair value of
the stock warrant was approximately $23,000.
125
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
We entered into a stock warrant agreement in exchange for services in June 1999 with certain of our legal
counsel which provides for the purchase of 25,000 shares of GCI Class A common stock, vesting through
December 2001, with an exercise price of $3.00 per share, and expiring December 2003. The fair value of
the stock warrant was approximately $94,000.
SFAS 123 Disclosures
Our stock options and warrants expire at various dates through December 2012. At December 31, 2002,
2001, and 2000, the weighted-average remaining contractual lives of options outstanding were 6.93, 6.95 and
6.88 years, respectively.
At December 31, 2002, 2001, and 2000, the number of exercisable shares under option was 3,187,618,
2,837,361 and 2,350,334, respectively, and the weighted-average exercise price of those options was $5.87,
$5.75 and $4.78, respectively.
The per share weighted-average fair value of stock options granted during 2002 was $3.05 per share for
compensatory and $0.61 for non-compensatory options; for 2001 was $6.99 per share for compensatory and
$10.58 for non-compensatory options; and for 2000 was $4.07 per share for compensatory and $2.71 for non-
compensatory options. The amounts were determined as of the options’ grant dates using a Black-Scholes
option-pricing model with the following weighted-average assumptions: 2002 – risk-free interest rate of
3.079%, volatility of 0.6844 and an expected life of 6.18 years; 2001 – risk-free interest rate of 4.664%,
volatility of 0.6178 and an expected life of 6.67 years; and 2000 – risk-free interest rate of 4.987%, volatility
of 0.6203 and an expected life of 5.82 years.
Summary information about our stock options and warrants outstanding at December 31, 2002:
Options and Warrants Outstanding
Options and Warrants Exercisable
Number
outstanding
as of
12/31/02
681,131
432,804
1,101,783
51,000
1,762,900
81,000
775,622
1,150,000
505,193
40,000
6,581,433
Weighted
Average
Remaining
Contractual
Life
4.73
6.56
7.42
7.99
6.76
5.14
5.63
9.10
6.86
8.50
6.93
Range of Exercise
Prices
$0.01-$4.00
$4.06-$5.69
$6.00-$6.00
$6.13-$6.35
$6.50-$6.50
$6.63-$6.99
$7.00-$7.00
$7.25-$7.25
$7.50-$10.98
$11.25-$11.25
$0.01-$11.25
Weighted
Average
Exercise Price
$3.48
$4.97
$6.00
$6.13
$6.50
$6.80
$7.00
$7.25
$7.88
$11.25
$6.33
Number
Exercisable as
of 12/31/02
661,131
251,757
466,646
20,000
950,520
62,666
525,622
0
241,276
8,000
3,187,618
Weighted Average
Exercise Price
$3.49
$4.94
$6.00
$6.13
$6.50
$6.80
$7.00
$0.00
$7.68
$11.25
$5.87
Class A Common Shares Held in Treasury
In 2002 we acquired a total of 20,000 shares of GCI Class A common stock for approximately $177,000 to
fund a deferred compensation agreement for an officer. In 2000 we acquired a total of 10,000 shares of GCI
Class A common stock for approximately $52,000 to fund deferred compensation agreements for an officer.
126
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
Employee Stock Purchase Plan
In December 1986, we adopted an Employee Stock Purchase Plan (“Plan”) qualified under Section 401 of the
Internal Revenue Code of 1986 (“Code”). The Plan provides for acquisition of GCI’s Class A and Class B
common stock at market value. The Plan permits each employee who has completed one year of service to
elect to participate in the Plan. Through December 31, 2002, eligible employees could elect to reduce their
compensation in any even dollar amount up to 10 percent of such compensation up to a maximum of
$11,000. As of January 1, 2003, eligible employees can elect to reduce their compensation in any even dollar
amount up to 50 percent of such compensation (subject to certain limitations) up to a maximum of $12,000.
Eligible employees may contribute up to 10 percent of their compensation with after-tax dollars, or they may
elect a combination of salary reductions and after-tax contributions.
Beginning in 2002 eligible employees are allowed to make catch-up contributions of no more than $1,000 in
2002 and $2,000 in 2003. We do not match employee catch-up contributions.
We may match employee salary reductions and after tax contributions in any amount, elected by our Board of
Directors each year, but not more than 10 percent of any one employee's compensation will be matched in
any year. For the year ended December 31, 2001 the combination of salary reductions, after tax contributions
and matching contributions could not exceed the lesser of 25 percent of an employee's compensation
(determined after salary reduction) or $35,000. For the years ended December 31, 2002 and 2003 the
combination of salary reductions, after tax contributions and matching contributions cannot exceed the lesser
of 100 percent of an employee's compensation or $40,000 (determined after salary reduction) for any year.
Matching contributions vest over six years.
Employee contributions may be invested in GCI class A common stock, WorldCom and MCI Group common
stock (through February 14, 2003), AT&T common stock, Comcast Corporation common stock, or various
mutual funds. TCI common stock was previously offered to employees as an investment choice however
TCI’s merger with AT&T in March 1999 resulted in the conversion of TCI shares of common stock into
AT&T shares of common stock.
WorldCom and MCI Group common stocks were delisted from the NASDAQ stock exchange as a result of
their bankruptcy filing in July 2002 (see note 11). The impaired market for shares of these common stocks
has resulted in difficulty executing trades on behalf of participating employees. Accordingly, as of February
14, 2003, participating employees were no longer allowed to invest in the common stock of WorldCom or
MCI Group.
Employee contributions invested in GCI common stock receive up to 100% matching, as determined by our
Board of Directors each year, in GCI common stock. Employee contributions invested in other than GCI
common stock receive up to 50% matching, as determined by our Board of Directors each year, in GCI
common stock. Our matching contributions allocated to participant accounts totaled approximately
$3,665,000, $3,194,000, and $2,773,000 for the years ended December 31, 2002, 2001, and 2000,
respectively. The Plan may, at its discretion, purchase shares of GCI common stock from GCI at market
value or may purchase GCI’s common stock on the open market. In 2002 and 2000 we funded some and all,
respectively, of our employer-matching contributions through the issuance of new shares of GCI common
stock rather than market purchases. In 2001 we funded all of our employer-matching contributions through
the purchase of shares on the open market.
Effective July 1, 2000, we transferred all of the Plan assets to Merrill, Lynch, Pierce, Fenner and Smith,
Incorporated who became the Plan’s new recordkeeper.
In March 2002 we allowed participating employees to diversify 25 percent of their holdings of GCI common
stock at December 31, 2001 in other investments offered by the Plan. We allowed diversification of the
remaining 75 percent of their holdings of GCI common stock at December 31, 2001 ratably over the
127
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
following three years. Effective January 1, 2003 the original diversification plan was superceded by a new
plan which allowed participating employees to diversify 100 percent of their holdings of GCI common stock
at December 31, 2002 in other investments offered by the Plan.
On January 23, 2003 we added seven additional mutual fund investment choices to the Plan.
(9)
Industry Segments Data
Our reportable segments are business units that offer different products. The reportable segments are each
managed separately and offer distinct products with different production and delivery processes.
We have four reportable segments as follows:
Long-distance services. We offer a full range of common carrier long-distance services to commercial,
government, other telecommunications companies and residential customers, through our networks of fiber
optic cables, digital microwave, and fixed and transportable satellite earth stations and our SchoolAccess
offering to rural school districts and a similar offering to rural hospitals and health clinics.
Cable services. We provide cable television services to residential, commercial and government users in
the State of Alaska. Our cable systems serve 33 communities and areas in Alaska, including the state's
three largest urban areas, Anchorage, Fairbanks and Juneau. We offer digital cable television services in
Anchorage, Fairbanks, Juneau, Kenai and Soldotna and retail cable modem service (through our Internet
services segment) in all of our locations in Alaska except Ketchikan and Kotzebue. We plan to offer cable
modem service in Ketchikan in 2003, and plan to continue to expand our product offerings as plant
upgrades are completed in other communities in Alaska.
Local access services. We offer facilities based competitive local exchange services in Anchorage,
Fairbanks and Juneau and plan to provide similar competitive local exchange services in other locations
pending regulatory approval and subject to availability of capital.
Internet services. We offer wholesale and retail Internet services. We offer cable modem service as further
described under Cable services above. Our undersea fiber optic cable allows us to offer enhanced services
with high-bandwidth requirements.
Included in the “All Other” category in the tables that follow are our managed services, product sales, cellular
telephone services, and, during the year ended December 31, 2001, management services for Kanas, a related
party. None of these business units has ever met the quantitative thresholds for determining reportable
segments. Also included in the All Other category are corporate related expenses including management
information systems, accounting, legal and regulatory, human resources and other general and administrative
expenses. In 2001, the All Other category includes revenues and costs associated with the sale of undersea
fiber optic cable system capacity (see note 1(o)).
The December 31, 2001 and 2000 Form 10-K “Industry Segments Data” reported marketing expenses in the
“All Other” category. Such 2001 and 2000 expenses have been reclassified to the applicable reportable
segments in this December 31, 2002 Form 10-K. We adopted SFAS 142, “Goodwill and Other Intangible
Assets” on January 1, 2002, resulting in a $6.5 million decrease in depreciation and amortization expense
primarily in the cable services segment during the year ended December 31, 2002 as compared to the years
ended December 31, 2001 and 2000.
We evaluate performance and allocate resources based on (1) earnings or loss from operations before
depreciation, amortization, net interest expense and income taxes, and (2) operating income or loss. The
accounting policies of the reportable segments are the same as those described in the summary of significant
128
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
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 of America. All of our
long-lived assets are located within the United States of America.
Summarized financial information for our reportable segments for the years ended December 31, 2002, 2001
and 2000 follows (amounts in thousands):
Long-
Distance
Services
Reportable Segments
Local
Access
Services
Internet
Services
Cable
Services
Total
Reportable
Segments
All
Other
Total
2002
Revenues:
Intersegment
External
Total revenues
Cost of sales and services:
Intersegment
External
Total cost of sales and
services
Contribution:
Intersegment
External
Total contribution
Selling, general and
administrative expenses
Bad debt expense
Earnings (loss) from
operations before
depreciation, amortization,
net interest expense and
income taxes
Depreciation and
amortization
$ 22,639 2,094
204,930 88,688
227,569 90,782
9,723
32,071
41,794
10,023
15,584
25,607
44,479
341,273
385,752
744
45,223
26,569 367,842
27,313 413,065
18,284
---
60,053 23,649
2,100
20,205
22,985
4,792
43,369
108,699
752
44,121
14,865 123,564
78,337
23,649
22,305
27,777
152,068
15,617 167,685
4,355 2,094
144,877 65,039
149,232 67,133
7,623 (12,962)
10,792
11,866
(2,170)
19,489
1,110
232,574
233,684
(8)
1,102
11,704 244,278
11,696 245,380
36,378
12,388
25,264
428
16,600
162
8,855
54
87,097
13,032
41,932 129,029
13,124
92
100,466
41,441
2,727
(11,079)
133,555
(30,328) 103,227
21,427
15,882
3,466
7,187
47,962
8,438
56,400
Operating income (loss)
$ 79,039 25,559
(739) (18,266)
85,593
(38,766)
46,827
Total assets
$ 288,680 322,899
35,276
28,102
674,957
63,825 738,782
Capital expenditures
$ 22,832 17,395
10,388
4,215
54,830
10,310
65,140
2001
Revenues:
Intersegment
External
Total revenues
Cost of sales and services:
Intersegment
External
Total cost of sales and
services
$ 20,239 1,650
200,694 76,554
220,933 78,204
8,716
25,229
33,945
6,110
11,996
18,106
36,715
314,473
351,188
355
37,070
42,785 357,258
43,140 394,328
16,739
---
73,257 20,829
1,586
14,037
17,345
4,749
35,670
112,872
461
36,131
26,921 139,793
89,996
20,829
15,623
22,094
148,542
27,382 175,924
129
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
Long-
Distance
Services
Reportable Segments
Local
Access
Services
Internet
Services
Cable
Services
Total
Reportable
Segments
All
Other
Total
Contribution:
Intersegment
External
Total contribution
Selling, general and
administrative expenses
Bad debt expense
Earnings (loss) from
operations before
depreciation, amortization,
net interest expense and
income taxes
Depreciation and
amortization
$ 3,500 1,650
127,437 55,725
130,937 57,375
7,130 (11,235)
7,247
11,192
(3,988)
18,322
1,045
201,601
202,646
(106)
939
15,864 217,465
15,758 218,404
38,102
21,740
2,790 1,053
13,138
181
8,066
86
81,046
4,110
35,490 116,536
4,279
169
90,045
34,582
5,003
(12,140)
117,490
(19,901)
97,589
21,899
20,704
3,530
2,879
49,012
6,663
55,675
Operating income (loss)
$ 68,146 13,878
1,473 (15,019)
68,478
(26,564)
41,914
Total assets
$ 294,175 321,722
30,040
27,363
673,300
61,379 734,679
Capital expenditures
$ 24,497 16,433
8,085
6,516
55,531
10,107
65,638
2000
Revenues:
Intersegment
External
Total revenues
Cost of sales and services:
Intersegment
External
Total cost of sales and
services
Contribution:
Intersegment
External
Total contribution
Selling, general and
administrative expenses
Bad debt expense
Earnings (loss) from
operations before
depreciation, amortization,
net interest expense and
income taxes
Depreciation and
amortization
$ 15,750
182,676
198,426
1,493 6,675 3,173
67,898 20,205 8,425
69,391 26,880 11,598
27,091
279,204
306,295
123
27,214
13,401 292,605
13,524 319,819
13,554
76,568
--- 1,401 11,692
17,821 10,768 4,389
26,647
109,546
123
26,770
10,166 119,712
90,122
17,821 12,169 16,081
136,193
10,289 146,482
2,196
106,108
108,304
1,493 5,274 (8,519)
50,077 9,437 4,036
51,570 14,711 (4,483)
444
169,658
170,102
---
444
3,235 172,893
3,235 173,337
34,816
3,510
20,879
12,316
691
388
7,288
162
75,299
4,751
24,609
259
99,908
5,010
69,978
30,000 2,007 (11,933)
90,052
(21,633)
68,419
19,500
18,942 4,375 1,915
44,732
5,923
50,655
Operating income (loss)
$ 50,478
11,058
(2,368) (13,848)
45,320
(27,556)
17,764
Total assets
$ 257,913 304,094 24,827 22,768
609,602
69,405 679,007
Capital expenditures
$ 18,062
10,966 3,430 7,902
40,360
10,513
50,873
130
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
Long-distance services, local access services and Internet services are billed utilizing a unified accounts
receivable system and are not reported separately by business segment. All such accounts receivable are
included above in the long-distance services segment for all periods presented.
A reconciliation of reportable segment revenues to consolidated revenues follows (amounts in thousands):
Years ended December 31,
Reportable segment revenues
Plus All Other revenues
Less intersegment revenues eliminated in consolidation
$
Consolidated revenues
$
2002
2001
2000
385,752
27,313
45,223
367,842
351,188
43,140
37,070
357,258
306,295
13,524
27,214
292,605
A reconciliation of reportable segment earnings from operations before depreciation, amortization, net
interest expense and income taxes to consolidated net income (loss) before income taxes follows (amounts in
thousands):
Years ended December 31,
2002
2001
2000
Reportable segment earnings from operations before
depreciation, amortization, net interest expense and
income taxes
Less All Other loss from operations before
depreciation, amortization, net interest expense and
income taxes
Less intersegment contribution eliminated in
consolidation
Consolidated earnings from operations before
$
133,555
117,490
90,052
30,328
19,901
21,633
1,102
939
444
Less depreciation and amortization expense
depreciation, amortization, net interest expense
and income taxes
102,125
56,400
45,725
33,403
Consolidated net income (loss) before income taxes $ 12,322
Consolidated operating income
Less other expense, net
96,650
55,675
40,975
32,316
8,659
67,975
50,655
17,320
38,969
(21,649)
A reconciliation of reportable segment operating income to consolidated net income (loss) before income
taxes follows (amounts in thousands):
Years ended December 31,
Reportable segment operating income
Less All Other operating loss
Less intersegment contribution eliminated in
consolidation
Consolidated operating income
Less other expense, net
$
Consolidated net income (loss) before income taxes $
2002
85,593
38,766
1,102
45,725
33,403
12,322
2001
68,478
26,564
939
40,975
32,316
8,659
2000
45,320
27,556
444
17,320
38,969
(21,649)
We provide long-distance services to WorldCom (see note 11) and Sprint, major customers. We earned
revenues from Sprint, net of discounts, included in the long-distance segment, totaling approximately
$36,899,000 for the year ended December 31, 2001. As a percentage of total revenues, Sprint revenues
totaled 10.3% for the year ended December 31, 2001. Sprint was not a major customer for segment
disclosure purposes for the years ended December 31, 2002 and 2000.
131
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
(10) Financial Instruments
Fair Value of Financial Instruments
The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current
transaction between willing parties. The carrying amounts and estimated fair values of our financial
instruments at December 31, 2002 and 2001 follows (amounts in thousands):
2002
2001
Carrying
Amount
$ 65,222
Fair
Value
65,222
Carrying
Amount
68,044
Fair
Value
68,044
$ 5,142
$ 44,289
5,142
44,289
3,246
52,980
3,246
52,980
Short-term assets
Notes receivable with related
parties
Short-term liabilities
Long-term debt and capital lease
obligations
$ 402,475
419,305
397,096
411,712
Fair value hedge asset
$ ---
---
1,261
1,261
Cash flow hedge asset (liability) $ (999)
(999)
13
13
The following methods and assumptions were used to estimate fair values:
Short-term assets: The fair values of cash and cash equivalents, net receivables and current portion of
notes receivable from related parties approximate their carrying values due to the short-term nature of
these financial instruments.
Notes receivable from related parties: The carrying value of notes receivable from related parties is
estimated to approximate fair values. Although there are no quoted market prices available for these
instruments, the fair value estimates were based on the change in interest rates and risk related interest
rate spreads since the note origination dates.
Short-term liabilities: The fair values of current maturities of long-term debt and capital lease obligations,
accounts payable, accrued interest, and subscriber deposits approximate their carrying value due to the
short-term nature of these financial instruments.
Long-term debt and capital lease obligations: The fair value of long-term debt is based primarily on
discounting the future cash flows of each instrument at rates currently offered to us for similar debt
instruments of comparable maturities by our bankers.
Derivative Instruments and Hedging Activities
Effective January 3, 2001, we entered into an interest rate swap agreement to convert $50 million of 9.75%
fixed rate debt to a variable interest rate equal to the 90 day LIBOR rate plus 334 basis points. This interest
rate swap was cancelled by the counterparty on August 1, 2002. The differential paid to us was recorded as a
decrease in Interest Expense in the Consolidated Statements of Operations in the period in which it was
recognized. During the years ended December 31, 2002 and 2001 we recognized approximately $1.2 million
and $1.1 million, respectively, as a reduction of interest expense.
Effective September 21, 2001, we entered into an interest rate swap agreement to convert $25 million of
variable interest rate debt equal to the 90 day LIBOR rate plus 334 basis points to 3.98% fixed rate debt plus
applicable margins. Terms of the interest rate swap mirror the underlying variable rate debt, except the
132
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
interest rate swap terminates on September 21, 2004. We entered into the transaction to help insulate us from
future increases in interest rates. Under SFAS No. 133, the interest rate swap is accounted for as a cash flow
hedge. The change in the fair value of the interest rate swap net of income taxes is recorded as an increase or
decrease in other comprehensive income (loss) in the Consolidated Statements of Stockholders’ Equity. The
accrual of interest income or expense is recognized in Interest Expense in the Consolidated Statements of
Operations. During the years ended December 31, 2002 and 2001 we recognized approximately $555,000
and $112,000, respectively, in incremental interest expense resulting from this transaction.
(11) Related Party Transactions
We earned revenues from WorldCom, a major shareholder of GCI (see note 8), net of discounts, of
approximately $73,637,000, $58,225,000 and $53,065,000 for the years ended December 31, 2002, 2001 and
2000, respectively. As a percentage of total revenues, WorldCom revenues totaled 20.0%, 16.3% and 18.1%
for the years ended December 31, 2002, 2001 and 2000, respectively. Amounts receivable, net of accounts
payable, from WorldCom totaled $21,677,000 and $15,379,000 at December 31, 2002 and 2001,
respectively. We paid WorldCom for distribution of our traffic in the contiguous 48 states and Hawaii
amounts totaling approximately $6,413,000, $7,289,000 and $9,124,000 for the years ended December 31,
2002, 2001 and 2000, respectively.
On July 21, 2002 WorldCom and substantially all of its active U.S. subsidiaries filed voluntary petitions for
reorganization under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court.
Chapter 11 allows a company to continue operating in the ordinary course of business in order to maximize
recovery for the company’s creditors and shareholders. The filings have enabled WorldCom to continue to
conduct business while it develops a reorganization plan.
During the year ended December 31, 2002 we have recognized $11.0 million in bad debt expense for
uncollected amounts due from WorldCom. At December 31, 2002 the bad debt reserve for uncollected
amounts due from WorldCom (“WorldCom reserve”) totaled $11.6 million and consisted of all billings for
services rendered prior to July 21, 2002 that were not paid or deemed recoverable as of December 31, 2002
and which have not been subsequently paid through the date of this report. The WorldCom reserve includes
approximately $655,000 in reserves recognized prior to the bankruptcy in addition to the $11.0 million in bad
debt expense previously discussed. Any payments received on amounts included in the WorldCom reserve
will reduce the reserve and bad debt expense in the period of receipt. We currently cannot predict the timing
or ultimate amount, if any, that WorldCom will pay on outstanding balances due us as of their bankruptcy
filing date of July 21, 2002. WorldCom has made timely payments for services rendered subsequent to July
21, 2002.
We entered into a long-term capital lease agreement in 1991 with the wife of our president for property
occupied by us. The leased asset was capitalized in 1991 at the owner’s cost of $900,000 and the related
obligation was recorded in the accompanying financial statements. The lease agreement was amended in
September 2002. The amended lease terminates on September 30, 2011. Through September 30, 2003 our
monthly payment is $20,000, increasing to $20,860 per month October 1, 2003 through September 30, 2006
and increasing to $21,532 per month October 1, 2006 through September 30, 2011. Since the property was
not sold prior to the tenth year of the lease, the owner was required to pay us the greater of one-half of the
appreciated value of the property over $900,000, or $500,000. Accordingly, we received $500,000 in the
form of a note in the first quarter of 2002. The owner paid us $135,000 in 2002 in the form of a note as
additional consideration for the execution of the September 2002 amendment.
133
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
During the six-month period ended June 30, 2001 and the year ended December 31, 2000 we provided
management services to Kanas. Effective June 30, 2001 we completed the acquisition of WorldCom’s 85%
controlling interest in Kanas (see note 3). During the six-month period ended June 30, 2001 and the year
ended December 31, 2000 we earned revenues of approximately $618,000 and $690,000, respectively, for
management services and long-distance services provided to Kanas. We paid approximately $372,000 and
$744,000 to Kanas for the lease and maintenance of fiber optic cable capacity during the six-month period
ended June 30, 2001 and the year ended December 31, 2000, respectively. We advanced approximately $4.9
million and $3.0 million to Kanas to partially fund its operations during the six-month period ended June 30,
2001 and the year ended December 31, 2000, respectively. Accounts receivable from Kanas were
approximately $3.7 million at December 31, 2000 and were classified as Other Assets in the Consolidated
Balance Sheets at December 31, 2000. During the year ended December 31, 2002, we acquired the
remaining 15% interest in Kanas in exchange for a total of 15,000 shares of GCI Class A common stock.
In January 2001 we entered into an aircraft operating lease agreement with a company owned by GCI’s
president. The lease was amended effective January 1, 2002. The lease is month-to-month and may be
terminated at any time upon one hundred and twenty days written notice. The monthly lease rate in 2001 was
$40,000, increasing to $50,000 per month on January 1, 2002. 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. At December 31,
2002 all of the shares under the option agreement are exercisable. We paid a deposit of $1.5 million in
connection with the lease. The deposit will be repaid to us, as amended, upon the earlier of six months after
the agreement terminates, or nine months after the date of a termination notice. The lessor may sell to us the
stock arising from the exercise of the stock option or surrender the right to purchase all or a portion of the
stock option to repay the deposit, as allowed by our debt and preferred stock instruments in effect at such
time.
(12) Commitments and Contingencies
Leases
Operating Leases as Lessee. We lease business offices, have entered into site lease agreements and use
satellite transponder capacity and certain equipment pursuant to operating lease arrangements. Rental costs
under such arrangements amounted to approximately $13,445,000, $9,292,000 and $8,152,000 for the years
ended December 31, 2002, 2001 and 2000, respectively.
Satellite Transponder Capacity Capital Lease
We lease satellite transponder capacity through a capital lease arrangement with a leasing company. The
capital lease was entered into in March 2000. The effective term of the lease is nine years from the closing
date. The capital lease includes certain covenants requiring maintenance of specific levels of operating cash
flow to indebtedness and limitations on additional indebtedness. We were in compliance with all covenants
during the year ending December 31, 2002.
We began operating the satellite transponders on April 1, 2000. The satellite transponders are recorded at a
cost of $48.2 million and are being depreciated over twelve years. At December 31, 2002 and 2001 $44.9
million and $45.9 million, respectively, was financed under this capital lease.
134
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
A summary of future minimum lease payments for all leases follows (amounts in thousands):
Years ending December 31:
2003
2004
2005
2006
2007
2008 and thereafter
Total minimum lease payments
Less amount representing interest
Less current maturities of obligations under capital
leases
Subtotal - long-term obligations under capital
leases
Less long-term obligations under capital leases due
to related party, excluding current maturities
Long-term obligations under capital leases,
excluding related party, excluding current
maturities
Operating
11,780
9,613
8,994
7,343
5,535
24,408
67,673
$
$
Capital
5,115
9,602
10,243
9,723
8,813
25,447
68,943
(22,311)
(1,857)
44,775
(703)
$
44,072
The leases generally provide that we pay the taxes, insurance and maintenance expenses related to the leased
assets. We expect that in the normal course of business leases that expire will be renewed or replaced by
leases on other properties.
Operating Leases as Lessor. In 1999 we signed agreements with a large commercial customer for the lease of
DS3 circuits on Alaska United facilities within Alaska, and between Alaska and the Lower 48 states. The
lease agreements were for three years with renewal options. One lease was canceled in January 2002,
approximately two months before its expiration. The remaining two leases were not renewed after their
initial three year terms expired.
Telecommunication Services Agreement
We lease a portion of our 800-mile fiber optic system capacity that extends from Prudhoe Bay to Valdez via
Fairbanks, and provide management and maintenance services for this capacity to a customer. The
telecommunications service agreement is for fifteen years and may be extended for up to two successive
three-year periods and, upon expiration of the extensions, one additional year.
A summary of minimum future service revenues, assuming the agreement is not terminated pursuant to
contract provisions, follows (amounts in thousands):
Years ending December 31,
2003
2004
2005
2006
2007
2008 and thereafter
Total minimum future service revenues
$
$
7,620
7,620
7,620
7,620
7,620
64,467
102,567
In December 2001 we signed a letter of agreement with our customer in which we agreed, amongst other
things, to upgrade the 800-mile fiber optic system, install multiple earth stations, and potentially provide
other services. We have completed the projects outlined in the letter of agreement and expect testing and
135
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
acceptance to be completed no later than the fourth quarter of 2003. We expect the contract to be amended in
2003 consistent with the terms of the letter of agreement. We expect the following additional minimum
future service revenues, assuming the agreement is amended and is not terminated pursuant to contract
provisions (amounts in thousands):
Years ending December 31,
2003
2004
2005
2006
2007
2008 and thereafter
Total minimum future service revenues
$
$
2,810
5,580
5,580
5,580
5,580
47,208
72,338
Deferred Compensation Plan
During 1995, we adopted a non-qualified, unfunded deferred compensation plan to provide a means by which
certain employees may elect to defer receipt of designated percentages or amounts of their compensation and
to provide a means for certain other deferrals of compensation. We may contribute matching deferrals at a
rate selected by us. Participants immediately vest in all elective deferrals and all income and gain attributable
thereto. Matching contributions and all income and gain attributable thereto vest over a six-year period.
Participants may elect to be paid in either a single lump sum payment or annual installments over a period not
to exceed 10 years. Vested balances are payable upon termination of employment, unforeseen emergencies,
death and total disability. Participants are general creditors of us with respect to deferred compensation plan
benefits. Compensation deferred pursuant to the plan totaled approximately $82,000, $39,000 and $0 for the
years ended December 31, 2002, 2001 and 2000, respectively.
Performance Based Incentive Compensation Plan
During 2002 we adopted a non-qualified, performance based incentive compensation plan. The incentive
compensation plan provides additional compensation to certain officers and key employees based upon the
Company’s achievement of specified financial performance goals. The Compensation Committee of the
Board of Directors establishes goals on which executive officers are compensated, and management
establishes the goals for other covered employees. Awards may be payable in cash or GCI’s Class A
common stock. No amounts were charged to expense in 2002 under the new plan.
Self-Insurance
We are self-insured for losses and liabilities related primarily to health and welfare claims up to
predetermined amounts above which third party insurance applies. A reserve of $1.6 million and $1.5 million
was recorded at December 31, 2002 and 2001, respectively, to cover estimated reported losses, estimated
unreported losses based on past experience modified for current trends, and estimated expenses for
investigating and settling claims. Actual losses will vary from the recorded reserve. While we use what we
believe is pertinent information and factors in determining the amount of reserves, future additions to the
reserves may be necessary due to changes in the information and factors used.
We are self-insured for damage or loss to certain of our transmission facilities, including our buried, under
sea, and above-ground transmission lines. If we become subject to substantial uninsured liabilities due to
damage or loss to such facilities, our financial position, results of operations or liquidity may be adversely
affected.
Beginning January 1, 2003, we will be self-insured for losses and liabilities related to workers’ compensation
claims up to predetermined amounts above which third party insurance applies. A reserve will be recorded in
2003 to cover estimated reported losses and estimated expenses for investigating and settling claims. Actual
losses will vary from the recorded reserve.
136
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
Litigation and Disputes
We are routinely involved in various lawsuits, billing disputes, legal proceedings and regulatory matters that
have arisen in the normal course of business.
On July 1, 1999, the APUC ruled that the rural exemptions from local competition for the ILECs operating in
Juneau, Fairbanks and North Pole would not be continued, which allowed us to negotiate for unbundled
elements for the provision of competitive local service. ACS requested reconsideration of this decision and
on October 11, 1999, the RCA issued an order terminating rural exemptions for the ILECs operating in the
Fairbanks and Juneau markets. ACS has appealed these decisions. The appeal presently is before the Alaska
Supreme Court. On February 11, 2003, the Alaska Supreme Court heard oral argument. One of the principal
issues in dispute concerns the assignment of the burden of proof. In accordance with instructions from the
Alaska Superior Court, the APUC assigned the burden to ACS at the remand proceeding. At the oral
argument, several Justices expressed concern with the assignment of the burden. At this time, we cannot
reasonably predict what the outcome of the case will be or even what relief the Court might order if it were to
find that the burden of proof was improperly assigned to ACS. An adverse decision from the Court, however,
has the potential to disrupt our ability to provide service to our Fairbanks and Juneau customers over our
facilities. We expect a decision from the Court within six months from the date of oral argument.
While the ultimate results of these items cannot be predicted with certainty, except for the rural exemption
proceedings described above, we do not expect at this time the resolution of them to have a material adverse
effect on our financial position, results of operations or liquidity.
Cable Service Rate Reregulation
Federal law permits regulation of basic cable programming services rates. However, Alaska law provides that
cable television service is exempt from regulation by the Regulatory Commission of Alaska (“RCA”) unless
25% of a system’s subscribers request such regulation by filing a petition with the RCA. At December 31,
2002, only the Juneau system is subject to RCA regulation of its basic service rates. No petition requesting
regulation has been filed for any other system. (The Juneau system serves 7.1% of our total basic service
subscribers at December 31, 2002.) On July 27, 2000 the RCA approved in full a requested rate increase for
the Juneau system, which was effective October 1, 2000. The cable rate increase in the Juneau system
effective February 1, 2003, did not effect basic programming service and therefore did not require RCA
approval.
Internal Revenue Service Examination
Our U.S. income tax return for 1999 was selected for examination by the Internal Revenue Service during
2001. The examination commenced during the third quarter of 2001 and was completed during the second
quarter of 2002 with no material adjustments required.
137
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
ILEC Over-earnings Refund
The FCC ruled in February 2001 that earnings of Alaska Communications Systems, Inc. (“ACS”) for the
1997 to 1998 reporting period exceeded their authorized rate of return and ordered a refund to us from ACS.
Rate of return carriers such as ACS 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. ACS appealed
the FCC ruling to the U.S. Court of Appeals for the District of Columbia circuit (“Court”). On May 21,
2002, the Court granted in part and denied in part the ACS appeal of the FCC’s earlier decision requiring
ACS to refund the over-earnings. The court remanded the case to the FCC for a determination of the
appropriate refund due as a result of the decision. The parties have briefed the relevant issues before the
FCC, and a decision in the remand proceeding is pending. That decision, once issued, itself can be appealed.
GCI and ACS have entered into discussions concerning the possible settling of the dispute, which discussions
have not yet produced a final agreement. We are unable to determine the final amount to be refunded and
when it may be refunded. The refundable amount has been accounted for as a gain contingency, and,
accordingly, has not been recorded. The refundable amount, if any, will be recorded upon receipt when
realization is a certainty.
138
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
(13) Supplementary Financial Data
The following is a summary of unaudited quarterly results of operations for the years ended December 31,
2002 and 2001 (amounts in thousands, except per share amounts):
2002
Total revenues
Gross profit
Net income (loss) 1
Basic and diluted net income (loss)
per common share 1
2001
Total revenues 2
Gross profit
Net income 2
Basic net income (loss) per common
share
Diluted net income (loss) per
common share 3
$
$
$
$
$
$
$
$
$
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Total
Year
88,210
56,973
2,212
92,740
61,879
(1,103)
94,550
64,175
5,063
92,342
61,251
491
367,842
244,278
6,663
0.03
(0.03)
0.08
0.00
0.08
96,917
54,831
2,423
85,535
51,704
166
88,019
55,276
1,527
86,787
55,654
473
357,258
217,465
4,589
0.04
(0.01)
0.02
0.00
0.03
(0.01)
0.02
0.00
0.05
0.05
1 We adopted SFAS 142, “Goodwill and Other Intangible Assets” on January 1, 2002, resulting in
a $6.5 million decrease in depreciation and amortization expense primarily in the cable services
segment during the year ended December 31, 2002 as compared to the years ended December
31, 2001.
2 The first quarter of 2001 includes $19.5 million of revenue and $8.7 of operating income from
the sale of long-haul capacity in the Alaska United undersea fiber optic cable system.
3 Due to rounding, the sum of quarterly net income (loss) per common share amounts does not
agree to total year net income per common share.
139
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.
3.1
3.2
10.3
10.4
10.5
10.6
10.7
10.13
Description
Restated Articles of Incorporation of the Company dated December 18, 2000 (30)
Amended and Restated Bylaws of the Company dated January 28, 2000 (28)
Westin Building Lease (5)
Duncan and Hughes Deferred Bonus Agreements (6)
Compensation Agreement between General Communication, Inc. and William C.
Behnke dated January 1, 1997 (19)
Order approving Application for a Certificate of Public Convenience and Necessity to
operate as a Telecommunications (Intrastate Interexchange Carrier) Public Utility
within Alaska (3)
1986 Stock Option Plan, as amended (21)
MCI Carrier Agreement between MCI Telecommunications Corporation and General
Communication, Inc. dated January 1, 1993 (8)
10.14
Contract for Alaska Access Services Agreement between MCI Telecommunications
Corporation and General Communication, Inc. dated January 1, 1993 (8)
10.15
Promissory Note Agreement between General Communication, Inc. and Ronald A.
Duncan, dated August 13, 1993 (9)
10.16
Deferred Compensation Agreement between General Communication, Inc. and Ronald
A. Duncan, dated August 13, 1993 (9)
10.17
Pledge Agreement between General Communication, Inc. and Ronald A. Duncan,
dated August 13, 1993 (9)
10.19
Summary Plan Description pertaining to Qualified Employee Stock Purchase Plan of
General Communication, Inc., as amended and restated January 1, 2003 (cid:195)
10.20
10.21
The GCI Special Non-Qualified Deferred Compensation Plan (11)
Transponder Purchase Agreement for Galaxy X between Hughes Communications
10.25
10.25.1
10.25.2
10.25.3
10.25.4
10.25.5
10.25.6
10.25.7
10.25.8
10.25.9
10.25.10
10.26
Galaxy, Inc. and GCI Communication Corp. (11)
Licenses: (5)
214 Authorization
International Resale Authorization
Digital Electronic Message Service Authorization
Fairbanks Earth Station License
Fairbanks (Esro) Construction Permit for P-T-P Microwave Service
Fairbanks (Polaris) Construction Permit for P-T-P Microwave Service
Anchorage Earth Station Construction Permit
License for Eagle River P-T-P Microwave Service
License for Juneau Earth Station
Issaquah Earth Station Construction Permit
ATU Interconnection Agreement between GCI Communication Corp. and
Municipality of Anchorage, executed January 15, 1997 (18)
10.29
Asset Purchase Agreement, dated April 15, 1996, among General Communication,
Inc., ACNFI, ACNJI and ACNKSI (12)
10.30
Asset Purchase Agreement, dated May 10, 1996, among General Communication, Inc.,
and Alaska Cablevision, Inc. (12)
10.31
Asset Purchase Agreement, dated May 10, 1996, among General Communication, Inc.,
and McCaw/Rock Homer Cable System, J.V. (12)
10.32
Asset Purchase Agreement, dated May 10, 1996, between General Communication,
Inc., and McCaw/Rock Seward Cable System, J.V. (12)
10.33
Amendment No. 1 to Securities Purchase and Sale Agreement, dated October 31,
1996, among General Communication, Inc., and the Prime Sellers Agent (13)
140
Exhibit No.
10.34
First Amendment to Asset Purchase Agreement, dated October 30, 1996, among
General Communication, Inc., ACNFI, ACNJI and ACNKSI (13)
Description
10.36
Order Approving Arbitrated Interconnection Agreement as Resolved and Modified by
10.37
10.38
10.39
10.40
10.41
10.42
10.43
10.44
10.45
Order U-96-89(8) dated January 14, 1997 (18)
Amendment to the MCI Carrier Agreement executed April 20, 1994 (18)
Amendment No. 1 to MCI Carrier Agreement executed July 26, 1994 (16)
MCI Carrier Addendum--MCI 800 DAL Service effective February 1, 1994 (16)
Third Amendment to MCI Carrier Agreement dated as of October 1, 1994 (16)
Fourth Amendment to MCI Carrier Agreement dated as of September 25, 1995 (16)
Fifth Amendment to the MCI Carrier Agreement executed April 19, 1996 (18)
Sixth Amendment to MCI Carrier Agreement dated as of March 1, 1996 (16)
Seventh Amendment to MCI Carrier Agreement dated November 27, 1996 (20)
First Amendment to Contract for Alaska Access Services between General
Communication, Inc. and MCI Telecommunications Corporation dated April 1, 1996
(20)
10.46
Service Mark License Agreement between MCI Communications Corporation and
General Communication, Inc. dated April 13, 1994 (19)
10.47
Radio Station Authorization (Personal Communications Service License), Issue Date
June 23, 1995 (19)
10.50
Contract No. 92MR067A Telecommunications Services between BP Exploration
(Alaska), Inc. and GCI Network Systems dated April 1, 1992 (20)
10.51
Amendment No. 03 to BP Exploration (Alaska) Inc. Contract No. 92MRO67A
effective August 1, 1996 (20)
10.52
Lease Agreement dated September 30, 1991 between RDB Company and General
Communication, Inc. (3)
10.54
Order Approving Transfer Upon Closing, Subject to Conditions, and Requiring
Filings dated September 23, 1996 (19)
10.55
10.58
Order Granting Extension of Time and Clarifying Order dated October 21, 1996 (19)
Employment and Deferred Compensation Agreement between General
Communication, Inc. and John M. Lowber dated July 1992 (19)
10.59
Deferred Compensation Agreement between GCI Communication Corp. and Dana
L. Tindall dated August 15, 1994 (19)
10.60
Transponder Lease Agreement between General Communication Incorporated and
Hughes Communications Satellite Services, Inc., executed August 8, 1989 (9)
10.61
Addendum to Galaxy X Transponder Purchase Agreement between GCI
Communication Corp. and Hughes Communications Galaxy, Inc. dated August
24, 1995 (19)
10.62
Order Approving Application, Subject to Conditions; Requiring Filing; and
Approving Proposed Tariff on an Inception Basis, dated February 4, 1997 (19)
10.66
Supply Contract Between Submarine Systems International Ltd. And GCI
Communication Corp. dated as of July 11, 1997. (23)
10.67
Supply Contract Between Tyco Submarine Systems Ltd. And Alaska United Fiber
System Partnership Contract Variation No. 1 dated as of December 1, 1997. (23)
10.71
Third Amendment to Contract for Alaska Access Services between General
10.77
10.78
10.79
10.80
Communication, Inc. and MCI Telecommunications Corporation dated February
27, 1998 (25)
General Communication, Inc. Preferred Stock Purchase Agreement (26)
Qualified Employee Stock Purchase Plan of General Communication, Inc., as amended
and restated January 01, 2003 (cid:195)
Statement of Stock Designation (Series B) (26)
Fourth Amendment to Contract for Alaska Access Services between General
Communication, Inc. and its wholly owned subsidiary GCI Communication
Corp., and MCI WorldCom. (27)
141
Exhibit No.
10.82
10.89
10.90
10.91
10.99
10.100
10.101
10.102
10.103
Description
Lease Intended for Security between GCI Satellite Co., Inc. and General Electric
Capital Corporation (29)
Fifth Amendment to Contract for Alaska Access Services between General
Communication, Inc. and its wholly owned subsidiary GCI Communication Corp.,
and MCI WorldCom Network Services, Inc., formerly known as MCI
Telecommunications Corporation dated August 7, 2000 ♦ (31)
Sixth Amendment to Contract for Alaska Access Services between General
Communication, Inc. and its wholly owned subsidiary GCI Communication
Corp., and MCI WorldCom Network Services, Inc., formerly known as MCI
Telecommunications Corporation dated February 14, 2001 ♦ (31)
Seventh Amendment to Contract for Alaska Access Services between General
Communication, Inc. and its wholly owned subsidiary GCI Communication Corp.,
and MCI WorldCom Network Services, Inc., formerly known as MCI
Telecommunications Corporation dated March 8, 2001 ♦ (31)
Statement of Stock Designation (Series C) (34)
Contract for Alaska Access Services between Sprint Communications Company L.P.
and General Communication, Inc. and its wholly owned subsidiary GCI
Communication Corp. dated March 12, 2002 ♦(35)
Credit, Guaranty, Security and Pledge Agreement between GCI Holdings, Inc. and
Credit Lyonnais New York Branch as Administrative Agent, Issuing Bank, Co-
Bookrunner and Co-Arranger, General Electric Capital Corporation as
Documentation Agent, Co-Arranger and Co-Bookrunner and CIT Lending
Services Corporation as Syndication Agent, dated as of November 1, 2002. (36)
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. (cid:195)
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 (cid:195)
10.104
Articles of merger between GCI Cablesystems of Alaska, Inc. and GCI Cable, Inc.,
adopted as of December 10, 2002 (cid:195)
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 (cid:195)
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 (cid:195)
21.1
23.1
99
99.1
99.2
99.7
99.8
99.15
99.16
99.17
99.18
99.19
99.20
99.21
99.22
Subsidiaries of the Registrant (cid:195)
Consent of KPMG LLP (Accountant for Company) (cid:195)
Additional Exhibits:
The Articles of Incorporation of GCI Communication Corp. (2)
The Bylaws of GCI Communication Corp. (2)
The Bylaws of GCI Cable, Inc. (14)
The Articles of Incorporation of GCI Cable, Inc. (14)
The Bylaws of GCI Holdings, Inc. (19)
The Articles of Incorporation of GCI Holdings, Inc. (19)
The Articles of Incorporation of GCI, Inc. (18)
The Bylaws of GCI, Inc. (18)
The Bylaws of GCI Transport, Inc. (23)
The Articles of Incorporation of GCI Transport, Inc. (23)
The Bylaws of Fiber Hold Co., Inc. (23)
The Articles of Incorporation of Fiber Hold Co., Inc. (23)
142
Exhibit No.
99.23
99.24
99.25
99.26
99.27
99.28
99.29
99.30
99.31
99.32
99.33
99.34
99.35
99.36
Description
The Bylaws of GCI Fiber Co., Inc. (23)
The Articles of Incorporation of GCI Fiber Co., Inc. (23)
The Bylaws of GCI Satellite Co., Inc. (23)
The Articles of Incorporation of GCI Satellite Co., Inc. (23)
The Partnership Agreement of Alaska United Fiber System (23)
The Bylaws of Potter View Development Co., Inc. (32)
The Articles of Incorporation of Potter View Development Co., Inc. (32)
The Bylaws of GCI American Cablesystems, Inc. (34)
The Articles of Incorporation of GCI American Cablesystems, Inc. (34)
The Bylaws of GCI Cablesystems of Alaska, Inc. (34)
The Articles of Incorporation of GCI Cablesystems of Alaska, Inc. (34)
The Bylaws of GCI Fiber Communication, Co., Inc. (34)
The Articles of Incorporation of GCI Fiber Communication, Co., Inc. (34)
Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 (cid:195)
-------------------------
♦
(cid:195)
Certain information has been redacted from this document which we desire to
keep undisclosed.
Filed herewith.
-------------------------
Exhibit
Reference
2
3
5
6
8
9
10
11
12
13
14
16
18
19
Description
Incorporated by reference to The Company’s Annual Report on Form 10-K for the
year ended December 31, 1990
Incorporated by reference to The Company’s Annual Report on Form 10-K for the
year ended December 31, 1991
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
Incorporated by reference to The Company’s Annual Report on Form 10-K for the
year ended December 31, 1989.
Incorporated by reference to The Company’s Current Report on Form 8-K dated
June 4, 1993.
Incorporated by reference to The Company’s Annual Report on Form 10-K for the
year ended December 31, 1993.
Incorporated by reference to The Company’s Annual Report on Form 10-K for the
year ended December 31, 1994.
Incorporated by reference to The Company’s Annual Report on Form 10-K for the
year ended December 31, 1995.
Incorporated by reference to The Company’s Form S-4 Registration Statement
dated October 4, 1996.
Incorporated by reference to The Company’s Current Report on Form 8-K dated
November 13, 1996.
Incorporated by reference to The Company’s Annual Report on Form 10-K for the
year ended December 31, 1996.
Incorporated by reference to The Company’s Current Report on Form 8-K dated
March 14, 1996, filed March 28, 1996.
Incorporated by reference to The Company's Form S-3 Registration Statement
(File No. 333-28001) dated May 29, 1997.
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.
143
Exhibit
Reference
20
21
23
24
25
26
27
28
29
30
31
32
33
34
35
36
Description
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.
Incorporated by reference to The Company's Amendment No. 3 to Form S-3/A
Registration Statement (File No. 333-28001) dated July 22, 1997.
Incorporated by reference to The Company’s Annual Report on Form 10-K for the
year ended December 31, 1997.
Incorporated by reference to The Company’s Quarterly Report on Form 10-Q for
the period ended June 30, 1998.
Incorporated by reference to The Company’s Annual Report on Form 10-K for the
year ended December 31, 1998.
Incorporated by reference to The Company’s Quarterly Report on Form 10-Q for
the period ended March 31, 1999.
Incorporated by reference to The Company’s Quarterly Report on Form 10-Q for
the period ended June 30, 1999.
Incorporated by reference to The Company’s Annual Report on Form 10-K for the
year ended December 31, 1999.
Incorporated by reference to The Company’s Quarterly Report on Form 10-Q for
the period ended June 30, 2000.
Incorporated by reference to The Company’s Annual Report on Form 10-K for the
year ended December 31, 2000.
Incorporated by reference to The Company’s Quarterly Report on Form 10-Q for
the period ended March 31, 2001.
Incorporated by reference to The Company’s Quarterly Report on Form 10-Q for
the period ended June 30, 2001.
Incorporated by reference to The Company’s Quarterly Report on Form 10-Q for
the period ended September 30, 2001.
Incorporated by reference to The Company’s Annual Report on Form 10-K for the
year ended December 31, 2001.
Incorporated by reference to The Company’s Quarterly Report on Form 10-Q for
the period ended June 30, 2002.
Incorporated by reference to The Company’s Quarterly Report on Form 10-Q for
the period ended September 30, 2002.
(c) Reports on Form 8-K
None.
144
INDEPENDENT AUDITORS’ REPORT
The Board of Directors and Stockholders
General Communication, Inc.:
Under date of February 26, 2003, we reported on the consolidated balance sheets of General Communication, Inc.
and subsidiaries (“Company”) as of December 31, 2002 and 2001 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,
2002, which are included in the Company's 2002 Annual Report on Form 10-K. In connection with our audit of the
aforementioned consolidated financial statements, we also audited the related consolidated financial statement
schedule which is listed in the index in Item 15(a)(2) of the Company's 2002 Annual Report on Form 10-K. This
consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is
to express an opinion on this consolidated financial statement schedule based on our audits.
In our opinion this consolidated financial statement schedule, when considered in relation to the consolidated
financial statements taken as a whole, presents fairly, in all material respects the information set forth therein.
Anchorage, Alaska
February 26, 2003
/s/
KPMG LLP
145
Schedule VIII
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended December 31, 2002, 2001 and 2000
Additions
Deductions
Description
Allowance for doubtful receivables, year ended:
Balance
at
beginning
of year
Charged
to profit
and loss
Other
(Amounts in thousands)
Write-
offs net of
recoveries
Balance
at end
of year
December 31, 2002 1
December 31, 2001
December 31, 2000
$
$
$
4,166
13,124
2,864
4,076
2,833
5,546
---
---
---
3,280
14,010
2,774
4,166
5,515
2,864
1 The Allowance for Doubtful Receivables at December 31, 2002 includes the provision of $11.6 million of
bad debt expense for estimated uncollectible accounts due from WorldCom. See note 11 to the
accompanying Notes to Consolidated Financial Statements included in Part II of this Report for
more information.
146
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
GENERAL COMMUNICATION, INC.
By:
/s/ Ronald A. Duncan
Ronald A. Duncan, President
(Chief Executive Officer)
Date: March 24, 2003
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.
Date
March 24, 2003
March 24, 2003
March 8, 2003
March 24, 2003
March 24, 2003
March 22, 2003
March 24, 2003
March 24, 2003
March 24, 2003
Signatures
Title
/s/ Ronald A. Duncan
Ronald A. Duncan
/s/ Stephen M. Brett
Stephen M. Brett
/s/ Donne F. Fisher
Donne F. Fisher
/s/ William P. Glasgow
William P. Glasgow
/s/ Stephen R. Mooney
Stephen R. Mooney
/s/ Stephen Reinstadtler
Stephen Reinstadtler
/s/ James M. Schneider
James M. Schneider
/s/ John M. Lowber
John M. Lowber
/s/ Alfred J. Walker
Alfred J. Walker
President, Chief Executive
Officer and Director
(Principal Executive Officer)
Director
Director
Director
Director
Director
Director
Senior Vice President,
Chief Financial Officer,
Secretary and Treasurer
(Principal Financial Officer)
Vice President, Chief
Accounting Officer
(Principal Accounting Officer)
147
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTIONS 302 AND 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Ronald A. Duncan, certify that:
1. I have reviewed this annual report on Form 10-K of General Communication, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by the annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual
report, fairly represent in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have;
a) designed such disclosure controls and procedures to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90
days prior to the filing date of this annual report (the "Evaluations Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and
procedures based on our evaluations as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee or registrants board of directors (or persons performing the
equivalent function);
a) all significant deficiencies in the design or operation of internal controls which could adversely affect
the registrant's ability to record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in the annual report whether or not there were
significant changes in internal controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluations, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 24, 2003
/s/ Ronald A. Duncan
Ronald A. Duncan
President and Director
148
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTIONS 302 AND 906 OF THE SARBANES-OXLEY ACT OF 2002
I, John M. Lowber, certify that:
1. I have reviewed this annual report on Form 10-K of General Communication, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by the annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual
report, fairly represent in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have;
a) designed such disclosure controls and procedures to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90
days prior to the filing date of this annual report (the "Evaluations Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and
procedures based on our evaluations as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee or registrants board of directors (or persons performing the
equivalent function);
a) all significant deficiencies in the design or operation of internal controls which could adversely affect
the registrant's ability to record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in the annual report whether or not there were
significant changes in internal controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluations, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 24, 2003
/s/ John M. Lowber
John M. Lowber
Senior Vice President, Chief Financial Officer,
Secretary and Treasurer
149
Exhibit 99.36
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of General Communication, Inc. (the “Company”) on Form 10-K for the
period ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Ronald A. Duncan, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as
adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act
of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition
and result of operations of the Company.
Date: March 24, 2003
/s/ Ronald A. Duncan
Ronald A. Duncan
Chief Executive Officer
General Communication, Inc.
Exhibit 99.36
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of General Communication, Inc. (the “Company”) on Form 10-K for the
period ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, John M. Lowber, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as
adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act
of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition
and result of operations of the Company.
Date: March 24, 2003
/s/ John M. Lowber
John M. Lowber
Chief Financial Officer
General Communication, Inc.
SUBSIDIARIES OF THE REGISTRANT
Exhibit 21.1
Alaska United Fiber System Partnership
Entity
Jurisdiction of
Organization
Alaska
Name Under Which Subsidiary Does
Business
Alaska United Fiber System Partnership,
Alaska United Fiber System, Alaska United
Fiber Hold Co., Inc.
Alaska
Fiber Hold Co., Inc., Fiber Hold Company
GCI Communication Corp.
Alaska
GCI, GCC, GCICC, GCI Communication
Corp.
GCI, Inc.
GCI Cable, Inc.
GCI Fiber Co., Inc.
GCI Holdings, Inc.
GCI Satellite Co., Inc.
GCI Transport Co., Inc.
Alaska
GCI, GCI, Inc.
Alaska
GCI Cable, GCI Cable, Inc.
Alaska
GCI Fiber Co., Inc., GCI Fiber Company
Alaska
GCI Holdings, Inc.
Alaska
Alaska
GCI Satellite Co., Inc., GCI Satellite
Company
GCI Transport Co., Inc., GCI Transport
Company
Potter View Development Co., Inc.
Alaska
Potter View Development Co., Inc.
GCI Cablesystems of Alaska, Inc.
Alaska
GCI Cablesystems of Alaska, Inc., Rogers
Cable
GCI American Cablesystems, Inc.
Delaware
GCI American Cablesystems, Inc.
GCI Fiber Communication, Co., Inc.
Alaska
GCI Fiber Communication, Co., Inc., GFCC,
Kanas
INDEPENDENT AUDITORS’ CONSENT
Exhibit 23.1
The Board of Directors
General Communication, Inc.:
We consent to the incorporation by reference in the registration statements (No. 33-60728 and No. 33-60222)
on Forms S-8 of General Communication, Inc. of our reports dated February 26, 2003, with respect to the
consolidated balance sheets of General Communication, Inc. and Subsidiaries as of December 31, 2002 and
2001, 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, 2002, and the related schedule, which reports appear in the
December 31, 2002, annual report on Form 10-K of General Communication, Inc.
/s/
KPMG LLP
Anchorage, Alaska
March 27, 2003