UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(√) ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-15279
GENERAL COMMUNICATION, INC.
(Exact name of registrant as specified in its charter)
ALASKA
(State or other jurisdiction of
incorporation or organization)
92-0072737
(I.R.S. Employer
Identification No.)
2550 Denali Street Suite 1000 Anchorage, Alaska 99503
(Zip Code)
(Address of principal executive offices)
Registrant’s telephone number, including area code: (907) 868-5600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A common stock
(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 (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes √ 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. [ √ ]
Indicate by check mark whether the registrant is an accelerated filer. Yes √ No
The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the average bid and
asked prices of such stock as of the close of trading on as of the last business day of the registrant's most recently completed
second fiscal quarter of June 30, 2003 was approximately $335,357,000.
The number of shares outstanding of the registrant’s common stock as of February 24, 2004, was:
Class A common stock – 53,271,720 shares; and,
Class B common stock – 3,865,580 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant’s definitive Proxy Statement to be filed pursuant to Regulation 14A of the Securities Exchange Act
of 1934, as amended, in connection with the Annual Meeting of Stockholders of the registrant to be held on June 10, 2004 are
incorporated by reference into Part III of this report.
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GENERAL COMMUNICATION, INC.
2003 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Glossary........................................................................................................................................................................ 3
Cautionary Statement Regarding Forward-Looking Statements ............................................................................ 11
Part I ........................................................................................................................................................................... 13
Item 1. Business .................................................................................................................................................. 13
Item 2. Properties................................................................................................................................................. 56
Item 3. Legal Proceedings ................................................................................................................................... 59
Item 4. Submissions of Matters to a Vote of Security Holders .......................................................................... 59
Part II .......................................................................................................................................................................... 59
Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters................................. 59
Item 6. Selected Financial Data .......................................................................................................................... 61
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations ............. 62
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ............................................................ 91
Item 8. Consolidated Financial Statements and Supplementary Data ............................................................ 91
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure. ........... 91
Item 9A. Controls and Procedures. ..................................................................................................................... 91
Part III ......................................................................................................................................................................... 92
Items 10, 11, 12, 13 and 14 are incorporated herein by reference from our
Proxy Statement for our 2004 Annual Shareholders’ meeting. ..................................................................... 92
Part IV ......................................................................................................................................................................... 93
Item 15. Exhibits, Consolidated Financial Statement Schedules, and Reports on Form 8-K......................... 93
Item 15(b). Reports on Form 8-K. .....................................................................................................................141
Item 15(c). Exhibits ............................................................................................................................................141
SIGNATURES ............................................................................................................................................................147
This Annual Report on Form 10-K is for the year ending December 31, 2003. This Annual Report modifies and
supersedes documents filed prior to this Annual Report. The Securities and Exchange Commission (“SEC”) allows
us to “incorporate by reference” information that we file with them, which means that we can disclose important
information to you by referring you directly to those documents. Information incorporated by reference is
considered to be part of this Annual Report. In addition, information that we file with the SEC in the future will
automatically update and supersede information contained in this Annual Report.
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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 Group, Inc., previously ALEC Holdings, Inc. — ACS, one of our
competitors, includes acquired properties from Century Telephone Enterprises, Inc. and the Anchorage
Telephone Utility (“ATU”). ATU provided local telephone and long distance services primarily in Anchorage and
cellular telephone services in Anchorage and other Alaska markets.
Alaska United or AULP — Alaska United Fiber System Partnership — An Alaska partnership, indirectly wholly
owned by the Company. Alaska United was organized to construct and operate fiber optic cable systems
connecting various locations in Alaska and the Lower 49 States and foreign countries through Seattle,
Washington.
AT&T — AT&T Corp. — A long distance carrier, parent company to AT&T Alascom.
AT&T Alascom — Alascom, Inc. — A wholly owned subsidiary of AT&T and one of our competitors.
AULP East — An undersea fiber optic cable system connecting Whittier, Valdez and Juneau, Alaska and Seattle,
Washington, which was placed into service in February 1999.
AULP West — A new undersea fiber optic cable system under construction connecting Seward, Alaska to
Warrenton, Oregon with a scheduled ready for service date of April 30, 2004.
Basic Service — The basic service tier includes, at a minimum, signals of local television broadcast stations,
any public, educational, and governmental programming required by the franchise to be carried on the basic
tier, and any additional video programming service added to the basic tier by the cable operator.
BOC — Bell System Operating Company — A LEC owned by any of the remaining Regional Bell Operating
Companies, which are holding companies established following the AT&T Divestiture Decree to serve as parent
companies for the BOCs.
Backbone — A centralized high-speed network that interconnects smaller, independent networks.
Bandwidth — A range or band of the frequency spectrum, measured in Hertz (Hz). It has become vogue,
though strictly a misuse of the term, to say bandwidth is the number of bits of data per second that can move
through a communications medium.
Broadband — A high-capacity communications circuit/path, usually implying speeds of 256 kilobits per second
(“kbps”) or better.
CAP — Competitive Access Provider — A company that provides its customers with an alternative to the LEC for
local transport of Private Line and special access communications services.
Central Offices — The switching centers or central switching facilities of the LECs.
CLEC — Competitive Local Exchange Carrier — A company that provides its customers with an alternative to the
ILEC for local transport of communications services, as allowed under the 1996 Telecom Act.
Co-Carrier Status — A regulatory scheme under which the ILEC is required to integrate new, competing
providers of local exchange service, into the systems of traffic exchange, inter-carrier compensation, and other
inter-carrier relationships that already exist among LECs in most jurisdictions.
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Collocation — The ability of a CAP or CLEC to connect its network to the LEC's central offices. Physical
collocation occurs when a connecting carrier places its network connection equipment inside the LEC's central
offices. Virtual collocation is an alternative to physical collocation pursuant to which the LEC permits a CAP or
CLEC to connect its network to the LEC's central offices on comparable terms, even though the CAP's or CLEC’s
network connection equipment is not physically located inside the central offices.
The Company — GCI and its direct and indirect subsidiaries, also referred to as “we,” “us” and “our.”
Compression or Decompression — A method of encoding, decoding and processing signals that allows
transmission (or storage) of more information than the medium would otherwise be able to support. Both
compression and decompression require processing capacity, but with many products, the signal delay time
due to processing is not noticeable.
DAMA — Demand Assigned Multiple Access — The Company’s digital satellite earth station technology that
allows calls to be made between remote villages using only one satellite hop thereby reducing satellite delay
and capacity requirements while improving quality.
Dark Fiber — An inactive fiber-optic strand without electronics or optronics. Dark fiber is not connected to
transmitters, receivers and regenerators.
DBS — Direct Broadcast Satellite — Subscription television service obtained from satellite transmissions using
frequency bands that are internationally allocated to the broadcast satellite services. Direct-to-home service
such as DBS has its origins in the large direct-to-home satellite antennas that were first introduced in the
1970's for the reception of video programming transmitted via satellite. Because these first-generation direct-
to-home satellites operated in the C-band frequencies at low power, direct-to-home satellite antennas, or
dishes, as they are also known, generally needed to be seven to ten feet in diameter in order to receive the
signals being transmitted. More recently, licensees have been using the Ku and extended Ku-bands to provide
direct-to-home services enabling subscribers to use a receiving home satellite parabolic dish typically less than
one meter in diameter. The major providers of DBS are currently DirecTV and EchoStar (marketed as the DISH
Network).
DS-0 — A data communications circuit that carries data at the rate of 64 kbps.
DS-1 — A data communications circuit that carries data at the rate of 1.544 Megabits per second (Mb/s), often
interchangeably referred to as a T-1.
DS-3 — A data communications circuit that is equivalent to 28 multiplexed T-1 channels capable of
transmitting data at 44.736 Mbps (sometimes called a T-3).
Dedicated — Communications lines dedicated or reserved for use by particular customers.
Digital — A method of storing, processing and transmitting information through the use of distinct electronic or
optical pulses that represent the binary digits 0 and 1. Digital transmission and switching technologies employ
a sequence of these pulses to represent information as opposed to the continuously variable analog signal.
Digital transmission is advantageous in that it is more resistant to the signal degrading effects of noise (such
as graininess or snow in the case of video transmission, or static or other background distortion in the case of
audio transmission).
DLC — Digital Loop Carrier — A digital transmission system designed for subscriber loop plant. Multiplexes a
plurality of circuits onto very few wires or onto a single fiber pair.
DLPS — Digital Local Phone Service — A term we use referring to our deployment of voice telephone service
utilizing our hybrid-fiber coax cable facilities.
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DOCSIS 1.1 — Data-Over-Cable Service Interface Specification 1.1 — An industry specification that provides for
high-speed Internet service tiers, using techniques known as data fragmentation and quality of service. Under
this specification, which is compatible with the existing DOCSIS 1.0 specification, cable operators can deliver
high-speed Internet services simultaneously over the same plant and in a path parallel to core video services.
DSL — Digital Subscriber Line — Technology that allows Internet access and other high-speed data services at
data transmission speeds greater than those of modems over conventional telephone lines.
Equal Access — Connection provided by a LEC permitting a customer to be automatically connected to the IXC
of the customer's choice when the customer dials “1”. Also refers to a generic concept under which the BOCs
must provide access services to AT&T's competitors that are equivalent to those provided to AT&T.
FCC — Federal Communications Commission — A federal regulatory body empowered to establish and enforce
rules and regulations governing public utility companies and others, such as the Company.
Frame Relay — A wideband (64 kilobits per second to 1.544 Mbps) packet-based data interface standard that
transmits bursts of data over WANs. Frame-relay packets vary in length from 7 to 1024 bytes. Data oriented,
it is generally not used for voice or video.
FTC — Federal Trade Commission — A federal regulatory body empowered to establish and enforce rules and
regulations governing companies involved in trade and commerce.
GCC — GCI Communication Corp. — An Alaska corporation and a wholly owned subsidiary of Holdings.
GCI — General Communication, Inc. — An Alaska corporation and the Registrant.
GCI, Inc. — A wholly owned subsidiary of GCI, an Alaska corporation and issuer of $180 million of senior notes
(increased to $250 million in the first quarter of 2004).
GFCC — GCI Fiber Communication Co., Inc. — An Alaska corporation and a wholly owned subsidiary of Holdings.
Holdings acquired all minority ownership interests in GFCC in the third and fourth quarters of 2002. GFCC
owns and operates a fiber optic cable system constructed along the trans-Alaska oil pipeline corridor extending
from Prudhoe Bay to Valdez, Alaska. See Kanas.
Holdings — GCI Holdings, Inc. — A wholly owned subsidiary of GCI, Inc., an Alaska corporation and party to the
Company’s Senior Credit Facility.
HDTV — High-Definition Television — A digital television format delivering theater-quality pictures and CD-
quality sound. HDTV offers an increase in picture quality by providing up to 1,920 active horizontal pixels by
1,080 active scanning lines, representing an image resolution of more than two million pixels. In addition to
providing improved picture quality with more visible detail, HDTV offers a wide screen format and Dolby®
Digital 5.1 surround sound.
ILEC — Incumbent Local Exchange Carrier — With respect to an area, the LEC that — (A) on the date of
enactment of the Telecommunications Act of 1996, provided telephone exchange service in such area; and
(B)(i) on such date of enactment, was deemed to be a member of the exchange carrier association pursuant to
section 69.601(b) of the FCC's regulations (47 C.F.R. 69.601(b)); or (ii) is a person or entity that, on or after
such date of enactment, became a successor or assign of a member described in clause (i).
Interexchange — Communication between two different LATAs or, in Alaska, between two different local
exchange serving areas.
IP — Internet Protocol — The method or protocol by which data is sent from one computer to another on the
Internet. Each computer (known as a host) on the Internet has at least one IP address that uniquely identifies
it from all other computers on the Internet.
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ISDN — Integrated Services Digital Network — A set of standards for transmission of simultaneous voice, data
and video information over fewer channels than would otherwise be needed, through the use of out-of-band
signaling. The most common ISDN system provides one data and two voice circuits over a traditional copper
wire pair, but can represent as many as 30 channels. Broadband ISDN extends the ISDN capabilities to
services in the Gigabit per second range.
ISP — Internet Service Provider — A company providing retail and/or wholesale Internet services.
Internet — A global collection of interconnected computer networks which use TCP/IP, a common
communications protocol.
IXC — Interexchange Carrier — A long-distance carrier providing services between local exchanges.
Kanas — Kanas Telecom, Inc. — An Alaska corporation that was renamed GFCC in 2001.
LAN — Local Area Network — The interconnection of computers for sharing files, programs and various devices
such as printers and high-speed modems. LANs may include dedicated computers or file servers that provide
a centralized source of shared files and programs.
LATA — Local Access and Transport Area — The approximately 200 geographic areas defined pursuant to the
AT&T Divestiture Decree. The BOCs were historically prohibited from providing long-distance service between
the LATA in which they provide local exchange services, and any other LATA.
LEC — Local Exchange Carrier — A company providing local telephone services. Each BOC is a LEC.
LMDS — Local Multipoint Distribution System — LMDS uses microwave signals (millimeterwave signals) in the
28 GHz spectrum to transmit voice, video, and data signals within small cells 3-10 miles in diameter. LMDS
allows license holders to control up to 1.3 GHz of wireless spectrum in the 28 GHz Ka-band. The 1.3 GHz can
be used to carry digital data at speeds in excess of one gigabit per second. The extremely high frequency used
and the need for point to multipoint transmissions limits the distance that a receiver can be from a
transmitter. This means that LMDS will be a “cellular” technology, based on multiple, contiguous, or
overlapping cells. LMDS is expected to provide customers with multichannel video programming, telephony,
video communications, and two-way data services. ILECs and cable companies may not obtain the in-region
1150 MHz license for three years following the date of the license grant. Within 10 years following the date of
the license grant, licensees will be required to provide 'substantial service' in their service regions.
Local Exchange — A geographic area generally determined by a PUC, in which calls generally are transmitted
without toll charges to the calling or called party.
Local Number Portability — The ability of an end user to change Local Exchange Carriers while retaining the
same telephone number.
Lower 48 States or Lower 48 — Refers to the 48 contiguous states south of or below Alaska.
Lower 49 States or Lower 49 — Refers to Hawaii and the Lower 48 States.
MAN — Metropolitan Area Network — LANs interconnected within roughly a 50-mile radius. MANs typically use
fiber optic cable to connect various wire LANs. Transmission speeds may vary from 2 to 100 Mbps.
Mat-Su Valley — The Matanuska and Susitna valleys are located in south-central Alaska, to the north of
Anchorage, and include the communities of Palmer and Wasilla and the immediately surrounding areas.
MDU — Multiple Dwelling Unit — MDUs include multiple-family buildings, such as apartment and condominium
complexes.
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MMDS — Multichannel Multipoint Distribution Service — Also known as wireless cable. The FCC established
the Multipoint Distribution Service (MDS) in 1972. Originally, the FCC thought MDS would be used primarily to
transmit business data. However, the service became increasingly popular in transmitting entertainment
programming. Unlike conventional broadcast stations whose transmissions are received universally, MDS
programming is designed to reach only a subscriber based audience. In 1983, the FCC reassigned eight
channels from the Instructional Television Fixed Service (ITFS) to MDS. These eight channels make up the
MMDS. Frequently, MDS and MMDS channels are used in combination with ITFS channels to provide video
entertainment programming to subscribers.
MVPD — Multi-channel Video Programming Distribution — The distribution of video programming over multiple
platforms, such as cable and satellite.
MWNS — MCI WorldCom Network Services — A subsidiary of WorldCom, which had previously entered into
service agreements with the Company on behalf of WorldCom.
Notes — $250 million, 7.25% Senior Notes, due February 15, 2014 — GCI, Inc. issued $250 million in notes
during the first quarter of 2004. The Notes are senior unsecured and unsubordinated obligations and rank
equally with all of GCI’s existing and future senior unsecured debts. The Notes pay interest on a semi-annual
basis.
OCC — Other Common Carrier — A long-distance carrier other than the Company.
OC-n — An optical communications circuit that optically signals at a data rate of n times 51.84 Mbps, where n
can be 1, 3, 12, 24, 48, 96, or 192.
Pay-per-view — Offering television broadcasts to viewers in a manner whereby they pay only for the programs
they watch rather than having to subscribe to the whole channel or station on a full-time basis.
PCS — Personal Communication Services — PCS encompasses a range of advanced wireless mobile
technologies and services. It promises to permit communications to anyone, anywhere and anytime while on
the move. The Cellular Telecommunications Industry Association (CTIA) defines PCS as a “wide range of
wireless mobile technologies, chiefly cellular, paging, cordless, voice, personal communications networks,
mobile data, wireless PBX, specialized mobile radio, and satellite-based systems.” The FCC defines PCS as a
“family of mobile or portable radio communications services that encompasses mobile and ancillary fixed
communications services to individuals and businesses and can be integrated with a variety of competing
networks.”
PBX — Private Branch Exchange — A customer premise communication switch used to connect customer
telephones (and related equipment) to LEC central office lines (trunks), and to switch internal calls within the
customer's telephone system. Modern PBXs offer numerous software-controlled features such as call
forwarding and call pickup. A PBX uses technology similar to that used by a central office switch (on a smaller
scale). (The acronym PBX originally stood for “Plug Board Exchange.”)
POP — Point of Presence — The physical access location interface between a LEC and an IXC network. The
point to which the telephone company terminates a subscriber's circuit for long-distance service or leased line
communications.
PRI — Primary Rate Interface — An ISDN circuit transmitting at T-1 (DS-1) speed (equivalent to 24 voice-grade
channels). One of the channels (“D”) is used for signaling, leaving 23 (“B”) channels for data and voice
communication.
Private Line — Uses dedicated circuits to connect customer's equipment at both ends of the line. Does not
provide any switching capability (unless supported by customer premise equipment). Usually includes two local
loops and an IXC circuit.
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Private Network — A communications network with restricted (controlled) access usually made up of Private
Lines (with some PBX switching).
RCA — Regulatory Commission of Alaska — A state regulatory body empowered to establish and enforce rules
and regulations governing public utility companies and others, such as the Company, within the State of
Alaska (sometimes referred to as Public Service Commissions, or PSCs, or Public Utility Commissions, or
PUCs). Previously known as the Alaska Public Utilities Commission (APUC).
Reciprocal Compensation — The same compensation of a CLEC for termination of a local call by the ILEC on its
network, as the new competitor pays the ILEC for termination of local calls on the ILEC network.
Rogers — Rogers American Cablesystems, Inc — A cable television service provider in Palmer and Wasilla,
Alaska, that we acquired in 2001.
SchoolAccess™ — The Company’s Internet and related services offering to schools in Alaska, and some sites in
Arizona, Montana and New Mexico. The federal mandate through the 1996 Telecom Act to provide universal
service resulted in schools across Alaska qualifying for varying levels of discounts to support the provision of
Internet services. The Universal Service Administrative Company through its Schools and Libraries Division
administers this federal program.
SDN — Software Defined Network — A switched long-distance service for very large users with multiple
locations. Instead of putting together their own network, large users can get special usage rates for calls
carried on regular switched long-distance lines.
Securities Reform Act — The Private Securities Litigation Reform Act of 1995.
Senior Credit Facility — Holding’s $220.0 million credit facility. On October 30, 2003 we closed a $220.0
million bank facility to refinance the previously outstanding Holding’s credit facility. The new Senior Credit
Facility includes a term loan of $170.0 million and a revolving credit facility of $50.0 million. The new Senior
Credit Facility matures on October 31, 2007 and bears interest at LIBOR plus 3.25%. You should see note 8
to the accompanying “Notes to Consolidated Financial Statements” included in Part II of this Report for more
information.
SMATV — Satellite Master Antenna Television — (Also known as “private cable systems”) are multichannel
video programming distribution systems that serve residential, multiple-dwelling units (“MDUs”), and various
other buildings and complexes. A SMATV system typically offers the same type of programming as a cable
system, and the operation of a SMATV system largely resembles that of a cable system — a satellite dish
receives the programming signals, equipment processes the signals, and wires distribute the programming to
individual dwelling units. The primary difference between the two is that a SMATV system typically is an
unfranchised, stand-alone system that serves a single building or complex, or a small number of buildings or
complexes in relatively close proximity to each other.
SONET — Synchronous Optical Network — A 1984 standard for optical fiber transmission on the public
network. 51.84 Mbps to 9.95 Gigabits per second, effective for ISDN services including asynchronous transfer
mode.
Sprint — Sprint Corporation — One of our significant customers.
T-1 — A data communications circuit capable of transmitting data at 1.5 Mbps.
Tariff — The schedule of rates and regulations set by communications common carriers and filed with the
appropriate federal and state regulatory agencies; the published official list of charges, terms and conditions
governing provision of a specific communications service or facility, which functions in lieu of a contract
between the subscriber or user and the supplier or carrier.
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TCP/IP — Transmission Control Protocol/Internet Protocol — A suite of network protocols that allows computers
with different architectures and operating system software to communicate with other computers on the
Internet.
TDM — Time Division Multiplex — A means by which multiple signals are combined and carried on one
transport medium by sequentially sharing the medium in slices of time (time slots) for each of the various
signals.
UNE — Unbundled Network Element — A discrete piece part of a telephone network. Unbundled network
elements are the basic network functions, i.e., the piece parts needed to provide a full range of
communications services. They are physical facilities as well as all the features and capabilities provided by
those facilities.
VSAT — Very Small Aperture Terminal — A small, sometimes portable satellite terminal that allows connection
via a satellite link.
WAN — Wide Area Network — A remote computer communications system. WANs allow file sharing among
geographically distributed workgroups (typically at higher cost and slower speed than LANs or MANs). WANs
typically use common carriers' circuits and networks. WANs may serve as a customized communication
backbone that interconnects all of an organization's local networks with communications trunks that are
designed to be appropriate for anticipated communication rates and volumes between nodes.
World Wide Web or Web — A collection of computer systems supporting a communications protocol that
permits multi-media presentation of information over the Internet.
WorldCom — WorldCom, Inc., d/b/a MCI (“MCI”) — Owns approximately 9% of our common stock, presently has
one representative on our Board, and is a major customer. Prior to May 1, 2000, the company was named
MCI WorldCom, Inc. See also MWNS. On July 21, 2002 WorldCom and substantially all of its active United
States subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the United States
Bankruptcy Code in the United States Bankruptcy Court. You should see note 15 to the accompanying “Notes
to Consolidated Financial Statements” included in Part II of this Report for more information.
1984 Cable Act — The Cable Communications Policy Act of 1984.
1992 Cable Act — The Cable Television Consumer Protection and Competition Act of 1992.
1996 Telecom Act — The Telecommunications Act of 1996 — The 1996 Telecom Act was signed into law
February 8, 1996. Under its provisions, BOCs were allowed to immediately begin manufacturing, research and
development; GTE Corp. could begin providing interexchange services through its telephone companies
nationwide; laws in 27 states that foreclosed competition were pre empted; co-carrier status for CLECs was
ratified; and the physical collocation of competitors' facilities in LECs central offices was allowed.
The purpose of the 1996 Telecom Act was to move from a regulated monopoly model of telecommunications
to a deregulatory competitive markets model. The act breaks down the old barriers that prevented three
groups of companies, the LECs, including the BOCs, the long-distance carriers, and the cable TV operators,
from competing head-to-head with each other. The act requires LECs to let new competitors into their
business. It also requires the LECs to open up their networks to ensure that new market entrants have a fair
chance of competing. The bulk of the act is devoted to establishing the terms under which the LECs, and more
specifically the BOCs, must open up their networks.
The 1996 Telecom Act substantially changed the competitive and regulatory environment for
telecommunications providers by significantly amending the Communications Act of 1934 including certain of
the rate regulation provisions previously imposed by the Cable Television Consumer Protection and
Competition Act of 1992 (the “1992 Cable Act”). The 1996 Telecom Act eliminated rate regulation of the
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cable programming service tier in 1999. Further, the regulatory environment will continue to change pending,
among other things, the outcome of legal challenges, legislative activity, and FCC rulemaking and enforcement
activity in respect of the 1992 Cable Act and the completion of a significant number of continuing FCC
rulemakings under the 1996 Telecom Act.
10
Cautionary Statement Regarding Forward-Looking Statements
You should carefully review the information contained in this Annual Report, but should particularly consider
any risk factors that we set forth in this Annual Report and in other reports or documents that we file from time
to time with the Securities and Exchange Commission (“SEC”). In this Annual Report, in addition to historical
information, we state our future strategies, plans, objectives or goals and our beliefs of future events and of
our future operating results, financial position and cash flows. In some cases, you can identify those so-called
“forward-looking statements” by words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,”
“believes,” “estimates,” “predicts,” “potential,” “project,” or “continue” or the negative of those words and
other comparable words. All forward-looking statements involve known and unknown risks, uncertainties and
other important factors that may cause our actual results, performance, achievements, plans and objectives to
differ materially from any future results, performance, achievements, plans and objectives expressed or
implied by these forward-looking statements. In evaluating those statements, you should specifically consider
various factors, including those outlined below. Those factors may cause our actual results to differ materially
from any of our forward-looking statements. For these statements, we claim the protection of the safe harbor
for forward-looking statements provided by the Securities Reform Act. Such risks, uncertainties and other
factors include but are not limited to those identified below.
• Material adverse changes in the economic conditions in the markets we serve and in general
economic conditions, including the continuing impact of the current depressed communications
industry due to high levels of competition in the long-distance market resulting in pressures to reduce
prices, an oversupply of long-haul capacity, excessive debt loads; several high-profile company failures
and potentially fraudulent accounting practices by some companies;
• The efficacy of laws enacted by Congress and the State of Alaska legislature; rules and regulations to
be adopted by the Federal Communications Commission (“FCC”) and state public regulatory agencies
to implement the provisions of the 1996 Telecom Act; the outcome of litigation relative thereto; and
the impact of regulatory changes relating to access reform;
• Our responses to competitive products, services and pricing, including pricing pressures, technological
developments, alternative routing developments, and the ability to offer combined service packages
that include long-distance, local, cable and Internet services;
• The extent and pace at which different competitive environments develop for each segment of our
business;
• The extent and duration for which competitors from each segment of the communications industries
are able to offer combined or full service packages prior to our being able to do so;
• The degree to which we experience material competitive impacts to our traditional service offerings
prior to achieving adequate local service entry;
• Competitor responses to our products and services and overall market acceptance of such products
and services;
• The outcome of our negotiations with ILECs and state regulatory arbitrations and approvals with
respect to interconnection agreements;
• Our ability to purchase network elements or wholesale services from ILECs at a price sufficient to
permit the profitable offering of local telephone service at competitive rates;
• Success and market acceptance for new initiatives, many of which are untested;
• The level and timing of the growth and profitability of existing and new initiatives, particularly yellow
page directories, local telephone services expansion including deploying digital local telephone service,
Internet services expansion and wireless services;
• Start-up costs associated with entering new markets, including advertising and promotional efforts;
• Risks relating to the operations of new systems and technologies and applications to support new
initiatives;
• Local conditions and obstacles;
• The impact on our industry and indirectly on us of oversupply of capacity resulting from excessive
deployment of network capacity in certain markets we do not serve;
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• 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;
• The risks associated with technological requirements, technology substitution and changes and other
technological developments;
• Prolonged service interruptions which could affect our business;
• Development and financing of communications, local telephone, wireless, Internet and cable networks
and services;
• Future financial performance, including the availability, terms and deployment of capital; the impact of
regulatory and competitive developments on capital outlays, and the ability to achieve cost savings
and realize productivity improvements and the consequences of increased leverage;
• Availability of qualified personnel;
• 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;
• Changes in regulations governing UNEs;
• Uncertainties in federal military spending levels and military base closures in markets in which we
operate;
• The ongoing global and domestic trend towards consolidation in the communications industry, which
may result in our competitors being larger and better financed, and provide these competitors with
extensive resources and greater geographic reach, allowing them to compete more effectively;
• The financial, credit and economic impacts of the MCI bankruptcy filing on the industry in general and
on us in particular;
• A significant delay in MCI's emergence from bankruptcy or a migration of MCI's traffic off our network
without it being replaced by other common carriers that interconnect with our network;
• The effect on us of pricing pressures, new program offerings and market consolidation in the markets
served by our significant customers, MCI and Sprint;
• The effect on us of industry consolidation including the potential acquisition of one or more of our large
wholesale customers by a company with commercial relationships with other providers;
• Under Statement of Financial Accounting Standard (“SFAS”) 142, we must test our intangibles for
impairment at least annually, which may result in a material, non-cash write-down of goodwill and
could have a material adverse impact on our financial position, results of operations or liquidity; and
• Other risks detailed from time to time in our periodic reports filed with the SEC.
You should not place undue reliance on any such forward-looking statements. Further, any forward-looking
statement, and such risks, uncertainties and other factors speak only as of the date on which they were
originally made and we expressly disclaim any obligation or undertaking to disseminate any updates or
revisions to any forward-looking statement to reflect any change in our expectations with regard to those
statements or any other change in events, conditions or circumstances on which any such statement is based,
except as required by law. New factors emerge from time to time, and it is not possible for us to predict what
factors will arise or when. In addition, we cannot assess the impact of each factor on our business or the
extent to which any factor, or combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements.
12
Item 1. Business
General
Part I
In this Annual Report, “we,” “us” and “our” refer to General Communication, Inc. and its direct and indirect
subsidiaries.
GCI was incorporated in 1979 under the laws of the State of Alaska and has its principal executive offices at
2550 Denali Street, Suite 1000, Anchorage, AK 99503-2781 (telephone number 907-868-5600).
GCI is primarily a holding company and together with its direct and indirect subsidiaries, is a diversified
communications provider with a leading position in facilities-based long-distance service in the State of Alaska
and is Alaska's leading cable television and Internet services provider.
We are the leading integrated, facilities-based communications provider in Alaska, offering local and long-
distance voice, cable video, data and Internet communications services to residential and business customers
under our GCI brand. A substantial number of our customers subscribe to product bundles that include two or
more of our services.
Since our founding, we have consistently expanded our product portfolio to satisfy our customers' needs. We
have benefited from the attractive and unique demographic and economic characteristics of the Alaskan
market. We are pioneers of bundled communications services offerings, and believe our integrated strategy of
providing innovative bundles of voice, video and data services provides us with an advantage over our
competitors and will allow us to continue to attract new customers, retain existing customers and expand our
addressable market. We hold leading market shares in long-distance, cable video and Internet services and
have gained significant market share in local access against the incumbent provider.
Through our focus on long-term results and strategic capital investments, we have consistently grown our
revenues and expanded our margins. Our integrated strategy provides us with competitive advantages in
addressing the challenges of converging telephony, video and broadband markets and has been a key driver
of our success. Using our extensive communications networks, we provide customers with integrated
communications services packages that we believe are unmatched by any other competitor in Alaska.
Availability of Reports and Other Information
Internet users can access information about the Company and its services at http://www.gci.com/,
http://www.gcinetworksolutions.com/, and http://www.alaskaunited.com/. The Company hosts Internet
services at http://www.gci.net/ and SchoolAccess™ services at http://www.gcisa.net/. We make available on
the http://www.gci.com/ website, free of charge, access to our Annual Report on Form 10-K, Quarterly Reports
on Form 10-Q, Current Reports on Form 8-K, Proxy Statement on Schedule 14A and amendments to those
materials filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934 as
soon as reasonably practicable after we electronically submit such material to the SEC. In addition, the SEC’s
website is http://www.sec.gov/. The SEC makes available on this website, free of charge, reports, proxy and
information statements, and other information regarding issuers, such as us, that file electronically with the
SEC. Information on our website or the SEC’s website is not part of this document.
Financial Information About Industry Segments
We have four reportable segments: long-distance services, cable services, local access services and Internet
services. For information required by this section, you should see Part II, Item 7, Management’s Discussion
and Analysis of Financial Condition and Results of Operations. Also refer to Note 13 included in Part II, Item 8,
Consolidated Financial Statements and Supplementary Data.
13
Recent Developments
New Senior Notes — In February 2004, our subsidiary, GCI, Inc. issued $250 million principal amount of senior
notes. These senior notes bear interest at 7.25% and are due in February 2014. GCI, Inc. intends to use the
net proceeds from the issuance of these senior notes to retire or repay other indebtedness. In connection with
the issuance of these senior notes, GCI, Inc. offered to purchase all of its outstanding 9.75% Senior Notes due
2007 (the “2007 Notes”) for cash at 103.5% of the principal amount. Approximately $114.6 million principal
amount of the 2007 Notes were tendered and accepted pursuant to this offer. GCI, Inc. called for redemption
of the remaining outstanding 2007 Notes at the redemption price of 103.25% of the principal amount. In
addition to the purchase and redemption of the 2007 Notes, approximately $53.8 million of proceeds received
from the issuance of the new senior notes were used to repay indebtedness under our Senior Credit Facility.
Senior Credit Facility Waiver — Compliance with the redemption notice requirements in the 2007 Notes
Indenture has resulted in a delay of up to sixty days between the date the new senior notes were issued and
the final redemption date of the 2007 Notes. As a result of such delay, our total debt will temporarily increase
during the overlap period between the redemption of the outstanding 2007 Notes and the issuance of the new
senior notes. This temporary increase does not comply with certain provisions of our Senior Credit Facility. We
have received a waiver of these provisions from the lenders under our Senior Credit Facility until April 30,
2004.
Fiber System Taken out of Service — We own a portion of the capacity of an undersea fiber optic cable system
linking Alaska to the Lower 48 states known as the Alaska spur of the North Pacific Cable (“NPC”). The Alaska
spur of the NPC was removed from service in January 2004 by PT Cable, Inc. due to a dispute over billings
between PT Cable, Inc. and AT&T. We determined that the recorded value for our NPC fiber asset was
impaired at December 31, 2003 and recorded a $5.4 million charge in the fourth quarter in the financial
statements included in Part II of this report.
Free Cable Modem Service — On January 26, 2004, we began offering new and current customers free
LiteSpeed cable modem Internet service when they sign up for certain of our other services. LiteSpeed uses
cable modems and is designed for dial-up Internet access customers who want more Internet download speed
and greater convenience. Cable modems transmit data reliably at a much faster rate than dial-up connections
and do not tie up the telephone line. Our cable modem service is available to a high percentage of Alaska
homes in Anchorage, Bethel, Cordova, Fairbanks, Homer, Juneau, Kenai, Ketchikan, Kodiak, Nome, Palmer,
Petersburg, Seward, Sitka, Soldotna, Valdez, Wasilla, and Wrangell.
Alaska Supreme Court Decision — ACS, through subsidiary companies, provides local telephone services in
Fairbanks and Juneau, Alaska. The ACS subsidiaries are classified as Rural Telephone Companies under the
1996 Telecom Act, which entitles them to an exemption of certain material interconnection terms of the 1996
Telecom Act, until and unless such “rural exemption” is examined and not continued by the RCA. On October
11, 1999, the RCA issued an order terminating rural exemptions for the ILECs operating in the Fairbanks and
Juneau markets so that we could compete with these companies in the provision of local telephone service.
Upon appeal by ACS, on December 12, 2003, the Alaska Supreme Court issued a decision in which it reversed
the RCA's rural exemption decision on the procedural ground that the competitor, not the incumbent, must
shoulder the burden of proof. The Court remanded the matter to the RCA for reconsideration with the burden
of proof assigned to us. Additionally, the Court left it to the RCA to decide as a matter of discretion whether to
change the state of competition during the remand period. In accordance with the Court's ruling, the RCA has
re-opened the rural exemption dockets and scheduled a hearing to commence on April 19, 2004. Additionally,
the RCA issued a ruling on January 16, 2004, in which the RCA determined that we can continue to rely on
unbundled network elements from ACS to serve our existing customers in Juneau and Fairbanks but that we
may not serve new customers through purchase of unbundled network elements pending the completion of
the remand proceeding. Until this matter is resolved, we may serve new customers using wholesale resale.
We believe it is unlikely that the rural exemptions will be restored in these markets; however, if they are
restored, we could be forced to discontinue providing service to residential customers and perhaps to
14
commercial customers in these locations. See “Part I — Item 1 — Business — Regulation, Franchise
Authorizations and Tariffs — Communications Operations — Rural Exemption” for more information.
Historical Development of our Business During the Past Fiscal Year
Rural Internet — We began a program in 2001 to bring affordable Internet access service to 150 rural Alaska
communities. In addition to deploying cable modem service in all regional centers, we deployed wireless
Internet access service, including service at broadband data rates, to over 70 rural communities in 2003. We
now provide Internet access service to 85 communities across Alaska and expect to provide service in the
remaining communities in 2004.
Rural Health Program — We completed service expansion and delivery of our Rural Health program in 2003 to
several rural Alaska health corporations that included various service levels to villages in the Arctic Slope
Native Association area, as well as in Chenega Bay, Kotzebue, Nanwalek, Platinum, Port Graham, Seward, and
Tatitlek, and completed service expansion to Diomede Island in January 2004.
Directory Assistance — During the fourth quarter of 2003, we began self-providing interstate directory
assistance for our retail customers, certain wholesale customers, and for MCI, as an overflow Alaska directory
assistance provider.
Cable Television Changes — We made significant changes and additions to our cable television lineup in
2003, including new networks and, in Anchorage, we introduced our first HDTV programming.
Hotel Broadband — We introduced a new hotel broadband product in 2003 which provides high-speed in-room
cable modem Internet access to hotel customers.
State of Alaska Microwave System Contract — On December 31, 2003, we were awarded a time-and-
materials contract from the State of Alaska to operate and maintain their statewide private microwave system.
State of Alaska Communications Contract — On December 17, 2003, we were awarded a contract from the
State of Alaska to provide communications services for an initial term of 18 months, with two 12-month
extensions possible thereafter. Communications services include long-distance, IP telephony, voice and data
network management and maintenance, Internet, audio and video conferencing and help desk. The total
value of the contract was approximately $10 million. This contract award followed the termination of the State
of Alaska's prior contract with an ILEC due to non-performance.
Pipeline Communications — In December 2003, we successfully concluded a three-year effort to upgrade our
GFCC network and prove the system reliable. The final stage of reliability testing and circuit conversion was
completed, bringing voice, data, Internet and cable television traffic onto the fiber system serving the Alaskan
oil industry. GFCC now carries a significant portion of all communications between Valdez, Anchorage and the
North Slope oil fields.
New Phone Directory — On November 24, 2003, we began distribution of the inaugural edition of the GCI
Anchorage Directory and yellow pages to residential and business customers in Anchorage, and launched our
on-line directory product. We worked with ALLTEL Publishing, a division of ALLTEL Corporation of Little Rock,
Arkansas, to produce and distribute the official GCI Anchorage phone directory. ALLTEL Publishing produces
approximately 408 directory titles in 38 states, including directories for its own telephone operations, and was
formerly the sales agent for the incumbent directories provider.
New Retail Store — On November 22, 2003, we opened a new retail store serving our south Anchorage
market. The new store allows customers to pay their bills, sign up for new services and experience our full
range of products including cable modem Internet access, digital cable television, local and long distance
telephone service, and cellular phone services. The new store allows customers to purchase any of our
services, pay bills and interact with customer service representatives.
15
Senior Credit Facility — On October 30, 2003, we refinanced our Senior Credit Facility. The new facility,
among other things, reduced the interest rate from LIBOR plus 6.50% to LIBOR plus 3.25%. The new facility
included a term loan of $170.0 million and a revolving credit facility of $50.0 million. In February, 2004, we
repaid approximately $43.8 million of the term loan, which cannot be reborrowed.
ConnectMD — On September 16, 2003, we introduced ConnectMD, a private medical network that reaches
clinics and hospitals in 110 rural Alaska communities and currently offers healthcare providers access to
continuing education courses from two leading Seattle institutions. ConnectMD has partnered with Seattle-
based Children’s Hospital and Regional Medical Center (Children’s) and Virginia Mason Medical Center.
ConnectMD links primary healthcare providers in Alaska to specialists and sub-specialists allowing them to
securely share information, such as confidential patient records and lab results, diagnose and prescribe
treatment for patients located in remote communities, and obtain continuing medical education credits. Using
Private Line and secure Internet, ConnectMD has created a private medical network that we believe is
revolutionizing the way health care is provided in Alaska.
Airlines Mileage Program — On September 2, 2003, we announced that we have become a mileage plan
partner with Alaska Airlines, offering new and existing customers opportunities to earn frequent flyer miles.
Our customers can earn Alaska Airlines mileage plan miles by using qualifying local or long distance telephone,
Internet, cable television, cellular, GCI directories or cable advertising services. Our residential and small
business customers can earn one mileage plan mile for every dollar spent on qualifying services. New
customers enrolling in a combination of services can earn up to 10,000 miles and current customers are
eligible for up to 7,500 bonus miles when adding or upgrading services. In addition customers can earn up to
500 anniversary miles every six months. The agreement requires the purchase of Alaska Airlines miles during
the year ended December 31, 2003 and in future years. The agreement has a remaining commitment at
December 31, 2003 totaling $16.0 million.
New Communications Policy for Alaska Areas — On August 6, 2003, the FCC issued a Report and Order
eliminating a policy that prohibited the installation or operation of more than one satellite earth station in any
Alaska rural community for competitive carriage of interstate message telephone service (“MTS”)
communications. The FCC found that through a series of regulatory steps, the environment that once called
for restrictions on competitive facilities-based entry had changed. This policy change allows us to install
facilities and provide competitive interstate MTS and other communications services over our own equipment
and network in rural communities where we presently have no facilities.
Email Filter for Businesses — On August 6, 2003, we introduced our eMail Guard for Business product. Email
Guard is an email filter that puts business owners and employees in control of screening unwanted junk
emails. We estimate that more than 75% of email delivered to businesses today is spam. Our eMail Guard
product keeps unwanted messages off of the customer’s network, Internet connection and mail servers. Our
Email Guard residential and business products filtered approximately 31,000 messages containing suspected
viruses and 1,991,000 messages containing suspected junk mail during a representative 24-hour period in
February 2004.
MCI Settlement — On July 24, 2003, following bankruptcy court approval, we signed a settlement and release
agreement with MWNS. The agreement affirmed contractual terms and conditions between the two
companies, settled MWNS’ pre-petition liabilities, settled billing disputes between the two companies, and
established a right to setoff our pre-petition payables. MWNS is a subsidiary of MCI, which had previously
entered into service agreements with GCI on behalf of MCI.
Under terms of the agreement, MWNS settled its outstanding liability of $12.9 million for $12.1 million net of
adjustments. In addition, the agreement reduced our pre-petition claim to $12.1 million and further allowed us
the right to setoff approximately $1 million in prepetition payables owed by us to MWNS. MWNS agreed to pay
the remaining $11 million to us as a credit against our future purchase of services from MWNS. Further, we
agreed to pay to MWNS, and did pay, the outstanding pre-petition payables balance of approximately
$649,000 in August 2003. Remaining credits available to us as of December 31, 2003 totaled approximately
$7.9 million.
16
Extended Supply Contract — On July 24, 2003 MCI extended its Contract of Alaska Access Services for five
years to July 2008. This agreement sets the terms and conditions under which we originate and terminate
certain types of long distance and data services in Alaska on MCI's behalf. In exchange for extending the term
of the contract, MCI receives a series of rate reductions implemented in phases over the life of the contract.
AULP West — On June 30, 2003, we announced our plan to build a second undersea fiber optic cable system
between Seward, Alaska and Warrenton, Oregon. The cable will complement our existing AULP East fiber optic
cable system between Whittier, Alaska and Seattle, Washington. The two systems will provide physically
diverse nearly instant backup to each other in the event of an outage. Fiber production was completed in
January 2004 and began to be deployed in February 2004. We expect to complete construction and testing in
April 2004. The 1,544-statute mile cable has a total design capacity of 640 Gigabits per second access speed
and is expected to be operational by May 2004.
RCA Renewal — On May 21, 2003, the Senate of the State of Alaska passed and the Governor later signed
House Bill 111 which extended the life of the RCA until 2007. We believe that renewal of the RCA is important
for consumers and competition alike. The Alaska Senate voted to renew the Agency for four-years without any
statutory changes that affect the manner by which utilities in Alaska are regulated.
Narrative Description of our Business
General
We are the largest Alaska-based and operated integrated communications provider. A pioneer in bundled
service offerings, we provide facilities-based local and long distance voice, cable video, Internet and data
communications services, and resell wireless telephone services, to residential and business customers under
our GCI brand.
We generated consolidated revenues of $390.8 million in 2003. We ended the year with approximately
85,600 long-distance customers, 106,100 local access lines in service, 134,400 basic cable subscribers, and
95,700 total Internet subscribers, including 46,000 cable modem subscribers. A substantial number of our
customers subscribe to product bundles that include two or more of our services.
Since our founding in 1979, we have consistently expanded our product portfolio to satisfy our customers'
needs. We have benefited from the attractive and unique demographic and economic characteristics of the
Alaskan market. We believe our integrated strategy of providing innovative bundles of voice, video and data
services provides us with an advantage over our competitors and will allow us to continue to attract new
customers, retain existing customers and expand our addressable market. We hold leading market shares in
long-distance, cable video and Internet services and have gained significant market share in local access
against an incumbent provider.
Through our focus on long-term results and strategic capital investments, we have consistently grown our
revenues and expanded our margins. Our integrated strategy provides us with competitive advantages in
addressing the challenges of converging telephony, video and broadband markets and has been a key driver
of our success. Today, using our extensive communications networks, we provide customers with integrated
communications services packages that are unmatched by any other competitor in Alaska.
We operate a broadband communications network that permits the delivery of a seamless integrated bundle
of communications, entertainment and information services. We offer a wide array of consumer and business
communications and entertainment services—including local telephone, long-distance and wireless
communications, cable television, consulting services, network and desktop computing outsourced services,
and dial-up, broadband (cable modem, wireless and DSL) and dedicated Internet access services at a wide
range of speeds—all under the GCI brand name.
17
We believe that the size and growth potential of the voice, video and data market, the increasing deregulation
of communications services, and the increased convergence of telephony, wireless, and cable services offer
us considerable opportunities to continue to integrate our communications, Internet and cable services and
expand into communications markets both within and, longer-term, possibly outside of Alaska.
Considerable deregulation has already taken place in the United States because of the 1996 Telecom Act with
the barriers to competition between long-distance, local exchange and cable providers being lowered. We
believe our acquisition of cable television systems and our development of local exchange service, Internet
services, broadband services, and wireless services leave us well positioned to take advantage of deregulated
markets.
We are Alaska's leading provider of long-distance, cable television and data and Internet services, as
measured by revenues, and we are the second largest local access provider, as measured by local access
lines. We attribute our leadership position to our commitment to provide our customers with high-quality
products in bundled offerings that maximize their satisfaction. We maintain a strong competitive position,
however there is active competition in the sale of substantially all products and services we offer.
Competition in the Communications Industry
There is substantial competition in the communications industry. The traditional dividing lines between
providers offering long-distance telephone service, local telephone service, wireless telephone service,
Internet services and video services are increasingly becoming blurred. Through mergers and various service
integration and product bundling strategies, major providers, including us, are striving to provide integrated
communications service offerings within and across geographic markets.
Competitive Strengths
Market Leader. We are Alaska's leading provider of long-distance, cable television and data and Internet
services, as measured by revenues, and we are the second largest local access provider, as measured by local
access lines. We attribute our leadership position to our commitment to provide our customers with high-
quality products in bundled offerings that maximize their satisfaction.
Advanced Infrastructure and Robust Network Assets. We own and operate advanced networks that provide
integrated end-to-end solutions. Our hybrid-fiber coax cable network enables us to offer last-mile broadband
connectivity to our customers. Our interstate and undersea fiber optic cable systems connect our major
markets in Alaska to the Lower 48 States. We employ satellite transmission for rural intrastate and interstate
traffic in markets where terrestrial based network alternatives are not available. We have or expect to be able
to obtain satellite transponders to meet our long-term satellite capacity requirements. In our local service
markets, we offer services using our own facilities, unbundled network elements and wholesale/resale.
Bundled Service Offerings. Ownership and control of our network and communications assets have enabled
us to effectively market bundled service offerings. Bundling facilitates the integration of operations and
administrative support to meet the needs of our customers. Our product and service portfolio includes stand-
alone offerings and bundled combinations of local and long-distance voice and data services, cable video,
broadband (cable modem, fixed wireless and DSL), dedicated Internet access services and other services.
Well-Recognized Brand Name. Our GCI brand is the oldest brand among major communications providers in
Alaska and positively differentiates our services from those of our competitors. We believe our customers
associate our brand name with quality products. We continue to benefit from high name recognition and
strong customer loyalty, and the majority of our customers purchase multiple services from us. We have been
successful in selling new and enhanced products to our customers based on perceived quality of products and
brand recognition.
Favorable Alaskan Market Dynamics. The Alaskan communications market is characterized by its large
geographic size and isolated markets that include a combination of major metropolitan areas and small,
18
dense population clusters, which create a deterrent to potential new entrants. Due to the remote nature of its
communities, the state's residents and businesses rely extensively on our systems to meet their
communications needs. We believe that, when compared to national averages, Alaskan households spend
more on communications services. According to the United States Census Bureau, the median household
income in Alaska was 28% higher than the three-year United States national average from 2000 to 2002, and
according to the Alaska Department of Revenue, in 2002, federal spending in Alaska was up 18%, year over
year. We believe there is a positive outlook for continued growth.
Experienced Management Team. Our experienced management team has a proven track record and has
consistently expanded our business and improved our operations. Our senior management averages more
than 23 years of experience in the communications industry and more than 18 years with our company.
Business Strategy
We intend to continue to increase revenues and cash flow using the following strategies:
Continue to Offer Bundled Products. We offer innovative service bundles to meet the needs of our
residential and business customers. Bundling our services significantly improves customer retention,
increases revenue per customer and reduces customer acquisition expenses. Our experience indicates
that our bundled customers are significantly less likely to churn, and we experience less price erosion
when we effectively combine our offerings. Bundling improves our top line growth, provides operating cost
efficiencies that expand our margins and drives our overall business performance. As a measure of
success to date, substantially all of our local customers subscribe to our long-distance service and
approximately one-third of our cable video subscribers also purchase our high-speed Internet service.
Maximize Sales Opportunities. We successfully sell new and enhanced services and products between
and within our business segments to our existing customer base to achieve increased revenues and
penetration of our services. Through close coordination of our customer service and sales and marketing
efforts, our customer service representatives cross sell and up sell our products. Many calls into our
customer service centers result in sales of additional products and services. We actively seek to continue
to encourage our existing customers to acquire higher value, enhanced services.
Deliver Industry Leading Customer Service. We have positioned ourselves as a customer service leader in
the Alaska communications market. We operate our own customer service department within our
marketing group and maintain and staff our own call centers. We have empowered our customer service
representatives to handle most service issues and questions on a single call. We prioritize our customer
services to expedite handling of our most valuable customers' issues, particularly for our largest business
customers. We believe our integrated approach to customer service, including setting-up the service,
programming various network databases with the customer's information, installation, and ongoing
service, allows us to provide a customer experience that fosters customer loyalty.
Leverage Communications Operations. We continue to expand and evolve our integrated network for the
delivery of our services. Our bundled strategy and integrated approach to serving our customers creates
efficiencies of scale and maximizes network utilization. By offering multiple services, we are better able to
leverage our network assets and increase returns on our invested capital. We periodically evaluate our
network assets and continually monitor technological developments that we can potentially deploy to
increase network efficiency and performance.
Expand Our Product Portfolio and Footprint in Alaska. Throughout our history, we have successfully
added and will continue to add new products to our product portfolio. Management has a demonstrated
history of evaluating potential new products for our customers, and we will continue to assess revenue-
enhancing opportunities that create value for our customers. In addition to new services such as digital
video recorders, HDTV and video-on-demand, we are also expanding the reach of our core products to new
markets. Where feasible and where economic analysis supports geographic expansion of our network
19
coverage, we will pursue opportunities to increase the scale of our facilities, enhance our ability to serve
our existing customers' needs and attract new customers.
Alaska Voice, Video and Data Markets
We estimate that the aggregate communications, cable television, and Internet markets in Alaska generated
revenues in 2003 of approximately $1.1 billion. Of this amount, approximately $480 million was attributable
to interstate and intrastate long-distance service, $348 million was attributable to local exchange services,
$102 million was attributable to wireless phone service, $92 million was attributable to cable television, and
$78 million was attributable to all other services, including wireless and Internet services. We report revenues
from certain services, such as cable modem Internet access services, in different reporting segments as
compared to those used in this market data presentation.
The Alaskan voice, video and data markets are unique within the United States. Alaska is geographically
distant from the rest of the United States and is generally characterized by large geographical size and
relatively small, dense population clusters (with the exception of population centers such as Anchorage,
Fairbanks and Juneau). It lacks a well-developed terrestrial transportation infrastructure, and the majority of
Alaska's communities are accessible only by air or water. As a result, Alaska's communication networks are
different from those found in the Lower 49 States.
Alaskans continue to rely extensively on satellite-based long-distance transmission for intrastate calling
between remote communities where investment in a terrestrial network would be uneconomic or impractical.
Also, given the geographic isolation of Alaska's communities and lack, in many cases, of major civic institutions
such as hospitals, libraries and universities, Alaskans are dependent on communications services to access
the resources and information of large metropolitan areas in Alaska, the rest of the United States and
elsewhere. In addition to satellite-based communications, the communications services infrastructure in
Alaska includes fiber optic cables between Anchorage, Valdez, Fairbanks, Prudhoe Bay, and Juneau, traditional
copper wire, and digital microwave radio on the Kenai Peninsula and other locations. For interstate and
international communications, Alaska is connected to the Lower 48 States by three fiber optic cables, one of
which was taken out of service in January 2004. See “Part I — Item 1 — Business — Historical Development of
our Business During the Past Fiscal Year — Fiber System Taken out of Service” for more information.
Fiber optics is the preferred method of carrying Internet, voice, video, and data communications over long-
distances, eliminating the delay commonly found in satellite connections. Widespread use of high capacity
fiber optic facilities is expected to allow continued expansion of business, government, educational, and health
care infrastructure in Alaska.
Long-Distance Services
Industry. Until the 1970s, AT&T had a virtual monopoly on long distance service in the United States. In the
1970s, competitors such as MCI and Sprint began to offer long distance service. With the gradual emergence
of competition, basic rates dropped, calling surged, and AT&T’s dominance declined. More than 1,000
companies now offer wire-line long distance service. AT&T’s 1984 toll revenues were approximately 90% of
those reported by all long distance carriers. The FCC’s regulation of AT&T as a “dominant” carrier ended in
1995. By 2002, AT&T’s revenues had declined to approximately 33% of all toll revenues. The two largest
market entrants, MCI and Sprint, have obtained a 30% combined market share through 2002.
The FCC reports that approximately $84 billion was derived from toll services in 2002. In 2001, residential
customers generated over 45% of toll revenues, and 35% of residential toll phone calls were interstate as
opposed to 47% of minutes. In 2001, approximately 30% of total toll services revenues was derived from
intrastate, 51% was derived from domestic interstate, and 19% was derived from international toll services.
Interstate long distance toll revenues increased approximately 92% from $26 billion in 1984 to $50 billion in
2001, and intrastate toll revenues increased approximately 38% from $21 billion in 1984 to $29 billion in
2001, despite significant rate reductions in both categories during this period.
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The FCC reports that average revenue per minute of long distance calling dropped from $0.32 in 1984, when
competitive discount and promotional long distance plans were introduced, to $0.10 in 2001. This average
price per minute represents a mix of international calling (an average of 35 cents per minute) and domestic
interstate calling (an average of 8 cents per minute). The decline in prices since 1984 is more than 80% after
adjusting for the impact of inflation. The average annual rate of change in the consumer price index for
telephone services between 1990 and 2002 was reported to be 0.6% as compared to 3.6% for all services.
The average revenue per minute for interstate and international calls in 1990 was $0.27 (adjusted for
inflation) as compared to $0.10 in 2001.
The FCC reports that through July 2003 more than twenty-eight million households have been added to the
nation's telephone system since November 1983. An estimated 3.6 million households were added between
July 2002 and July 2003. As of July 2003, 106.8 million households had telephone service. The FCC reports
that approximately 2% of all consumer expenditures are devoted to telephone service. This percentage has
remained relatively constant over the past 15 years, despite major changes in the industry and in telephone
usage. Average annual expenditures for telephone service increased from $877 per household in 2000 to
$1,001 in 2002.
The FCC reports that approximately 104 million households had telephone services as of November 2002, an
increase of 25 million households since 1983. An estimated 95.2% of households and virtually all businesses
in the United States subscribed to telephone service in July 2003. Approximately 92.9% of households
subscribed to telephone service in 1980.
The FCC reports that primary lines in service have grown over time, averaging approximately 3% per year,
which has historically reflected growth in the population and the economy. The percentage of additional lines
for households with telephone service has increased significantly, from approximately 3% in 1988 to
approximately 25% in 2001. The total number of lines, however, has declined since 2000 because of the
recession, because some consumers are substituting wireless service for wireline service, and because some
households are eliminating second lines when they move from dial-up Internet service to broadband service.
International communications has become an increasingly important segment of the communications market.
The FCC reports that the number of calls made from the United States to other countries increased from 200
million in 1980 to 6.3 billion in 2001, and that Americans spent approximately $11.4 billion on international
calls in 2001. Consistent with domestic toll rates per minute, international toll rates per minute have
decreased significantly. On average, carriers billed 34 cents per minute for international calls in 2001, a
decline of more than 74% since 1980. Five markets, Canada, Mexico, the United Kingdom, Germany, and
Japan, accounted for approximately 41% of the international calls billed in the United States in 2001. AT&T,
MCI, and Sprint combined accounted for 88% of the international service billed in the United States in 2001.
While the 1996 Telecom Act has facilitated competition and rapid growth in the communications market, the
last three years have been a tumultuous time for that marketplace. Industry analysts believe that overly
optimistic projections of data growth spurred companies to invest large amounts of capital to boost network
capacity. While demand for communications services grew, it did not grow at a sufficient pace to justify the
substantial build-out of fiber capacity. A wide gap developed between the supply of network capacity and the
demand for data transmission. Network owners refocused their efforts to demonstrate profitability over a
much shorter time horizon than initially projected. A downward spiral ensued, as some communications
carriers went out of business after failing to generate sufficient revenues to service their accelerating debt
loads. The resultant slowdown in capital expenditures left equipment manufacturers with surplus inventory
and personnel.
Industry analysts believe that the communications industry stabilized in 2003 and has begun to show signs of
recovery. Growth in data is expected to continue to be a key component of industry revenue growth. We
believe that the data communications business will eventually rival and perhaps become larger than the
traditional voice telephony market. The continuing migration of voice and other traffic from analog to digital
transmission and the growth in data attributed to broadband applications are expected to fuel the growth in
data.
21
The FCC issued a Report and Order (FCC 03-197) in 2003 eliminating a policy that prohibited the installation
or operation of more than one satellite earth station in any Alaska rural community for competitive carriage of
interstate MTS communications. The FCC found that through a series of regulatory steps, the environment
that once called for restrictions on competitive facilities-based entry had changed. This policy change allows
us to install facilities and provide competitive interstate MTS and other communications services over our own
equipment and network in rural communities where we presently have no facilities.
We believe that federal and state legislators, courts and regulators will continue to influence the
communications industry in 2004. Consummation of mergers between and spin-offs from long-distance
companies, local access services companies, ISPs and cable television companies have occurred which blur
the distinction between product lines and competitors.
Industry analysts believe companies will be successful in the long-term if they can achieve and maintain a
superior operating cost position, minimize regulatory battles, offer a full suite of integrated services to their
customers using a network that is largely under their control, and continue to offer new and enhanced services
that customers wish to purchase.
See “Part I — Item I — Business — Regulation, Franchise Authorizations and Tariffs — Long-Distance Services”
for more information.
General. We supply a full range of common carrier long-distance and other communications products and
services. We operate a modern, competitive communications network employing the latest digital transmission
technology based upon fiber optic facilities within and between Anchorage, Fairbanks and Juneau, Alaska. Our
facilities include a self-constructed and financed digital fiber optic cable and additional owned capacity on
another undersea fiber optic cable (which was taken out of service in January 2004, (see “Part I — Item 1 —
Business — Historical Development of our Business During the Past Fiscal Year — Fiber System Taken out of
Service”), linking our Alaska terrestrial networks to the networks of other carriers in the Lower 49 States. We
use satellite transponders to transmit voice and data traffic to remote areas of Alaska. We operate digital
microwave systems to link Anchorage with the Kenai Peninsula, and our Prudhoe Bay Earth Station with
Deadhorse. Digital microwave facilities also are used to backup our fiber facilities from Anchorage to our Eagle
River earth station, and to our Fairbanks earth station from our Fairbanks distribution center. Virtually all
switched services are computer controlled, digitally switched, and interconnected by a packet switched SS7
signaling network.
We provide interstate and intrastate long-distance services throughout Alaska using our own facilities or
facilities leased from or swapped with other carriers. We also provide (or join in providing with other carriers)
communications services to and from Alaska, Hawaii, the Lower 48 States, and many foreign nations and
territories.
We offer cellular services by reselling another cellular provider’s services. We offer wireless local access
services over our own facilities, and have purchased PCS and LMDS wireless broadband licenses in FCC
auctions covering markets in Alaska.
Products. Our long-distance services industry segment is engaged in the transmission of interstate and
intrastate-switched message telephone service and Private Line and Private Network communications service
between the major communities in Alaska, and the remaining United States and foreign countries. Our
message toll services include intrastate, interstate and international direct dial, toll-free 800, 888, 877 and
866 services, GCI calling card, operator and enhanced conference calling, frame relay, SDN, ISDN technology
based services, as well as terminating northbound MTS traffic for MCI, Sprint and several large resellers who
do not have facilities of their own in Alaska. We also provide origination of southbound calling card and toll-
free 800, 888, 877 and 866 toll services for MCI, Sprint, and other IXCs. We offer our message services to
commercial, residential, and government subscribers. Subscribers generally may cancel service at any time.
Toll, Private Line, broadband and related services account for approximately 49.6%, 53.5% and 53.5% of our
2003, 2002 and 2001 revenues, respectively. Broadband services include our SchoolAccess™ and Rural
22
Health initiatives. Private Line and Private Network services utilize voice and data transmission circuits,
dedicated to particular subscribers, which link a device in one location to another in a different location.
We have positioned ourselves as a price, quality, and customer service leader in the Alaska communications
market. The value of our long-distance services is generally designed to be equal to or greater than that for
comparable services provided by our competitors.
In addition to providing communications services, we also design, sell, install, service and operate, on behalf
of certain customers, communications and computer networking equipment and provide field/depot, third
party, technical support, communications consulting and outsourcing services through our Network Solutions
business. We also supply integrated voice and data communications systems incorporating interstate and
intrastate digital Private Lines, point-to-point and multipoint Private Network and small earth station services.
Our Network Solutions sales and services revenue totaled $11.9 million, $12.4 million, and $16.3 million in
the years ended December 31, 2003, 2002 and 2001, respectively, or approximately 3.0%, 3.4% and 4.6% of
total revenues, respectively. Presently, there are a number of competing companies in Alaska that actively sell
and maintain data and voice communications systems. Network Solutions’ managed services and product
sales results are reported in the All Other category in the Consolidated Financial Statements included in Part IV
of this report.
Our ability to integrate communications networks and data communications equipment has allowed us to
maintain our market position based on “value added” support services rather than price competition. These
services are blended with other transport products into unique customer solutions, including managed
services and outsourcing.
Facilities. Our communication facilities include an undersea fiber optic cable system connecting Whittier,
Valdez and Juneau, Alaska and Seattle, Washington, which was placed into service in February 1999. As of
the date of this report we are constructing a new undersea fiber optic cable system connecting Seward, Alaska
to Warrenton, Oregon that we expect to be operational by May 2004. This fiber optic cable system is
designated AULP West and the original undersea fiber optic cable system is now designated AULP East. The
Seward cable landing station will connect to our network in Anchorage and the Warrenton cable landing
station will connect to our network in Seattle via long-term leased capacity. The combination of AULP West
and AULP East will provide us with the ability to provide fully protected geographically diverse routing of service
between Alaska and the Lower 48 States.
We also own a portion of the capacity on a second undersea fiber optic cable system linking Alaska to the
Lower 48 States known as the Alaska spur of the NPC, which was taken out of service in January 2004. See
“Part I — Item 1 — Business — Historical Development of our Business During the Past Fiscal Year — Fiber
System Taken out of Service” for more information.
These undersea fiber optic cable systems allow us to carry our military base traffic and our Anchorage, Delta
Junction, Eagle River, Fairbanks, Girdwood, Glenallen, Healy, Juneau, Kenai Peninsula, Ketchikan, Palmer,
Prudhoe Bay, Sitka, Valdez, Wasilla, and Whittier, Alaska traffic to and from the contiguous Lower 48 States
and between these instate locations over terrestrial circuits, eliminating the one-quarter second delay
associated with satellite circuits.
Other facilities include major earth stations at Barrow, Bethel, Cordova, Dillingham, Dutch Harbor, Eagle River,
Ketchikan, King Salmon, Kodiak, Kotzebue, Nome, Prudhoe Bay, and Sitka, all in Alaska, serving the
communities in their vicinity, and at Issaquah, Washington, which provides interconnection to Seattle and the
Lower 48 States for traffic to and from major Alaska earth stations. The Eagle River earth station is linked to
the Anchorage distribution center by fiber optic facilities.
We use SONET as a service delivery method for our terrestrial metropolitan area networks as well as our long-
haul terrestrial and undersea fiber optic cable networks. As of December 31, 2003 we have completed
interconnection of approximately 70 businesses and co-location facilities within the Anchorage, Juneau and
Fairbanks metropolitan areas, as well as the 800-mile long Alyeska pipeline right of way that connects Valdez
23
to Prudhoe Bay, Alaska. We currently connect Anchorage, Whittier, Juneau and Seattle through our AULP East
undersea fiber network. We use SONET-based next generation multi-service nodes for purposes of delivering
traditional TDM services (at DS-0, DS-1 and DS-3 data rates) as well as next generation services, such as
optical OC-n and Ethernet. We have expanded our digital cross-connect capacity through the addition of three
large 3:1 cross connects located in Anchorage and Seattle.
We completed construction of a fiber optic cable system from the Anchorage distribution center to the
Matanuska Telephone Association Eagle River central office and to our major hub earth station in Eagle River
in the second quarter of 2000. The Issaquah earth station is connected with the Seattle distribution center by
means of diversely routed leased fiber optic cable transmission systems, each having the capability to restore
the other in the event of failure. The Juneau earth station and distribution centers are collocated. We have
digital microwave facilities serving the Kenai Peninsula communities. We maintain earth stations in Fairbanks
(linked by digital microwave to the Fairbanks distribution center), Juneau (collocated with the Juneau
distribution center), Anchorage (Benson earth station), and in Prudhoe Bay as fiber network restoration earth
stations. Our Benson earth station also uplinks our statewide video service; such service may be pre-empted if
earth station capacity is needed to restore our fiber network between Anchorage and Prudhoe Bay.
In 2002, we constructed a 3.6-meter earth station at St. Paul, 6-meter earth stations at Unalakleet and
Mountain Village, and a 9-meter earth station at Ft. Yukon, all in Alaska. These stations were constructed to
support our SchoolAccessTM distance learning and telemedicine networks, and primarily serve surrounding
villages.
We use our DAMA facilities to serve 57 additional locations throughout Alaska. DAMA is a digital satellite earth
station technology that allows calls to be made between remote villages using only one satellite hop thereby
reducing satellite delay and capacity requirements while improving quality. In 1996, we obtained the
necessary RCA and FCC approvals waiving prohibitions against construction of competitive facilities in certain
rural Alaska communities, allowing for deployment of DAMA technology in 56 sites in rural Alaska on a
demonstration basis. These prohibitions were removed by the FCC on August 6, 2003 allowing us to begin
deploying earth stations in more locations in Alaska (see “Part I — Item 1 — Business — Historical Development
of our Business During the Past Fiscal Year — New Communications Policy for Alaska Areas” for more
information). In addition, 69 (for a total of 126) C-band facilities provide dedicated Internet access, Telehealth
and Private Network services to rural public schools, hospitals, health clinics, and natural resource
development industries throughout Alaska and in several locations in the Lower 48 States.
Our Anchorage, Fairbanks, and Juneau distribution centers contain electronic switches to route calls to and
from local exchange companies and, in Seattle, to obtain access to MCI, Sprint and other carriers to distribute
our southbound traffic to the remaining 49 states and international destinations. In Anchorage, a Lucent
Technologies Inc. (“Lucent”) 5ESS digital host switch is connected by fiber to seven remote facilities that are
co-located in the ILEC switching centers, to provide both local and long-distance service. Our extensive
metropolitan area fiber network in Anchorage supports cable television, Internet and telephony services. The
Anchorage, Fairbanks, and Juneau facilities also include digital access cross-connect systems, frame relay
data switches, Internet platforms, and in Anchorage and Fairbanks, co-location facilities for interconnecting
and hosting equipment for other carriers. We also maintain an operator and customer service center in
Wasilla, Alaska.
In 2001 we constructed a new switching center in Fairbanks and installed a new Lucent switch to enable the
provisioning of local telephone access services in the Fairbanks market. The existing Fairbanks long-distance
toll switch was decommissioned in December 2001. Substantially all toll traffic originating in Fairbanks is now
routed to Anchorage. The first ILEC collocation office was also constructed during 2001 to enable access to a
portion of the Fairbanks ILEC UNE loop facilities. Fairbanks UNE loop provisioning began in early 2002.
Construction of a second collocation office was completed in 2002.
We installed a new Lucent switch in our Juneau distribution center, also enabling local services to be launched
in the Juneau market in 2002. This new switch also replaced the existing toll switch in Juneau, which we
decommissioned in 2002. One collocation office and a second adjacent collocation facility were completed at
24
two of the Juneau ILEC central offices. We placed these collocation facilities in service in 2002 enabling UNE
loop access to a portion of the Juneau ILEC’s loop facilities. Provisioning customers via UNE in Fairbanks and
Juneau is presently subject to certain restrictions. See “Part I — Item 1 — Business — Historical Development
of our Business During the Past Fiscal Year — Alaska Supreme Court Decision” for more information.
Our Alcatel DSC DEX toll switch in Seattle was also decommissioned in 2002 after its traffic was transitioned
to our Lucent 5ESS switch in Seattle, which was placed into service in 2000. Our Alcatel DSC DEX toll switch
in Anchorage was removed from service in the second quarter of 2003 and its traffic was moved to our
existing Lucent 5ESS network. Installation of a second Lucent 5ESS in Anchorage began in the fourth quarter
of 2003 to support network expansion and enable additional network efficiencies. This switch is expected to
be integrated into our network by the second quarter of 2004.
Our operator services traffic was moved in early 2003 to our Lucent 5ESS switch platform as an interim step
to decommission our existing digital operator switch. Our operator services traffic was moved in the fourth
quarter of 2003 to an integrated services platform that hosts operator services, answering services, directory
assistance and internal conferencing services.
We employ satellite transmission for rural intrastate and interstate traffic and certain other major routes. We
acquired satellite transponders on PanAmSat Corporation (“PanAmSat”) Galaxy XR satellite in March 2000 to
meet our long-term satellite capacity requirements. We further augmented capacity on Galaxy XR with the
lease of a seventh C-band transponder in October, 2002.
As demand for redundant, geographically diverse capacity on our network increases, we will need to further
augment our facilities between Alaska and the Lower 48 States. In June 2003 we began the construction of
AULP West connecting Seward, Alaska and Warrenton, Oregon, with leased backhaul facilities to connect it to
our switching and distribution centers in Anchorage, Alaska and Seattle, Washington. A consortium of
companies has been selected to design, engineer, manufacture, and install the undersea fiber optic cable
system and a contract has been signed at a total cost to us of $35.2 million. We expect the total cost of the
new fiber system to be approximately $51 million. We expect to fund construction of the fiber optic cable
system through our operating cash flows and, to the extent necessary, with draws on our new Senior Credit
Agreement. Our capital expenditures for this project totaled approximately $16.5 million in 2003, all of which
has been funded through our operating cash flows.
In 2000 we began deploying a new packet data satellite transmission technology for the efficient transport of
broadband data in support of our rural health and SchoolAccessTM initiatives. We continued to deploy and
upgrade this network during 2003 and expect to further expand and upgrade this network during 2004. An
upgrade of the packet data satellite transmission equipment to a more bandwidth efficient modulation
scheme is expected to occur during the second half of 2004. In addition, our SchoolAccessTM and rural
wireless Internet service is partially provisioned over a satellite based digital video broadcast carrier that is
scheduled to convert to a more efficient modulation scheme during the second quarter of 2004. These
projects reduce the requirement for new satellite transponder bandwidth to support expected growth in rural
health, distance learning and rural Internet services.
Emerging technology that facilitates more efficient transport of fixed assigned point-to-point satellite
transmissions may become available during the second quarter of 2004. This technology would allow fixed
point-to-point transmissions between two earth stations to transmit at the same frequency. Successful
development and implementation of this new technology may reduce the requirement for new satellite
bandwidth to meet our needs as expected growth in demand for our services occurs. We are investigating the
possible use of this new technology to further increase the bandwidth utilization for a portion of our satellite
network.
We employ advanced digital transmission technologies to carry as many voice circuits as possible through a
satellite transponder without sacrificing voice quality. Other technologies such as terrestrial microwave
systems, metallic cable, and fiber optics tend to be favored more for point-to-point applications where the
volume of traffic is substantial. With a sparse population spread over a large geographic area, neither
25
terrestrial microwave nor fiber optic transmission technology is considered to be economically feasible in rural
Alaska in the foreseeable future.
Customers. We had approximately 85,600, 88,200 and 87,900 active Alaska long-distance message
telephone service subscribers at December 31, 2003, 2002 and 2001, respectively. Approximately 11,300,
11,600 and 12,200 of these were business and government users at December 31, 2003, 2002 and 2001,
respectively, and the remainder were residential customers. Reductions in our business and government
customer counts were primarily attributed to continuing competitive pressures in Anchorage and other
markets we serve. Message telephone service revenues (excluding broadband, operator services and Private
Line revenues) averaged approximately $10.6 million per month during 2003.
Equal access conversions have been completed in all communities we serve with owned facilities. We
estimate that we carry slightly over 50% of combined business and residential traffic as a statewide average
for both originating interstate and intrastate message telephone service traffic.
A summary of our switched long-distance message telephone service traffic (in minutes) follows:
Interstate Minutes
South-
bound 1
North-
bound
126,681
141,091
160,600
130,638
559,010
133,455
144,143
159,564
138,735
575,897
132,172
142,333
159,439
144,829
578,773
74,252
76,256
87,230
90,812
328,550
91,061
105,001
90,839
78,483
365,384
78,882
83,749
96,512
107,620
366,763
For Quarter ended
March 31, 2001
June 30, 2001
September 30, 2001
December 31, 2001
Total 2001
March 31, 2002
June 30, 2002
September 30, 2002
December 31, 2002
Total 2002
March 31, 2003
June 30, 2003
September 30, 2003
December 31, 2003
Total 2003
Combined
Interstate
and Inter-
national
Minutes
Inter-
national
Calling
Minutes
Card
(Amounts in thousands)
1,424
2,087
1,530
1,926
1,634
1,961
1,362
1,946
5,950
7,920
204,444
220,803
251,425
224,758
901,430
1,683
1,582
1,463
1,341
6,069
1,186
1,107
1,055
1,013
4,361
1,413
1,462
1,527
1,506
5,908
1,487
1,508
1,514
1,546
6,055
227,612
252,188
253,393
220,065
953,258
213,727
228,697
258,520
255,008
955,952
Intra-
state
Minutes
Total
Minutes
38,763
40,407
39,355
39,246
243,207
261,210
290,780
264,004
157,771 1,059,201
40,781
44,528
46,860
43,595
268,393
296,716
300,253
263,660
175,764 1,129,022
45,345
52,489
55,918
49,553
259,072
281,186
314,438
304,561
203,305 1,159,257
__________________________
1 The 2001 Interstate Southbound minutes include traffic that originates and terminates in Washington by us on
behalf of an OCC customer.
All minutes data were taken from our internal billing statistics reports.
___________________________
We entered into a significant business relationship with MCI in 1993 that included the following agreements,
among others.
• 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.
• The parties agreed to share certain communications network resources and various marketing,
engineering and operating resources. We also carry MCI's 800, 888, 877 and 866 traffic originating in
26
Alaska and terminating in the Lower 49 States and handle traffic for MCI's calling card customers
when they are traveling in Alaska.
Concurrently with these agreements, MCI purchased approximately 31% (which represented approximately 9%
as of December 31, 2003) of GCI's Common Stock and presently one representative serves on the Board. In
conjunction with our acquisition of cable television companies in 1996, MCI purchased an additional two
million shares at a premium to the then current market price for $13 million or $6.50 per share. MCI sold 4.5
million shares of GCI Class A common stock in 2002.
Revenues attributed to MCI's message telephone traffic from these agreements (excluding Private Line and
other revenues) in 2003, 2002 and 2001 totaled $57.8 million, $54.7 million and $44.8 million, or 14.8%,
14.9% and 12.6% of total revenues, respectively. The contract was amended in March 2001 extending its
term five years to March 2006. The amendment reduced the rate to be charged by us for certain traffic over
the extended term of the contract.
On July 21, 2002 MCI and substantially all of its active United States subsidiaries filed voluntary petitions for
reorganization under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court.
Chapter 11 allows a company to continue operating in the ordinary course of business in order to maximize
recovery for the company's creditors and shareholders.
On July 24, 2003, our contract to provide interstate and intrastate long-distance services to MCI was extended
for a minimum of five years to July 2008. The agreement sets the terms and conditions under which we
originate and terminate certain types of long-distance and data services in Alaska on MCI's behalf. In exchange
for extending the term of this exclusive contract, MCI will receive a series of rate reductions implemented in
phases over the life of the contract.
On October 31, 2003, MCI's reorganization plan was approved by the United States Bankruptcy Court. MCI
requested in February 2004 that the United States Bankruptcy Court for the Southern District of New York
approve a 60-day extension to the February 28, 2004 deadline to emerge from bankruptcy. An extension to
the deadline would give MCI time to complete financial filings with the SEC. The financial filings are reported to
be the last major task left for MCI to emerge from bankruptcy.
See “Part I — Item 1 — Risks Relating to our Business and Operations — Our significant customer, MCI, is in
bankruptcy,” and “Management's Discussion and Analysis of Financial Condition and Results of Operations —
Long-Distance Services Overview” for additional information.
In 1993 we entered into a long-term agreement with Sprint, pursuant to which we agreed to terminate all
Alaska-bound Sprint long-distance traffic and Sprint agreed to handle substantially all of our international
traffic. Services provided pursuant to the contract with Sprint resulted in message telephone service revenues
(excluding Private Line and other revenues) in 2003, 2002 and 2001 of approximately $18.3 million, $23.5
million and $29.7 million, or approximately 4.7%, 6.4% and 8.3% of total revenues, respectively. The contract
was amended in March 2002 extending its term five years to March 2007, with two one-year automatic
extensions thereafter. The amendment reduces the rate to be charged by us for certain traffic over the
extended term of the contract.
With the contracts and amendment described above, we believe that MCI, subject to successful emergence
from the bankruptcy process, and Sprint, our two largest customers, will continue to make use of our services
during the extended term. MCI was a major customer of our long-distance services industry segment through
2003. Sprint met the threshold for classification as a major customer through 1998, and met the threshold
again in 2001.
Other common carrier traffic routed to us for termination in Alaska is largely dependent on traffic routed to our
carrier customers by their customers. Pricing pressures, new program offerings, revised business plans, and
market consolidation continue to evolve in the markets served by our carrier customers. If, as a result, their
traffic is reduced, or if their competitors' costs to terminate or originate traffic in Alaska are reduced, our traffic
27
will also likely be reduced, and we may have to reduce our pricing to respond to competitive pressures. We
are unable to predict the effect of such changes on our business; however the loss of one or both of MCI or
Sprint as customers, a material adverse change in our relationships with them or a material loss of or
reduction in their long-distance customers would have a material adverse effect on our financial position,
results of operations or liquidity.
We provide various services to the State of Alaska, BP Alaska, Wells Fargo Bank Alaska, and Alyeska Pipeline
Service Company. Although these customers do not meet the threshold for classification as major customers,
we do derive significant revenues and gross profit from them. There are no other individual customers, the
loss of which would have a material impact on our revenues or gross profit.
We provided broadband, Private Line and Private Network communications products and services, including
SchoolAccessTM and rural health Private Line facilities, to 359 commercial and government customers at the
end of 2003. These products and services generated approximately 15.9%, 14.8% and 14.1% of total
revenues during the years ended December 31, 2003, 2002 and 2001, respectively.
Although we have several agreements to facilitate the origination and termination of international toll traffic,
we have neither foreign operations nor export sales See “Part I — Item 1 — Business — Financial Information
about our Foreign and Domestic Operations and Export Sales” for more information.
Competition. The long-distance industry is intensely competitive and subject to constant technological
change. Competition is based upon price and pricing plans, the type of services offered, customer service,
billing services, performance, perceived quality, reliability and availability. AT&T Alascom, as a subsidiary of
AT&T, has access to greater financial, technical and marketing resources than we have. Future competitors
could also be substantially larger than we are, and have greater financial, technical and marketing resources
than we have.
In the long-distance market, we compete against AT&T Alascom, ACS, the Matanuska Telephone Association,
and certain smaller rural local telephone carrier affiliates. There is also the possibility that new competitors
will enter the Alaska market. In addition, wireless services continue to grow as an alternative to wireline
services as a means of reaching customers.
Historically, we have competed in the long-distance market by offering discounts from rates charged by our
competitors and by providing desirable packages of services. Discounts have been eroded in recent years due
to lowering of prices by AT&T Alascom and entry of other competitors into the long-distance markets we serve.
In addition, our competitors have also begun to offer their own packages of services. If competitors lower their
rates further or develop more attractive packages of services, we may be forced to reduce our rates or add
additional services, which would have a material adverse effect on our financial position, results of operations
or liquidity.
Under the terms of the acquisition of Alascom by AT&T Corp., AT&T Alascom rates and services must mirror
those offered by AT&T Corp., so changes in AT&T Corp. prices indirectly affect our rates and services. AT&T
Corp.'s and AT&T Alascom's interstate prices are regulated under a price cap plan whereby their rate of return
is not regulated or restricted. Price increases by AT&T Corp. and AT&T Alascom generally improve our ability to
raise prices while price decreases pressure us to follow. We believe we have, so far, successfully adjusted our
pricing and marketing strategies to respond to AT&T Corp. and other competitors' pricing practices. However,
if competitors significantly lower their rates, we may be forced to reduce our rates, which could have a material
adverse effect on our financial position, results of operations or liquidity.
ACS and other LECs have entered the interstate and international long-distance market, and pursuant to RCA
authorization, entered the intrastate long-distance market. ACS and other LECs generally lease or buy long-
haul capacity on long-distance carriers' facilities to provide their interstate and intrastate long-distance
services.
28
Another carrier completed construction of fiber optic facilities connecting points in Alaska to the Lower 48
States in 1999. The additional fiber system provides direct competition to services we provide on our owned
fiber optic facilities, however the fiber system provides an alternative routing path for us in case of a major
fiber outage in our systems. This carrier filed for Chapter 11 bankruptcy in 2001 and its assets were sold in
2002. We are currently in the process of constructing the AULP West fiber optic cable system. If successfully
completed, it will provide us with owned capacity for route diversity.
In the wireless communications services market, we expect our PCS business license in the future may be
used to compete against Dobson Communications Corporation (“Dobson”), ACS, Alaska DigiTel LLC, and
resellers of those services in Anchorage and other markets. The wireless communications industry continues
to experience significant consolidation. In February 2004 Cingular Wireless was reported to have been
successful in its bid to acquire AT&T Wireless for $41 billion, subject to shareholder approval. Dobson
acquired its Anchorage wireless properties in a 2003 asset exchange with AT&T Wireless. Dobson has
acquired wireless companies and negotiated roaming arrangements that give it a national presence. Mergers
and joint ventures in the industry have created large, well-capitalized competitors with substantial financial,
technical, marketing and other resources. These competitors may be able to offer nationwide services and
plans more quickly and more economically than we can, and obtain roaming rates that are more favorable
than those that we obtain. We currently resell Dobson analog and digital cellular services and provide limited
wireless local access and Internet services using our own facilities.
Our long-distance services sales efforts are primarily directed toward increasing the number of subscribers we
serve, selling bundled services, and generating incremental revenues through product and feature up-sale
opportunities. We sell our long-distance communications services through telemarketing, direct mail
advertising, door-to-door selling, up-selling by our customer service personnel, and local media advertising.
We expect competition to increase as new technologies, products and services continue to develop. We
cannot predict which of many possible future technologies, products or services will be important to maintain
our competitive position or what expenditures will be required to develop and provide these technologies,
products or services. Our ability to compete successfully will depend on marketing and on our ability to
anticipate and respond to various competitive factors affecting the industry, including new services that may
be introduced, changes in consumer preferences, economic conditions, market and competitor consolidation,
and pricing strategies by competitors. To the extent we do not keep pace with technological advances or fail to
timely respond to changes in competitive factors in our industry and in our markets we could lose market
share or experience a decline in our revenue and net income. Competitive conditions create a risk of market
share loss and the risk that customers shift to less profitable lower margin services. Competitive pressures
also create challenges to our ability to grow new business or introduce new services successfully and execute
on our business plan. Each of our business segments also faces the risk of potential price cuts by our
competitors that could materially adversely affect our long-distance segment market share and results of
operations.
Cable Services
Industry. The programmed video services industry includes traditional broadcast television, cable television,
satellite systems such as DBS, private cable operators, LEC entry, broadband service providers, wireless
cable, open video systems, home video sales and rentals, Internet video, and electric and gas utilities. Cable
television providers have added non-broadcast programming, utilized improved technology to digitize signals
and increase channel capacity, and expanded service markets to include more densely populated areas and
those communities in which off-air reception is not problematic. Broadcast television stations including
network affiliates and independent stations generally serve the urban centers. One or more local television
stations may serve smaller communities. Rural communities may not receive local broadcasting or have cable
systems but may receive direct broadcast programming via a satellite dish. More rural communities are
receiving local and regional station programming as satellite system providers obtain local and regional
programming content.
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During the last 50 years, the cable television industry has experienced extensive growth and transformation.
From initially offering clear reception of broadcast stations, cable has grown into a broadband provider of
video, Internet and voice telephone services, expanding from analog technology to an increasingly digital
platform. The National Cable and Telecommunications Association (“NCTA”) reports that more than 30% of
U.S. cable customers were reported to have subscribed to digital cable television service at the end of 2003.
The 1996 Telecom Act enabled cable television operators to undertake a multiyear upgrade of cable system
infrastructure and lead in the transition from an analog platform to a broadband digital platform. Industry
progress was made in 2003 to further deploy HDTV, video-on-demand, interactive and other new consumer-
driven services that rely on the broadband digital platform.
Cable television operators and programmers began providing HDTV services in 2002. HDTV has been
described by some analysts as the most dramatic change for viewers since the introduction of color television.
Deployment of HDTV service was reported by the NCTA to have increased approximately 90% during the first
11 months of 2003, reaching 70 million households by December 1, 2003 as compared to 37 million at the
end of 2002. In addition, the amount of cable HDTV programming increased steadily, and now comes from a
broader programming services group.
The NCTA reported that in December 2002, the consumer electronics and cable industries reached agreement
on standards for the creation of digital cable ready equipment for the home. The FCC approved those
standards in September 2003 and new sets are becoming available in retail outlets.
The NCTA reported that at December 31, 2003, more than 90% of all cable homes were reported to have been
passed by cable plant with a capacity of at least 550MHz, and approximately 90 million cable homes were
passed by systems with a capacity of 750MHz or higher. The NCTA reported further that more than 95 million
households were reported to have been passed by activated two-way plant at the end of 2003. These
upgrades position cable companies to compete more effectively with their DBS competitors.
The growth of DBS is still, in part, attributable to the authority granted to DBS operators to distribute local
broadcast television stations in their local markets by the Satellite Home Viewer Improvement Act of 1999
(“SHVIA”). Continued DBS subscriber growth is expected as local programming is offered in more markets.
The North American cable TV market was reported by the FCC to have declined in 2003, as former cable
subscribers either switched to satellite services or cancelled their cable service. The FCC reports that since the
introduction of DBS service, its growth rate has exceeded the growth rate of cable service by double digits in
every year except in the year ended June 30, 2003, when DBS growth exceeded cable growth by approximately
9.2%. The NCTA reports that while the number of basic cable TV subscribers decreased approximately 0.2% in
2003, digital cable TV subscriber growth reached 23% during the same period. Analysts believe that cable TV
subscriber growth in the future may result from cable television operators’ ability to attract new subscribers to
their traditional analog video services, and from ongoing deployments of digital video, voice, and data services.
As a converged platform, cable is a viable competitive alternative outside its traditional video space, not only
in the broadband space as a competitor with technology such as DSL, but also in traditional telephony services
as voice becomes another application that is carried on data centric networks.
The most significant convergence of service offerings over cable plant continues to be the pairing of Internet
service with other service offerings. Cable operators continue to build-out the broadband infrastructure that
permits them to offer high-speed Internet access. The most popular way to access the Internet over cable is
still through the use of a cable modem and personal computer. Virtually all of the major multiple system
operators offer Internet access via cable modems in portions of their service areas. Like cable, the DBS
industry is developing ways to bring advanced services to their customers. Many MMDS and private cable
operators also offer Internet access services. In addition, broadband services providers continue to build
advanced systems specifically to offer a bundle of services, including video, voice, and high-speed Internet
access. We currently offer high-speed cable modem access in Anchorage, Bethel, Cordova, Juneau, Eielson Air
Force Base, Elmendorf Air Force Base, Fairbanks, Fort Richardson, Fort Wainwright, Homer, Kenai, Kodiak,
Kotzebue, Nome, North Pole, Palmer, Petersburg, Seward, Sitka, Soldotna, Wasilla, Wrangell, and Valdez.
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The cable industry has expanded its competitive offerings to include business and residential telephone
services delivered over its fiber optic infrastructure. Cable-delivered telephone service is a natural extension
of a network already capable of delivering digital and broadband services and products. Once upgraded to a
two-way capability, a cable system can offer telephone service over the same cable line that already carries
digital video, high speed Internet, and other advanced services to consumers. Cable operators are beginning
to deploy IP telephony in addition to circuit-switched telephony offerings. Circuit-switched service requires
large capital expenditures for switching equipment in addition to facility upgrades. Voice over IP is more
modular and does not require the large upfront cost needed to deploy circuit-switched service. Voice over IP
utilizes the data path already built, and is expected to allow for easy software changes and additions to service
packages including innovative combinations of voice, data, and fax services. The NCTA reports that cable-
delivered residential telephone service subscribers totaled an estimated 2.5 million through September 2003.
With digital transmissions and compression, cable operators are better able to offer a variety and quality of
channels to rival DBS, with pay-per-view choices that can approximate video-on-demand. In 2000 we installed
a commercial version of video-on-demand for the Anchorage hotel market and continue to evaluate the
feasibility of deploying this technology in the residential market. With this service, customers can access a
wide selection of movies and other programming at any time, with digital picture quality.
Kagan World Media reported that estimated 2003 total cable industry revenue reached $51.3 billion, an
estimated 3.8% increase over 2002. Operators face constant pressure to keep rate increases at a minimum.
According to the FCC, the average monthly rate for cable services rose 8.2% over the 12-month period ending
July 1, 2002. Over the past several years, the FCC reports that operators have averaged annual rate increases
in the 5% range. While many public-interest groups and press reports note that cable rates have increased at
factors in excess of the general rate of inflation, cable rates are reported to have lagged national inflation on a
per channel basis.
The FCC reports that cable operators attributed rate increases to increased programming costs, an increase in
the number of video and non-video services offered, system upgrades, and general inflationary pressures. The
escalation of programming costs continues to adversely impact the economics of cable operators.
Programming costs are reported to be the largest cost item for major system operators, and the fastest
growing operating cost item for most. The NCTA reported that, on the basis of financial data supplied to them
by nine cable operators, they found that these operators’ yearly programming expenses, on a per-subscriber
basis, increased from $122 in 1999 to $180 in 2002 — a 48 percent increase.
The FCC reports that 63.7% of homes passed by cable television facilities were subscribers to cable television
services at June 30, 2003. Our overall average penetration of homes passed was 66.4% at December 31,
2003 with individual systems ranging from 51.2% to 85.8%.
In Alaska, cable television was introduced in the 1970s to provide television signals to communities with few
or no available off-air television signals and to communities with poor reception or other reception difficulties
caused by terrain interference. Since that time, as on the national level, the cable television providers in
Alaska have added non-broadcast programming, and DBS providers have added local broadcast programming.
The market for programmed video services in Alaska includes traditional broadcast television, cable television,
wireless cable, and DBS systems. Broadcast television stations including network affiliates and independent
stations serve the urban centers in Alaska. Eight, six and five broadcast stations serve Anchorage, Fairbanks
and Juneau, respectively. In addition, several smaller communities such as Bethel are served by one local
television station that is typically a PBS affiliate. Other rural communities without cable systems receive a
single state sponsored channel of television by a satellite dish and a low power transmitter.
Advancements in technology, facility upgrades and plant expansions to enable the ongoing migration to digital
programming are expected to continue to have a significant impact on cable services in the future. We expect
that changing federal, state and local regulations, intense competition, and developing technologies and
standards will continue to challenge the industry.
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See “Part I — Item I — Business, Regulation, Franchise Authorizations and Tariffs — Cable Services” for more
information.
General. We are the largest operator of cable systems in Alaska, serving approximately 134,400 residential,
commercial and government basic subscribers at December 31, 2003. Our cable television systems serve 35
communities and areas in Alaska, including the state's four largest urban areas, Anchorage, Fairbanks, the
Matanuska-Susitna Valley and Juneau. Our statewide cable systems consist of approximately 2,300 miles of
installed cable plant having 330 to 625 MHz of channel capacity.
Products. Programming services offered to our cable television systems subscribers differ by system (all
information as of December 31, 2003).
Anchorage and Mat-Su Valley system. The Anchorage and Mat-Su Valley system, which is located in the
urban center for Alaska, is fully addressable and offers a basic analog service that includes approximately
18 channels and 2 additional analog tiers offering 39 and 4 channels. This system also carries digital
service, offering enhanced picture and audio quality, over 25 digital special interest channels, 45 channels
of digital music, 2 channels of HDTV, digital video recorders (beginning in 2004), and over 60 channels of
premium and pay-per-view products. Premium services are available either individually or as part of a
value package. Commercial subscribers such as hospitals, hotels and motels are charged negotiated
monthly service fees. Apartment and other multi-unit dwelling complexes can receive basic service at a
negotiated bulk rate with the opportunity for additional services on a tenant pay basis.
Fairbanks, Juneau, Kenai, Soldotna, and Ketchikan systems. These systems offer a basic analog service
with 12 to 18 channels and an additional analog tier with 34 to 42 channels. These systems also carry
digital service, over 17 special interest channels, 45 channels of digital music, and over 50 channels of
premium and pay-per-view products.
Sitka System. This location offers an advanced analog service with a 15 channel basic service, a 37
channel expanded basic service, five channels of premium service, four channels of pay-per-view and 31
music channels.
Other systems. We own systems in the Alaska communities and areas of Bethel, Cordova, Homer, Kodiak,
Kotzebue, Nome, Petersburg, Seward, Valdez, and Wrangell. These analog systems offer a basic service
with 10 to 15 channels and an expanded basic service with 27 to 42 channels. Several channels of
premium service are also available in all systems. Music service is available in Kodiak, Petersburg, Valdez
and Wrangell. Pay-per-view is available in Homer, Kodiak, Kotzebue, Nome, Petersburg, Seward and
Wrangell.
Facilities. Our cable television businesses are located in Anchorage, Bethel, Chugiak, Cordova, Douglas, Eagle
River, Eielson AFB, Elmendorf AFB, Fairbanks, Fort Greely, Fort Richardson, Fort Wainwright, Homer, Juneau,
Kachemak, Kenai, Ketchikan, Kodiak, Kodiak Coast Guard Air Station, Kotzebue, Mount Edgecombe, Nome,
North Pole, Palmer, Petersburg, Peters Creek, Prudhoe Bay, Saxman, Seward, Sitka, Soldotna, Valdez, Ward
Cove, Wasilla, and Wrangell, Alaska. Our facilities include cable plant and head-end distribution equipment.
Certain of our head-end distribution centers are co-located with customer service, sales and administrative
offices.
Customers. Our cable systems passed approximately 202,200, 196,900 and 192,200 homes at December
31, 2003, 2002 and 2001, respectively, and served approximately 134,400, 136,100 and 132,000 basic
subscribers at December 31, 2003, 2002 and 2001, respectively. Revenues derived from cable television
services totaled $96.0 million, $88.7 million and $76.6 million in 2003, 2002 and 2001, respectively.
Competition. The 1996 Telecom Act removed barriers to telephone company or LEC entry into the video
marketplace to facilitate competition between incumbent cable operators and telephone companies. At the
time of the 1996 Telecom Act, it was expected that LECs would compete in the video delivery market and that
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cable operators would provide local telephone exchange service. The FCC reports that the four largest ILECs
have largely exited the video business. A few smaller LECs continue to offer, or are preparing to offer, multi-
channel video programming distribution.
We believe our greatest source of competition comes from the DBS industry. Two major companies, DirecTV
and Echostar are currently offering nationwide high-power DBS services. Due to the existing structure of
satellite orbital slots, satellite transmission power and lack of local signals, competition from DBS providers
has been limited.
In the past, the majority of Alaska DBS subscribers were required to install larger satellite dishes (generally
three to six feet in diameter) because of the weaker satellite signals currently available in northern latitudes,
particularly in communities surrounding, and north of, Fairbanks. In addition, the satellites had a relatively low
altitude above the horizon when viewed from Alaska, making their signals subject to interference from
mountains, buildings and other structures. Recent satellite placements provide Alaska and Hawaii residents
with a DBS package that requires a smaller satellite dish (typically 18 inches); however, a second larger dish is
required if the subscriber wants to receive a channel line-up similar to that provided by our cable systems. In
addition to the dish size and cost deterrents, DBS signals are subject to degradation from atmospheric
conditions such as rain and snow.
We expect the potential launch of new satellites, the addition of local stations in 2003, and the changing
nature of technology and of the DBS business will result in greater satellite coverage and competition in
Alaska.
Our cable television systems face competition from alternative methods of receiving and distributing television
signals, including digital video service over telephone lines, wireless and SMATV systems, and from other
sources of news, information and entertainment such as off-air television broadcast programming,
newspapers, movie theaters, live sporting events, interactive computer services, Internet services and home
video products, including videotape cassette and video disks. Our cable television systems also face
competition from potential overbuilds of our existing cable systems by other cable television operators.
Several ILECs in the Lower 48 and the largest ILEC in Alaska have announced marketing arrangements to
provide DBS services along with local telephone and other services. Similar arrangements could be extended
to other ILECs in the markets we serve in Alaska. In August 2003 DBS service provider EchoStar launched
Anchorage local network programming for an additional fee. We will continue to strive to compete effectively
by providing, at reasonable prices, a greater variety of communication services than are available off-air or
through other alternative delivery sources. Additionally, we believe we offer superior technical performance
and responsive community-based customer service.
In November 2003, the ILEC in the Mat-Su Valley launched digital video service over telephone lines in limited
areas. Their product offerings and price points are similar to our product offerings.
Competitive forces will be counteracted by offering expanded programming through digital services and by
providing high-speed data services. By June 30, 2003, system upgrades were completed to make our systems
reverse activated, thus creating the necessary infrastructure to offer cable modem service to greater than 99%
of our homes passed. Over the succeeding two years, we expect to establish a digital platform in the majority
of our systems. These plant upgrades combined with local broadcast programming are expected to provide an
attractive product in comparison to competitive offerings. In 2002, seven-year retransmission agreements
were signed with Anchorage broadcasters. These agreements provide for the uplink/downlink of their signals
into all our systems, assuring local programming is available for the foreseeable future.
High-speed data access competition takes two primary forms: cable modem access service and DSL service.
DSL service allows Internet access to subscribers at data transmission speeds similar to cable modems over
traditional telephone lines. Numerous companies, including telephone companies, have introduced DSL
service and certain telephone companies are seeking to provide high-speed broadband services, including
interactive online services, without regard to present service boundaries and other regulatory restrictions.
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Companies in the Lower 49 States, including telephone companies and ISPs, have asked local, state and
federal governments to mandate that cable communications systems operators provide capacity on their
cable infrastructure so that these companies and others may deliver Internet services directly to customers
over cable facilities. The FCC determined in March 2002 that cable system operators will not be required to
provide such “open access” to others. See “Part I — Item 1 — Business, Regulation, Franchise Authorizations
and Tariffs — Cable Services” for more information.
Other new technologies may become competitive with non-entertainment services that cable television
systems can offer. The FCC has authorized television broadcast stations to transmit textual and graphic
information useful to both consumers and businesses. The FCC also permits commercial and non-commercial
FM stations to use their subcarrier frequencies to provide non-broadcast services including data
transmissions. The FCC established an over-the-air interactive video and data service that will permit two-way
interaction with commercial and educational programming along with informational and data services. LECs
and other common carriers also provide facilities for the transmission and distribution to homes and
businesses of interactive computer-based services, including the Internet, as well as data and other non-video
services. The FCC has conducted spectrum auctions for licenses to provide PCS, as well as other services. PCS
and other services will enable license holders, including cable operators, to provide voice and data services.
We own a statewide license to provide PCS in Alaska.
Cable television systems generally operate pursuant to franchises granted on a non-exclusive basis. The 1992
Cable Act gives local franchising authorities jurisdiction over basic cable service rates and equipment in the
absence of “effective competition,” prohibits franchising authorities from unreasonably denying requests for
additional franchises and permits franchising authorities to operate cable systems. Well-financed businesses
from outside the cable industry (such as the public utilities that own certain of the poles on which cable is
attached) may become competitors for franchises or providers of competing services.
Our cable services sales efforts are primarily directed toward increasing the number of subscribers we serve,
selling bundled services, and generating incremental revenues through product and feature up-sale
opportunities. We sell our cable services through telemarketing, direct mail advertising, door-to-door selling,
up-selling by our customer service personnel, and local media advertising.
Advances in communications technology as well as changes in the marketplace are constantly occurring. We
cannot predict the effect that ongoing or future developments might have on the communications and cable
television industries or on us specifically.
Local Access Services
Industry. The FCC reported that end-user customers obtained local service at June 30, 2003 by means of 156
million ILEC switched access lines, 27 million CLEC switched access lines, and 148 million mobile wireless
telephone service subscriptions.
The FCC reported that total CLEC end-user switched access lines increased by 9% during the first half of 2003,
from 25 million to 27 million lines. By comparison, total CLEC lines increased by 14% during the preceding six
months, from 22 to 25 million lines. For the full twelve month period ending June 30, 2003, CLEC end-user
lines increased by 24%. Approximately 15% of the 183 million total end-user switched access lines were
reported by CLECs, compared to 11% a year earlier.
The FCC further reported that approximately 62% of reported CLEC switched access lines serve residential and
small business customers, compared to approximately 78% of ILEC lines. CLECs reported 12% of total
residential and small business switched access lines, compared to 8% a year earlier.
The FCC reported that CLECs reported providing about 18% (a decline from 43% in December 1999) of their
switched access lines by reselling the services of other carriers, about 58% (an increase from 24% in
December 1999) by means of UNE loops leased from other carriers, and about 23% of switched access lines
over their own local loop facilities.
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The FCC reports that since December 1999, the percentage of nationwide CLEC switched access lines
reported to be provisioned by reselling services has declined steadily, to 18% at the end of June 2003, and the
percentage provisioned over UNE loops has grown steadily, to 58% at June 30, 2003. The FCC reported that
ILECs provided about 2.2 million switched access lines to unaffiliated carriers on a resale basis at the end of
June 2003, down from 2.7 million six months earlier. The FCC reported that ILECS provided 17.2 million
unbundled loops (with or without unbundled switching) to unaffiliated carriers at June 30, 2003, up from 14.5
million six months earlier.
UNE loops provided with ILEC switching (UNE-Platform) have increased faster than UNE loops provided without
switching. The FCC reported that ILECs provided approximately 27% more UNE loops with switching to
unaffiliated carriers at the end of June 2003 than they reported six months earlier (13.0 million compared to
10.2 million) and about 1% fewer UNE loops without switching (about 4.2 million compared to 4.3 million).
The FCC reports that during the first half of 2003, cable-telephony lines increased by 1% to 3 million lines,
which constituted approximately 11% of switched access lines provided by CLECs and approximately 2% of
total switched access lines. Cable telephony deployments in the U. S. continue to expand using proprietary,
circuit switched technology. More hardware has become available that is DOCSIS 1.1 qualified, which provides
quality of service necessary for voice services. Cable telephony services continue to expand as cable
television operators expand their video, data, and voice service offerings. Industry analysts estimate that
worldwide cable telephony subscribers reached 10 million in 2003 and are forecast to rise to over 19 million
in 2007, with revenues estimated at $4 billion in 2003 and to rise to over $6 billion in 2007. A significant
driver for cable telephony is the bundling of telephony services with existing digital video and high speed data
services. We expect to begin deploying a cable telephony solution in the second quarter of 2004 that meets
our needs and the needs of our customers.
The communications industry has been weighed down by regulatory uncertainty as a result of successive court
reversals of the FCC’s core local competition rules. These court actions have left providers with little guidance
about the network elements that will be available at regulated cost-based rates and have put at risk current
plans of some businesses that were developed based on the challenged rules.
See “Part I — Item I — Business, Regulation, Franchise Authorizations and Tariffs — Local Access Services” for
more information.
General. Our local exchange and exchange access services (“local access services”) segment entered the
local services market in Anchorage in 1997, providing services to residential, commercial, and government
users. At December 31, 2003 we could access approximately 92%, 71%, and 48% of Anchorage, Fairbanks,
and Juneau area local loops, respectively, from our collocated remote facilities and DLC installations.
Products. Our collocated remote facilities access the ILEC’s unbundled network element loops, allowing us to
offer full featured, switched-based local service products to both residential and commercial customers, and
provide Private Line service products to commercial customers. In areas where we do not have access to ILEC
loop facilities, we offer service using total service resale of the ILEC’s local service in Anchorage, and either
total service resale or UNE platform in Fairbanks and Juneau.
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) 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) Intercom service forwarding
(cid:130) Per line blocking
(cid:130) Selective call acceptance
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(cid:130) Selective call rejection
(cid:130) Speed calling
(cid:130) Voice mail
(cid:130) Non-listed number
(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 5ESS host switching system, have collocated six
remote facilities adjacent to or within the ILEC’s local switching offices to access unbundled loop network
elements, and have installed a DLC system adjacent to a smaller, seventh ILEC wire center for access to
unbundled loop network elements. Remote and DLC facilities are interconnected to the host switch via our
diversely routed fiber optic links. Additionally, we provided our own facilities-based services to many of
Anchorage’s larger business customers through further expansion and deployment of SONET fiber
transmission facilities, DLC facilities, and leased HDSL and T-1 facilities.
In Fairbanks and Juneau we employ Lucent Distinctive Remote Module switching systems (5ESS) and have
collocated DLC systems adjacent to the ILEC’s local switching office and within the ILEC’s wire center to
access unbundled loop network elements.
Customers. We had approximately 106,100, 96,100 and 79,200 local lines in service from Anchorage,
Fairbanks, and Juneau, Alaska subscribers at December 31, 2003, 2002 and 2001, respectively. We began
providing local access services in Fairbanks in 2001 and in Juneau in 2002. The 2003 line count consists of
approximately 61,900 residential access lines and 36,900 business access lines, including 7,300 Internet
service provider access lines. We ended 2003 with market share gains in substantially all market segments.
Revenues derived from local access services in 2003, 2002 and 2001 totaled $39.0 million, $32.1 million
and $25.2 million, respectively, representing approximately 10.0%, 8.7% and 7.1% of our total revenues in
2003, 2002 and 2001, respectively.
Competition. In the local access services market the 1996 Telecom Act, judicial decisions, and state
legislative and regulatory developments have increased the likelihood that barriers to local telephone
competition will be reduced or removed. These initiatives include requirements that ILECs negotiate with
entities, including us, to provide interconnection to the existing local telephone network, to allow the purchase,
at cost-based rates, of access to unbundled network elements, to establish dialing parity, to obtain access to
rights-of-way and to resell services offered by the ILEC.
The 1996 Telecom Act also provides ILECs with new competitive opportunities. We believe that we have
certain advantages over these companies in providing communications services, including awareness by
Alaskan customers of the GCI brand-name, our facilities-based communications network, and our prior
experience in, and knowledge of, the Alaskan market.
Data obtained from the RCA indicates that there are 23 ILECs and six CLECs certified to operate in the State of
Alaska. We compete against ACS, the ILEC in Anchorage, Juneau and Fairbanks, and with AT&T Corp. in the
Anchorage service area. AT&T Corp. offers local exchange service only to residential customers through total
service resale. We also compete in the business market against TelAlaska Long Distance, Inc. (“TelAlaska”) in
the Anchorage service area.
ACS, through subsidiary companies, provides local telephone services in Fairbanks and Juneau, Alaska. These
ACS subsidiaries are classified as Rural Telephone Companies under the 1996 Telecom Act, which entitles
them to an exemption of certain material interconnection terms of the 1996 Telecom Act, until and unless
such “rural exemption” is examined and discontinued by the RCA. On October 11, 1999, the RCA issued an
order terminating rural exemptions for the ACS subsidiaries operating in the Fairbanks and Juneau markets so
that we could compete with these companies in the provision of local telephone service pursuant to the terms
of Section 251(c) of the 1996 Telecom Act. These rural exemptions limited the obligation of the ILECs in these
markets to provide us access to UNEs at rates under the pricing standard established by the FCC.
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Upon appeal by ACS, on December 12, 2003, the Alaska Supreme Court issued a decision in which it reversed
the RCA's rural exemption decision on the procedural ground that the competitor, not the incumbent, must
shoulder the burden of proof. The Court remanded the matter to the RCA for reconsideration with the burden
of proof assigned to us. Additionally, the Court left it to the RCA to decide as a matter of discretion whether to
change the state of competition during the remand period. In accordance with the Court's ruling, the RCA has
re-opened the rural exemption dockets and scheduled a hearing to commence on April 19, 2004. Additionally,
the RCA issued a ruling on January 16, 2004, in which the Commission determined that we can continue to
rely on UNEs from ACS to serve our existing customers in Juneau and Fairbanks but that we may not serve new
customers through purchase of UNEs pending the completion of the remand proceeding. Until this matter is
resolved, we may serve new customers using wholesale resale. The outcome of this proceeding could result in
a change in our cost of serving these markets via the facilities of ACS or via wholesale offerings and could
adversely impact our ability to offer local telephone service in these markets. We believe it is unlikely that the
rural exemptions will be restored in these markets; however, if they are restored, we could be forced to
discontinue providing service to residential customers and perhaps to commercial customers in these
locations.
We expect further competition in the marketplaces we serve as other companies may receive certifications.
The Company expects competition in business customer telephone access, Internet access, DSL and Private
Line markets.
We continue to offer local exchange services to substantially all consumers in the Anchorage, Juneau and
Fairbanks service areas, primarily through our own facilities and unbundled local loops leased from ACS.
Our local services sales efforts continue to focus on increasing the number of subscribers we serve, selling
bundled services, and generating incremental revenues through product and feature up-sale opportunities.
We sell our local services through telemarketing, direct mail advertising, up selling by our customer service
personnel, and door-to-door selling.
You should see “Part I — Item 1 — Business, Regulation, Franchise Authorizations and Tariffs —
Communications Operations” for more information.
Internet Services
Industry. The Internet continues to expand at a significant rate. The Internet Systems Consortium reports that
approximately 233 million web sites were hosted at the end of January 2004, an increase of 35% from 172
million at the end of January 2003. The FCC reports that the percent of U. S. households with a computer
grew from 39% in 1997 to 56% in 2001, and that the percent of households with Internet access increased
from 19% to 50% during the same period.
Dial-up Internet service continues to be the most widely used method to access the Internet. As of year-end
2003, an estimated 57% of U. S. Internet connected households were reported by Nielsen//NetRatings to
access the Internet using dial-up modems. Growth in the proportion of households accessing the Internet with
broadband connections has accelerated and is expected to exceed dial-up modem access within several
years. We believe high-speed Internet access will likely become the dominant access method for residential
Internet users as broadband becomes more widely available, more flexibly priced, and as new kinds of
entertainment, content and services emerge. Jupiter Research estimate that 50% of all United States Internet
homes are forecast to use broadband connections by 2008.
The FCC reported that high-speed lines (those that provide services at speeds exceeding 200 kbps in at least
one direction) connecting homes and businesses to the Internet increased by 23% during the second half of
2002, from 16.2 million to 19.9 million lines, compared to a 27% increase, from 12.8 million to 16.2 million
lines, during the first half of 2002. Approximately 17.4 million of the 19.9 million total lines served residential
and small business subscribers, a 24% increase from the 14.0 million lines reported six months earlier.
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The FCC further reported that of the 19.9 million high-speed lines, 13.0 million provided advanced services,
i.e., services at speeds exceeding 200 kbps in both directions. Advanced services lines increased 24% from
10.4 million lines to 13.0 million lines during the second half of 2002. Advanced services lines increased 41%
from 7.4 million to 10.4 million lines during the first half of 2002. Approximately 10.8 million of the 13.0
million advanced services lines served residential and small business subscribers.
Cable modem Internet access continues to be the primary means of accessing the Internet in the United
States over broadband networks. Industry analysts believe that a cable network upgrade is more efficient
than is a DSL network upgrade, largely because of the individual local loops that must be provisioned for DSL,
with central office proximity a severe mitigating factor. In contrast, cable networks are upgraded into smaller
discrete nodes. Less costly and more efficient upgrades required for cable modem usage lead to greater
scalability. Analysts believe that cable operators have more incentive to upgrade networks and have
potentially higher returns due to the potential for new sources of revenue from digital cable, telephony and
other products that are made possible from such upgrades.
DSL is the most significant broadband competitor to cable modem service, with an estimated 7 million United
States subscribers through June 2003 according to FCC reports. Despite intense competition from DSL
service providers, cable’s offering of high-speed Internet access was reported by the FCC to have experienced
customer growth of almost 19% during the first six months of 2003. The FCC reports that United States cable
modem subscribers totaled an estimated 13.8 million through June 2003 as compared to 3.7 million in 2000.
The FCC reported that high-speed asymmetric DSL lines in service increased by 19% during the first half of
2003, from 6.5 million to 7.7 million lines, compared to a 27% increase, from nearly 5.1 million to 6.5 million
lines, during the preceding six months.
Satellite technologies currently have less than one percent of the market and are not expected to appreciably
increase market share over the next several years.
Industry analysts believe that broadband deployment will continue to bring valuable new services to
consumers and advance many other objectives, such as improving education advancing economic
opportunities. With an estimated 73 million cable households in the United States and an estimated 57
million households owning a computer, broadband cable Internet access growth is expected to continue as
new advanced services are deployed.
As state and local governments attempt to increase funding sources for their programs, taxes on Internet
access continue to be debated and proposed. The Internet Tax Freedom Act was enacted in 1998 but expired
in October 2001. A similar bill extended the moratorium until November 2003. A new bill (H.R. 49) is under
review by the House of Representatives to permanently extend the tax moratorium. A similar bill (S. 52) is
under review by the Senate Committee on Commerce, Science, and Transportation. The bills would make
permanent the moratorium on taxes on Internet access, regardless of the speed of that access, and on
multiple or discriminatory taxes on electronic commerce. Analysts believe that keeping the Internet free of
such taxes will create an environment for innovation and will ensure that electronic commerce will remain a
vital and growing part of the economy of the United States.
See “Part I — Item I — Business, Regulation, Franchise Authorizations and Tariffs — Internet Services” for more
information.
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
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also offers free data transfer up to one gigabyte per month at a rate of 64 Kbps and can be connected 24-
hours-a-day, 365-days-a-year, allowing for real-time information and e-mail access. This product acts as a
dialup replacement and upgrade since it is always connected and provides more efficient data transfer. Cable
modems use our coaxial cable plant that provides cable television service, instead of the traditional ILEC
copper wire. Coaxial cable has a much greater carrying capacity than telephone wire and can be used to
simultaneously deliver both cable television (analog or digital) and Internet access services.
At the end of 2003 we launched a plan to increase the speed of our entry level broadband cable modem level
service from 384 kbps to 512 kbps for new and current customers. The project was completed in January
2004. We also adjusted the speed including data transfer for all of our cable modem packages to meet the
demand for higher speed access. Additional cable modem service packages tailored to both heavy residential
and commercial Internet users are also available.
We currently offer several Internet service packages for commercial use: dial-up access, DSL, T-1 and
fractional T-1 leased line, frame relay, multi-megabit and high-speed cable modem Internet access. Our
business high-speed cable modem Internet service offers access speeds ranging from 512 kbps to 2.4 Mbps,
free monthly data transfers of up to 30 gigabytes and free 24-hour customer service and technical support.
Our DSL offering can support speeds of up to 768 kbps over the same copper line used for phone service.
Business services also include a personalized web page, domain name services, and e-mail addressing.
We also provide dedicated access Internet service to commercial and public organizations in Alaska. We offer
a premium service and currently support many of the largest organizations in the state such as Conoco Phillips
Alaska, the State of Alaska and the Anchorage School District. We have hundreds of other enterprise
customers, both large and small, using this service.
Bandwidth is made available to our Internet segment through our AULP undersea fiber cable system and our
Galaxy XR transponders. Our Internet offerings are coupled with our long-distance, cable television, and local
services offerings and provide free basic Internet services (both dialup and cable modem access) if certain
plans are selected. Value-added Internet features are available for additional charges.
We provide Internet access for schools and health organizations using a platform including many of the latest
advancements in technology. Services are delivered through a locally available circuit, our existing lines,
and/or satellite earth stations.
Facilities. The Internet is an interconnected global public computer network of tens of thousands of packet-
switched networks using the Internet protocol. The Internet is effectively a network of networks routing data
throughout the world. We provide access to the Internet using a platform that includes many of the latest
advancements in technology. The physical platform is concentrated in Anchorage and is extended into many
remote areas of the state. Our Internet platform includes the following:
(cid:130) Our Anchorage facilities are connected to multiple Internet access points in Seattle through
multiple, diversely routed networks.
(cid:130) We use 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.
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(cid:130) SchoolAccess™ Internet service delivery to over 210 schools in rural Alaska and 30 schools in
Montana, New Mexico and Arizona is accomplished by three variations on primary delivery
systems:
(cid:130)
In communities where we have terrestrial interconnects or provide existing service over
regional earth stations, we have configured intermediate distribution facilities. Schools
that are within these service boundaries are connected locally to one of those facilities.
In communities where we have extended communications services via our DAMA earth
station program, SchoolAccessTM 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 communications services,
SchoolAccessTM is provided via a dedicated (usually on premise) DAMA VSAT satellite
station. The DAMA connects to an intermediate distribution facility located in Anchorage.
(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 communications are maintained with all of the routers in
the network. The availability and quality of service, as well as statistical information on traffic loading, are
continuously monitored for quality assurance. The management platform has the capability to remotely access
routers, permitting changes in router configuration without the need to physically be at the service point. This
management platform allows us to offer outsourced network monitoring and management services to
commercial businesses. Many of the largest commercial networks in the State of Alaska use this service,
including the state government.
GCI.net offers a unique combination of innovative network design and aggressive performance management.
Our Internet platform has received a certification that places it in the top one percent of all service providers
worldwide and is the only ISP in Alaska with such a designation. We operate and maintain what we believe is
the largest, most reliable, and highest performance Internet network in the State of Alaska.
Customers. We had approximately 95,700, 89,500 and 72,700 total active residential and commercial
Internet subscribers at December 31, 2003, 2002 and 2001, respectively. Included in these totals were
approximately 46,000, 36,200 and 26,500 active residential and commercial cable modem Internet
subscribers at December 31, 2003, 2002 and 2001, respectively. Revenues derived from Internet services
totaled $19.8 million, $15.6 million and $12.0 million, in 2003, 2002 and 2001, respectively, representing
approximately 5.1%, 4.2% and 3.4% of our total revenues in 2003, 2002 and 2001, respectively.
Our Internet services sales efforts are primarily directed toward increasing the number of subscribers we
serve, selling bundled services, and generating incremental revenues through product and feature upsale
opportunities. We sell our Internet services through telemarketing, direct mail advertising, door-to-door selling,
up selling by our customer service and technical support personnel, and local media advertising.
Competition. The Internet industry is highly competitive, rapidly evolving and subject to constant
technological change. Competition is based upon price and pricing plans, service packages, the types of
services offered, the technologies used, customer service, billing services, perceived quality, reliability and
availability. As of December 31, 2003, we competed with more than seven Alaska based Internet providers,
and competed with other domestic, non-Alaska based providers that provide national service coverage.
Several of the providers have substantially greater financial, technical and marketing resources than we do.
ACS and other Alaska telephone service providers are providing competitive high-speed DSL services over their
telephone lines in direct competition with our high-speed cable modem service. DBS providers and others
provide wireless high speed Internet service in competition with our high-speed cable modem services.
Competitive local fixed wireless providers are providing service in certain of our markets.
Niche providers in the industry, both local and national, compete with certain of our Internet service products,
such as web hosting, list services and email.
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Marketing and Sales
Our marketing and sales strategy hinges on our ability to leverage (i) our unique position as an integrated
provider of multiple communications, Internet and cable services, (ii) our well-recognized and respected brand
name in the Alaskan marketplace and (iii) our leading market positions in long-distance, Internet and cable
television services. By continuing to pursue a marketing strategy that takes advantage of these characteristics,
we believe we can increase our residential and commercial customer market penetration and retention rates,
increase our share of our customers' aggregate voice, video and data services expenditures and achieve
continued growth in revenues and operating cash flow.
Environmental Regulations
We may undertake activities that, under certain circumstances may affect the environment. Accordingly, they
are subject to federal, state, and local regulations designed to preserve or protect the environment. The FCC,
the Bureau of Land Management, the United States Forest Service, and the National Park Service are required
by the National Environmental Policy Act of 1969 to consider the environmental impact before the
commencement of facility construction.
We believe that compliance with such regulations has no material effect on our consolidated operations. The
principal effect of our facilities on the environment would be in the form of construction of facilities and
networks at various locations in Alaska and between Alaska, Seattle, Washington, and Warrenton, Oregon. Our
facilities have been constructed in accordance with federal, state and local building codes and zoning
regulations whenever and wherever applicable. Some facilities may be on lands that may be subject to state
and federal wetland regulation.
Uncertainty as to the applicability of environmental regulations is caused in major part by the federal
government's decision to consider a change in the definition of wetlands. Most of our facilities are on leased
property, and, with respect to all of these facilities, we are unaware of any violations of lease terms or federal,
state or local regulations pertaining to preservation or protection of the environment.
Our Alaska United projects consist, in part, of deploying land-based and undersea fiber optic cable facilities
between Anchorage, Juneau, Seward, Valdez, and Whittier, Alaska, Seattle, Washington, and Warrenton,
Oregon. The engineered routes pass over wetlands and other environmentally sensitive areas. We believe our
construction methods used for buried cable have a minimal impact on the environment. The agencies, among
others, that are involved in permitting and oversight of our cable deployment efforts are the United States
Army Corps of Engineers, The National Marine Fisheries Service, United States Fish & Wildlife, United States
Coast Guard, National Oceanic and Atmospheric Administration, Alaska Department of Natural Resources, and
the Alaska Office of the Governor-Governmental Coordination. We are unaware of any violations of federal,
state or local regulations or permits pertaining to preservation or protection of the environment.
In the course of operating the cable television and communications systems, we have used various materials
defined as hazardous by applicable governmental regulations. These materials have been used for insect
repellent, locate paint and pole treatment, and as heating fuel, transformer oil, cable cleaner, batteries, diesel
fuel, and in various other ways in the operation of those systems. We do not believe that these materials,
when used in accordance with manufacturer instructions, pose an unreasonable hazard to those who use
them or to the environment.
Patents, Trademarks and Licenses
We do not hold patents, franchises or concessions for communications services or local access services. We
do hold registered service marks for the DigistarTM logo and letters GCITM, and for the term SchoolAccessTM.
The Communications Act of 1934 gives the FCC the authority to license and regulate the use of the
electromagnetic spectrum for radio communications. We hold licenses through our long-distance services
industry segment for our satellite and microwave transmission facilities for provision of long-distance services.
41
We acquired a license for use of a 30-MHz block of spectrum for providing PCS services in Alaska. We are
required by the FCC to provide adequate broadband PCS service to at least two-thirds of the population in our
licensed areas within 10 years of being licensed. The PCS license has an initial duration of 10 years. At the
end of the license period, a renewal application must be filed. We believe renewal will generally be granted on
a routine basis upon showing of compliance with FCC regulations and continuing service to the public.
Licenses may be revoked and license renewal applications may be denied for cause. We expect to renew the
PCS license for an additional 10-year term under FCC rules.
We acquired a LMDS license in 1998 for use of a 150-MHz block of spectrum in the 28 GHz Ka-band for
providing wireless services. The LMDS license has an initial duration of 10 years. Within 10 years, licensees
will be required to provide “substantial service” in their service regions. Our operations may require additional
licenses in the future.
Earth stations are licensed generally for 15 years. The FCC also issues a single blanket license for a large
number of technically identical earth stations (e.g., VSATs).
Regulation, Franchise Authorizations and Tariffs
The following summary of regulatory developments and legislation does not purport to describe all present and
proposed federal, state, and local regulation and legislation affecting our businesses. Other existing federal
and state regulations are currently the subject of judicial proceedings, legislative hearings and administrative
proposals that could change, in varying degrees, the manner in which these industries operate. We cannot
predict at this time the outcome of these proceedings and legislation, their impact on the industries in which
we operate, or their impact on us.
Communications Operations
General. We are subject to regulation by the FCC and by the RCA as a non-dominant provider of long-distance
services. We file tariffs with the FCC for interstate access and operator services, and limited international long-
distance services, subject to the FCC's mandatory detariffing policies, and with the RCA for intrastate service.
Such tariffs routinely become effective without intervention by the FCC, RCA or other third parties since we are
a non-dominant carrier. Military franchise requirements also affect our ability to provide communications and
cable television services to military bases.
The 1996 Telecom Act preempts state statutes and regulations that restrict the provision of competitive local
communications services. State commissions can, however, impose reasonable terms and conditions upon
the provision of communications services within their respective states. Because we are authorized to offer
local access services, we are regulated as a CLEC by the RCA. In addition, we are subject to other regulatory
requirements, including certain requirements imposed by the 1996 Telecom Act on all LECs, which
requirements include permitting resale of LEC services, local number portability, dialing parity, and reciprocal
compensation.
As a PCS and LMDS licensee, we are subject to regulation by the FCC, and must comply with certain build-out
and other conditions of the license, as well as with the FCC's regulations governing the PCS and LMDS services
(described above). On a more limited basis, we may be subject to certain regulatory oversight by the RCA (e.g.,
in the areas of consumer protection), although states are not permitted to regulate the rates or entry of PCS,
LMDS and other commercial wireless service providers. PCS and LMDS licensees may also be subject to
regulatory requirements of local jurisdictions pertaining to, among other things, the location of tower facilities.
Rural Exemption. ACS, through subsidiary companies, provides local telephone services in Fairbanks and
Juneau, Alaska. These ACS subsidiaries are classified as Rural Telephone Companies under the 1996 Telecom
Act, which entitles them to an exemption of certain material interconnection terms of the 1996 Telecom Act,
until and unless such “rural exemption” is examined and discontinued by the RCA. On October 11, 1999, the
RCA issued an order terminating rural exemptions for the ACS subsidiaries operating in the Fairbanks and
Juneau markets so that we could compete with these companies in the provision of local telephone service
42
pursuant to the terms of Section 251(c) of the 1996 Telecom Act. These rural exemptions limited the
obligation of the ILECs in these markets to provide us with access to unbundled network elements at rates
under the pricing standard established by the FCC. Upon appeal by ACS, on December 12, 2003, the Alaska
Supreme Court issued a decision in which it reversed the RCA's rural exemption decision on the procedural
ground that the competitor, not the incumbent, must shoulder the burden of proof. The Court remanded the
matter to the RCA for reconsideration with the burden of proof assigned to us. Additionally, the Court left it to
the RCA to decide as a matter of discretion whether to change the state of competition during the remand
period. In accordance with the Court's ruling, the RCA has re-opened the rural exemption dockets and
scheduled a hearing to commence on April 19, 2004. Additionally, the RCA issued a ruling on January 16,
2004, in which the Commission determined that we can continue to rely on unbundled network elements from
ACS to serve our existing customers in Juneau and Fairbanks but that we may not serve new customers
through purchase of unbundled network elements pending the completion of the remand proceeding. Until
this matter is resolved, we may serve new customers using wholesale resale. The outcome of this proceeding
could result in a change in our cost of serving these markets via the facilities of the ILEC or via wholesale
offerings and could adversely impact our ability to offer local telephone service in these markets. We believe it
is unlikely that the rural exemptions will be restored in these markets; however, if they are restored, we could
be forced to discontinue providing service to residential customers and perhaps to commercial customers in
these locations.
Access Fees. The FCC regulates the fees that local telephone companies charge long-distance companies for
access to their local networks. In 2001, the FCC adopted a plan to restructure access charges for rate-of-
return regulated carriers, which has the effect of shifting certain charges from IXCs to end users. The FCC is
continuing to monitor the access charge regime and could consider other proposals that would restructure and
could reduce access charges. Changes in the access charge structure or the introduction of new technologies
that are not subject to the access charge structure could fundamentally change the economics of some
aspects of our business.
Access to Unbundled Network Elements. The United States Court of Appeals for the Circuit of the District of
Columbia heard argument on January 28, 2004 on appeal of the FCC's Triennial Review Order, in which the
FCC reviewed its regulations governing access that ILECs must make available to competitors to unbundled
network elements pursuant to Section 251(c) of the 1996 Telecom Act. On March 2, 2004, the Court issued a
decision affirming in part, vacating in part, and remanding in part the FCC’s Order. In addition, the RCA is in
the process of reviewing in a separate proceeding the extent to which ACS may not be required to continue
offering access to certain unbundled network elements, in accordance with guidelines established by the FCC
in the Triennial Review Order. This RCA decision is expected by July 2, 2004. We cannot predict the extent to
which further appeals of the March 2, 2004 decision or the decision itself will affect the pending RCA
proceeding. In addition, the outcome of either further court appeals or the regulatory proceeding could result
in a change in our cost of serving new and existing markets via the facilities of the ILEC or via wholesale
offerings. The ability to obtain unbundled network elements is an important element of our local access
services business, and we believe that the FCC's actions in this area have generally been positive. However,
we cannot predict the extent to which the existing rules will be sustained in the face of additional legal action
and the scope of the rules that are yet to be determined by the FCC.
The FCC has pending a notice of proposed rulemaking in which it is currently reviewing its pricing standard
that governs the rates ILECs may charge competitors for access to unbundled network elements. The outcome
of this regulatory proceeding could result in a change in our cost of serving new and existing markets via the
facilities of the ILEC or via wholesale offerings. Recurring and non-recurring charges for telephone lines and
other unbundled network elements may increase based on the rates proposed by the ILECs and approved by
the RCA from time to time, which could have an adverse effect on our financial position, results of operations
or liquidity.
We are currently involved in arbitration to revise the rates, terms, and conditions that govern GCI's access to
unbundled network elements in Anchorage, and a RCA decision is pending. In addition, the proceeding to
arbitrate revised rates, terms, and conditions to govern GCI's access to unbundled network elements in
Fairbanks and Juneau is being held in abeyance, pending the RCA's decision in the Anchorage arbitration. We
43
have been largely successful in the prior arbitration proceedings as to the material terms, including prices and
technical issues; however, the RCA's decisions in these proceedings could result in a change in our costs of
serving new and existing markets via the facilities of the ILEC or via wholesale offerings.
Critics continue to ask Congress to modify, if not altogether rework, the 1996 Telecom Act, citing the level of
competition in the local phone and broadband sectors. There is a lack of consensus on what changes are
needed, however, or who is to blame for the 1996 Telecom Act's perceived failures. Loosened regulations on
ILECs that control bottleneck facilities could diminish CLEC local phone competition.
Universal Service. We have qualified under FCC regulations as a competitive “eligible telecom carrier,” or ETC,
with respect to our provision of local telephone service in Anchorage, Fairbanks, and Juneau. ETCs are entitled
to receive subsidies paid by the Universal Service Fund. If we do not continue to qualify for this status in
Anchorage, Fairbanks and/or Juneau, or if we do not qualify for this status in other rural areas where we
propose to offer new services, we would not receive this subsidy and our net cost of providing local telephone
services in these areas would be materially adversely affected.
In addition, the FCC has referred issues concerning the designation of ETCs, portability of support, and the
basis for calculating support to a Federal-State Joint Board on Universal Service. On February 27, 2004, the
Joint Board issued a recommendation on which the FCC will have 12 months to act. The FCC's decision in this
proceeding could affect the subsidy and result in a change in our net costs of providing local telephone
services in new and existing markets.
Local Regulation. We may be required to obtain local permits for street opening and construction permits to
install and expand our networks. Local zoning authorities often regulate our use of towers for microwave and
other communications sites. We also are subject to general regulations concerning building codes and local
licensing. The 1996 Telecom Act requires that fees charged to communications carriers be applied in a
competitively neutral manner, but there can be no assurance that ILECs and others with whom we will be
competing will bear costs similar to those we will bear in this regard.
Cable Services Operations
General. The FCC has adopted rules that will require cable operators to carry the digital signals of broadcast
television stations. However, the FCC has decided that cable operators should not be required to carry both
the analog and digital services of broadcast television stations while broadcasters are transitioning from
analog to digital transmission. Carrying both the analog and digital services of broadcast television stations
would consume additional cable capacity. As a result, a requirement to carry both analog and digital services
of broadcast television stations could require the removal of popular programming services with materially
adverse results for cable operators, including us. Should the FCC mandate dual carriage, we will carry the
broadcast signals in both analog and digital formats.
Subscriber Rates. In Alaska, the RCA is the local franchising authority certified to regulate basic cable rates.
Under state law, however, the cable television service is exempt from regulation unless subscribers petition
the state commission for regulation under the procedures set forth in AS 42.05.712. At present, the only
community where regulation of the basic rate occurs is in Juneau.
FCC regulations govern rates that may be charged to subscribers for regulated services. The FCC uses a
benchmark methodology as the principal method of regulating rates. Cable operators are also permitted to
justify rates using a cost-of-service methodology, which contains a rebuttable presumption of an industry-wide
11.25% rate of return on an operator's allowable rate base. Cost-of-service regulation is a traditional form of
rate regulation, under which a company is allowed to recover its costs of providing the regulated service, plus a
reasonable profit. Franchising authorities are empowered to regulate the rates charged for monthly basic
service, for additional outlets and for the installation, lease and sale of equipment used by subscribers to
receive the basic cable service tier, such as converter boxes and remote control units. The FCC's rules require
franchising authorities to regulate these rates based on actual cost plus a reasonable profit, as defined by the
FCC. Cable operators required to reduce rates may also be required to refund overcharges with interest. The
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FCC has also adopted comprehensive and restrictive regulations allowing operators to modify their regulated
rates on a quarterly or annual basis using various methodologies that account for changes in the number of
regulated channels, inflation and increases in certain external costs, such as franchise and other
governmental fees, copyright and retransmission consent fees, taxes, programming fees and franchise-related
obligations. We cannot predict whether the FCC will modify these “going forward” regulations in the future.
Cable System Delivery of Internet Service. Although there is at present no significant federal regulation of
cable system delivery of Internet services, and the FCC has issued several reports finding no immediate need
to impose such regulation, this situation may change as cable systems expand their broadband delivery of
Internet services and as a result of legislative, regulatory and judicial developments.
In particular, proposals have been advanced at the FCC and Congress that would require cable operators to
provide access to unaffiliated Internet service providers and online service providers.
Recently, in an October 6, 2003 decision, the United States Court of Appeals for the Ninth Circuit reversed an
FCC decision defining high-speed Internet over cable as an “information service” not subject to local cable-
franchise fees, like cable service is, or any explicit requirements for “open access,” as communications service
is. Rehearing by the full panel has been requested. If Internet access requirements are imposed on cable
operators, it could burden the capacity of cable systems and complicate our own plans for providing expanded
Internet access services. These access obligations could adversely affect our financial position, results of
operations or liquidity.
Must Carry/Retransmission Consent. The 1992 Cable Act contains broadcast signal carriage requirements
that allow local commercial television broadcast stations to elect once every three years to require a cable
system to carry the station, subject to certain exceptions, or to negotiate for “retransmission consent” to carry
the station.
The FCC decided against imposition of dual digital and analog must carry in a January 2001 ruling. The ruling
resolved a number of technical and legal matters, and clarified that a digital-only television station,
commercial or non-commercial, can immediately assert its right to carriage on a local cable system. The FCC
also said that a television station that returns its analog spectrum and converts to digital operations must be
carried by local cable systems. At the same time, however, it initiated further fact gathering that ultimately
could lead to a reconsideration of the conclusion.
Satellite Home Viewer Improvement Act of 1999. A major change introduced by the SHVIA was a “local into
local” provision allowing satellite carriers, for the first time, to retransmit the signals of local television stations
by satellite back to viewers in their local markets. The intent was to promote multichannel video competition
by removing the prohibition on satellite retransmission of local signals, which cable operators already offered
to their subscribers under the must-carry/retransmission consent scheme of regulation described above.
Congress is considering reauthorization of this act, including possible changes to its requirements. We cannot
predict at this time the outcome of this review, its impact on the industries in which we operate, or its impact
on us.
Access to Programming. To spur the development of independent cable programmers and competition to
incumbent cable operators, the 1992 Cable Act imposed restrictions on the dealings between cable operators
and cable programmers. The Act precludes video programmers affiliated with cable companies from favoring
their cable operators over new competitors and requires such programmers to sell their programming to other
multichannel video distributors. The current prohibition extends until October 5, 2007.
Franchise Procedures. The 1984 Cable Act contains renewal procedures designed to protect incumbent
franchisees against arbitrary denials of renewal. The 1992 Cable Act made several changes to the renewal
process that could make it easier for a franchising authority to deny renewal. Moreover, even if the franchise is
renewed, the franchising authority may seek to impose new and more onerous requirements such as
significant upgrades in facilities and services or increased franchise fees as a condition of renewal. Similarly, if
a franchising authority's consent is required for the purchase or sale of a cable system or franchise, such
45
authority may attempt to impose more burdensome or onerous franchise requirements in connection with a
request for such consent. Historically, franchises have been renewed for cable operators that have provided
satisfactory services and have complied with the terms of their franchises. We believe that we have generally
met the terms of our franchises and have provided quality levels of service. Furthermore, our franchises are
issued by the state public utility commission (the RCA) and do not require periodic renewal.
Various courts have considered whether franchising authorities have the legal right to limit the number of
franchises awarded within a community and to impose certain substantive franchise requirements (e.g. access
channels, universal service and other technical requirements). These decisions have been inconsistent and,
until the United States Supreme Court rules definitively on the scope of cable operators' First Amendment
protections, the legality of the franchising process generally and of various specific franchise requirements is
likely to be in a state of flux.
Pole Attachment. The Communications Act requires the FCC to regulate the rates, terms and conditions
imposed by public utilities for cable systems' use of utility pole and conduit space unless state authorities can
demonstrate that they adequately regulate pole attachment rates. In the absence of state regulation, the FCC
administers pole attachment rates on a formula basis. This formula governs the maximum rate certain utilities
may charge for attachments to their poles and conduit by companies providing communications services,
including cable operators.
The RCA has largely retained the existing pole attachment formula that has been in state regulation since
1987. This formula could be subject to further revisions upon petition to the RCA. We cannot predict at this
time the outcome of any such proceedings.
Copyright. Cable television systems are subject to federal copyright licensing covering carriage of television
and radio broadcast signals. In exchange for filing certain reports and contributing a percentage of their
revenues to a federal copyright royalty pool that varies depending on the size of the system, the number of
distant broadcast television signals carried, and the location of the cable system, cable operators can obtain
blanket permission to retransmit copyrighted material included in broadcast signals. The United States
Copyright Office adopted an industry agreement providing for an increase in the copyright royalty rates. The
possible modification or elimination of this compulsory copyright license is the subject of continuing legislative
review and could adversely affect our ability to obtain desired broadcast programming. We cannot predict the
outcome of this legislative activity. Copyright clearances for nonbroadcast programming services are arranged
through private negotiations.
Cable operators distribute locally originated programming and advertising that use music controlled by the two
principal major music performing rights organizations, the American Society of Composers, Authors and
Publishers and Broadcast Music, Inc. The cable industry has had a long series of negotiations and
adjudications with both organizations. A prior voluntarily negotiated agreement with Broadcast Music has now
expired, and is subject to further proceedings. The governing rate court recently set retroactive and
prospective cable industry rates for American Society of Composers music based on the previously negotiated
Broadcast Music rate. Although we cannot predict the ultimate outcome of these industry proceedings or the
amount of any license fees we may be required to pay for past and future use of association-controlled music,
we do not believe such license fees will be significant to our business and operations.
Other Statutory and FCC Provisions. The Communications Act includes provisions, among others, concerning
customer service, subscriber privacy, marketing practices, equal employment opportunity, regulation of
technical standards and equipment compatibility.
The FCC has various rulemaking proceedings pending implementing the 1996 Telecom Act; it also has
adopted regulations implementing various provisions of the 1992 Cable Act and the 1996 Telecom Act that
are the subject of petitions requesting reconsideration of various aspects of its rulemaking proceedings. The
FCC has the authority to enforce its regulations through the imposition of substantial fines, the issuance of
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.
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Other Regulations of the FCC. The FCC has previously initiated an inquiry to determine whether the cable
industry's future provision of interactive services should be subject to regulations ensuring equal access and
competition among service vendors. The inquiry is another indication of regulatory concern regarding control
over cable capacity. In addition, other bills and administrative proposals pertaining to cable communications
are introduced in Congress from time to time or have been considered by other governmental bodies over the
past several years. It is possible that Congress and other governmental bodies will make further attempts to
regulate cable communications services.
State and Local Regulation. Because our cable communications systems use local streets and rights-of-way,
our systems are subject to state and local regulation. Cable communications systems generally are operated
pursuant to franchises, permits or licenses granted by a municipality or other state or local government entity.
In Alaska, the RCA is the franchising authority for the state. We provide cable television service throughout
Alaska pursuant to various certificates of authority issued by the RCA. These certificates are not subject to
terms of renewal and continue in effect until and unless the state commission were to seek to modify or
revoke them for good cause.
Internet Operations
General. With significant growth in Internet activity and commerce over the past several years the FCC and
other regulatory bodies have been challenged to develop new models that allow them to achieve the public
policy goals of competition and universal service. Many aspects of regulation and coordination of Internet
activities and traffic are evolving and are facing unclear regulatory futures. Changes in regulations and in the
regulatory environment, including changes that affect communications costs or increase competition from
ILECs or other communications services providers, could adversely affect the prices at which we sell ISP
services.
Internet Governance and Standards. There is no one entity or organization that governs the Internet. Each
facilities-based network provider that is interconnected with the global Internet controls operational aspects of
their own network. Certain functions, such as domain name routing and the definition of the TCP/IP protocol,
are coordinated by an array of quasi-governmental, intergovernmental, and non-governmental bodies.
The legal authority of any of these bodies is unclear. Most of the underlying architecture of the Internet was
developed under the auspices, directly or indirectly, of the United States government. The government has not,
however, defined whether it retains authority over Internet management functions, or whether these
responsibilities have been delegated to the private sector.
1996 Telecom Act. The 1996 Telecom Act provides little direct guidance as to whether the FCC has authority
to regulate Internet-based services.
Given the absence of clear statutory guidance, the FCC must determine whether it has the authority or the
obligation to exercise regulatory jurisdiction over specific Internet-based activities, or to decline from doing so
under the appropriate standards.
FCC Regulations. The FCC does not regulate the prices charged by ISPs or Internet backbone providers.
However, the vast majority of users connect to the Internet over facilities of existing communications carriers.
Those communications carriers are subject to varying levels of regulation at both the federal and the state
level. Thus, regulatory decisions exercise a significant influence over the economics of the Internet market.
There are pending complaints and proceedings at the FCC that may affect access charges, compensation and
other aspects of Internet service, and we cannot predict the effect or outcome of such proceedings.
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
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States and Alaska and believe that any subdivision of our operations into distinct geographic areas would not
be meaningful. Revenues associated with international toll traffic were $2.9 million, $3.5 million and $4.9
million for the years ended December 31, 2003, 2002 and 2001, respectively.
Seasonality
Our long-distance revenues have historically been highest in the summer months because of temporary
population increases attributable to tourism and increased seasonal economic activity such as construction,
commercial fishing, and oil and gas activities. Our cable television revenues, on the other hand, are higher in
the winter months because consumers tend to watch more television, and spend more time at home, during
these months. Our local service and Internet operations are not expected to exhibit significant seasonality,
with the exception of SchoolAccess™ Internet services that are reduced during the summer months. Our
ability to implement construction projects is also reduced during the winter months because of cold
temperatures, snow and short daylight hours.
Customer-Sponsored Research
We have not expended material amounts during the last three fiscal years on customer-sponsored research
activities.
Backlog of Orders and Inventory
As of December 31, 2003 and 2002, our long-distance services segment had a backlog of Private Line orders
of approximately $271,000 and $318,000, respectively, which represents recurring monthly charges for
Private Line and broadband services. As of December 31, 2003 and 2002, we had a backlog of equipment
sales orders of approximately $745,000 and $601,000, respectively for services included in the All Other
category described in note 13 to the “Notes to Consolidated Financial Statements” included in Part II of this
Report. The increase in backlog as of December 31, 2003 can be attributed to increased outstanding sales
orders at December 31, 2003 as compared to 2002. We expect that all of the Private Line orders and
equipment sales in backlog at the end of 2003 will be delivered during 2004.
Geographic Concentration and Alaska Economy
We offer voice and data communications and video services to customers primarily in the State of Alaska.
Because of this geographic concentration, growth of our business and operations depend upon economic
conditions in Alaska. The economy of the State of Alaska is dependent upon natural resource industries, in
particular oil production, as well as investment earnings (including earnings from the State of Alaska
Permanent Fund), tourism, government, and United States military spending. Any deterioration in these
markets could have an adverse impact on us. Oil revenues are now the second largest source of state
revenues, following funds from federal sources. The economic stagnation in the Lower 48 States appears to
have dampened demand for services provided by our large common carrier customers. To the extent that
these customers experience reduced demand for traffic destined for and originating in Alaska, it could
adversely affect our common carrier traffic and associated revenues. See “Part I — Item 1 — Business — Risks
Relating to Our Business and Operations — Our business is currently geographically concentrated in Alaska,”
and “Part II — Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of
Operations” for more information about the effect of geographic concentration and the Alaska economy on us.
Factors That May Affect Our Business and Future Results
Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may
also materially and adversely affect our business operations. Any of the following risks could materially and
adversely affect our business, financial position, results of operations or liquidity.
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Risks Relating to Our Business and Operations
We face competition that may reduce our market share and harm our financial performance.
There is substantial competition in the communications industry. The traditional dividing lines between long-
distance telephone, local telephone, wireless telephone, Internet, and video services are increasingly
becoming blurred. Through mergers and various service integration and product bundling strategies, major
providers are striving to provide integrated communications services offerings within and across geographic
markets.
We expect competition to increase as a result of the rapid development of new technologies, products and
services. We cannot predict which of many possible future technologies, products or services will be important
to maintain our competitive position or what expenditures will be required to develop and provide these
technologies, products or services. Our ability to compete successfully will depend on marketing and on our
ability to anticipate and respond to various competitive factors affecting the industry, including new services
that may be introduced, changes in consumer preferences, economic conditions and pricing strategies by
competitors. To the extent we do not keep pace with technological advances or fail to timely respond to
changes in competitive factors in our industry and in our markets, we could lose market share or experience a
decline in our revenue and net income. Competitive conditions create a risk of market share loss and the risk
that customers shift to less profitable lower margin services. Competitive pressures also create challenges for
our ability to grow new businesses or introduce new services successfully and execute our business plan. Each
of our business segments also faces the risk of potential price cuts by our competitors that could materially
adversely affect our market share and gross margins.
Long-distance services. The long-distance industry is intensely competitive and subject to constant
technological change. Competition is based upon price and pricing plans, the type of services offered,
customer service, billing services, performance, perceived quality, reliability and availability. Current or future
competitors could be substantially larger than we are, or have greater financial, technical and marketing
resources than we do.
In the long-distance market, we compete against AT&T Alascom, ACS, the Matanuska Telephone Association
and certain smaller rural local telephone carrier affiliates. There is also the possibility that new competitors will
enter the Alaska market. In addition, wireless services continue to grow as an alternative to wireline services
as a means of reaching customers.
Historically, we have competed in the long-distance market by offering discounts from rates charged by our
competitors and by providing desirable packages of services. Discounts have been eroded in recent years due
to lowering of prices by AT&T Alascom and entry of other competitors into the long-distance markets we serve.
In addition, our competitors offer their own packages of services. If competitors lower their rates further or
develop more attractive packages of services, we may be forced to reduce our rates or add additional services,
which would have a material adverse effect on our financial position, results of operations or liquidity.
Cable Services. Our cable television systems face competition from alternative methods of receiving and
distributing television signals, including DBS and digital video over telephone lines, and from other sources of
news, information and entertainment such as off-air television broadcast programming, newspapers, movie
theaters, live sporting events, interactive computer services, Internet services and home video products,
including videotape cassettes and video disks. Our cable television systems also face competition from
potential overbuilds of our existing cable systems by other cable television operators and alternative methods
of receiving and distributing television signals. The extent to which our cable television systems are
competitive depends, in part, upon our ability to provide quality programming and other services at
competitive prices.
Our greatest source of competition for video services comes from the DBS industry. We also are subject to
digital video over telephone line competition in the Mat-Su Valley. With the addition of Anchorage local
broadcast stations, increased marketing, ILEC and DBS alliances, and emerging technologies creating new
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opportunities, competition from these sources has increased and will likely continue to increase. The resulting
increase in competition may adversely affect our market share and results of operations from our cable
television segment.
Local Telephone Services. In the local telephone market, we compete against ACS, the ILEC, in Anchorage,
Juneau and Fairbanks. We also complete against AT&T Alascom and TelAlaska in Anchorage. We may provide
local telephone service in other locations in the future where we would face other competitors. In the local
telephone services market, the 1996 Telecom Act, judicial decisions and state legislative and regulatory
developments have increased the likelihood that barriers to local telephone competition will be substantially
reduced or removed. These initiatives include requirements that LECs negotiate with entities, including us, to
provide interconnection to the existing local telephone network, to allow the purchase, at cost-based rates, of
access to unbundled network elements, to establish dialing parity, to obtain access to rights-of-way and to
resell services offered by the ILEC. We have been able to obtain interconnection, access and related services
from the LECs at rates that allow us to offer competitive services. However, if we are unable to continue to
obtain these services and access at acceptable rates, our ability to offer local telephone services, and our
revenues and net income, could be materially adversely affected. To date, we have been successful in
capturing a significant portion of the local telephone market in the locations where we are offering these
services. However, there can be no assurance that we will continue to be successful in attracting or retaining
these customers.
Internet Services. The Internet industry is highly competitive, rapidly evolving and subject to constant
technological change. Competition is based upon price and pricing plans, service packages, the types of
services offered, the technologies used, customer service, billing services, perceived quality, reliability and
availability. We compete with several Alaska-based Internet providers and other domestic, non-Alaska based
providers. Several of the providers have substantially greater financial, technical and marketing resources
than we do.
ACS and other Alaska telephone service providers are providing competitive high-speed Internet access over
their telephone lines in direct competition with our high-speed cable modem service. DBS providers and
others also provide wireless high-speed Internet service in competition with our high-speed cable modem
services. Competitive local fixed wireless providers are providing service in certain of our markets.
Niche providers in the industry, both local and national, compete with certain of our Internet service products,
such as web hosting, list services and email.
The regulatory and legislative environment creates challenges for our business segments.
Local Telephone Services. Our success in the local telephone market depends on our continued ability to
obtain interconnection, access and related services from ILECs on terms that are just and reasonable and that
are based on the cost of providing these services. Our local telephone services business faces the risk of the
impact of implementing current regulations and legislation, unfavorable changes in regulation or legislation or
the introduction of new regulations. Our ability to enter into the local telephone market depends on our
negotiation or arbitration with ILECs to allow interconnection to the carrier's existing local telephone network,
to allow the purchase, at cost-based rates, of access to unbundled network elements, to establish dialing
parity, to obtain access to rights-of-way and to resell services offered by the ILEC. In most Alaska markets, it
also depends on our ability to have the rural exemption for certain carriers terminated, so these carriers are
obligated to provide access to unbundled network elements at economic costs. Future arbitration and rural
exemption proceedings with respect to new or existing markets could result in a change in our cost of serving
these markets through the facilities of the ILEC or via wholesale offerings.
ACS, through subsidiary companies, provides local telephone services in Fairbanks and Juneau, Alaska. These
ACS subsidiaries are classified as Rural Telephone Companies under the 1996 Telecom Act, which entitles
them to an exemption of certain material interconnection terms of the 1996 Telecom Act, until and unless
such rural exemption is examined and discontinued by the RCA. On October 11, 1999, the RCA issued an
order terminating rural exemptions for the ACS subsidiaries operating in the Fairbanks and Juneau markets so
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that we could compete with these companies in the provision of local telephone service pursuant to the terms
of Section 251(c) of the 1996 Telecom Act. These rural exemptions limited the obligation of the ILECs in these
markets to provide us access to unbundled network elements at rates under the pricing standard established
by the FCC. Upon appeal by ACS, on December 12, 2003, the Alaska Supreme Court issued a decision in
which it reversed the RCA's rural exemption decision on the procedural ground that the competitor, not the
incumbent, must shoulder the burden of proof. The Court remanded the matter to the RCA for reconsideration
with the burden of proof assigned to us. Additionally, the Court left it to the RCA to decide as a matter of
discretion whether to change the state of competition during the remand period. In accordance with the
Court's ruling, the RCA has re-opened the rural exemption dockets and scheduled a hearing to commence on
April 19, 2004. Additionally, the RCA issued a ruling on January 16, 2004, in which the Commission
determined that we can continue to rely on unbundled network elements from ACS to serve our existing
customers in Juneau and Fairbanks but that we may not serve new customers through purchase of unbundled
network elements pending the completion of the remand proceeding. Until this matter is resolved, we may
serve new customers using wholesale resale. The outcome of this proceeding could result in a change in our
cost of serving these markets via the facilities of ACS or via wholesale offerings and could adversely impact
our ability to offer local telephone service in these markets. We believe it is unlikely that the rural exemptions
will be restored in these markets; however, if they are restored, we could be forced to discontinue providing
service to residential customers and perhaps to commercial customers in these locations.
Cable Services. The cable television industry is subject to extensive regulation at various levels, and many
aspects of such regulation are currently the subject of judicial proceedings and administrative or legislative
proposals. The law permits certified local franchising authorities to order refunds of rates paid in the previous
12-month period determined to be in excess of the reasonable rates. It is possible that rate reductions or
refunds of previously collected fees may be required of us in the future by state or federal regulators.
Currently, pursuant to Alaska law, the basic cable rates in Juneau are the only rates in Alaska subject to
regulation by the local franchising authority, and the rates in Juneau were reviewed and approved by the RCA
in October 2000.
Other existing federal regulations, including copyright licensing rules, are currently the subject of judicial,
legislative, and administrative review that could change, in varying degrees, the manner in which cable
television systems operate. Neither the outcome of these proceedings nor their impact upon the cable
television industry in general, or on our activities and prospects in the cable television business in particular,
can be predicted at this time. There can be no assurance that future regulatory actions taken by Congress, the
FCC or other federal, state or local government authorities will not have a material adverse effect on our
business, financial position, results of operations or liquidity.
Proposals may be made before Congress and the FCC to mandate cable operators provide “open access” over
their cable systems to Internet service providers. The FCC has declined to impose such requirements through
the date of this report. If the FCC or other authorities mandate additional access to our cable systems, we
cannot predict the effect that this would have on our Internet service offerings.
Internet Services. Changes in the regulatory environment relating to the Internet access market, including
changes in legislation, FCC regulation, judicial action or local regulation that affect communications costs or
increase competition from the ILEC or other communications services providers, could adversely affect the
prices at which we sell Internet services.
We depend on a small number of customers for a substantial portion of our revenue and business.
For the year ended December 31, 2003, we provided long-distance services (excluding Private Lines and other
revenue) to MCI and to Sprint, which generated combined revenues of approximately 19.5% of our total
revenues for that year. These two customers are free to seek out long-distance communications services from
our competitors upon expiration of their contracts (in July 2008 in the case of MCI, and in March 2007 in the
case of Sprint) or earlier upon a default or the occurrence of a force majeure event or a substantial change in
applicable law or regulation under the applicable contract.
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Mergers and acquisitions in the communications industry are relatively common. If a change in control of MCI
or Sprint were to occur, it would not permit them to terminate their existing contracts with us, but could in the
future result in the termination of or a material adverse change in our relationships with them.
In addition, MCI's and Sprint's need for our long-distance services depends directly upon their ability to obtain
and retain their own long-distance customers and upon the needs of those customers for long-distance
services.
The loss of one or both of MCI or Sprint as customers, a material adverse change in our relationships with
either of them, or a material loss of or reduction in their long-distance customers would have a material
adverse effect on our financial position, results of operations or liquidity.
Our major customer, MCI, is in bankruptcy.
On July 21, 2002, MCI and substantially all of its active United States subsidiaries filed voluntary petitions for
reorganization under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court.
Chapter 11 allows a company to continue operating in the ordinary course of business in order to maximize
recovery for the company's creditors and shareholders. On July 22, 2003, the Bankruptcy Court affirmed all of
our existing contracts with MCI and allowed us the right to, in lieu of collecting our pre-petition claim of
approximately $12.9 million, set-off certain of our pre-petition accounts receivable from MCI against amounts
payable for future services purchased by us from MCI. The amount of the set-off right was initially
approximately $11.1 million on July 22, 2003 and as of December 31, 2003, we have set-off rights remaining
totaling approximately $7.9 million.
On October 31, 2003, MCI's reorganization plan was approved by the United States Bankruptcy Court. MCI
requested in February 2004 that the United States Bankruptcy Court for the Southern District of New York
approve a 60-day extension to the February 28, 2004 deadline to emerge from bankruptcy. An extension to
the deadline would give MCI time to complete financial filings with the SEC. The financial filings are reported to
be the last major task left for MCI to emerge from bankruptcy. We cannot predict what effect MCI's bankruptcy
and reorganization process may have on MCI's demand for our services.
Our businesses are currently geographically concentrated in Alaska.
We offer voice and data communication and video services to customers primarily in the State of Alaska.
Because of this geographic concentration, our growth and operations depend upon economic conditions in
Alaska. The economy of Alaska is dependent upon natural resource industries, in particular oil production, as
well as tourism, government spending and United States military spending. Any deterioration in these markets
could have an adverse impact on the demand for communication and cable television services and on our
results of operations and financial condition. In addition, the customer base in Alaska is limited. Alaska has a
population of approximately 644,000 people, approximately 42% of whom are located in the Anchorage area.
We have already achieved significant market penetration with respect to our service offerings in Anchorage
and in other locations in Alaska. We may not be able to continue to increase our market share of the existing
markets for our services and no assurance can be given that the Alaskan economy will continue to grow and
increase the size of the markets we serve or increase the demand for the services we offer. As a result, the
best opportunities for expanding our business may arise in other geographic areas such as the Lower 48
States. There can be no assurance that we will find attractive opportunities to grow our businesses outside the
State of Alaska or that we will have the necessary expertise to take advantage of such opportunities. The
markets in Alaska for voice and data communications and video services are unique and distinct within the
United States due to Alaska's large geographical size and its distance from the rest of the United States. The
expertise we have developed in operating our businesses in the State of Alaska may not provide us with the
necessary expertise to successfully enter other geographic markets.
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We may not develop our wireless services.
We offer wireless mobile services by reselling other providers' wireless mobile services. We offer wireless local
telephone services over our own facilities, and have purchased PCS and LMDS wireless broadband licenses in
FCC auctions covering markets in Alaska. We have fewer subscribers to our wireless services than to our other
service offerings. The geographic coverage of our wireless services is also smaller than the geographic
coverage of our other services. Some of our competitors offer or propose to offer an integrated bundle of
communications, entertainment and information services, including wireless services. If we are unable to
expand and further develop our wireless services, we may not be able to meet the needs of customers who
desire packaged services, and our competitors who offer these services would have an advantage. This could
result in the loss of market share for our other service offerings.
As a PCS and LMDS licensee, we are subject to regulation by the FCC, and must comply with certain build-out
and other conditions of the licenses, as well as with the FCC's regulations governing the PCS and LMDS
services. The conditions of our PCS licenses require us to meet certain build-out requirements on or before
July, 2005. We may not meet these build-out requirements and, as a result, we could lose our PCS license.
Our efforts to deploy DLPS may be unsuccessful.
An element of our business strategy is to deploy voice telephone service utilizing our hybrid fiber coax cable
facilities. If we are able to deploy this service, we will be able to utilize our own cable facilities to provide local
access to our customers and avoid paying local loop charges to the ILEC. To successfully deploy this service,
we must integrate new technology with our existing facilities. The viability of this service depends on the
adoption of industry-wide standards for the sending and receiving of voice communications over cable
facilities and the availability of the equipment necessary to provide the service at a cost-effective price. The
deployment of this service may require additional substantial capital investment by us. If we are unable to
successfully deploy DLPS, we will not be able to recover any capital investment we may make and the margins
on our local telephone services business will not improve.
Prolonged service interruptions could affect our business.
We rely heavily on our network equipment, communications providers, data and software, to support all of our
functions. We rely on our networks and the networks of others for substantially all of our revenues. We are
able to deliver services only to the extent that we can protect our network systems against damage from power
or communication failures, computer viruses, natural disasters, unauthorized access and other disruptions.
While we endeavor to provide for failures in the network by providing back-up systems and procedures, we
cannot guarantee that these back-up systems and procedures will operate satisfactorily in an emergency.
Should we experience a prolonged failure, it could seriously jeopardize our ability to continue operations. In
particular, should a significant service interruption occur, our ongoing customers may choose a different
provider, and our reputation may be damaged, reducing our attractiveness to new customers.
To the extent that any disruption or security breach results in a loss or damage to our customers' data or
applications, or inappropriate disclosure of confidential information, we may incur liability and suffer from
adverse publicity. In addition, we may incur additional costs to remedy the damage caused by these
disruptions or security breaches.
If a failure occurs in our undersea fiber optic cable, our ability to immediately restore the entirety of our
service may be limited.
Our communications facilities include an undersea fiber optic cable that carries a large portion of our Internet
voice and data traffic to and from the Lower 48 States. We are currently constructing alternative
communications facilities as backup facilities. If a failure of our undersea fiber optic facilities occurs before we
are able to complete construction of backup facilities and we are not able to secure alternative facilities, some
of the communications services we offer to our customers could be interrupted, which could have a material
adverse effect on our business, financial position, results of operations or liquidity.
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If a failure occurs in our satellite communications systems, our ability to immediately restore the entirety
of our service may be limited.
We serve many rural and remote Alaska locations solely via satellite communications. Each of our C- and Ku-
band satellite transponders is backed up on the same spacecraft with multiple backup transponders. Our
primary spacecraft is PanAmSat's Galaxy 10R (“G-10R”), but we also lease capacity on two other spacecraft
for services we provide, SES Americom's AMC-7 and AMC-8. On G-10R, we use 7 C-band transponders. We
have arranged for backup C-band satellite capacity on another PanAmSat spacecraft, Galaxy 13 (“G-13”), for
all of those satellite transponders in the unlikely event of a total primary spacecraft failure. If such a failure
occurs, service may not be fully restored for up to a week or longer due to the time necessary to redirect earth
station antennae. We also own one Ku-band satellite transponder on the same primary spacecraft (G-10R)
that provides our C-band service. In the event of total primary spacecraft failure, we believe we would be able
to restore our Ku-band transponder traffic on G-13, although no pre-arrangement for its backup is currently in
place. We also lease approximately 11 MHz of protected and backed-up C-band capacity on SES Americom's
AMC-8 spacecraft. SES Americom's AMC-7 is the backup spacecraft for AMC-8. We also lease certain C-band
transponder capacity on AMC-7that can be preempted in the case of a satellite failure. The services that are
preempted would not be immediately restored should AMC-7 fail or be called up to provide restoration of
another of SES Americom's spacecraft.
We depend on a limited number of third-party vendors to supply communications equipment.
We depend on a limited number of third-party vendors to supply cable, Internet, DLPS, and telephony-related
equipment. If our providers of this equipment are unable to timely supply the equipment necessary to meet
our needs or provide them at an acceptable cost, we may not be able to satisfy demand for our services and
competitors may fulfill this demand.
We do not have insurance to cover certain risks to which we are subject.
We are self-insured for damage or loss to certain of our transmission facilities, including our buried, under sea,
and above-ground transmission lines. If we become subject to substantial uninsured liabilities due to damage
or loss to such facilities, our financial position, results of operations or liquidity may be adversely affected.
A significant percentage of our voting securities are owned by a small number of shareholders and these
shareholders can control stockholder decisions on very important matters.
As of December 31, 2003, our executive officers and directors and their affiliates owned approximately 16.5%
of our combined outstanding Class A and class B common stock, representing approximately 34.4% of the
combined voting power of that stock (including outstanding Series B preferred stock voting with Class A
common stock on an as-converted basis). These shareholders can significantly influence, if not control, our
management policy and all fundamental corporate actions, including mergers, substantial acquisitions and
dispositions, and election of directors to the Board.
Terrorist attacks, such as the attacks that occurred on September 11, 2001, and other attacks or acts of
war may adversely affect us.
The attacks of September 11, 2001, and subsequent events have caused instability in the local, national and
international economies and markets and have led, and may continue to lead, to further armed hostilities or to
further acts of terrorism in the United States or elsewhere, which could cause further instability in such
economies and markets. In addition, armed hostilities and further acts of terrorism may directly impact our
physical facilities and operations or those of our customers. Furthermore, terrorist attacks, subsequent events
and future developments may adversely affect our customers or their facilities or otherwise result in reduced
demand from our customers for our services. Any of the foregoing could subject our operations to increased
risks and, depending on their magnitude, could have a material adverse effect on our financial position,
results of operations or liquidity.
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We have and will continue to have a significant amount of debt.
On December 31, 2003, we had total debt, including capital lease obligations, of approximately $389.8
million. Our high level of debt could have important consequences, including the following:
• Use of a large portion of our cash flow to pay principal and interest on the New Senior Notes, the
Senior Credit Facility and our other debt, which will reduce the availability of our cash flow to fund
working capital, capital expenditures, and other business activities;
Increase our vulnerability to general adverse economic and industry conditions;
•
• Limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we
operate;
• Restrict us from making strategic acquisitions or exploiting business opportunities;
• Make it more difficult for us to satisfy our obligations with respect to our debt;
• Place us at a competitive disadvantage compared to our competitors that have less debt; and
• Limit, along with the financial and other restrictive covenants in our debt, among other things, our
ability to borrow additional funds, dispose of assets or pay cash dividends.
In addition, a substantial portion of our debt bears interest at variable rates. If market interest rates increase,
variable-rate debt will create higher debt service requirements, which would adversely affect our financial
position, results of operations or liquidity.
We will require a significant amount of cash to service our debt. Our ability to generate cash depends on
many factors beyond our control.
Our ability to make payments on and to refinance our debt, and to fund planned capital expenditures and
business development efforts, will depend on our ability to generate cash in the future. This is subject to
general economic, financial, competitive, legislative, regulatory and other factors that may be beyond our
control.
We cannot provide assurance that our business will generate sufficient cash flow from operations or that
future borrowings will be available to us under our Senior Credit Facility or otherwise in an amount sufficient to
enable us to pay our debt or to fund our other liquidity needs. We may need to refinance all or a portion of our
debt on or before maturity. We cannot provide assurance that we will be able to refinance any of our debt on
commercially reasonable terms or at all.
Despite our current significant level of debt, we may still be able to incur substantially more debt. This
could further exacerbate the risks associated with our substantial debt.
We may be able to incur substantial debt in the future. Although our debt agreements contain restrictions on
the incurrence of additional debt, these restrictions are subject to a number of qualifications and exceptions
and, under certain circumstances, debt incurred in compliance with these restrictions could be substantial. If
new debt is added to our current debt levels, the substantial risks described above would intensify.
The terms of our debt impose, or will impose, restrictions on us that may affect our ability to successfully
operate our business.
Our debt agreements contain covenants that, among other things, limit our ability to:
•
Incur additional debt and issue preferred stock;
• Pay dividends or make other restricted payments;
• Make certain investments;
• Create liens;
55
• Allow restrictions on the ability of certain of our subsidiaries to pay dividends or make other payments
to us;
• Sell assets;
• Merge or consolidate with other entities; and
• Enter into transactions with affiliates.
The Senior Credit Facility also requires us to comply with specified financial ratios and tests, including, but not
limited to, minimum interest coverage ratio, maximum leverage ratio and maximum annual capital
expenditures.
These covenants could materially and adversely affect our ability to finance our future operations or capital
needs and to engage in other business activities that may be in our best interest.
All of these covenants may restrict our ability to expand or to pursue our business strategies. Our ability to
comply with these covenants may be affected by events beyond our control, such as prevailing economic
conditions and changes in regulations, and if such events occur, we cannot be sure that we will be able to
comply. A breach of these covenants could result in a default under our debt agreements.
Employees
We employed 1,255 persons as of January 31, 2004, and are not parties to union contracts with our
employees. We believe our future success will depend upon our continued ability to attract and retain highly
skilled and qualified employees. We believe that relations with our employees are satisfactory.
Other
No material portion of our businesses is subject to renegotiation of profits or termination of contracts at the
election of the federal government.
Item 2. Properties
General. Our properties do not lend themselves to description by character or location of principal units. Our
investment in property, plant and equipment in our consolidated operations consisted of the following at
December 31:
Telephone distribution systems
Cable television distribution systems
Support equipment
Property and equipment under capital leases
Construction in progress
Transportation equipment
Land and buildings
Total
2003
53.5%
24.9%
7.1%
7.9%
5.2%
0.9%
0.5%
100.0%
2002
56.4%
24.4%
6.5%
8.5%
2.8%
0.9%
0.5%
100.0%
These properties are divided among our operating segments at December 31, 2003 as follows: long-distance
services, 48.7%; cable services, 26.2%; local access services, 7.8%; Internet services, 5.8%; and all other,
11.5%.
These properties consist primarily of switching equipment, satellite earth stations, fiber-optic networks,
microwave radio and cable and wire facilities, cable head-end equipment, coaxial distribution networks,
routers, servers, transportation equipment, computer equipment and general office equipment. Substantially
all of our properties secure our new Senior Credit Facility. You should see note 8 to the “Notes to Consolidated
Financial Statements” included in Part II of this Report for more information.
56
Our construction in progress totaled $33.6 million at December 31, 2003, consisting of $16.5 million for
AULP West with the remainder consisting of long-distance, cable, local and Internet services, and support
systems projects that were incomplete at December 31, 2003. Our construction in progress totaled $17.0
million at December 31, 2002, consisting of long-distance, cable and local services, and support systems
projects that were incomplete at December 31, 2002.
Long-Distance Services. We operate a modern, competitive communications network employing the latest
digital transmission technology based upon fiber optic and digital microwave facilities within and between
Anchorage, Fairbanks and Juneau, Alaska. Our network includes digital fiber optic cables linking Alaska to the
Lower 48 States and providing access to other carriers' networks for communications around the world. We
use satellite transmission to remote areas of Alaska and for certain interstate and intrastate traffic, and to
provide backup facilities for certain portions of our long-haul fiber networks.
Our long-distance services segment owns properties and facilities including satellite earth stations, and
distribution, transportation and office equipment. Additionally, in December 1992 we acquired capacity on an
undersea fiber optic cable from Seward, Alaska to Pacific City, Oregon which was taken out of service in
January 2004. See “Part I — Item 1 — Business — Historical Development of our Business During the Past
Fiscal Year — Fiber System Taken out of Service” for more information. We completed construction of AULP
East linking Alaska to Seattle, Washington in February 1999. In June 2003, we began the construction of
AULP West connecting Seward, Alaska and Warrenton, Oregon, with leased backhaul facilities to connect it to
our switching and distribution centers in Anchorage, Alaska and Seattle, Washington. We expect to complete
this project by May 2004.
We entered into a purchase and lease-purchase option agreement in August 1995 for the acquisition of
satellite transponders on the PanAmSat Galaxy XR satellite to meet our long-term satellite capacity
requirements. We use the satellite transponders pursuant to a long-term capital lease arrangement with a
leasing company. The purchase and lease-purchase option agreement provided for the interim lease of
transponder capacity on the PanAmSat Galaxy IX satellite through the delivery of the purchased transponders
on Galaxy XR in March 2000.
Effective June 30, 2001, we acquired, through the issuance of preferred stock, a controlling interest in the
corporation owning the 800-mile fiber optic cable system that extends from Prudhoe Bay, Alaska to Valdez,
Alaska via Fairbanks.
We lease our long-distance services industry segment’s executive, corporate and administrative facilities in
Anchorage, Fairbanks and Juneau, Alaska. Our operating, executive, corporate and administrative properties
are in good condition. We consider our properties suitable and adequate for our present needs and they are
being fully utilized.
Cable Services. The cable systems serve 35 communities and areas in Alaska including Anchorage,
Fairbanks, the Mat-Su Valley, and Juneau, the state's four largest urban areas. As of December 31, 2003, the
Cable Systems consisted of approximately 2,300 miles of installed cable plant having between 330 to 625
MHz of channel capacity. Our principal physical assets consist of cable television distribution plant and
equipment, including signal receiving, encoding and decoding devices, headend reception facilities,
distribution systems and customer drop equipment for each of our cable television systems.
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.
57
Local Access Services. We operate a modern, competitive local access communications network employing
analog and the latest digital transmission technology based upon fiber optic facilities within Anchorage,
Fairbanks and Juneau, Alaska. Our outside plant consists of connecting lines (aerial, underground and buried
cable), the majority of which is on or under public roads, highways or streets, while the remainder is on or
under private property. Central office equipment primarily consists of digital electronic switching equipment
and circuit carrier transmission equipment. Operating equipment consists of motor vehicles and other
equipment.
Substantially all of our local access services’ central office equipment, administrative and business offices,
and customer service centers are in leased facilities. Such properties are in good condition. We consider our
properties suitable and adequate for our present and anticipated future needs.
Internet Services. We operate a modern, competitive Internet network employing the latest available
technology. We provide access to the Internet using a platform that includes many of the latest advancements
in technology. The physical platform is concentrated in Anchorage and is extended into many remote areas of
Alaska. Our Internet platform includes trunks connecting our Anchorage, Fairbanks, and Juneau facilities to
Internet access points in Seattle through multiple, diversely routed upstream Internet networks, and various
other routers, servers and support equipment.
We lease our Internet services industry segment’s operating facilities, located primarily in Anchorage. Such
properties are in good condition. We consider our properties suitable and adequate for our present and
anticipated future needs.
Capital Expenditures
Capital expenditures consist primarily of (a) gross additions to property, plant and equipment having an
estimated service life of one year or more, plus the incidental costs of preparing the asset for its intended use,
and (b) gross additions to capitalized software.
The total investment in property, plant and equipment has increased from $417.5 million at January 1, 1999
to $646.7 million at December 31, 2003, including construction in progress and not including deductions of
accumulated depreciation. Significant additions to property, plant and equipment will be required in the future
to meet the growing demand for communications, Internet and entertainment services and to continually
modernize and improve such services to meet competitive demands.
Our capital expenditures for 1999 through 2003 were as follows (in millions):
1999
2000
2001
2002
2003
$ 36.6
$ 50.9
$ 65.6
$ 65.1
$ 62.5
We project capital expenditures of $90 million to $100 million for 2004, including approximately $34 million
additional for AULP West. We have made purchase commitments totaling approximately $40 million at
December 31, 2003, including approximately $25 million for AULP West. A majority of the expenditures are
expected to expand, enhance and modernize our current networks, facilities and operating systems, to
develop other businesses, and to complete the construction of AULP West. You should see note 16 to the
accompanying “Notes to Consolidated Financial Statements” included in Part II of this Report for more
information.
During 2003, we funded our normal business capital requirements substantially through internal sources and,
to the extent necessary, from external financing sources. We expect expenditures for 2004, including
58
amounts necessary to construct the AULP West undersea fiber optic cable system, to be financed in the same
manner.
Insurance
We have insurance to cover risks incurred in the ordinary course of business, including general liability,
property coverage, director and officers and employment practices liability, auto, crime, fiduciary, aviation, and
business interruption insurance in amounts typical of similar operators in our industry and with reputable
insurance providers. Central office equipment, buildings, furniture and fixtures and certain operating and
other equipment are insured under a blanket property insurance program. This program provides substantial
limits of coverage against “all risks” of loss including fire, windstorm, flood, earthquake and other perils not
specifically excluded by the terms of the policies. As is typical in the communications industry, we are self-
insured for damage or loss to certain of our transmission facilities, including our buried, under sea, and above-
ground transmission lines. We self-insure with respect to employee health insurance and workers
compensation, subject to stop-loss insurance with other parties that caps our liability at specified limits. We
believe our insurance coverage is adequate, however if we become subject to substantial uninsured liabilities
due to damage or loss to such facilities, our financial results may be adversely affected.
Item 3. Legal Proceedings
Except as set forth in this item, neither the Company, its property nor any of its subsidiaries or their property is
a party to or subject to any material pending legal proceedings. We are parties to various claims and pending
litigation as part of the normal course of business. We are also involved in several administrative proceedings
and filings with the FCC, Department of Labor and state regulatory authorities. In the opinion of management,
the nature and disposition of these matters are considered routine and arising in the ordinary course of
business. Except as previously disclosed concerning rural exemption proceedings (see “Part I — Item 1 —
Regulation, Franchise Authorizations and Tariffs”), even if resolved unfavorably to us, management believes
these matters would not have a materially adverse affect on our business or financial position, results of
operations or liquidity.
Item 4. Submissions of Matters to a Vote of Security Holders
No matters were submitted during the fourth quarter of 2003 to a vote of security holders, through the
solicitation of proxies or otherwise.
Part II
Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters
Market Information for Common Stock
Shares of GCI's Class A common stock are traded on the Nasdaq National Market tier of The Nasdaq Stock
Market under the symbol GNCMA. Shares of GCI's Class B common stock are traded on the Over-the-Counter
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.
59
Class A
Class B
High
Low
High
Low
$
$
$
$
$
$
$
$
9.70
10.26
7.25
7.80
7.49
8.85
9.10
10.44
7.05
6.40
2.60
2.99
4.98
5.44
7.59
8.32
9.00
12.00
7.00
7.00
7.20
8.70
9.40
10.01
7.30
7.00
3.50
3.10
5.20
5.70
7.25
8.60
2002:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2003:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Holders
As of December 31, 2003 there were 1,992 holders of record of GCI's Class A common stock and 443
holders of record of GCI's Class B common stock (amounts do not include the number of shareholders whose
shares are held of record by brokers, but do include the brokerage house as one shareholder).
Dividends
GCI has never paid cash dividends on its common stock and has no present intention of doing so. Payment of
cash dividends in the future, if any, will be determined by GCI's Board of Directors in light of our earnings,
financial condition and other relevant considerations. Our existing bank loan agreements contain provisions
that prohibit payment of dividends on common stock, other than stock dividends (you should see note 8 to
the “Consolidated Financial Statements” included in Part II of this Report for more information).
Stock Transfer Agent and Registrar
Mellon is our stock transfer agent and registrar.
60
Item 6. Selected Financial Data
The following table presents selected historical information relating to financial condition and results of
operations over the past five years.
Revenues
Net income (loss) before income taxes and
cumulative effect of a change in
accounting principle
Cumulative effect of a change in
accounting principal, net of income tax
benefit of $367 in 2003 and $245 in
1999
Net income (loss)
Basic and diluted net income (loss) per
common share
Total assets
Long-term debt, including current portion
Obligations under capital leases, including
Years ended December 31,
2003
1999
2000
2001
2002
(Amounts in thousands except per share amounts)
$ 390,797 367,842 357,258 292,605 279,179
$ 26,160
12,322
8,659
(21,649)
(14,866)
$
(544)
0
0
0
(344)
$ 15,542
6,663
4,589
(13,234)
(9,527)
$
0.24
0.08
0.05
(0.29)
(0.21)
$ 763,020 738,782 734,679 679,007 643,151
$ 345,000 357,700 351,700 334,400 339,400
current portion
$ 44,775
46,632
47,282
48,696
1,674
Redeemable preferred stock:
Series B
Series C
$ 15,664
16,907
16,907
22,589
19,912
$ 10,000
10,000
10,000
0
0
Total stockholders’ equity
$ 226,642 208,220 202,392 183,480 192,548
Dividends declared per common share
$
0.00
0.00
0.00
0.00
0.00
The Selected Financial Data should be read in conjunction with “Part II — Item 7 —
Management’s Discussion and Analysis of Financial Condition and Results of Operations. “
61
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
In the following discussion, General Communication, Inc. and its direct and indirect subsidiaries are referred
to as “we,” “us” and “our.”
Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our
consolidated financial statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these financial statements requires us
to make estimates and assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate our
estimates and judgments, including those related to unbilled revenues, cost of sales and services accruals,
allowance for doubtful accounts, depreciation, amortization and accretion periods, intangible assets, income
taxes, and contingencies and litigation. We base our estimates and judgments on historical experience and
on various other factors that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates under different assumptions or
conditions. See also our “Cautionary Statement Regarding Forward-Looking Statements.”
General Overview
Through our focus on long-term results, acquisitions, and strategic capital investments, we have consistently
grown our revenues and expanded our margins. We have historically met our cash needs for operations,
regular capital expenditures and maintenance capital expenditures through our cash flows from operating
activities. Historically, cash requirements for significant acquisitions and major capital expenditures have
been provided largely through our financing activities. We are funding the construction of a new fiber optic
cable system through our operating cash flows and, to the extent necessary, with draws on our new Senior
Credit Facility, as further discussed in Liquidity and Capital Resources in this report.
Results of Operations
The following table sets forth selected Statement of Operations data as a percentage of total revenues for the
periods indicated (underlying data rounded to the nearest thousands):
Statement of Operations Data:
Revenues:
Long-distance services
Cable services
Local access services
Internet services
All other services
Total revenues
Year Ended December 31,
Percentage Change 1
2003
2002
2001
2003
vs.
2002
2002
vs.
2001
52.3%
24.6%
10.0%
5.1%
8.0%
56.2%
55.7%
21.4%
24.1%
7.1%
8.7%
3.3%
4.3%
12.0%
7.2%
100.0% 100.0% 100.0%
(0.2%)
8.2%
21.6%
27.3%
18.1%
6.2%
2.1%
15.9%
27.1%
29.9%
(37.9%)
3.0%
62
Cost of sales and services
Selling, general and administrative
expenses
Bad debt expense
Impairment charge
Depreciation and amortization
Operating income
Net income before income taxes
and cumulative effect of a
change in accounting principle
Net income before cumulative
effect of a change in accounting
principle
Net income
Other Operating Data:
Long-distance services operating
income 2
Cable services operating income 3
Local access services operating income
(loss) 4
Internet services operating loss 5
__________________________
Year Ended December 31,
Percentage Change 1
2003
32.1%
2002
33.6%
2001
39.1%
35.5%
0.0%
1.4%
13.6%
17.4%
35.1%
3.6%
0.0%
15.3%
12.4%
32.6%
1.2%
0.0%
15.6%
11.5%
2003
vs.
2002
1.5%
2002
vs.
2001
(11.6%)
7.5%
10.7%
(101.4%) 206.7%
0.0%
1.3%
11.6%
NA
(5.6%)
49.2%
6.7%
3.3%
2.4%
112.3%
42.3%
4.1%
4.0%
3.3%
1.8%
2.4%
1.3%
141.4%
133.3%
42.3%
45.2%
40.8%
28.6%
38.6%
28.8%
34.0%
18.1%
9.6%
7.5%
16.0%
84.2%
3.8%
(2.3%)
(2.2%) (117.2%) (125.2%)
5.8%
301.5%
97.6%
(150.2%)
(21.6%)
1 Percentage change in underlying data.
2 Computed as a percentage of total external long-distance services revenues.
3 Computed as a percentage of total external cable services revenues.
4 Computed as a percentage of total external local access services revenues.
5 Computed as a percentage of total external Internet services revenues.
NA – Not applicable
__________________________
Year Ended December 31, 2003 (“2003”) Compared To Year Ended December 31, 2002 (“2002”)
Overview of Revenues and Cost of Sales and Services
Total revenues increased 6.2% from $367.8 million in 2002 to $390.8 million in 2003. The cable services,
local access services and Internet services segments and All Other Services contributed to the increase in
total revenues, partially off-set by decreased revenues in the long-distance services segment. See the
discussion below for more information by segment.
Total cost of sales and services increased 1.5% to $125.4 million in 2003. As a percentage of total revenues,
total cost of sales and services decreased from 33.6% in 2002 to 32.1% in 2003. The cable services, local
access services and Internet services segments and All Other Services contributed to the increase in total cost
of sales and services, partially off-set by decreased cost of sales and services in the long-distance services
segment. See the discussion below for more information by segment.
Long-Distance Services Overview
Long-distance services revenue in 2003 represented 52.3% of consolidated revenues. Our provision of
interstate and intrastate long-distance services, Private Line and leased dedicated capacity services, and
broadband services accounted for 94.7% of our total long-distance services revenues during 2003.
63
Factors that have the greatest impact on year-to-year changes in long-distance services revenues include the
rate per minute charged to customers, usage volumes expressed as minutes of use, and the number of
Private Line, leased dedicated service and broadband products in use.
Due in large part to the favorable synergistic effects of our bundling strategy, the long-distance services
segment continues to be a significant contributor to our overall performance, although the migration of traffic
from voice to data and from fixed to mobile wireless continues.
Our long-distance services segment faces significant competition from AT&T Alascom, long-distance resellers,
and local telephone companies that have entered the long-distance market. We believe our approach to
developing, pricing, and providing long-distance services and bundling different business segment services
will continue to allow us to be competitive in providing those services.
Our contract to provide interstate and intrastate long-distance services to Sprint was replaced in March 2002
extending its term to March 2007 with two one-year automatic extensions to March 2009. Beginning in April
2002 the new contract reduced the rate to be charged by us for certain Sprint traffic over the extended term
of the contract. Additional contractual rate reductions occur annually through the end of the initial term of the
contract.
On July 21, 2002 MCI and substantially all of its active United States subsidiaries filed voluntary petitions for
reorganization under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court.
Chapter 11 allows a company to continue operating in the ordinary course of business in order to maximize
recovery for the company’s creditors and shareholders. On July 22, 2003, the United States Bankruptcy Court
approved a settlement agreement for pre-petition amounts owed to us by MCI and affirmed all of our existing
contracts with MCI. On July 24, 2003, our contract to provide interstate and intrastate long-distance services
to MCI was extended for a minimum of five years to July 2008. The agreement sets the terms and conditions
under which we originate and terminate certain types of long distance and data services in Alaska on MCI’s
behalf. In exchange for extending the term of this exclusive contract, MCI will receive a series of rate
reductions implemented in phases over the life of the contract.
Other common carrier traffic routed to us for termination in Alaska is largely dependent on traffic routed to
MCI and Sprint by their customers. Pricing pressures, general economic deterioration, new program offerings,
business failures, and market and business consolidations continue to evolve in the markets served by MCI
and Sprint. If, as a result, their traffic is reduced, or if their competitors’ costs to terminate or originate traffic
in Alaska are reduced, our traffic will also likely be reduced, and our pricing may be reduced to respond to
competitive pressures. Additionally, a protracted economic malaise in the Lower 48 States or a further
disruption in the economy resulting from terrorist attacks and other attacks or acts of war could affect our
carrier customers. We are unable to predict the effect on us of such changes, however given the materiality
of other common carrier revenues to us, a significant reduction in traffic or pricing could have a material
adverse effect on our financial position, results of operations and liquidity.
At the time of MCI’s petition for bankruptcy, we had approximately $12.9 million in receivables outstanding
from MCI. At December 31, 2002 the bad debt reserve for uncollected amounts due from MCI (“MCI reserve”)
totaled $11.6 million and consisted of all billings for services rendered prior to July 21, 2002 that were not
paid or deemed recoverable as of December 31, 2002.
The settlement agreement approved by the United States Bankruptcy Court on July 22, 2003 settled unpaid
balances due from MCI for services rendered prior to their bankruptcy filing date, settled billing disputes
between us, and established a right to set-off certain of our pre-petition accounts payable to MCI. Under the
terms of the agreement, we reduced the pre-petition amounts receivable from MCI by $800,000 and off-set
our pre-petition accounts payable by $1.0 million. The majority of the difference reduced the MCI reserve with
the remainder recorded as bad debt expense.
The remaining pre-petition accounts receivable balance owed by MCI to us after this settlement was $11.1
million (“MCI credit”) which we have and will use as a credit against amounts payable for services purchased
64
from MCI. At settlement, all of the remaining pre-petition amounts receivable due from MCI, which were fully
reserved, were removed from accounts receivable in our Consolidated Balance Sheets.
After settlement, we began reducing the MCI credit as we utilized it for services otherwise payable to MCI. The
use of the credit is recorded as a reduction of bad debt expense. During 2003 we utilized approximately $2.8
million of the MCI credit against amounts payable for services received from MCI.
The remaining unused MCI credit totaled $7.9 million at December 31, 2003. The credit balance is not
recorded on the Consolidated Balance Sheets as we are recognizing recovery of bad debt expense as the
credit is utilized.
On October 31, 2003, MCI’s reorganization plan was approved by the United States Bankruptcy Court. The
court order provided for a February 28, 2004 deadline for MCI to emerge from bankruptcy. In February 2004
MCI asked the Court for a 60-day extension to the February 28 deadline to allow it to complete financial
filings with the SEC. The financial filings are reported to be the last major task left for MCI to emerge from
bankruptcy. We expect to evaluate the likelihood that we will receive full recovery of bad debt expense for our
remaining credit balance when MCI exits bankruptcy proceedings and may change our recognition method at
that time.
Long-distance Services Segment Revenues
Total long-distance services segment revenues decreased 0.2% to $204.6 million in 2003. The components
of long-distance services segment revenues are as follows (amounts in thousands):
Common carrier message telephone services
Residential, commercial and governmental
message telephone services
Private line and Private Network services
Broadband services
Lease of fiber optic cable system capacity
Total long-distance services segment revenue
2003
$ 91,700
2002
95,947
39,701
37,123
25,167
10,876
$ 204,567
46,169
36,157
18,432
8,225
204,930
Percentage
Change
(4.4%)
(14.0%)
2.7%
36.5%
32.2%
(0.2%)
Common Carrier Message Telephone Services Revenue
The 2003 decrease in message telephone service revenues from other common carriers (principally MCI and
Sprint) results from the following:
(cid:130) A 10.0% decrease in the average rate per minute on minutes carried for other common carriers primarily
due to the decreased average rate per minute as agreed to in the July 24, 2003 extension of our
contract to provide interstate and intrastate long-distance services to MCI,
(cid:130) A discount given to a certain other common carrier customer starting in 2003, and
(cid:130) Revenue earned due to a 2002 increase in the rate per minute of certain other common carrier minutes
retroactive to April 2002 which did not recur in 2003.
The decrease in message telephone service revenues from other common carriers in 2003 was off-set by a
6.7% increase in wholesale minutes carried to 875.0 million minutes.
65
Residential, Commercial and Governmental Message Telephone Services Revenue
Selected key performance indicators for our offering of message telephone service to residential, commercial
and governmental customers follow:
Retail minutes carried
Average rate per minute
Number of active residential,
commercial and governmental
customers 1
2003
2002
284.3 million
309.2 million
$0.138
$0.142
Percentage
Change
(8.1%)
(2.8%)
85,600
88,200
(2.9%)
1 All current subscribers who have had calling activity during December of 2003 and
2002, respectively.
The decrease in message telephone service revenues from residential, commercial, and governmental
customers in 2003 is primarily due to the following:
(cid:130) A decrease in minutes carried for these customers primarily due to the effect of customers substituting
cellular phone, prepaid calling card and email usage for direct dial minutes,
(cid:130) A decrease in the average rate per minute primarily due to our promotion of and customers' enrollment
in calling plans offering a certain number of minutes for a flat monthly fee, and
(cid:130) A decrease in the number of active residential, commercial, and governmental customers billed primarily
due to the effect of customers substituting cellular phone, prepaid calling card, and email usage for
direct dial minutes.
Broadband Services Revenue
The increase in revenues from our packaged telecommunications offering to rural hospitals and health clinics
and our SchoolAccess™ offering to rural school districts in 2003 is primarily due to the following:
(cid:130) Our new SchoolAccess™ offering called Distance Learning Service that started in late 2002. Distance
Learning Service is a video-conference based service that enables eight school districts in Alaska to
provide additional educational opportunities for their students, and
(cid:130) An increased number of circuits leased to rural hospitals and health clinics in Alaska.
Long-distance Services Segment Cost of Sales and Services
Long-distance services segment cost of sales and services decreased 11.1% to $53.4 million in 2003. Long-
distance services segment cost of sales and services as a percentage of long-distance services segment
revenues decreased from 29.3% in 2002 to 26.1% in 2003 primarily due to the following:
(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 $.011 and $.061 per minute for interstate and intrastate traffic,
respectively. We expect cost savings to continue to occur as long-distance traffic originated, carried, and
terminated on our own facilities grows,
The FCC Multi-Association Group (“MAG”) reform order reducing the interstate access rates paid by
interexchange carriers to LECs beginning July 2002,
(cid:130)
(cid:130) A $2.3 million refund ($1.9 million after deducting certain direct costs) in 2003 from a local exchange
carrier in respect of its earnings that exceeded regulatory requirements, and
(cid:130) A $1.7 million refund in 2003 from an intrastate access cost pool that previously overcharged us for
access services.
66
The decrease in the long-distance services segment cost of sales and services as a percentage of long-
distance services segment revenues is partially off-set by the following:
(cid:130)
Increased costs associated with additional transponder and network back-up capacity in 2003 as
compared to 2002,
(cid:130) A discount given to a certain other common carrier customer starting in the third quarter of 2003 without
(cid:130)
a corresponding decrease in the cost of sales and services, and
The decreased average rate per minute on minutes carried for other common carriers as agreed to in the
July 24, 2003 extension of our contract to provide interstate and intrastate long-distance services to
MCI.
Cable Services Overview
Cable television revenues in 2003 represented 24.6% of consolidated revenues. Our cable systems serve 35
communities and areas in Alaska, including the state's four largest population centers, Anchorage, Fairbanks,
the Matanuska-Susitna Valley and Juneau.
We generate cable services revenues from four primary sources: (1) digital and analog programming services,
including monthly basic and premium subscriptions, pay-per-view movies and other one-time events, such as
sporting events; (2) equipment rentals and installation; (3) cable modem services (shared with our Internet
services segment); and (4) advertising sales. During 2003 programming services generated 76.3% of total
cable services revenues, cable services’ allocable share of cable modem services accounted for 11.4% of
such revenues, equipment rental and installation fees accounted for 8.1% of such revenues, advertising sales
accounted for 3.4% of such revenues, and other services accounted for the remaining 0.8% of total cable
services revenues.
Effective February 2003, we increased rates charged for certain cable services and premium packages in six
communities, including three of the state's four largest population centers, Anchorage, Fairbanks and Juneau.
Rates increased approximately 4% for those customers who experienced an adjustment.
The primary factors that contribute to year-to-year changes in cable services revenues include average
monthly subscription and pay-per-view rates, the mix among basic, premium and pay-per-view services and
digital and analog services, the average number of cable television and cable modem subscribers during a
given reporting period, and revenues generated from new product offerings.
In the second quarter of 2002 we signed seven-year retransmission agreements with the five local Anchorage
broadcasters and began up-linking and distributing the local Anchorage programming to all of our cable
systems. This local programming provides additional value to our cable subscribers that not all our DBS
competitors can provide. In 2003 DBS service provider Dish Network (EchoStar Communications
Corporation) began providing, for an additional fee, Anchorage based broadcaster programming in Anchorage
and in other Alaska communities where there is not a similar local broadcast affiliate.
Cable Services Segment Revenues and Cost of Sales and Services
Selected key performance indicators for our cable services segment follow:
Basic subscribers
Digital special interest subscribers
Cable modem subscribers
Homes passed
2003
134,400
34,900
46,000
202,200
2002
136,100
30,500
36,200
196,900
Percentage
Change
(1.2%)
14.4%
27.1%
2.7%
Total cable services segment revenues increased 8.2% to $96.0 million and average gross revenue per
average basic subscriber per month increased $4.35 or 7.8% in 2003.
67
Programming services revenues increased 7.4% to $73.2 million in 2003 resulting from the following:
(cid:130) An increase in the number of digital subscribers, and
(cid:130)
The February 2003 rate increase of approximately 4% for those customers who experienced an
adjustment.
The increase in programming services revenue is partially off-set by a decrease in basic subscribers due to
increased competition from DBS.
The cable services segment’s share of cable modem revenue (offered through our Internet services segment)
increased 37.2% to $11.0 million in 2003 due to an increased number of cable modems deployed.
Approximately 99% of our cable homes passed are able to subscribe to our cable modem service. In the
second quarter of 2003 we completed our upgrade of the Ketchikan cable system. Customers in this system
are now able to subscribe to cable modem service.
We now offer digital programming service in Anchorage, the Matanuska-Susitna Valley, Fairbanks, Juneau,
Ketchikan, Kenai, and Soldotna, representing approximately 89% of our total homes passed at December 31,
2003. We launched digital programming services in the Matanuska-Susitna Valley and Ketchikan cable
systems in 2003.
Cable services cost of sales and services increased 9.9% to $26.0 million in 2003 due to programming cost
increases for most of our cable programming services offerings. Cable services cost of sales and services as
a percentage of cable services revenues increased from 26.7% in 2002 to 27.1% in 2003 primarily due to
rate increases by programming vendors exceeding our rate adjustments. Cost of sales increases are partially
off-set by increasing amounts of cable modem services sold that generally have higher margins than do cable
programming services.
Multiple System Operator (“MSO”) Operating Statistics
In October 2002 we, along with the other largest publicly traded MSOs, signed a pledge to support and
adhere to new voluntary reporting guidelines on common operating statistics to provide investors and others
with a better understanding of our operations. Our operating statistics include capital expenditures and
customer information from our cable services segment and the components of our local access services and
Internet services segments which offer services utilizing our cable services’ facilities.
Our capital expenditures by standard reporting category for the year ending December 31, 2003 and 2002
follows (amounts in thousands):
Customer premise equipment
Commercial
Scalable infrastructure
Line extensions
Upgrade/rebuild
Support capital
Sub-total
Remaining reportable segments and
All Other capital expenditures
$
2003
10,713
705
2,221
1,270
3,800
503
19,212
43,267
62,479
$
2002
10,609
597
3,082
866
4,567
5,413
25,134
40,006
65,140
68
The standardized definition of a customer relationship is the number of customers that receive at least one
level of service, encompassing voice, video, and data services, without regard to which services customers
purchase. At December 31, 2003 and 2002 we had 121,900 and 124,400 customer relationships,
respectively.
The standardized definition of a revenue generating unit is the sum of all primary analog video, digital video,
high-speed data, and telephony customers, not counting additional outlets. At December 31, 2003 and 2002
we had 180,400 and 172,200 revenue generating units, respectively.
Local Access Services Overview
We generate local access services revenues from three primary sources: (1) business and residential basic
dial tone services; (2) business Private Line and special access services; and (3) business and residential
features and other charges, including voice mail, caller ID, distinctive ring, inside wiring and subscriber line
charges. During 2003 local access services revenues represented 10.0% of consolidated revenues.
The primary factors that contribute to year-to-year changes in local access services revenues include the
average number of business and residential subscribers to our services during a given reporting period, the
average monthly rates charged for non-traffic sensitive services, the number and type of additional premium
features selected, and the traffic sensitive access rates charged to carriers and the Universal Service
Program.
Our local access services segment faces significant competition in Anchorage, Fairbanks, and Juneau from
ACS , which is the largest ILEC in Alaska, and from AT&T Alascom, Inc. We began providing service in the
Juneau market in the first quarter of 2002. We believe our approach to developing, pricing, and providing
local access services and bundling different business segment services will allow us to be competitive in
providing those services.
We have been testing the deployment of voice telephone service utilizing our coaxial cable facilities. If we are
able to deploy this service, we will be able to utilize our own cable facilities to provide local access to our
customers and avoid paying local loop charges to the ILEC. To successfully deploy this service, we must
integrate new technology with our existing facilities and the industry must adopt standards for the sending
and receiving of voice communications over cable facilities. To ensure the necessary equipment is available
to us we have committed to purchase a certain number of outdoor, network powered multi-media adapters,
as further disclosed below in “Liquidity and Capital Resources.” We expect to begin implementing this service
delivery method in the second quarter of 2004.
At December 31, 2003, 106,100 lines were in service as compared to approximately 96,100 lines in service
at December 31, 2002. At December 31, 2003 approximately 1,940 additional lines were awaiting
connection. We estimate that our 2003 lines in service total represents a statewide market share of
approximately 22%.
Our access line mix at December 31, 2003 follows:
(cid:130) Residential lines represent approximately 58% of our lines,
(cid:130) Business customers represent approximately 35% of our lines, and
(cid:130)
Internet access customers represent approximately 7% of our lines.
Approximately 86% of our lines are provided on our own facilities and leased local loops. Approximately 5% of
our lines are provided using UNE platform.
In December 2003 we distributed our new phone directory and began recognizing revenue and costs of sales
and service in the local access services segment. We recognized one month of revenue and cost of sales and
service in the fourth quarter of 2003 and we plan to recognize the remaining eleven months in 2004.
Operating expenses incurred and recognized throughout 2003 to prepare our new phone directory are
reported in the local access services segment.
69
Local Access Services Segment Revenues and Cost of Sales and Services
Local access services segment revenues increased 21.6% in 2003 to $39.0 million primarily due to the
following:
(cid:130) Growth in the average lines in service,
(cid:130) $1.9 million of support from the Universal Service Program, and
(cid:130) A change in how we provision local access lines in Fairbanks and Juneau. In 2002 we primarily resold
service purchased from ACS. In 2003 we are benefiting from our facilities build-out with an increased
number of access lines provisioned on our own facilities using UNEs, allowing us to collect interstate and
intrastate access revenues.
Local access services segment cost of sales and services increased 17.6% to $23.8 million in 2003. Local
access services segment cost of sales and services as a percentage of local access services segment
revenues decreased from 63.0% in 2002 to 60.9% in 2003, primarily due to the $1.9 million of support from
the Universal Service Program and reductions in access costs attributed to our conversion of service provided
on a wholesale basis to service provided through our own facilities.
The local access services segment operating results are negatively affected by the allocation of the benefit of
access cost savings to the long-distance services segment. If the local access services segment received
credit for the access charge reductions recorded by the long distance services segment, the local access
services segment operating results would have improved by approximately $6.9 million and the long distance
services segment operating results would have been reduced by an equal amount in 2003. Avoided access
charges totaled approximately $7.0 million in 2002.
The local access services segment operating results are affected by our continued evaluation and testing of
digital local phone service and Internet protocol-based technology to deliver phone service through our cable
facilities.
Internet Services Overview
We generate Internet services revenues from three primary sources: (1) access product services, including
commercial, Internet service provider, and retail dial-up access; (2) network management services; and (3)
Internet services’ allocable share of cable modem revenue (a portion of cable modem revenue is also
recognized by our cable services segment). During 2003 Internet services segment revenues represented
5.1% of consolidated revenues.
The primary factors that contribute to year-to-year changes in Internet services revenues include the average
number of subscribers to our services during a given reporting period, the average monthly subscription rates,
the amount of bandwidth purchased by large commercial customers, and the number and type of additional
premium features selected.
Marketing campaigns continue to be deployed targeting residential and commercial customers featuring
bundled products. Our Internet offerings are bundled with our long-distance and/or local access services
offerings and provide free basic Internet services or discounted premium Internet services if certain long-
distance and local access services plans are selected. In 2004 we have added cable service to our bundled
offering. Value-added premium Internet features are available for additional charges.
We compete with a number of Internet service providers in our markets. We believe our approach to
developing, pricing, and providing Internet services allows us to be competitive in providing those services.
During 2003 we upgraded the download speeds of all of our cable modem Internet service offerings. These
enhancements have proven to be popular with our customers which we believe is helping to further solidify
our customer relationships.
70
Internet Services Segment Revenues and Cost of Sales and Services
Selected key performance indicators for our Internet services segment follow:
Total Internet subscribers
Cable modem subscribers
Dial-up subscribers
2003
95,700
46,000
49,600
2002
89,500
36,200
53,300
Percentage
Change
6.9%
27.1%
(6.9%)
Total Internet services segment revenues increased 27.3% to $19.8 million in 2003 primarily due to the
39.1% increase in its allocable share of cable modem revenues to $9.1 million in 2003 as compared to
2002. The increase in cable modem revenues is primarily due to growth in cable modem subscribers and the
termination in the first quarter of 2003 of our offering in which customers received up to two months of free
cable modem service. Additionally, the growth in cable modem revenues is affected by the level of service
our subscribers select. In 2003 and 2002, 8.1% and 6.0%, respectively, of our subscribers selected our
highest level of cable modem service resulting in increased revenue of approximately $897,000 in 2003 as
compared to 2002.
We previously reported a total of 71,700 Internet subscribers at December 31, 2002. This subscriber count
was based upon the total number of active dial-up subscribers at December 31, 2002. Not all cable modem
subscribers paying for a dial-up plan have activated their dial-up service. When we first started selling cable
modem service it was packaged in a way that almost all cable modem subscribers were also dial up
subscribers. As we introduced new packages and plans and started promoting our cable modem LiteSpeed
service the number of cable modem subscribers without a dial up plan increased substantially. An internal
review during the second quarter of 2003 revealed that these subscriber counts had risen substantially
enough that they are now being reported separately.
Internet services cost of sales and services increased 22.3% to $5.9 million in 2003, and as a percentage of
Internet services revenues, totaled 29.6% and 30.8% in 2003 and 2002, respectively. The 2003 decrease as
a percentage of Internet services revenues is primarily due to the increase in Internet’s portion of cable
modem revenue which generally has higher margins than do other Internet services products. As Internet
services revenues increase, economies of scale and more efficient network utilization continue to result in
reduced Internet cost of sales and services as a percentage of revenues.
All Other Services Overview
Revenues reported in the All Other category as described in note 13 in the accompanying “Notes to
Consolidated Financial Statements” include our managed services, product sales, and cellular telephone
services.
Revenues included in the All Other category represented 8.0% of total revenues in 2003.
All Other Revenues and Costs of Sales and Services
All Other revenues increased 18.1% to $31.4 million in 2003. The increase in revenues is primarily due to
the following:
(cid:130)
Increased monthly revenue earned from our GCI Fiber system that transits the Trans Alaska oil pipeline
corridor, and
(cid:130) $2.0 million in special project revenue earned from our GCI Fiber system in 2003.
71
All Other costs of sales and services increased 10.3% to $16.4 million in 2003, and as a percentage of All
Other revenues, totaled 52.2% and 56.0% in 2003 and 2002, respectively. The decrease in All Other costs of
sales and services as a percentage of All Other revenues is primarily due to the following:
(cid:130)
(cid:130)
Increased monthly revenue earned from our recurring service contracts in 2003 which exceeds the
corresponding increase in costs of sales or services, and
The recognition of $2.0 million in special project revenue earned in 2003 which exceeds the
corresponding increase in costs of sales or services.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 7.5% to $138.7 million in 2003 and, as a percentage
of total revenues, increased to 35.5% in 2003 from 35.1% in 2002. The 2003 increase in selling, general
and administrative expenses is primarily due to a $4.9 million increase in labor and health insurance costs
and a $4.3 million increase in the accrual for company-wide success sharing bonus costs.
Marketing and advertising expenses as a percentage of total revenues decreased from 3.3% in 2002 to 2.5%
in 2003.
Bad Debt Expense (Recovery)
Bad debt expense (recovery) decreased 101.4% to ($178,000) in 2003. The 2003 decrease is primarily due
to the following:
(cid:130) Utilization of approximately $2.8 million of the MCI credit as a reduction to bad debt expense in 2003, as
further discussed in the “Long Distance Service Overview” above, and
(cid:130) Provision in 2002 of a $11.0 million bad debt reserve for uncollected amounts due from MCI, as further
discussed in the “Long Distance Service Overview” above.
Impairment Charge
In 2003, we reported an impairment charge of $5.4 million which equaled the remaining net book value
recorded for our North Pacific Cable asset. In 1991 we purchased one DS-3 of capacity on a fiber optic cable
system owned by AT&T. This fiber optic cable system is a spur off of a trans-Pacific fiber optic cable system
owned by another group. We used our owned capacity to carry traffic to and from Alaska and the Lower 48
States. The section of the North Pacific Cable in which we own capacity was taken out of service in January
2004 due to a billing dispute between AT&T and the owner of the trans-Pacific cable system causing us to re-
route certain of our traffic. We believe it is probable that we will not return our traffic to the North Pacific
Cable even if it is placed back into service. We have requested in writing to be relieved of all future
obligations required by our purchase agreement. Should our request be accepted, we expect to cease
payment of maintenance and vessel standby costs totaling approximately $324,000 per year that would
otherwise be payable over the remaining life of the system. The fiber optic cable system we are building is
scheduled for completion in May 2004 and will provide us with route diversity and redundancy far in excess of
that previously provided by the North Pacific Cable.
Depreciation, Amortization and Accretion Expense
Depreciation, amortization and accretion expense decreased 5.6% to $53.4 million in 2003. The decrease is
primarily attributed to a reduction in the depreciable value of Property and Equipment due to a basis
adjustment of $18.5 million which was recorded in 2002 associated with the Kanas Telecom, Inc. acquisition,
and a 2003 reduction of $1.3 million in depreciation expense which was also associated with the acquisition.
The decrease in depreciation, amortization and accretion expense described above was partially off-set by an
increase in depreciation expense due to our $59.2 million investment in equipment and facilities placed into
service during 2002 for which a full year of depreciation was recorded in 2003, and the $45.8 million
investment in equipment and facilities placed into service during 2003 for which a partial year of depreciation
was recorded in 2003.
72
Other Expense, Net
Other expense, net of other income, increased 25.5% to $41.9 million in 2003. The increase is primarily due
to the following:
(cid:130)
(cid:130) As described further in “Liquidity and Capital Resources” below, we recognized approximately $5.0
million in Amortization of Loan and Senior Notes Fees in 2003 because a portion of the new Senior
Credit Facility was a substantial modification of the April 22, 2003 amended Senior Credit Facility,
Increased interest expense due to increased interest rates on our amended Senior Credit Facility from
October 2002 through October 2003, when the amended Senior Credit Facility was replaced with the
new Senior Credit Facility,
Increased amortization of loan fees due to additional loan fees incurred to amend our Senior Credit
Facility, and
(cid:130)
(cid:130) A $1.2 million interest benefit earned in 2002 from an interest rate swap agreement which was called at
no cost by the counter party and terminated on August 1, 2002.
Partially offsetting these increases was a decrease in the average outstanding indebtedness in 2003 and
decreased interest expense in November and December 2003 due to the decreased interest rate paid on our
new Senior Credit Facility.
Income Tax Expense
Income tax expense was $10.1 million in 2003 and $5.7 million in 2002. The change was due to increased
net income before income taxes and cumulative effect of a change in accounting principle in 2003 as
compared to 2002. Our effective income tax rate decreased from 45.9% in 2002 to 38.5% in 2003 due to
the effect of items that are nondeductible for income tax purposes and adjustments made to ending
temporary difference balances in 2003.
At December 31, 2003, we have (1) tax net operating loss carryforwards of approximately $188.6 million that
will begin expiring in 2005 if not utilized, and (2) alternative minimum tax credit carryforwards of
approximately $1.9 million available to offset regular income taxes payable in future years. Our utilization of
certain net operating loss carryforwards is subject to limitations pursuant to Internal Revenue Code section
382.
Tax benefits associated with recorded deferred tax assets are considered to be more likely than not realizable
through future reversals of existing taxable temporary differences and future taxable income exclusive of
reversing temporary differences and carryforwards. The amount of deferred tax asset considered realizable,
however, could be reduced in the near term if estimates of future taxable income during the carryforward
period are reduced which would result in additional income tax expense. We estimate that our effective
income tax rate for financial statement purposes will be 40% to 43% in 2004.
Cumulative Effect of a Change in Accounting Principle
On January 1, 2003 we adopted SFAS No. 143, “Accounting for Asset Retirement Obligations,” and recorded
the cumulative effect of accretion and depreciation expense as a cumulative effect of a change in accounting
principle of approximately $544,000, net of income tax benefit of $367,000.
Year Ended December 31, 2002 (“2002”) Compared To Year Ended December 31, 2001 (“2001”).
Overview of Revenues and Cost of Sales and Services
Total revenues increased 3.0% from $357.3 million in 2001 to $367.8 million in 2002. Excluding revenues
from the fiber optic cable system capacity sale of $19.5 million in 2001 as described in note 1(r) in the
accompanying “Notes to Consolidated Financial Statements,” total revenues increased 8.9% in 2002. The
long-distance services, cable services, local access services and Internet services segments contributed to
the increase in total revenues, partially off-set by decreased revenues from All Other Services. See the
discussions below for more information by segment.
73
Total cost of sales and services decreased 11.6% to $123.6 million in 2002. As a percentage of total
revenues, total cost of sales and services decreased from 39.1% in 2001 to 33.6% in 2002. Excluding the
2001 fiber optic cable system capacity sale, total cost of sales and services as a percentage of total revenues
totaled 38.2% in 2001 as compared to 33.6% in 2002. The long-distance services segment and All Other
Services contributed to the decrease in total cost of sales and services, partially off-set by increases in cost of
sales and services in the cable services, local access services and Internet services segments. See the
discussions below for more information by segment.
Long-distance Services Segment Revenues
Long-distance services segment revenues increased 2.1% to $204.9 million in 2002. The components of
long-distance services segment revenues are as follows (amounts in thousands):
Common carrier message telephone services
Residential, commercial and governmental
message telephone services
Private line and Private Network services
Broadband services
Lease of fiber optic cable system capacity
Total long-distance services segment revenue
2002
95,947
$
2001
86,577
46,169
36,157
18,432
8,225
$ 204,930
54,225
34,694
15,696
9,502
200,694
Percentage
Change
10.8%
(14.9%)
4.2%
17.4%
(13.4%)
2.1%
Common Carrier Message Telephone Service Revenue
Message telephone service revenues from other common carriers (principally MCI and Sprint) increased
10.9% to $88.8 million in 2002 resulting from a 14.7% increase in wholesale minutes carried to 819.8
million minutes. After excluding certain 2001 low-margin wholesale minutes no longer carried for other
common carriers, comparable wholesale minutes carried for other common carriers increased 19.5% over the
prior year. Revenue increases resulting from increased wholesale minutes carried for other common carriers
was partially off-set by a 3.5% decrease in the average rate per minute on minutes carried for other common
carriers. The increase is also due to the reclassification of approximately 12.0 million minutes of traffic
generated by a certain customer from retail in 2001 to wholesale in 2002. The average rate per minute
decrease is primarily due to a reduced rate charged by us for certain Sprint traffic due to a new contract
commencing April 2002. After excluding certain 2001 low-margin wholesale minutes not carried in 2002 for
other common carriers, the comparable average rate per minute decreased 6.5% from the prior year.
Residential, Commercial and Governmental Message Telephone Services Revenue
Selected key performance indicators for our offering of message telephone service to residential, commercial
and governmental customers follow:
Retail minutes carried
Average rate per minute
Number of active residential, commercial
and governmental customers 1
2002
309.2 million
$0.142
88,200
2001
344.2 million
$0.151
87,900
Percentage
Change
(10.2%)
(6.0%)
0.3%
1 All current subscribers who have had calling activity during December of 2002 and 2001,
respectively.
Message telephone service revenues from residential, commercial, and governmental customers decreased
12.2% to $53.3 million in 2002 primarily due to the following:
(cid:130) A decrease in retail minutes carried for these customers primarily due to the loss of approximately 8.0
million to 10.0 million minutes earned annually from a certain retail customer and the reclassification of
approximately 12.0 million minutes of traffic generated by a certain customer from retail in 2001 to
74
wholesale in 2002, and
(cid:130) A decrease in the average rate per minute paid by these customers due to our promotion of and
customers' enrollment in calling plans offering a certain number of minutes for a flat monthly fee.
Through May 2001 discounts recognized on revenue from certain Private Line and Private Network customers
totaling $2.8 million off-set 2001 message telephone service revenue from residential, commercial and
governmental customers. Beginning June 2001 these discounts off-set revenue earned from Private Line and
Private Network customers. If these discounts had not been recognized in the 2001 message telephone
service revenue from residential, commercial and governmental customers through May 2001, revenues
would have decreased 16.1% to $53.3 million in 2002 as compared to 2001.
Private Line and Private Network Service Revenue
Private line and Private Network transmission services revenues increased 4.2% to $36.2 million in 2002.
The increase is partially off-set by the effect of a reclassification of discounts recognized on revenue from
certain Private Line and Private Network customers, discussed above in “Residential, Commercial and
Governmental Message Telephone Services Revenue”. If the discounts had been recognized in revenue from
Private Line and Private Network customers during all of 2001 the increase in revenue would be 13.4% to
$36.2 million. The increase in revenue from Private Line and Private Network customers in 2002 is primarily
due to an increased number of circuits leased by governmental customers.
Broadband Services Revenue
Revenues from our packaged telecommunications offering to rural hospital and health clinic service and our
SchoolAccess™ 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™
product offering called Distance Learning that started in late 2002. Distance Learning is a video-conference
based service and is used by six school districts in Alaska in 2002.
Long-distances Services Segment Cost of Sales and Services
Long-distance services segment cost of sales and services decreased 18.0% to $60.1 million in 2002. Long-
distance services segment cost of sales and services as a percentage of long-distance services segment
revenues decreased from 36.5% in 2001 to 29.3% in 2002 primarily due to the following:
(cid:130) Reductions in access costs due to distribution and termination of our traffic on our own local access
(cid:130)
(cid:130)
services network instead of paying other carriers to distribute and terminate our traffic. The statewide
average cost savings is approximately $.010 and $.056 per minute for interstate and intrastate traffic,
respectively. We expect cost savings to continue to occur as long-distance traffic originated, carried, and
terminated on our own facilities grows,
The FCC MAG reform order reducing the interstate access rates paid by 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.
75
Cable Services Segment Revenues and Cost of Sales and Services
Selected key performance indicators for our cable services segment follow:
Basic subscribers
Digital special interest subscribers
Cable modem subscribers
Homes passed
2002
136,100
30,500
36,200
196,900
2001
132,000
24,600
26,500
192,200
Percentage
Change
3.1%
24.0%
36.6%
2.4%
Cable services segment revenues increased 15.9% to $88.7 million and average gross revenue per average
basic subscriber per month increased $3.38 or 6.4% in 2002. The increases in revenues and rates per
subscriber were accomplished without any meaningful rate increases during 2002 and are due primarily to
continued deployment of our high value services including digital cable television and cable modems.
Programming services revenues increased 11.9% to $68.2 million in 2002 due to an increase in basic and
digital subscribers.
The cable services segment’s share of cable modem revenue (offered through our Internet services segment)
increased $3.1 million to $8.0 million in 2002 due to an increased number of cable modems deployed.
Approximately 96% of our cable homes passed are able to subscribe to our cable modem service in 2002.
At December 31, 2002 we offered digital programming in Anchorage, Fairbanks, Juneau, Kenai, and
Soldotna, which markets represented approximately 80% of our homes passed.
Homes passed increased at December 31, 2002 as compared to December 31, 2001 due to new facility
construction efforts.
In the second quarter of 2002 we signed new seven-year retransmission agreements with the five local
Anchorage broadcasters and began up linking and distributing the local Anchorage programming to all of our
cable systems. This was done to provide additional value to our cable subscribers and to allow us to
differentiate our programming from that of our DBS competitors.
Cable services cost of sales and services increased 13.5% to $23.6 million in 2002. Cable services cost of
sales and services as a percentage of cable services revenues, which is less as a percentage of revenues
than are long-distance, local access and Internet services cost of sales and services, decreased from 27.2%
in 2001 to 26.7% in 2002.
Revenues earned from equipment rental and installation, cable services’ allocable share of cable modem
services and advertising sales do not have significant corresponding costs of sales and services. The
decrease in cable services cost of sales and services as a percentage of cable services revenues is primarily
due to an increase in the percentage of cable services revenues earned from equipment rental and
installation, cable services’ allocable share of cable modem services and advertising sales from 20.4% in
2001 to 23.1% in 2002.
The decrease in cable services cost of sales and services as a percentage of cable services revenues
described above is off-set by an increase in cable programming services cost of sales and services as a
percentage of cable programming services revenue from 34.2% in 2001 to 34.7% in 2002. Cable services
rate increases did not keep pace with programming cost increases in 2002. Programming costs increased for
most of our cable services offerings, and we incurred additional costs on new programming introduced in
2001 and 2002.
Local Access Services Segment Revenues and Cost of Sales and Services
Local access services segment revenues increased 27.1% in 2002 to $32.1 million primarily due to growth in
the average lines in service. At December 31, 2002 an estimated 96,100 lines were in service as compared
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to approximately 79,200 lines in service at December 31, 2001. At December 31, 2002 approximately
1,700 additional lines were awaiting connection. The increase in local access services revenues described
above was partially off-set by the following:
(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.
We estimate that our 2002 lines in service total represented a statewide market share of approximately 20%.
Our access line mix continued to hold steady in 2002, with residential lines representing approximately 55% of
our lines, business customers representing approximately 37%, and Internet access customers representing
approximately 8%. Approximately 86% of our lines are provided on our own facilities or using leased local
loops.
Local access services cost of sales and services increased 43.9% to $20.2 million in 2002. Local access
services cost of sales and services as a percentage of local access services revenues increased from 55.6%
in 2001 to 63.0% in 2002, primarily due to the following:
(cid:130)
(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,
The lease of wholesale circuits from ACS in Fairbanks and Juneau pending completion of our facilities
enabling service transition to UNE facilities and pricing, and
(cid:130) An increase in the Anchorage loop lease rates. ACS requested and received permission for a 7.7%
increase in the UNE loop rate to $14.92 per month and a 24% increase in their retail residential rates,
both effective in November 2001. The wholesale service rate we pay is tied to the retail residential rate
and increased approximately $2.25 per line per month. Additionally, the cost of most residential
features increased 24.0% to approximately $1.35 per line per month. The increased rates resulted in an
approximately $1.2 million increase in our local access services cost of sales and services in 2002
without a corresponding increase in our revenue.
The increases in local access services cost of sales and services as a percentage of local access services
revenues described above are partially offset by further economies of scale and more efficient network
utilization as the number of local access services subscribers and resulting revenues increase.
The size of the local access services segment operating loss is exacerbated by the allocation of the benefit of
access cost savings to the long-distance services segment. If the local access services segment received
credit for the access charge reductions recorded by the long distance services segment, the local access
services segment operating loss would have decreased by approximately $7.0 million and the long distance
services segment would be reduced by an equal amount in 2002. Avoided access charges totaled
approximately $6.3 million in 2001.
The local access services segment operating loss was affected by the expected start-up losses we
experienced in the new Fairbanks and Juneau markets and our continued evaluation and testing of DLPS
technology.
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Internet Services Segment Revenues and Cost of Sales and Services
Selected key performance indicators for our Internet services segment follow:
Total Internet subscribers
Cable modem subscribers
Dial-up subscribers
2002
89,500
36,200
53,300
2001
72,700
26,500
46,000
Percentage
Change
23.1%
36.6%
15.9%
Internet services segment revenues increased 29.9% to $15.6 million in 2002 primarily due to growth in the
number of customers served and the 60.3% increase in its allocable share of cable modem revenues in 2002
as compared to 2001. The increase in cable modem revenue is primarily due to growth in the number of
cable modem subscribers from 2001 to 2002 and our subscribers’ more frequent selection of our highest
level of cable modem service.
Internet services cost of sales and services increased 0.9% to $4.8 million in 2002, and as a percentage of
Internet services revenues, totaled 30.8% and 39.6% in 2002 and 2001, respectively. The decrease as a
percentage of Internet services revenues is primarily due to the increase in Internet’s portion of cable modem
revenue which generally has higher margins than do other Internet services products. As Internet services
revenues increase, economies of scale and more efficient network utilization continue to result in reduced
Internet cost of sales and services as a percentage of revenues.
We enhanced the value of our Internet offerings in 2002 through the addition of electronic billing and
presentment capabilities and the rollout of a product called e-mail guard, which filters out e-mail spam and
viruses. In 2002 we upgraded the download speeds of all of our cable modem Internet service offerings.
These new services and enhancements have proven to be very popular with our customers and are helping to
further solidify our customer relationships.
All Other Revenues and Cost of Sales and Services
The 37.9% decrease in All Other revenues to $26.6 million in 2002 is primarily due to the $19.5 million fiber
optic cable system capacity sale in 2001, as described in note 1(r) in the accompanying “Notes to
Consolidated Financial Statements.” The decrease in revenues is partially offset by a $3.0 million increase in
managed services revenue to $22.0 million in 2002 primarily due to the provision of additional services to
and increased revenues from a certain customer as performance criteria was met.
All Other costs of sales and services decreased 44.8% to $14.9 million in 2002 primarily due to $10.9 million
in costs of sale for the fiber optic cable system capacity sale in 2001.
As a percentage of All Other revenues, All Other costs of sales and services totaled 56.0% and 62.9% in 2002
and 2001, respectively. Excluding revenues from the 2001 fiber optic cable system capacity sale, cost of
sales and services as a percentage of revenues totaled 56.0% and 68.9% in 2002 and 2001, respectively.
The decrease is primarily due to the provision of additional services to and increased revenues from a certain
customer as performance criteria was met without a corresponding increase in cost of sales and services.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 10.7% to $129.0 million in 2002 and, as a
percentage of total revenues, increased to 35.1% in 2002 from 32.6% in 2001. Excluding the fiber optic
cable system capacity sale in 2001, selling, general and administrative expenses, as a percentage of total
revenues, increased from 34.1% in 2001 to 35.1% in 2002. The 2002 increase in selling, general and
administrative expenses is primarily due to increased labor and health insurance costs, incremental new
costs to operate GFCC and Rogers, and costs incurred for our unsuccessful bid to purchase certain of the
assets of WCI Cable, Inc., partially offset by a decreased accrual for company-wide success sharing bonus
costs.
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Marketing and advertising expenses as a percentage of total revenues decreased from 3.4% in 2001 to 3.3%
in 2002. Excluding revenues from the fiber optic cable system capacity sale in 2001, marketing and
advertising expenses as a percentage of total revenues were 3.6% in 2001.
Bad Debt Expense
Bad debt expense increased 206.7% to $13.1 million in 2002 and, as a percentage of total revenues,
increased to 3.6% in 2002 from 1.2% in 2001. Excluding revenues from the fiber optic cable system capacity
sale in 2001, bad debt expense as a percentage of total revenues was 1.3% in 2001. The 2002 increase is
primarily due to the $11.0 million bad debt expense for uncollected accounts due from MCI.
Depreciation and Amortization
Depreciation and amortization expense increased 1.3% to $56.4 million in 2002. The increase is primarily
attributable to an increase of 15.1% to $55.6 million in depreciation expense due to our $68.0 million
investment in equipment and facilities placed into service during 2001 for which a full year of depreciation
was recorded in 2002, and the $59.2 million investment in equipment and facilities placed into service
during 2002 for which a partial year of depreciation will be recorded in 2002.
Partially offsetting the depreciation expense increase described above is the discontinuation of amortization
of Goodwill and Cable Certificates upon the adoption of SFAS 142, “Goodwill and Other Intangible Assets” on
January 1, 2002, resulting in a decrease in 2002 amortization expense of approximately $6.5 million as
compared to 2001.
Other Expense, Net
Other expense, net of other income, increased 3.4% to $33.4 million in 2002. The increase is primarily due
to the following:
(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 Credit Facility and Fiber
Facility, and
Increased interest expense in November and December 2002 due to the increased interest rate paid on
our amended Senior Credit Facility starting November 1, 2002.
(cid:130)
Partially offsetting these increases were decreased 2002 interest rates on our Senior Credit Facility and Fiber
Facility through November 1, 2002.
Income Tax Expense
Income tax expense was $5.7 million in 2002 and $4.1 million in 2001. The increase was due to increased
net income before income taxes in 2002 as compared to 2001. Our effective income tax rate decreased
from 47.0% in 2001 to 45.9% in 2002 due to the effect of items that are nondeductible for income tax
purposes.
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Fluctuations in Fourth Quarter Results of Operations
The following is a summary of unaudited quarterly results of operations for the years ended December 31,
2003 and 2002 (amounts in thousands, except per share amounts):
2003
Total revenues
Gross profit
Net income before cumulative
effect of a change in accounting
principle
Net income
Basic and diluted net income per
common share:
Net income before cumulative
effect of a change in
accounting principle 1
Cumulative effect of a change in
accounting principle, net of
income tax benefit of $367
Net income 1
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Total
Year
$ 92,777 95,939
$ 62,529 65,868
98,327 103,754 390,797
66,457 70,560 265,414
$
$
3,095
2,551
4,810
4,810
4,529
4,529
3,652 16,086
3,652 15,542
$
0.05
0.08
0.07
0.06
0.25
(0.01)
0.04
$
---
0.08
---
0.07
---
0.06
(0.01)
0.24
2002
Total revenues
Gross profit
Net income (loss)
Basic and diluted net income (loss)
$ 88,210 92,740
$ 56,973 61,879
(1,103)
$
2,212
94,550 92,342 367,842
64,175 61,251 244,278
6,663
5,063
491
per common share
$
0.03
(0.03)
0.08
0.00
0.08
1 Due to rounding, the sum of quarterly net income per common share amounts does not
agree to total year net income per common share.
The following describes unusual or infrequently occurring items recognized in the following quarters of 2002
and 2003:
(cid:130)
(cid:130)
(cid:130)
In the fourth quarter of 2003 we reported an impairment charge of $5.4 million which equaled the
remaining net book value recorded for our North Pacific Cable asset, as discussed in “Impairment
Charge” above,
In the fourth quarter of 2003 we recognized approximately $5.0 million in Amortization of Loan and
Senior Notes Fees due to classifying a portion of the new Senior Credit Facility described further in
“Liquidity and Capital Resources” below as a substantial modification of the April 22, 2003 amended
Senior Credit Facility, and
In the second and third quarters of 2002 we recognized $9.7 million and $1.2 million, respectively, in
bad debt expense for uncollected accounts due from MCI. In the third and fourth quarters of 2003 we
recognized approximately $647,000 and $2.2 million, respectively, in recoveries of bad debt expense for
uncollected accounts due from MCI.
Liquidity and Capital Resources
Cash flows from operating activities totaled $85.7 million in 2003 as compared to $74.5 million in 2002. The
2003 increase is primarily due to increased cash flow from all of our reportable segments, a $2.3 million
refund from a local exchange carrier in respect of its earnings that exceeded regulatory requirements, receipt
80
of $2.0 million in payments of notes receivable from related parties issued upon stock option exercise, and a
$1.7 million refund from an intrastate access cost pool that previously overcharged us for access services.
Uses of cash during 2003 included expenditures of $62.5 million for property and equipment, including
construction in progress, principal payments on long-term debt and capital lease obligations of $14.6 million,
payment of $6.2 million to purchase other assets and intangible assets, payment of $3.5 million in fees
associated with the amended and new Senior Credit Facility, and payment of preferred stock dividends of $2.0
million.
Net receivables increased $15.7 million from December 31, 2002 to December 31, 2003 primarily due to
increases in the following:
(cid:130)
(cid:130)
(cid:130)
(cid:130)
(cid:130)
Trade receivables for broadband services provided to hospitals and health clinics,
Trade receivables for special project revenue earned from a certain customer,
Trade receivables for telecommunication services provided to a certain customer,
Trade receivable for estimated support from the Universal Service Program, and
Trade receivable for directory advertising services associated with our new phone directory.
Working capital totaled $8.9 million at December 31, 2003, a $4.7 million increase as compared to $4.2
million at December 31, 2002. The increase is primarily attributed to the following:
(cid:130) $13.7 million of the $15.7 million increase in net receivables at December 31, 2003. The remaining
increase in trade receivables does not result in a significant change in working capital due to an off-set
reported in current liabilities,
(cid:130) A $2.3 million decrease in accounts payable primarily due to the timing of payments for cost of sales
and service and the bankruptcy settlement with MCI in July 2003 (as further discussed in “Long
Distance Services Overview” above), partially off-set by increased accounts payable associated with
the construction of our new fiber optic cable system, and
(cid:130) A $2.0 million increase in the current portion of notes receivable from related parties at December 31,
2003 as compared to December 31, 2002.
The increase in working capital was partially off-set by the following:
(cid:130) A $5.7 million increase in accrued payroll primarily due to an increased accrual for company-wide
success sharing bonus costs, and
(cid:130) An increase of $3.4 million in the current maturity of our satellite transponder lease obligation.
In February 2004 GCI’s wholly owned subsidiary GCI, Inc. sold $250 million in aggregate principal amount of
senior debt securities due February 15, 2014 (“new Senior Notes”). The new Senior Notes are an unsecured
senior obligation. We will pay interest of 7.25% on the new Senior Notes, which were sold at a discount of $4.3
million. The new Senior Notes will be carried on our balance sheet net of the unamortized portion of the
discount, which will be amortized to interest expense over the life of the new Senior Notes.
The net proceeds of the offering were primarily used to repay our existing $180 million 9.75% Senior Notes
(“old Senior Notes”) and to repay approximately $43.8 million of the term portion and $10.0 million of the
revolving portion of our new Senior Credit Facility. Semi-annual interest payments of approximately $9.1
million will be due beginning August 15, 2004. In connection with the issuance, we paid fees and other
expenses of approximately $6.3 million which will be amortized over the life of the new Senior Notes.
The new Senior Notes were offered only to qualified institutional buyers pursuant to Rule 144A and non-United
States persons pursuant to Regulation S. The new Senior Notes have not been registered under the Securities
Act and, unless so registered, may not be offered or sold except pursuant to an exemption from, or in a
transaction not subject to, the registration requirements of the Securities Act and applicable state securities
laws. We plan to register our new Senior Notes by June 16, 2004.
81
The new Senior Notes are not redeemable prior to February 15, 2009. At any time on or after February 15,
2009, the new Senior Notes are redeemable at our option, in whole or in part, on not less than thirty days nor
more than sixty days notice, at the following redemption prices, plus accrued and unpaid interest (if any) to the
date of redemption:
If redeemed during the twelve month
period commencing February 1 of the
year indicated:
2009
2010
2011
2012 and thereafter
Redemption
Price
103.625%
102.417%
101.208%
100.000%
We may, on or prior to February 17, 2007, at our option, use the net cash proceeds of one or more
underwritten public offerings of our qualified stock to redeem up to a maximum of 35% of the initially
outstanding aggregate principal amount of our new Senior Notes at a redemption price equal to 107.25% of
the principal amount of the new Senior Notes, together with accrued and unpaid interest, if any, thereon to the
date of redemption, provided that not less than 65% of the principal amount of the new Senior Notes originally
issued remain outstanding following such a redemption.
The new Senior Notes restrict GCI, Inc. and certain of its subsidiaries from incurring debt in most
circumstances unless the result of incurring debt does not cause our leverage ratio to exceed 6.0 to one. The
new Senior Notes do not allow debt under the new Senior Credit Facility to exceed the greater of (and reduced
by certain stated items):
(cid:130) $250 million, reduced by the amount of any prepayments, or
(cid:130) 3.0 times earnings before interest, taxes, depreciation and amortization for the last four full fiscal
quarters of GCI, Inc. and certain of its subsidiaries.
The new Senior Notes limit our ability to make cash dividend payments.
We are conducting a Consent Solicitation and Tender Offer for the old Senior Notes. Through February 13,
2004 we accepted for payment $114.6 million principal amount of notes which were validly tendered. Such
notes accepted for payment received additional consideration as follows:
(cid:130) $4.0 million based upon a payment of $1,035 per $1,000 principal amount, consisting of the
purchase price of $1,025 per $1,000 principal amount and the consent payment of $10 per $1,000
principal amount, and
(cid:130) $497,000 in accrued and unpaid interest through February 16, 2004.
The remaining principal amount of $65.4 million will be redeemed by March 18, 2004 for additional
consideration as follows:
(cid:130) $2.1 million based upon a payment of $1032.50 per $1,000 principal amount, and
(cid:130) $815,000 in estimated accrued and unpaid interest through the expected date of redemption March
17, 2004.
The total estimated redemption cost is expected to be $186.1 million. The premium to redeem our old Senior
Notes is expected to be $6.1 million (excluding estimated interest cost of $1.3 million), which will be
recognized as a component of Other Income (Expense) during the three months ended March 31, 2004.
Compliance with the redemption notice requirements in the Indenture will result in a delay of up to sixty days
before final redemption of some of the old Senior Notes. As a result of such delay, our total debt will increase
during the overlap period between the redemption of the outstanding old Senior Notes and the issuance of the
new Senior Notes making us out of compliance with Section 6.11 of our Credit, Guaranty, Security and Pledge
82
Agreement, dated as of October 30, 2003. We have received a waiver from compliance with Section 6.11
until April 30, 2004.
On April 22, 2003 we amended our $225.0 million Senior Credit Facility. On October 30, 2003 we closed a
new $220.0 million Senior Credit Facility to replace the April 22, 2003 amended Senior Credit Facility. The
new Senior Credit Facility reduced the interest rate from LIBOR plus 6.50% to LIBOR plus 3.25%. The new
Senior Credit Facility includes a term loan of $170.0 million and a revolving credit facility of $50.0 million.
The repayment schedule for the term loan portion of the new Senior Credit Facility, after considering
repayments from our new Senior Notes offering proceeds, is as follows (amounts in thousands):
Date
Quarter ended December 31, 2005
Quarterly from March 31, 2006 to December 31, 2006
Quarterly from March 31, 2007 to September 30, 2007
Amount
$
170
$ 8,000
$ 10,000
The remaining balance of the new Senior Credit Facility will be payable in full on October 31, 2007.
We are required to pay a commitment fee on the unused portion of the commitment. We may not permit the
Total Leverage Ratio (as defined), the Senior Secured Leverage Ratio (as defined), and the Interest Coverage
Ratio (as defined) to exceed certain amounts over the life of the new Senior Credit Facility.
Capital expenditures, excluding up to $58.0 million incurred to build or acquire additional fiber optic cable
system capacity between Alaska and the Lower 48 States, in any of the years ended December 31, 2004,
2005 and 2006 may not exceed:
(cid:130) $25.0 million, plus
(cid:130) 100% of any Excess Cash Flow (as defined) during the applicable period less certain permitted
investments during the applicable period.
If the revolving credit facility exceeds $25.0 million, we may not incur capital expenditures, other than those
incurred to build or acquire additional fiber optic cable system capacity, in excess of $25.0 million.
The new Senior Credit Facility requirement that we must either have repaid in full or successfully refinanced
our old Senior Notes by February 1, 2007 was met with the refinancing of our old Senior Notes, as previously
discussed.
$3.5 million of the new Senior Credit Facility has been used to provide a letter of credit to secure payment for
our contract for the design, engineering, manufacture and installation of the new undersea fiber optic cable
system. The letter of credit will be reduced to $1.8 million after a contract payment estimated to be made in
March 2004. The letter of credit will be cancelled after the final contract payment date estimated to be in
April 2004.
In connection with the April 22, 2003 amended Senior Credit Facility, we paid bank fees and other expenses of
approximately $2.6 million during the year ended December 31, 2003. In connection with the new Senior
Credit Facility, we paid bank fees and other expenses of $912,000 during the three months ended December
31, 2003 which will be amortized over the life of the new Senior Credit Facility.
Because a portion of the new Senior Credit Facility was a substantial modification of the April 22, 2003
amended Senior Credit Facility, we recognized approximately $5.0 million in Amortization of Loan and Senior
Notes Fees during the three months ended December 31, 2003. The remaining $2.2 million in amended
Senior Credit Facility Deferred Loan Costs will continue to be amortized over the life of the new Senior Credit
Facility.
83
The term loan is fully drawn and we have letters of credit totaling $6.5 million, which left $43.5 million
available at December 31, 2003 to draw under the revolving credit facility if needed. In January 2004 we
drew $10.0 million under the revolving credit facility. Our ability to draw down on the revolver portion of our
new Senior Credit Facility could be diminished if we are not in compliance with all new Senior Credit Facility
covenants or have a material adverse change at the date of the request for the draw. In September and
December 2003 we made scheduled principal payments on our term loan totaling $10.0 million. In April
2003, we made a $2.7 million principal payment on the revolving credit facility. As described above, we
issued new Senior Notes in February 2004 and used a portion of the proceeds to repay approximately $43.8
million of the term portion and $10.0 million of the revolving portion of our new Senior Credit Facility.
We were in compliance with all loan covenants at December 31, 2003.
Our expenditures for property and equipment, including construction in progress, totaled $62.5 million and
$65.1 million during 2003 and 2002, respectively. Our capital expenditures requirements in excess of
approximately $25 million per year are largely success driven and are a result of the progress we are making
in the marketplace. We expect our 2004 expenditures for property and equipment for our core operations,
including construction in progress and excluding the new fiber system construction costs and other special
projects described below, to total $45 million to $55 million, depending on available opportunities and the
amount of cash flow we generate during 2004.
We are constructing a fiber optic cable system connecting Seward, Alaska and Warrenton, Oregon, with leased
backhaul facilities to connect it to our switching and distribution centers in Anchorage, Alaska and Seattle,
Washington. The 1,544-statute mile cable system has a total design capacity of 960 Gigabits per second
access speed and is planned to be operational by May 2004. The cable will complement our existing fiber
optic cable system between Whittier, Alaska and Seattle, Washington. The two cables will provide physically
diverse backup to each other in the event of an outage. We expect to fund construction costs that are
expected to total $50 million through our operating cash flows and, to the extent necessary, with draws on our
new Senior Credit Facility. During 2003 our capital expenditures for this project have totaled approximately
$16.5 million, all of which has been funded through our operating cash flows.
Planned capital expenditures over the next five years include those necessary for continued expansion of our
long-distance, local exchange and Internet facilities, supplementing our existing network backup facilities,
continuing development of our PCS network to meet the requirements of our license, digital local phone
service, and upgrades to our cable television plant.
We are testing the deployment of DLPS. We expect to begin implementing this service delivery method in the
second quarter of 2004. To ensure the necessary equipment is available to us we have entered into an
agreement to purchase a certain number of outdoor, network powered multi-media adapters. The agreement
has a remaining outstanding commitment at December 31, 2003 of $18.3 million.
We believe that payment for services provided to MCI subsequent to their bankruptcy filing date will continue
to be made timely, consistent with our status in MCI’s filing as a key service provider or utility to MCI. See
“Long Distance Services Overview” for a discussion of the settlement of the uncollected amounts due from
MCI.
A migration of MCI’s traffic off our network without it being replaced by other common carriers that
interconnect with our network could have a materially adverse impact on our financial position, results of
operations and liquidity.
Dividends accrued on our Series B preferred stock are payable in cash at the semi-annual payment dates of
April 30 and October 31 of each year. We paid dividends of $722,000 and $713,000 on April 30, 2003 and
October 31, 2003, respectively. Redemption is required on April 30, 2011.
Our next Series B preferred stock dividend is due April 30, 2004. In October 2003, 1,250 shares of our Series
B preferred stock was converted to approximately 225,000 shares of our Class A common stock at the stated
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conversion price of $5.55 per share. In January 2004 an additional 3,108 shares of our Series B preferred
stock was converted to 560,000 shares of our Class A common stock at the stated conversion price of $5.55
per share. The conversions will reduce our future semi-annual cash dividends.
Dividends accrued on our Series C preferred stock are payable quarterly in cash. Our next Series C preferred
stock dividend of approximately $150,000 is due March 31, 2004. We may redeem the Series C preferred
stock at any time in whole but not in part. Mandatory redemption is required at any time after June 30, 2005
at the option of holders of 80% of the outstanding shares of the Series C preferred stock. The redemption
price is $1,000 per share plus the amount of all accrued and unpaid dividends, whether earned or declared,
through the redemption date.
The long-distance, local access, cable, Internet and wireless services industries continue to experience
substantial competition, regulatory uncertainty, and continuing technological changes. Our future results of
operations will be affected by our ability to react to changes in the competitive and regulatory environment and
by our ability to fund and implement new or enhanced technologies. We are unable to determine how
competition, economic conditions, and regulatory and technological changes will affect our ability to obtain
financing.
The telecommunications industry in general has been depressed due to high levels of competition in the long-
distance market resulting in pressures to reduce prices, an oversupply of long-haul capacity, excessive debt
loads, several high-profile company failures and potentially fraudulent accounting practices by some
companies. Our ability to obtain new debt under acceptable terms and conditions in the future may be
diminished as a result.
We believe that we will be able to meet our current and long-term liquidity and capital requirements, fixed
charges and preferred stock dividends through our cash flows from operating activities, existing cash, cash
equivalents, short-term investments, credit facilities, and other external financing and equity sources. Should
cash flows be insufficient to support additional borrowings and principal payments scheduled under our
existing credit facilities, capital expenditures will likely be reduced.
Critical Accounting Policies
Our accounting and reporting policies comply with accounting principles generally accepted in the United
States of America. The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions. The financial position and results of
operations can be affected by these estimates and assumptions, which are integral to understanding
reported results. Critical accounting policies are those policies that management believes are the most
important to the portrayal of the Company’s financial condition and results, and require management to make
estimates that are difficult, subjective or complex. Most accounting policies are not considered by
management to be critical accounting policies. Several factors are considered in determining whether or not
a policy is critical in the preparation of financial statements. These factors include, among other things,
whether the estimates are significant to the financial statements, the nature of the estimates, the ability to
readily validate the estimates with other information including third parties or available prices, and sensitivity
of the estimates to changes in economic conditions and whether alternative accounting methods may be
utilized under accounting principles generally accepted in the United States of America. For all of these
policies, management cautions that future events rarely develop exactly as forecast, and the best estimates
routinely require adjustment. Management has discussed the development and the selection of critical
accounting policies with the Company’s Audit Committee.
Those policies considered to be critical accounting policies for the year ended December 31, 2003 are
described below.
(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
85
recoveries. If the financial condition of our customers were to deteriorate or if they are unable to emerge
from reorganization proceedings, resulting in an impairment of their ability to make payments, additional
allowances may be required. If their financial condition improves or they emerge successfully from
reorganization proceedings, allowances may be reduced. Such allowance changes could have a material
effect on our consolidated financial condition and results of operations.
(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 the applicability of quoted market prices in active markets and, if quoted market prices are
not available and/or are not applicable, how the acquired asset will perform in the future using a
discounted cash flow analysis. Estimated cash flows may extend beyond ten years and, by their nature,
are difficult to determine over an extended timeframe. Events and factors that may significantly affect
the estimates include, among others, competitive forces, customer behaviors and attrition, changes in
revenue growth trends, cost structures and technology, and changes in discount rates, performance
compared to peers, material and ongoing negative economic trends, and specific industry or market
sector conditions. In determining the reasonableness of cash flow estimates, we review historical
performance of the underlying asset or similar assets in an effort to improve assumptions utilized in our
estimates. In assessing the fair value of goodwill and other intangibles, we may consider other
information to validate the reasonableness of our valuations including third-party assessments. These
evaluations could result in a change in useful lives in future periods and could result in write-down of the
value of intangible assets. Because of the significance of the identified intangible assets and goodwill to
our consolidated balance sheet, the annual impairment analysis will be critical. Any changes in key
assumptions about the business and its prospects, or changes in market conditions or other
externalities, could result in an impairment charge and such a charge could have a material adverse
effect on our consolidated financial position, results of operations or liquidity. Refer to Note 6 in the
accompanying “Notes to Consolidated Financial Statements” for additional information regarding
intangible assets.
(cid:130) We estimate unbilled long-distance segment cost of sales and services based upon minutes of use
carried through our network and established rates. We estimate unbilled costs for new circuits and
services, and when network changes occur that result in traffic routing changes or a change in carriers.
Carriers that provide service to us regularly change their networks which can lead to new, revised or
corrected billings. Such estimates are revised or removed when subsequent billings are received,
payments are made, billing matters are researched and resolved, tariffed billing periods lapse, or when
disputed charges are resolved. Revisions to previous estimates could either increase or decrease costs
in the year in which the estimate is revised which could have a material effect on our consolidated
financial condition and results of operations.
(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 $77.5 million associated with income tax net operating losses that were generated
from 1990 to 2003, and that expire from 2005 to 2022. Pre-acquisition income tax net operating
losses associated with acquired companies are subject to additional deductibility limits. We have
recorded deferred tax assets of approximately $1.9 million associated with alternative minimum tax
credits that do not expire. Significant management judgment is required in developing our provision for
income taxes, including the determination of deferred tax assets and liabilities and any valuation
allowances that may be required against the deferred tax assets. In conjunction with certain 1996
acquisitions, we determined that approximately $20 million of the acquired net operating losses would
86
not be utilized for income tax purposes, and elected with our December 31, 1996 income tax returns to
forego utilization of such acquired losses. Deferred tax assets were not recorded associated with the
foregone losses and, accordingly, no valuation allowance was provided. We have not recorded a
valuation allowance on the deferred tax assets as of December 31, 2003 based on management’s belief
that future reversals of existing taxable temporary differences and estimated future taxable income
exclusive of reversing temporary differences and carryforwards, will, more likely than not, be sufficient to
realize the benefit of these assets over time. In the event that actual results differ from these estimates
or if our historical trends change, we may be required to record a valuation allowance on deferred tax
assets, which could have a material adverse effect on our consolidated financial position, results of
operations or liquidity.
Other significant accounting policies, not involving the same level of measurement uncertainties as those
discussed above, are nevertheless important to an understanding of the financial statements. Polices related
to revenue recognition and financial instruments require difficult judgments on complex matters that are
often subject to multiple sources of authoritative guidance. Certain of these matters, including but not limited
to the requirement to account for the market value of stock options as compensation expense, are among
topics currently under reexamination by accounting standards setters and regulators. Although no specific
conclusions reached by these standard setters appear likely to cause a material change in our accounting
policies, outcomes cannot be predicted with confidence. A complete discussion of our significant accounting
policies can be found in Note 1 in the accompanying “Notes to Consolidated Financial Statements.”
New Accounting Standards
In December 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. (“FIN”)
46 (revised December 2003), Consolidation of Variable Interest Entities, which addresses how a business
enterprise should evaluate whether it has a controlling financial interest in an entity through means other
than voting rights and accordingly should consolidate the entity. FIN 46R replaces FIN 46, Consolidation of
Variable Interest Entities, which was issued in January 2003. We will be required to apply FIN 46R to variable
interests in Variable Interest Entities (“VIEs”) created after December 31, 2003. For variable interests in VIEs
created before January 1, 2004, the Interpretation will be applied beginning on January 1, 2005. For any
VIEs that must be consolidated under FIN 46R that were created before January 1, 2004, the assets,
liabilities and non-controlling interests of the VIE initially would be measured at their carrying amounts with
any difference between the net amount added to the balance sheet and any previously recognized interest
being recognized as the cumulative effect of an accounting change. If determining the carrying amounts is
not practicable, fair value at the date FIN 46R first applies may be used to measure the assets, liabilities and
non-controlling interest of the VIE. At December 31, 2003, we do not have VIEs. We will adopt this statement
January 1, 2004 and do not expect it to have a material effect on our results of operations, financial position
and cash flows.
Geographic Concentration and the Alaska Economy
We offer voice and data telecommunication and video services to customers primarily throughout Alaska.
Because of this geographic concentration, growth of our business and of our operations depends upon
economic conditions in Alaska. The economy of Alaska is dependent upon the natural resource industries,
and in particular oil production, as well as investment earnings, tourism, government, and United States
military spending. Any deterioration in these markets could have an adverse impact on us. All of the federal
funding and the majority of investment revenues are dedicated for specific purposes, leaving oil revenues as
the primary source of general operating revenues. In fiscal 2003 the State’s actual results indicate that
Alaska’s oil revenues, federal funding and investment revenues supplied 36%, 31% and 20%, respectively, of
the state’s total revenues. In fiscal 2004 state economists forecast that Alaska’s oil revenues, federal
funding and investment revenues will supply 28%, 32% and 30%, respectively, of the state’s total projected
revenues.
The volume of oil transported by the TransAlaska Oil Pipeline System over the past 20 years has been as high
as 2.0 million barrels per day in fiscal 1988. Production has been declining over the last several years with
87
an average of 0.990 million barrels produced per day in fiscal 2003. The state forecasts the production rate
to decline from 0.996 million barrels produced per day in fiscal 2004 to 0.844 million barrels produced per
day in fiscal 2015. The state reports that its forecast has been adjusted since the last forecast reported in
April 2003 due to the reexamination of field reservoir performance and potential.
Market prices for North Slope oil averaged $28.15 in fiscal 2003 and are forecasted to average $27.70 in
fiscal 2004. The closing price per barrel was $31.53 on February 6, 2004. To the extent that actual oil
prices vary materially from the state’s projected prices the state’s projected revenues and deficits will change.
Every $1 change in the price per barrel of oil is forecasted to result in a $50.0 to $60.0 million change in the
state’s fiscal 2004 revenue. The production policy of the Organization of Petroleum Exporting Countries and
its ability to continue to act in concert represents a key uncertainty in the state’s revenue forecast.
The State of Alaska maintains the Constitutional Budget Reserve Fund that is intended to fund budgetary
shortfalls. If the state’s current projections are realized, the Constitutional Budget Reserve Fund will be
depleted in 2007. The date the Constitutional Budget Reserve Fund is depleted is highly influenced by the
price of oil. If the fund is depleted, aggressive state action will be necessary to increase revenues and reduce
spending in order to balance the budget. The governor of the State of Alaska and the Alaska legislature
continue to pursue cost cutting and revenue enhancing measures.
Should new oil discoveries or developments not materialize or the price of oil become depressed, the long
term trend of continued decline in oil production from the Prudhoe Bay area is inevitable with a corresponding
adverse impact on the economy of the state, in general, and on demand for telecommunications and cable
television services, and, therefore, on us, in particular. Periodically there are renewed efforts to allow
exploration and development in the Arctic National Wildlife Refuge (“ANWR”). The United States Energy
Information Agency estimates it could take nine years to begin oil field drilling after approval of ANWR
exploration.
Deployment of a natural gas pipeline from the State of Alaska’s North Slope to the Lower 48 States has been
proposed to supplement natural gas supplies. A competing natural gas pipeline through Canada has also
been proposed. The economic viability of a natural gas pipeline depends upon the price of and demand for
natural gas. Either project could have a positive impact on the State of Alaska’s revenues and the Alaska
economy. In January 2004, two competing groups submitted applications to the State of Alaska to negotiate
tax and other financial terms for the construction of a natural gas pipeline. The governor of the State of
Alaska and certain natural gas transportation companies continue to support a natural gas pipeline from
Alaska’s North Slope by trying to reduce the project’s costs and by advocating for federal tax incentives to
further reduce the project’s costs.
Development of the ballistic missile defense system project may have a significant impact on Alaskan
telecommunication requirements and the Alaska economy. The proposed system would be a fixed, land-
based, non-nuclear missile defense system with a land and space based detection system capable of
responding to limited strategic ballistic missile threats to the United States. The preferred alternative is
deployment of a system with up to 100 ground-based interceptor silos and battle management command and
control facilities at Fort Greely, Alaska.
The United States Army Corps of Engineers awarded a construction contract in 2002 for test bed facilities.
The contract is reported to contain basic requirements and various options that could amount to $250 million
in construction, or possibly more, if all items are executed. Site preparation has been underway at Fort Greely
since August of 2001 and construction began on the Fort Greely test bed shortly after the June 15, 2002
groundbreaking. The test bed is due to be operational by September 30, 2004, though it may be operational
in the summer of 2004.
In 2003 the Alaska Legislature passed and the Governor signed legislation that extended the life of the RCA
until 2007.
88
Tourism, air cargo, and service sectors have helped offset the prevailing pattern of oil industry downsizing
that has occurred during much of the last several years.
We have, since our entry into the telecommunication marketplace, aggressively marketed our services to
seek a larger share of the available market. The customer base in Alaska is limited, however, with a
population of approximately 644,000 people. The State of Alaska’s population is distributed as follows:
(cid:130) 42% are located in the Municipality of Anchorage,
(cid:130) 13% are located in the Fairbanks North Star Borough,
(cid:130) 10% are located in the Matanuska-Susitna Borough,
(cid:130) 5% are located in the City and Borough of Juneau, and
(cid:130)
The remaining 30% are located in other communities across the State of Alaska.
No assurance can be given that the driving forces in the Alaska economy, and in particular, oil production, will
continue at appropriate levels to provide an environment for expanded economic activity.
No assurance can be given that oil companies doing business in Alaska will be successful in discovering new
fields or further developing existing fields which are economic to develop and produce oil with access to the
pipeline or other means of transport to market, even with a reduced level of royalties. We are not able to
predict the effect of changes in the price and production volumes of North Slope oil on Alaska’s economy or
on us.
Seasonality
Long-distance revenues (primarily those derived from our other common carrier customers) have historically
been highest in the summer months because of temporary population increases attributable to tourism and
increased seasonal economic activity such as construction, commercial fishing, and oil and gas activities.
Cable television revenues, on the other hand, are higher in the winter months because consumers spend
more time at home and tend to watch more television during these months. Local access and Internet
services do not exhibit significant seasonality. Our ability to implement construction projects is also
hampered during the winter months because of cold temperatures, snow and short daylight hours.
Off-Balance Sheet Arrangements
We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purpose of
raising capital, incurring debt or operating parts of our business that are not consolidated into our financial
statements. We do not have any arrangements or relationships with entities that are not consolidated into our
financial statements that are reasonably likely to materially affect our liquidity or the availability of our capital
resources.
Schedule of Certain Known Contractual Obligations
The following table details future projected payments associated with our certain known contractual
obligations as of December 31, 2003.
89
Payments Due by Period
Total
Less than
1 Year
1 to 3
Years
(Amounts in thousands)
4 to 5
Years
More
Than 5
Years
Long-term debt
Interest on long-term debt
Capital lease obligations,
including interest
Operating lease commitments
Redeemable preferred stock
Purchase obligations
Total contractual obligations
$ 345,000 20,000
70,200 17,550
56,000 269,000
17,550
35,100
---
---
61,902
8,448
69,473 12,357
---
25,664
71,038 45,024
18,478
23,099
15,664
---
$ 643,277 103,379 161,391 321,266 57,241
19,201
15,775
20,787 13,230
---
10,000
5,711
20,303
For long-term debt included in the above table, we have included principal payments on our new Senior Credit
Facility and on our old Senior Notes. Interest on amounts outstanding under our new Senior Credit Facility is
based on variable rates and therefore the amount is not determinable. Our old Senior Notes require semi-
annual interest payments of approximately $8.8 million through August 2007. For a discussion of our long-
term debt, including the redemption of our old Senior Notes, issuance of new Senior Notes and the use of
proceeds from the issuance of new Senior Notes to pay down our new Senior Credit Facility, see notes 8 and
17 to the accompanying “Notes to Consolidated Financial Statements.”
For a discussion of our capital and operating leases, see note 16 to the accompanying “Notes to Consolidated
Financial Statements.”
We have included only the maturity redemption amount on our Series B and C preferred stock (cash dividends
are excluded). Our Series B preferred stock is convertible at $5.55 per share into GCI Class A common stock.
Dividends are payable semi-annually at the rate of 8.5%, plus accrued but unpaid dividends, in cash.
Mandatory redemption is required 12 years from the date of closing. In January 2004, a Series B preferred
stockholder converted 3,108 shares of Series B preferred stock to GCI Class A common stock. Our Series C
preferred stock is convertible at $12 per share into GCI Class A common stock, is non-voting, and pays a 6%
per annum quarterly cash dividend. We may redeem the Series C preferred stock at any time in whole but not
in part. Mandatory redemption is required at any time after the fourth anniversary date at the option of
holders of 80% of the outstanding shares of the Series C preferred stock. For more information about our
redeemable preferred stock, see notes 1(e) and 17to the accompanying “Notes to Consolidated Financial
Statements.”
Purchase obligations include the remaining construction commitment for our fiber optic cable system of $24.6
million, the remaining DLPS equipment purchase commitment of $18.3 million and the remaining $16.0
million commitment for our Alaska Airlines agreement as further described in note 16 to the accompanying
“Notes to Consolidated Financial Statements.” The contracts associated with these commitments are non-
cancelable. Purchase obligations also include other commitments for goods and services for capital projects
and normal operations which are not included in our Consolidated Balance Sheets at December 31, 2003,
because the goods had not been received or the services had not been performed at December 31, 2003.
Regulatory Developments
You should see “Part I — Item 1 — Business, Regulation, Franchise Authorizations and Tariffs” for more
information about regulatory developments affecting us.
Inflation
We do not believe that inflation has a significant effect on our operations.
90
Audit Committee
The Audit Committee, composed entirely of independent directors, meets periodically with our independent
auditors and management to review the Company's financial statements and the results of audit activities.
The Audit Committee, in turn, reports to the Board of Directors on the results of its review and recommends
the selection of independent auditors.
The Audit Committee has approved the independent auditor to provide the following services:
(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 Credit Facility carries interest rate risk. Amounts borrowed under this Agreement bear
interest at Libor plus 3.25%. Should the Libor rate change, our interest expense will increase or decrease
accordingly. On September 21, 2001, we entered into an interest rate swap agreement to convert $25.0
million of variable interest rate debt to 3.98% fixed rate debt plus applicable margin. As of December 31,
2003, we have borrowed $165.0 million of which $140.0 million is subject to interest rate risk. On this
amount, a 1% increase in the interest rate would result in $1,400,000 in additional gross interest cost on an
annualized basis.
Our Satellite Transponder Capital Lease carries interest rate risk. Amounts borrowed under this Agreement
bear interest at Libor plus 3.25%. Should the Libor rate change, our interest expense will increase or
decrease accordingly. As of December 31, 2003, we have borrowed $43.5 million subject to interest rate
risk. On this amount, a 1% increase in the interest rate would result in $435,000 in additional gross interest
cost on an annualized basis.
Item 8. Consolidated Financial Statements and Supplementary Data
Our consolidated financial statements are filed under this Item, beginning on Page 93. The financial
statement schedules required under Regulation S-X are filed pursuant to Item 14 of this Report.
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report on Form 10-K, we carried out an evaluation of the
effectiveness of the design and operation of our “disclosure controls and procedures” (as defined in the
Securities Exchange Act of 1934 (“Exchange Act”) Rules 13a-14(c) and 15d-14(c)) under the supervision and
with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer.
Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our
disclosure controls and procedures are effective.
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.
91
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.
Items 10, 11, 12, 13 and 14 are incorporated herein by reference from our Proxy Statement for our 2004
Annual Shareholders’ meeting.
Part III
92
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, 2003 and 2002
Consolidated Statements of Operations,
Years ended December 31, 2003, 2002 and 2001
Consolidated Statements of Stockholders’ Equity,
Years ended December 31, 2003, 2002 and 2001
Consolidated Statements of Cash Flows,
Years ended December 31, 2003, 2002 and 2001
Notes to Consolidated Financial Statements
(a)(2) Consolidated Financial Statement Schedules
None
(b) Reports on Form 8-K
(c)
Exhibits
Page No.
94
95 — 96
97
98 — 100
101
102 — 140
141
141
Other schedules are omitted, as they are not required or are not applicable, or the required information is
shown in the applicable financial statements or notes thereto.
93
INDEPENDENT AUDITORS' REPORT
The Board of Directors
General Communication, Inc.:
We have audited the accompanying consolidated balance sheets of General Communication, Inc.
and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements
of operations, stockholders’ equity and cash flows for each of the years in the three-year period
ended December 31, 2003. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United
States of America. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of General Communication, Inc. and subsidiaries as of
December 31, 2003 and 2002, and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 2003 in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 1(p) to the consolidated financial statements, the Company adopted
Statement of Financial Accounting Standards, No. 143, Accounting for Asset Retirement
Obligations, effective January 1, 2003.
Anchorage, Alaska
February 20, 2004
/s/
KPMG LLP
94
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
ASSETS
Current assets:
Cash and cash equivalents
Receivables
Less allowance for doubtful receivables
Net receivables
Prepaid and other current assets
Deferred income taxes, net
Notes receivable from related parties
Property held for sale
Inventories
Total current assets
Property and equipment in service, net of depreciation
Construction in progress
Net property and equipment
Cable certificates, net of amortization of $26,775 and $26,884 at
December 31, 2003 and 2002, respectively
Goodwill
Other intangible assets, net of amortization of $1,656 and $1,848 at
December 31, 2003 and 2002, respectively
Deferred loan and senior notes costs, net of amortization of $5,308 and
$4,110 at December 31, 2003 and 2002, respectively
Notes receivable from related parties
Other assets
Total other assets
Total assets
See accompanying notes to consolidated financial statements.
December 31,
2003
2002
$
10,435
11,940
70,235
1,954
68,281
12,159
7,195
2,723
2,173
1,513
66,595
14,010
52,585
9,171
8,509
697
1,037
400
104,479
84,339
369,039 381,394
16,958
402,657 398,352
33,618
191,241
41,972
191,132
41,972
3,895
3,460
5,757
3,443
9,576
9,961
5,142
4,424
255,884 256,091
$ 763,020 738,782
95
(Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
(Amounts in thousands)
LIABILITIES, REDEEMABLE PREFERRED STOCK, AND STOCKHOLDERS' EQUITY
December 31,
2002
2003
Current liabilities:
Current maturities of 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
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):
$ 5,139
34,133
21,275
17,545
8,645
8,156
651
95,544
1,857
33,605
18,290
11,821
7,938
5,763
889
80,163
345,000 357,700
44,072
38,959
703
677
16,061
24,168
6,366
4,956
510,714 503,655
25,664
26,907
Class A. Authorized 100,000 shares; issued 52,589 and 51,795 shares
at December 31, 2003 and 2002, respectively
202,362 199,903
Class B. Authorized 10,000 shares; issued 3,868 and 3,875 shares at
December 31, 2003 and 2002, respectively; convertible on a share-
per-share basis into Class A common stock
Less cost of 338 and 317 Class A common shares held in treasury at
3,269
3,274
December 31, 2003 and 2002, respectively
(1,917)
(1,836)
Paid-in capital
Notes receivable with related parties issued upon stock option exercise
Retained earnings
Accumulated other comprehensive loss
12,836
(4,971)
15,371
(308)
11,222
(5,650)
1,847
(540)
Total stockholders' equity
226,642 208,220
Commitments and contingencies
Total liabilities, redeemable preferred stock, and stockholders' equity
$ 763,020 738,782
See accompanying notes to consolidated financial statements.
96
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003
2002
(Amounts in thousands, except per share amounts)
2001
Revenues
Cost of sales and services
Selling, general and administrative expenses
Bad debt expense (recovery)
Impairment charge
Depreciation, amortization and accretion expense
Operating income
Other income (expense):
Interest expense
Amortization of loan and senior notes fees
Interest income
Other expense, net
Net income before income taxes and cumulative
effect of a change in accounting principle
Income tax expense
$ 390,797
367,842
125,383
138,693
(178)
5,434
53,388
68,077
123,564
129,029
13,124
---
56,400
45,725
(34,745)
(7,732)
560
(41,917)
(29,316)
(4,612)
525
(33,403)
357,258
139,793
116,536
4,279
---
55,675
40,975
(31,208)
(1,402)
294
(32,316)
26,160
10,074
12,322
8,659
5,659
4,070
Net income before cumulative effect of a change in
accounting principle
16,086
6,663
4,589
Cumulative effect of a change in accounting principle,
net of income tax benefit of $367
Net income
(544)
---
---
$
15,542
6,663
4,589
Basic and diluted net income per common share:
Net income before cumulative effect of a change in
accounting principle
Cumulative effect of a change in accounting principle,
net of income tax benefit of $367
Net income
$
$
0.25
(0.01)
0.24
0.08
---
0.08
0.05
---
0.05
See accompanying notes to consolidated financial statements.
97
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
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
Compre-
hensive
Income
(Amounts in thousands)
Balances at December 31, 2000
Net income
Change in fair value of cash flow
hedge, net of income tax effect 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 officer stock option exercise
Preferred stock series B dividends
Preferred stock series C dividends
Balances at December 31, 2001
$ 182,706 3,299
---
---
(1,659) 7,368
---
---
(2,976)
---
(5,258)
4,589
---
---
---
---
---
---
---
18
---
(18)
4,182
---
---
688
2,388
5,665
---
---
---
---
---
---
---
---
---
---
---
2,317
---
---
---
---
(300)
789
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
$195,647
---
---
---
3,281
---
---
---
---
---
---
(1,659) 10,474
688
---
---
(2,588)
---
(1,801)
(301)
(2,771)
Total
183,480
4,589
8
4,597
2,317
---
3,882
789
688
2,388
5,665
688
(1,801)
(301)
202,392
---
---
8
---
---
---
---
---
---
---
---
---
---
8
See accompanying notes to consolidated financial statements.
98
(Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(Continued)
Class A
Common
Stock
Class B
Common
Stock
Class A
Shares
Held in
Treasury
Paid-in
Capital
Notes
Receivable
Issued to
Related
Parties
Retained
Earnings
Accumulated
Other
Compre-
hensive
Income (Loss)
$195,647
---
3,281
---
(1,659) 10,474
---
---
(2,588)
---
(2,771)
6,663
8
---
---
---
---
---
---
---
(548)
(Amounts in thousands)
Balances at December 31, 2001
Net income
Change in fair value of cash flow
hedge, net of income tax effect 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
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
---
7
3,372
---
791
---
(7)
---
---
---
---
---
---
---
---
319
---
---
---
---
(3,062)
429
---
---
---
---
---
---
---
---
---
---
---
---
---
86
---
---
---
$199,903
---
---
---
---
3,274
---
(177)
---
---
---
---
---
---
(1,836) 11,222
---
---
---
---
(5,650)
---
---
(1,445)
(600)
1,847
---
---
---
---
(540)
86
(177)
(1,445)
(600)
208,220
Total
202,392
6,663
(548)
6,115
319
---
310
429
791
See accompanying notes to consolidated financial statements.
99
(Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(Continued)
(Amounts in thousands)
Balances at December 31, 2002
Net income
Change in fair value of cash flow
hedge, net of change in income tax
effect of $252
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
Shares issued upon exercise of
warrants
Payments received on notes
receivable issued to related parties
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 purchased and retired
Conversion of Series B preferred
stock to Class A common stock
Purchase of treasury stock
Preferred stock series B dividends
Preferred stock series C dividends
Balances at December 31, 2003
Class A
Common
Stock
Class B
Common
Stock
Class A
Shares
Held in
Treasury
Paid-in
Capital
Notes
Receivable
Issued to
Related
Parties
$199,903
---
3,274
---
(1,836) 11,222
---
---
(5,650)
---
Accumulated
Other
Compre-
hensive
Income (Loss)
(540)
---
Retained
Earnings
1,847
15,542
---
---
---
---
---
---
232
---
5
1,836
125
---
---
(5)
---
---
---
---
(750)
---
---
---
---
---
---
---
---
---
538
---
---
---
---
---
---
---
---
679
1,076
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
1,243
---
---
---
$202,362
---
---
---
---
3,269
---
(81)
---
---
---
---
---
---
(1,917) 12,836
---
---
---
---
(4,971)
---
---
(1,418)
(600)
15,371
---
---
---
---
(308)
Total
208,220
15,542
232
15,774
538
---
1,836
125
679
1,076
(750)
1,243
(81)
(1,418)
(600)
226,642
See accompanying notes to consolidated financial statements
100
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(Amounts in thousands)
Cash flows from operating activities:
2003
2002
2001
Net income
Adjustments to reconcile net income to net cash provided by operating
$
15,542
6,663
4,589
activities:
Depreciation, amortization and accretion expense
Deferred income tax expense
Amortization of loan and senior notes fees
Impairment charge
Compensatory stock options
Bad debt expense (recovery), net of write-offs
Deferred compensation
Cumulative effect of a change in accounting principle, net
Non-cash cost of sales
Employee Stock Purchase Plan expense funded with issuance of
General Communication, Inc. Class A common stock
Write-off of capitalized interest
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
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
Acquisition of Rogers net of cash received
Advances and billings to Kanas
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
Payment of debt issuance costs
Payment of preferred stock dividends
Proceeds from common stock issuance, net of notes receivable from
53,388
9,673
7,732
5,434
1,076
(1,084)
689
544
---
---
---
99
(7,395)
85,698
(62,479)
(6,249)
74
(99)
(138)
---
---
(68,891)
---
(14,557)
(3,528)
(2,036)
56,400
5,754
4,612
---
548
9,844
430
---
---
791
---
90
(10,654)
74,478
(65,140)
(1,657)
946
(3,055)
(38)
---
---
(68,944)
14,766
(17,279)
(352)
(2,045)
55,675
3,958
1,402
---
404
1,294
787
---
10,877
---
170
(44)
815
79,927
(65,638)
(2,296)
1,065
(959)
(101)
(18,533)
(5,404)
(91,866)
29,000
(13,667)
(629)
(2,200)
related parties issued upon stock option exercise
1,961
396
3,882
Purchase and retirement of General Communication, Inc. Class A
common stock
Payment received on note receivable from related parties issued upon
stock option exercise
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
(750)
---
---
679
(81)
(18,312)
(1,505)
11,940
---
(177)
(4,691)
843
11,097
688
---
17,074
5,135
5,962
Cash and cash equivalents at end of year
$
10,435
11,940
11,097
See accompanying notes to consolidated financial statements.
101
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
(l)
Business and Summary of Significant Accounting Principles
In the following discussion, General Communication, Inc. (“GCI”) and its direct and indirect subsidiaries
are referred to as “we,” “us” and “our”.
(a) Business
GCI, an Alaska corporation, was incorporated in 1979. We offer the following services:
(cid:130)
Long-distance telephone service between Alaska and the remaining United States and foreign
countries
Facilities-based competitive local access services in Anchorage, Fairbanks and Juneau, Alaska
Internet access services
Termination of traffic in Alaska for certain common carriers
(cid:130) Cable television services throughout Alaska
(cid:130)
(cid:130)
(cid:130)
(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 an undersea fiber optic cable system used in the transmission
of interstate and intrastate Private Line, switched message long-distance and Internet services
between Alaska and the remaining United States and foreign countries
(b) Principles of Consolidation
The consolidated financial statements include the consolidated accounts of GCI and its wholly owned
subsidiaries with all significant intercompany transactions eliminated.
(c) Earnings per Common Share
Earnings per common share (“EPS”) and common shares used to calculate basic and diluted EPS
consist of the following (amounts in thousands, except per share amounts):
Year Ended December 31,
2003
Shares
(Denom-
inator)
Income
(Num-
erator)
Per-share
Amounts
Net income before cumulative effect of a change in accounting
principle, net of income tax benefit of $367
Less preferred stock dividends:
Series B
Series C
Basic EPS:
Net income before cumulative effect of a change in accounting
principle, net of income tax benefit of $367, available to
common stockholders
Effect of Dilutive Securities:
Unexercised stock options
Diluted EPS:
$16,086
1,418
600
14,068
55,675
$ 0.25
---
765
---
Net income before cumulative effect of a change in accounting
principle, net of income tax benefit of $367, available to
common stockholders
$14,068
56,440
$ 0.25
102
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
Years Ended December 31,
2002
Shares
(Denom-
inator)
Per-share
Amounts
Income
(Num-
erator)
$ 6,663
1,445
600
2001
Shares
(Denom-
inator)
Per-share
Amounts
Income
(Num-
erator)
$ 4,589
1,801
301
4,618
55,081
$ 0.08
2,487
53,091
$ 0.05
---
584
---
---
1,381
---
$ 4,618 55,665
$ 0.08
$ 2,487 54,472
$ 0.05
Net income
Less preferred stock dividends:
Series B
Series C
Basic EPS:
Net income available to
common stockholders
Effect of Dilutive Securities:
Unexercised stock options
Diluted EPS:
Net income available to
common stockholders
Common equivalent shares outstanding which are anti-dilutive for purposes of calculating EPS for
the years ended December 31, 2003, 2002 and 2001, are not included in the diluted EPS
calculations, and consist of the following (shares, in thousands):
Series B redeemable preferred stock
Series C redeemable preferred stock
Anti-dilutive common shares outstanding
2003
2,837
833
3,670
2002
3,062
833
3,895
2001
3,832
833
4,665
Weighted average shares associated with outstanding stock options for the years ended
December 31, 2003, 2002 and 2001 which have been excluded from the diluted EPS calculations
because the options’ exercise price was greater than the average market price of the common
shares consist of the following (shares, in thousands):
Weighted average shares associated with outstanding
stock options
380
2,545
36
2003
2002
2001
103
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
(d) Common Stock
Following are the changes in common stock for the years ended December 31, 2003, 2002 and 2001
(shares, in thousands):
Balances at December 31, 2000
Class B shares converted to Class A
Shares issued under stock option plan
Conversion of preferred stock Series B
Class A
48,643
21
1,044
Class B
3,904
(21)
---
to Class A common stock
1,021
---
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’ interests in GFCC
Balances at December 31, 2002
Class B shares converted to Class A
Shares issued under stock option plan
Shares issued upon conversion of
Series B preferred stock to Class A
common stock
Shares issued per G.C. Cablevision, Inc.
acquisition agreement
Shares purchased and retired
Balances at December 31, 2003
238
50,967
---
3,883
8
584
221
(8)
---
---
15
51,795
---
3,875
7
416
225
(7)
---
---
223
(77)
52,589
---
---
3,868
(e) Redeemable Preferred Stock
Redeemable preferred stock at December 31, 2003 and 2002 consist of (amounts in thousands):
Series B
Series C
2003
$ 15,664
10,000
$ 25,664
2002
16,907
10,000
26,907
We have 1,000,000 shares of preferred stock authorized with the following shares issued at
December 31, 2003, 2002 and 2001 (shares, in thousands):
Balance at December 31, 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
Shares converted to GCI Class A common stock
Balance at December 31, 2003
Series B
20
3
(6)
---
17
(1)
16
Series C
---
---
---
10
10
---
10
104
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
As of December 31, 2003, the combined aggregate amount of preferred stock mandatory
redemption requirements, including dividends, follow (amounts in thousands):
Years ending
December 31:
2004
2005
2006
2007
2008
$
---
10,150
---
---
---
$ 10,150
Series B
We issued 20,000 shares of convertible redeemable accreting Series B preferred stock on April 30,
1999. The Series B preferred stock is convertible at $5.55 per share into GCI Class A common
stock. Through April 30, 2003, dividends were payable semi-annually at the rate of 8.5%, plus
accrued but unpaid dividends, at our option, in cash or in additional fully-paid shares of Series B
preferred stock. Dividends earned after April 30, 2003, are payable semi-annually in cash only.
Mandatory redemption is required 12 years from the date of closing. The redemption amount of
our convertible redeemable accreting Series B preferred stock at December 31, 2003 and 2002
was $15,887,000 and $17,148,000, respectively. The difference between the carrying and
redemption amounts of approximately $223,000 or approximately $14 per share, is due to
accrued dividends which are included in Accrued Liabilities until either paid in cash or through the
issuance of additional Series B preferred stock.
Series C
We issued 10,000 shares of convertible redeemable accreting Series C preferred stock as of June
30, 2001 to acquire a controlling interest in Kanas (see note 3). The Series C preferred stock is
convertible at $12 per share into GCI Class A common stock, is non-voting, and pays a 6% per
annum quarterly cash dividend. We may redeem the Series C preferred stock at any time in whole
but not in part. Mandatory redemption is required at any time after the fourth anniversary date at
the option of holders of 80% of the outstanding shares of the Series C preferred stock. The
redemption price is $1,000 per share plus the amount of all accrued and unpaid dividends,
whether earned or declared, through the redemption date. In the event of a liquidation of GCI, the
holders of Series C preferred stock shall be entitled to be paid an amount equal to the redemption
price before any distribution or payment is made upon our common stock and other shares of our
capital stock hereafter issued which by its terms is junior to the Series C preferred stock. Series B
preferred stock is senior to Series C preferred stock. The redemption amount of our convertible
redeemable accreting Series C preferred stock on December 31, 2003 and 2002 was
$10,000,000. There we no accrued dividends at December 31, 2003 and 2002.
(f) Cash Equivalents
Cash equivalents consist of repurchase interest investments which are short-term and readily
convertible into cash.
(g) Accounts Receivable and Allowance for Doubtful Receivables
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The
allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our
existing accounts receivable. We determine the allowance based on historical write-off experience
by industry and regional economic data. We review our allowance for doubtful accounts monthly.
Past due balances over 90 days and over a specified amount are reviewed individually for
collectibility. All other balances are reviewed on a pooled basis by type of receivable. Account
105
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
balances are charged off against the allowance when we feel it is probable the receivable will not
be recovered. We do not have any off-balance-sheet credit exposure related to our customers.
(h)
Inventories
Inventory of merchandise for resale and parts is stated at the lower of cost or market. Cost is
determined using the average cost method.
(i) Property and Equipment
Property and equipment is stated at cost. Construction costs of facilities are capitalized.
Equipment financed under capital leases is recorded at the lower of fair market value or the
present value of future minimum lease payments. Construction in progress represents distribution
systems and support equipment not placed in service on December 31, 2003; management
intends to place this equipment in service during 2004.
Depreciation is computed on a straight-line basis based upon the shorter of the estimated useful
lives of the assets or the lease term, if applicable, in the following ranges:
Asset Category
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
3-10 years
5-10 years
3-20 years
Repairs and maintenance are charged to expense as incurred. Expenditures for major renewals
and betterments are capitalized. Gains or losses are recognized at the time of retirements, sales or
other dispositions of property.
(j)
Intangible Assets
Effective January 1, 2002, we adopted Statement of Financial Accounting Standard (“SFAS”) No.
142, “Goodwill and Other Intangible Assets.” Since our adoption of SFAS No. 142, goodwill and
cable certificates (certificates of convenience and public necessity) are no longer amortized.
Cable certificates represent certain perpetual operating rights to provide cable services and were
amortized on a straight-line basis over 20 to 40 years in the year ended December 31, 2001.
Goodwill represents the excess of cost over fair value of net assets acquired and was amortized on
a straight-line basis over periods of 10 to 40 years in the year ended December 31, 2001. Cable
certificates are allocated to our cable services reportable segment. Goodwill is primarily allocated
to the cable services segment and the remaining amount is not allocated to a reportable segment,
but is included in the All Other Category in note 13.
The cost of our Personal Communication Services license and related financing costs were
capitalized as an amortizable intangible asset. The associated assets were placed into service
during 2000 and the recorded cost of the license and related financing costs are being amortized
over a 40-year period using the straight-line method. All other amortizable intangible assets are
being amortized over 2-20 year periods using the straight-line method.
(k) Impairment of Long-lived Assets, Intangibles and Goodwill
Cable certificates are tested annually for impairment, and are tested for impairment more
frequently if events and circumstances indicate that the asset might be impaired. The impairment
test consists of a comparison of the fair value of the asset with its carrying amount. If the carrying
amount of the cable certificates asset exceeds its fair value, an impairment loss is recognized in
an amount equal to that excess. After an impairment loss is recognized, the adjusted carrying
amount of the asset is its new accounting basis.
106
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
Goodwill is tested annually for impairment, and is tested for impairment more frequently if events
and circumstances indicate that the asset might be impaired. An impairment loss is recognized to
the extent that the carrying amount exceeds the asset’s fair value. This determination is made at
the reporting unit level and consists of two steps. First, we determine the fair value of a reporting
unit and compare it to its carrying amount. Second, if the carrying amount of a reporting unit
exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of
the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of
goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a
purchase price allocation, in accordance with SFAS No. 141, “Business Combinations.” The
residual fair value after this allocation is the implied fair value of the reporting unit goodwill.
Long-lived assets, such as property, plant, and equipment, and purchased intangibles subject to
amortization, are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an asset to estimated
undiscounted future cash flows expected to be generated by the asset. If the carrying amount of
an asset exceeds its estimated future cash flows, an impairment charge is recognized by the
amount by which the carrying amount of the asset exceeds the fair value of the asset.
(l) Amortization of Loan and Senior Notes Fees
Debt issuance costs are deferred and amortized using the straight-line method, which
approximates the interest method, over the term of the related debt and notes. Amortization costs
are reported as a component of Other Income (Expense) in the Consolidated Statements of
Operations.
(m) Other Assets
Other Assets primarily include long-term deposits and non-trade accounts receivable.
(n) Accounting for Derivative Instruments and Hedging Activities
We record derivatives on the balance sheet as assets or liabilities, measured at fair value
consistent with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as
amended.
On July 1, 2003 we adopted SFAS No. 149, “Amendment of Statement 133 on Derivative
Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities.” Adoption of SFAS No. 149 did not
have a material effect on our results of operations, financial position and cash flows.
(o) Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity
On July 1, 2003 we adopted SFAS No. 150, “Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity.” SFAS No. 150 establishes standards for how an
issuer classifies and measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). Many of those instruments were previously classified
as equity. Adoption of SFAS No. 150 did not have a material effect on our results of operations,
financial position and cash flows.
(p) Asset Retirement Obligations
On January 1, 2003 we adopted SFAS No. 143, “Accounting for Asset Retirement Obligations.”
SFAS No. 143 provides accounting and reporting standards for costs associated with the
107
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
retirement of long-lived assets. This statement requires entities to record the fair value of a liability
for an asset retirement obligation in the period in which it is incurred. When the liability is initially
recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived
asset. Over time, the liability is accreted to its present value each period, and the capitalized cost
is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity
either settles the obligation for its recorded amount or incurs a gain or loss upon settlement.
Upon adoption, we recorded the cumulative effect of accretion and depreciation expense as a
cumulative effect of a change in accounting principle of approximately $544,000, net of income
tax benefit of $367,000.
Following is a reconciliation of the beginning and ending aggregate carrying amount of our asset
retirement obligations at December 31, 2003 (amounts in thousands):
Balance at December 31, 2002
Liability recognized upon adoption of SFAS No. 143
Liability incurred during the year ended December 31, 2003
Accretion expense for the year ended December 31, 2003
Balance at December 31, 2003
$
$
---
1,565
277
163
2,005
Following is the amount of the liability for asset retirement obligations as if SFAS No. 143 had been
applied at December 31, 2001 (amounts in thousands):
Balance at December 31, 2001
Balance at December 31, 2002
$
$
1,350
1,565
At the date of adoption we recorded additional capitalized costs of $654,000 in Property and
Equipment in Service, Net of Depreciation. During the year ended December 31, 2003 we
recorded additional capitalized costs of $278,000 in Property and Equipment in Service, Net of
Depreciation.
(q) Revenue Recognition
All revenues are recognized when the earnings process is complete in accordance with Securities
and Exchange Commission (“SEC”) Staff Accounting Bulletins No. 101 and No. 104, “Revenue
Recognition.” Revenues generated from long-distance and managed services are recognized
when the services are provided. Cable television service, local access service, Internet service and
private line telecommunication revenues are billed in advance, recorded as Deferred Revenue on
the balance sheet, and are recognized as the associated service is provided. Revenues from the
sale of equipment are recognized at the time the equipment is delivered or installed. Technical
services revenues are derived primarily from maintenance contracts on equipment and are
recognized on a prorated basis over the term of the contracts. Revenues from telephone and
yellow-page directories are recognized ratably during the period following publication, which
typically begins with distribution and is complete in the month prior to publication of the next
directory. Other revenues are recognized when the service is provided. We recognize unbilled
revenues when the service is provided based upon minutes of use processed or established rates,
net of credits and adjustments.
(r) Sale of Fiber Optic Cable System Capacity
During the first quarter of 2001 we completed a $19.5 million sale of long-haul capacity in the
Alaska United undersea fiber optic cable system (“fiber capacity sale”) in a cash transaction. The
sale included both capacity within Alaska, and between Alaska and the contiguous 48 states. We
used the proceeds from the fiber capacity sale to repay $11.7 million of the debt and to fund
capital expenditures and working capital.
108
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
The fiber capacity sale was pursuant to a contract giving the purchaser an indefeasible right to use
a certain amount of fiber system capacity expiring on February 4, 2024. The term may be
extended if the actual useful life of the fiber system capacity extends beyond the estimated useful
life of twenty-five years. The fiber system capacity sold is integral equipment because it is
attached to real estate. Because all of the benefits and risks of ownership have been transferred
to the purchaser upon full receipt of the purchase price and other terms of the contract meet the
requirements of SFAS No. 66, “Accounting for Sales of Real Estate” we accounted for the fiber
capacity sale as a sales-type lease. We recognized $19.5 million in revenue from the fiber
capacity sale. We recognized $10.9 million as cost of sales during the year ended December 31,
2001.
The accounting for the sale of fiber system capacity is currently evolving and accounting guidance
may become available in the future which could require us to change our policy. If we are required
to change our policy, it is likely the effect would be to recognize the gain from future sales of fiber
capacity, if any, over the term the capacity is provided.
(s) Payments Received from Suppliers
On March 20, 2003 the Financial Accounting Standards Board issued Emerging Issues Task Force
(“EITF”) Issue No. 02-16, “Accounting by a Reseller for Cash Consideration Received from a
Vendor” (“EITF No. 02-16”). We have applied EITF No. 02-16 prospectively for arrangements
entered into or modified after December 31, 2002. Our cable services segment occasionally
receives reimbursements for costs to promote suppliers’ services, called cooperative advertising
arrangements. The supplier payment is classified as a reduction of selling, general and
administrative expenses if it reimburses specific, incremental and identifiable costs incurred to
resell the suppliers’ services. Excess consideration, if any, is classified as a reduction of cost of
sales and services.
Occasionally our cable services segment enters into a binding arrangement with a supplier in which
we receive a rebate dependent upon us meeting a specified goal. We recognize the rebate as a
reduction of cost of sales and services systematically as we make progress toward the specified
goal, provided the amounts are probable and reasonably estimable. If earning the rebate is not
probable and reasonably estimable, it is recognized only when the goal is met.
(t) Advertising Expense
We expense advertising costs in the fiscal year during which the first advertisement appears.
Advertising expenses were approximately $3,727,000, $2,967,000 and $3,168,000 for the years
ended December 31, 2003, 2002 and 2001, respectively.
(u)
(v)
Interest Expense
Interest costs incurred during the construction period of significant capital projects, such as
construction of an undersea fiber optic cable system, are capitalized. During the year ended
December 31, 2003, $403,000 in interest cost was capitalized during the construction of the fiber
optic cable system discussed further in note 16. No interest was capitalized during the years
ended December 31, 2002 and 2001.
Income Taxes
Income taxes are accounted for using the asset and liability method. Deferred tax assets and
liabilities are recognized for their future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply
to taxable earnings in the years in which those temporary differences are expected to be
109
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
recovered or settled. Deferred tax assets are recognized to the extent that the benefits are more
likely to be realized than not.
(w) Costs Associated with Exit or Disposal Activities
On January 1, 2003 we adopted SFAS No. 146, “Accounting for Costs Associated with Exit or
Disposal Activities.” Upon adoption of SFAS No. 146, enterprises may only record exit or disposal
costs when they are incurred and can be measured at fair value. The recorded liability will be
subsequently adjusted for changes in estimated cash flows. SFAS 146 revises accounting for
specified employee and contract terminations that are part of restructuring activities. Adoption of
SFAS No. 146 did not have a material effect on our results of operations, financial position and
cash flows.
(x)
Incumbent Local Exchange Carrier (“ILEC”) Over-earnings Refunds
We receive refunds from time to time from ILECs with which we do business in respect of their
earnings that exceed regulatory requirements. Telephone companies that are rate regulated by
the Federal Communications Commission (“FCC”) using the rate of return method are required by
the FCC to refund earnings from interstate access charges assessed to long-distance carriers
when their earnings exceed their authorized rate of return. Such refunds are computed based on
the regulated carrier’s earnings in several access categories. Uncertainties exist with respect to
the amount of their earnings, the refunds (if any), their timing, and their realization. We account
for such refundable amounts as gain contingencies, and, accordingly, do not recognize them until
realization is a certainty upon receipt.
(y) Stock Option Plan
At December 31, 2003, we had one stock-based employee compensation plan, which is described
more fully in note 12. We account for this plan under the recognition and measurement principles
of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to
Employees,” and related interpretations. We use the intrinsic-value method and compensation
expense is recorded on the date of grant only if the current market price of the underlying stock
exceeds the exercise price. We have adopted SFAS 123, “Accounting for Stock-Based
Compensation,” which permits entities to recognize as expense over the vesting period the fair
value of all stock-based awards on the date of grant. Alternatively, SFAS 123 also allows entities
to continue to apply the provisions of APB Opinion No. 25.
We have adopted SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and
Disclosure.” This Statement amends SFAS No. 123 to provide alternative methods of transition
for a voluntary change to the fair value based method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123
to require prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the method used
on reported results. We have elected to continue to apply the provisions of APB Opinion No. 25
and provide the pro forma disclosure as required by SFAS 148.
110
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
Stock-based employee compensation cost is reflected over the options’ vesting period of generally
five years and compensation cost for options granted prior to January 1, 1996 is not considered.
The following table illustrates the effect on net income and EPS for the years ended December 31,
2003, 2002 and 2001, if we had applied the fair-value recognition provisions of SFAS 123 to
stock-based employee compensation (amounts in thousands, except per share amounts):
Net income, as reported
Total stock-based employee compensation
expense included in reported net income,
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
Basic and diluted EPS after cumulative effect
of a change in accounting principle, as
reported
Basic and diluted EPS after cumulative effect
of a change in accounting principle, pro
forma
2003
$ 15,542
2002
6,663
2001
4,589
630
257
472
(1,981)
$ 14,191
(2,504)
4,416
(3,483)
1,578
$
0.24
0.08
0.05
$
0.22
0.04
(0.01)
The calculation of total stock-based employee compensation expense under the fair-value based
method includes weighted-average assumptions of a risk-free interest rate, volatility and an
expected life.
(z) Stock Options and Stock Warrants Issued for Non-employee Services
We account for stock options and warrants issued in exchange for non-employee services
pursuant to the provisions of SFAS 123, Emerging Issues Task Force (“EITF”) 96-3 and EITF 96-18,
wherein such transactions are accounted for at the fair value of the consideration or services
received or the fair value of the equity instruments issued, whichever is more reliably measurable.
When a stock option or warrant is issued for non-employee services where the fair value of such
services is not stated, we estimate the value of the stock option or warrant issued using the Black
Scholes method.
The fair value determined using these principles is charged to operating expense over the shorter
of the term for which non-employee services are provided, if stated, or the stock option or warrant
vesting period.
(aa) Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting
principles requires us to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period.
Significant items subject to estimates and assumptions include allowance for doubtful
receivables, valuation allowances for deferred income tax assets, depreciable lives of assets, the
carrying value of long-lived assets including goodwill, and the accrual of cost of sales and services.
Actual results could differ from those estimates.
111
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
(ab) Concentrations of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk are primarily cash
and cash equivalents and accounts receivable. Excess cash is invested in high quality short-term
liquid money instruments issued by highly rated financial institutions. At December 31, 2003 and
2002, substantially all of our cash and cash equivalents were invested in short-term liquid money
instruments at one highly rated financial institution.
We have one major customer, MCI (see note 15). Additionally, Sprint was a major customer during
the year ended December 31, 2001 (see note 13). There is increased risk associated with these
customers’ accounts receivable balances. Our remaining customers are located primarily
throughout Alaska. Because of this geographic concentration, our growth and operations depend
upon economic conditions in Alaska. The economy of Alaska is dependent upon the natural
resources industries, and in particular oil production, as well as tourism, government, and United
States military spending. Though limited to one geographical area and except for MCI and Sprint,
the concentration of credit risk with respect to our receivables is minimized due to the large
number of customers, individually small balances, and short payment terms.
(ac) Software Capitalization Policy
Internally used software, whether purchased or developed, is capitalized and amortized using the
straight-line method over an estimated useful life of five years. In accordance with Statement of
Position ("SOP") 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use,” we capitalize certain costs associated with internally developed software such as
payroll costs of employees devoting time to the projects and external direct costs for materials and
services. Costs associated with internally developed software to be used internally are expensed
until the point the project has reached the development stage. Subsequent additions,
modifications or upgrades to internal-use software are capitalized only to the extent that they allow
the software to perform a task it previously did not perform. Software maintenance and training
costs are expensed in the period in which they are incurred. The capitalization of software requires
judgment in determining when a project has reached the development stage.
(ad) Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections
Effective January 1, 2003, we adopted SFAS No. 145, “Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” Accordingly,
unamortized bank fees and other expenses totaling approximately $2.3 million associated with
the November 2002 refinancing of debt instruments were not classified as an extraordinary item
and were charged to Amortization of Loan and Senior Notes Fees during the year ended December
31, 2002.
(ae) Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others
On January 1, 2003 we adopted FASB Interpretation (“FIN”) No. 45, “Guarantor’s Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others.” This Interpretation elaborates on the disclosures to be made by a guarantor in its interim
and annual financial statements about its obligations under certain guarantees that it has issued.
It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability
for the fair value of the obligation undertaken in issuing the guarantee. This Interpretation does
not prescribe a specific approach for subsequently measuring the guarantor's recognized liability
over the term of the related guarantee. This Interpretation also incorporates, without change, the
guidance in FIN No. 34, “Disclosure of Indirect Guarantees of Indebtedness of Others,” which is
being superseded. Adoption of FIN No. 45 did not have a material effect on our results of
operations, financial position and cash flows.
112
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
(af) Reclassifications
Reclassifications have been made to the 2001 and 2002 financial statements to make them
comparable with the 2003 presentation.
(2) Consolidated Statements of Cash Flows Supplemental Disclosures
Changes in operating assets and liabilities consist of (amounts in thousands):
Year ended December 31,
2003
2002
2001
Increase in accounts receivable
Increase in prepaid and other current assets
(Increase) decrease in inventories
Increase (decrease) in accounts payable
Increase in deferred revenue
Increase (decrease) in accrued payroll and
payroll related obligations
Increase (decrease) in accrued interest
Increase in accrued liabilities
Decrease in subscriber deposits
Increase (decrease) in components of other
long-term liabilities
$ (16,549)
(2,988)
(1,113)
2,465
2,985
5,724
707
1,909
(238)
(5,476)
(6,005)
446
(2,859)
6,161
(10,229)
(487)
(88)
5,701
1,519
(3,468)
(111)
825
(232)
4,872
(1,207)
1,091
(253)
(104)
815
(297)
(7,395)
$
65
(10,654)
We paid interest totaling approximately $34,441,000, $29,427,000 and $32,415,000 during the years
ended December 31, 2003, 2002 and 2001, respectively.
We paid income taxes totaling $112,000 during the year ended December 31, 2001. We paid no
income taxes during the years ended December 31, 2003 and 2002. Net income tax refunds received
totaled $283,700 during the year ended December 31, 2002. We received no income tax refunds
during the years ended December 31, 2003 and 2001.
We recorded $538,000, $319,000 and $2,317,000 during the years ended December 31, 2003, 2002
and 2001, respectively, in paid-in capital in recognition of the income tax effect of excess stock
compensation expense for tax purposes over amounts recognized for financial reporting purposes.
Effective March 31, 2001 we acquired the assets and customer base of G.C. Cablevision, Inc. Upon
acquisition the seller received shares of GCI Class A common stock with a future payment in additional
shares contingent upon the market price of our common stock on March 31, 2003. At March 31, 2003
the market price condition was not met and approximately 222,600 shares of GCI Class A common stock
were issued.
During the year ended December 31, 2002 we funded the employer match portion of Employee Stock
Purchase Plan contributions by issuing GCI Class A common stock valued at $791,000 and by
purchasing GCI Class A common stock on the open market. During the years ended December 31, 2003
and 2001 all employer match shares were purchased on the open market.
We financed the acquisition of approximately $1.0 million of telephony distribution equipment pursuant
to a long-term capital lease arrangement with a leasing company during the year ended December 31,
2002.
We acquired all minority shareholders’ ownership interests in GFCC by issuing 15,000 shares of GCI
Class A common stock in 2002.
113
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
Effective June 30, 2001 we issued $10.0 million of Series C preferred stock in exchange for MCI’s 85%
controlling interest in Kanas (renamed GFCC, see note 3).
(3)
Acquisitions
Effective March 31, 2001 we acquired the assets and customer base of G.C. Cablevision, Inc. of
Fairbanks. The seller received 238,199 unregistered shares of GCI Class A common stock with a future
payment in additional shares contingent upon certain conditions (see note 2). The property and
equipment was valued at $2,088,000 on the date of acquisition. The value of the remaining assets and
liabilities acquired was not material.
Effective June 30, 2001 we completed the acquisition of MCI’s 85 percent controlling interest in Kanas,
which owns the 800-mile fiber optic cable system that extends from Prudhoe Bay to Valdez via Fairbanks.
The corporation owning the fiber optic system was renamed and is now operated as GFCC. The fiber
optic cable system was valued at approximately $21,198,000 on the date of acquisition. On June 30,
2001 we issued to MCI, a related party, shares of Series C preferred stock (see note 1(e)) valued at
$10.0 million. The balance of the carrying value consisted of payments to and services performed on
behalf of Kanas to maintain its operations prior to June 30, 2001. The value of the remaining assets and
liabilities acquired was not material. We acquired the remaining 15 percent ownership interest of GFCC
by issuing 15,000 shares of GCI Class A common stock in 2002.
Effective November 19, 2001 we acquired all of the stock of Rogers, a cable television service provider in
Palmer and Wasilla, Alaska for $18.5 million in cash. Per the acquisition agreement $467,000 was
withheld from the original payment to account for the amount by which Rogers’ current liabilities
exceeded current assets and for certain capital expenditures incurred by the previous owners of Rogers
through May 2001. The final settlement of $345,000 was paid in the first quarter of 2003. This
acquisition was funded through a $19.0 million draw on our then existing Senior Holdings Loan. The
results of Roger’s operations have been included in the consolidated financial statements in the cable
services segment since the acquisition date. This acquisition added approximately 10,000 homes
passed and approximately 7,000 subscribers to our cable services segment in 2001.
The following table, updated to reflect refinements of original estimates, summarizes the estimated fair
values of assets acquired and liabilities assumed at the date of the Rogers acquisition (amounts in
thousands):
Current assets
Property and equipment, net of accumulated depreciation
Franchise agreement
Goodwill
Total assets
Current liabilities
Long-term deferred tax liability
Net assets acquired
$
556
5,160
10,976
3,324
20,016
642
374
$ 19,000
(4) Receivables and Allowance for Doubtful Receivables
Receivables consist of the following at December 31, 2003 and 2002 (amounts in thousands):
Trade
Employee
Other
Total receivables
2003
$ 67,186
284
2,765
$ 70,235
2002
63,111
391
3,093
66,595
114
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
Following are the changes in the allowance for doubtful receivables during the years ended December
31, 2003, 2002 and 2001 (amounts in thousands):
Description
Balance at
beginning
of year
Additions
Charged to
costs and
expenses
Charged
to Other
Accounts
Deductions
Write-offs
net of
recoveries
Balance
at end of
year
December 31, 2003
$ 14,010
2,996
---
15,052
1,954
December 31, 2002
December 31, 2001
$
$
4,166
13,124
2,864
4,076
---
---
3,280
14,010
2,774
4,166
As further described in note 15, during the year ended December 31, 2003 we reached a settlement
agreement for pre-petition amounts owed to us by MCI. The remaining pre-petition accounts receivable
balance owed by MCI after this settlement was removed from our Consolidated Balance Sheets in 2003.
During the year ended December 31, 2003 we utilized approximately $2.8 million of the MCI credit
against amounts otherwise payable for services received from MCI.
As further described in note 15, the Allowance for Doubtful Receivables at December 31, 2002 includes
the provision of $11.6 million of bad debt expense for estimated uncollectible accounts due from MCI.
(5) Net Property and Equipment in Service
Net property and equipment in service consists of the following at December 31, 2003 and 2002
(amounts in thousands):
Land and buildings
Telephony distribution systems
Cable television distribution systems
Support equipment
Transportation equipment
Property and equipment under capital leases
Less accumulated depreciation and amortization
Net property and equipment in service
2003
3,151
2002
$
2,982
345,984 344,566
161,054 149,415
39,807
5,687
51,770
613,122 594,227
244,083 212,833
$ 369,039 381,394
46,219
5,500
51,214
115
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
(6)
Intangible Assets
As of December 31, 2003 cable certificates and goodwill were tested for impairment and the fair values
were greater than the carrying amounts, therefore these intangible assets were determined not to be
impaired at December 31, 2003. The remaining useful lives of our cable certificates and goodwill were
evaluated as of December 31, 2003 and events and circumstances continue to support an indefinite
useful life. The following pro forma financial information reflects net income and basic and diluted EPS
as if goodwill and cable certificates were not subject to amortization for the year ended December 31,
2001 (amounts in thousands, except per share amounts):
Net income, as reported
Add cable certificate amortization, net of income taxes
Add goodwill amortization, net of income taxes
Adjusted net income
Net Income
4,589
3,113
756
8,458
$
$
Basic and
Diluted EPS
0.05
0.06
0.01
0.12
Amortization expense for amortizable intangible assets for the years ended December 31, 2003, 2002
and 2001 follow:
Amortization expense for amortizable intangible assets
$
660
790
7,372
Amortization expense for amortizable intangible assets for each of the five succeeding fiscal years is
estimated to be (amounts in thousands):
Years Ended December 31,
2001
2002
2003
Years ending
December 31,
2004
2005
2006
2007
2008
$ 646
$ 515
$ 510
$ 449
$ 198
No intangible assets have been impaired based upon impairment testing performed as of December 31,
2003 (see note 1(k)) and no indicators of impairment have occurred since the impairment testing was
performed.
Following are the changes in Other Intangible Assets (amounts in thousands):
Balance, December 31, 2001
Asset additions
Less amortization expense
Balance, December 31, 2002
Asset additions
Less amortization expense
Balance, December 31, 2003
$
$
3,387
863
790
3,460
1,095
660
3,895
116
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
(7) Notes Receivable from Related Parties
Notes receivable from related parties consist of the following (amounts in thousands):
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 and
a personal residence, due through August 26,
2004
Notes receivable from other related parties bearing
interest up to 8.4% or at the rate paid by us on
our senior indebtedness, unsecured and secured
by property, due through December 31, 2007
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,
2003
2002
$
7,480
8,068
919
919
1,126
1,612
11,137
1,271
1,231
11,489
4,971
5,650
2,723
697
receivable
$
3,443
5,142
(8) Long-term Debt
Long-term debt consists of the following (amounts in thousands):
Senior Notes (a)
Senior Credit Facility (b)
Long-term debt
2003
$ 180,000
165,000
$ 345,000
December 31,
2002
180,000
177,700
357,700
(a)
On August 1, 1997 GCI, Inc. issued $180.0 million of 9.75% senior notes due 2007 (“Senior
Notes”). The Senior Notes were issued at face value. Net proceeds to GCI, Inc. after deducting
underwriting discounts and commissions totaled $174.6 million. Issuance costs of $6.5 million
were being charged to Amortization of Loan and Senior Notes Fees over the term of the Senior
Notes. The unamortized portion of issuance costs at February 2004 totaled approximately $2.3
million and will be charged to Amortization of Loan and Senior Notes Fees during the three
months ended March 31, 2004.
GCI, Inc. was in compliance with all Senior Notes covenants during the year ending December 31,
2003.
(b)
On April 22, 2003 we amended our $225.0 million Senior Credit Facility (“amended Senior Credit
Facility”). On October 30, 2003 we closed a $220.0 million Senior Credit Facility (“new Senior
Credit Facility”) to replace the April 22, 2003 amended Senior Credit Facility. The new Senior
117
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
Credit Facility reduced the interest rate from LIBOR plus 6.50% to LIBOR plus 3.25%. The new
Senior Credit Facility includes a term loan of $170.0 million and a revolving credit facility of
$50.0 million.
The repayment schedule for the term loan portion of the new Senior Credit Facility, after
consideration of the $43.8 million term loan prepayment from the new Senior Notes issuance
proceeds as described in note 17, is as follows (amounts in thousands):
Date
Quarter ended December 31, 2005
Quarterly from March 31, 2006 to December 31, 2006
Quarterly from March 31, 2007 to September 30, 2007
Amount
$
170
$
8,000
$ 10,000
The remaining balance of the new Senior Credit Facility will be payable in full on October 31,
2007.
We are required to pay a commitment fee on the unused portion of the commitment as follows:
Commitment fee if the
outstanding revolving credit
facility is > 50% of the average
revolving credit facility
commitments by the lenders
during such period
1.00%
0.75%
0.50%
0.50%
Commitment fee if the outstanding
revolving credit facility is < 50% of
the average revolving credit facility
commitments by the lenders during
such period
1.25%
1.00%
0.75%
0.75%
Total Leverage
Ratio (as defined)
>3.75
>3.25 but <3.75
>2.75 but <3.25
< 2.75
We may not permit the Total Leverage Ratio (as defined) to exceed:
Period
October 30, 2003 through December 30, 2003
December 31, 2003 through December 30, 2004
December 31, 2004 through December 30, 2005
December 31, 2005 through June 29, 2006
June 30, 2006 through June 29, 2007
June 30, 2007 through September 29, 2007
September 30, 2007 through October 31, 2007
Total Leverage Ratio
4.25:1
4.00:1
3.75:1
3.50:1
3.25:1
3.00:1
2.75:1
We may not permit the Senior Secured Leverage Ratio (as defined) to exceed:
Period
October 30, 2003 through December 30, 2004
December 31, 2004 through September 29, 2006
September 30, 2006 through June 29, 2007
June 30, 2007 through September 29, 2007
September 30, 2007 through October 31, 2007
Senior Secured
Leverage Ratio
2.00:1
1.75:1
1.50:1
1.25:1
1.00:1
The Interest Coverage Ratio (as defined) may not be less than 2.50:1 at any time.
118
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
Capital expenditures, excluding up to $58.0 million incurred to build or acquire additional fiber
optic cable system capacity between Alaska and the lower forty-eight states, in any of the years
ended December 31, 2004, 2005 and 2006 may not exceed:
(cid:130) $25.0 million, plus
(cid:130) 100% of any Excess Cash Flow (as defined) during the applicable period less certain
permitted investments during the applicable period.
If the revolving credit facility exceeds $25.0 million, we may not incur capital expenditures, other
than those incurred to build or acquire additional fiber optic cable system capacity, in excess of
$25.0 million.
The new Senior Credit Facility requirement that we must either have repaid in full or successfully
refinanced our Senior Notes by February 1, 2007 was met with the refinancing of our Senior
Notes, as discussed in note 17.
We were in compliance with all new Senior Credit Facility covenants through December 31,
2003.
Our ability to draw down the revolver portion of our new Senior Credit Facility could be diminished
if we are not in compliance with all new Senior Credit Facility covenants or have a material
adverse change at the date of the request for the draw.
In connection with the new Senior Credit Facility, we paid bank fees and other expenses of
$912,000 during the year ended December 31, 2003 which will be amortized over the life of the
new Senior Credit Facility.
In connection with the April 22, 2003 amended Senior Credit Facility, we paid bank fees and
other expenses of approximately $2.6 million during the year ended December 31, 2003.
Because a portion of the new Senior Credit Facility was a substantial modification of the April 22,
2003 amended Senior Credit Facility we recognized approximately $5.0 million in Amortization of
Loan and Senior Notes Fees during the three months ended December 31, 2003. The remaining
$2.2 million in amended Senior Credit Facility deferred loan costs will continue to be amortized
over the life of the new Senior Credit Facility.
119
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
As of December 31, 2003 maturities of long-term debt, after considering a $10.0 million draw on
the revolving credit portion of our new Senior Credit Facility in January 2004 and the new Senior
Notes issuance in February 2004, as discussed in note 17, were as follows (amounts in
thousands):
Years ending December 31,
2004
2005
2006
2007
2008
2009 and thereafter
Additional principal portion after issuance of
our new Senior Notes
Use of new Senior Notes proceeds to pay
down new Senior Credit Facility
Draw on the revolving credit portion of our
$
---
170
32,000
89,000
---
250,000
371,170
(70,000)
53,830
new Senior Credit Facility
Long-term debt, at December 31, 2003
(10,000)
345,000
$
(9)
Impairment Charge
In 2003 we reported an impairment charge of $5.4 million which equaled the remaining net book value
recorded for our North Pacific Cable asset. In 1991 we purchased one DS-3 of capacity on a fiber optic
cable system owned by AT&T. This fiber optic cable system is a spur off of a trans-Pacific fiber optic
cable system owned by another group. We used our owned capacity to carry traffic to and from Alaska
and the Lower 48 states. The section of the North Pacific Cable in which we own capacity was taken out
of service in January 2004 due to a billing dispute between AT&T and the owner of the trans-Pacific
cable system causing us to re-route certain of our traffic. We believe it is probable that we will not return
our traffic to the North Pacific Cable even if it is placed back into service. We have requested in writing
to be relieved of all future obligations required by our purchase agreement. Should our request be
accepted, we expect to cease payment of maintenance and vessel standby costs totaling approximately
$324,000 per year that would otherwise be payable over the remaining life of the system. The fiber
optic cable system we are building (see note 16) is scheduled for completion in May 2004 and will
provide us with route diversity and redundancy far in excess of that previously provided by the North
Pacific Cable.
(10) Comprehensive Income
SFAS No. 130, “Reporting Comprehensive Income” requires us to report and display comprehensive
income and its components in a financial statement that is displayed with the same prominence as other
financial statements. During the years ended December 31, 2003, 2002 and 2001 we had other
comprehensive income (loss) of approximately $232,000, ($548,000) and $8,000, respectively. Total
comprehensive income at December 31, 2003, 2002 and 2001 was $15,774,000, $6,115,000 and
$4,597,000, respectively.
120
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
(11)
Income Taxes
Total income tax (expense) benefit was allocated as follows (amounts in thousands):
Net income before cumulative effect of a
change in accounting principle
$
(10,074)
(5,659)
(4,070)
Years ended December 31,
2002
2003
2001
Cumulative effect of a change in accounting
principle
Net income from continuing operations
Stockholders’ equity, for stock option
compensation expense for tax purposes in
excess of amounts recognized for financial
reporting purposes
367
(9,707)
---
(5,659)
---
(4,070)
538
317
2,317
$
(9,169)
(5,342)
(1,753)
Income tax expense consists of the following (amounts in thousands):
Years ended December 31,
2002
2003
2001
Current tax expense:
Federal taxes
State taxes
Deferred tax expense:
Federal taxes
State taxes
$
$
(297)
(104)
(401)
(1,754)
(536)
(2,290)
---
---
---
(7,169)
(2,504)
(9,673)
(10,074)
(2,580)
(789)
(3,369)
(5,659)
(3,115)
(955)
(4,070)
(4,070)
Total income tax expense differed from the “expected” income tax expense determined by applying the
statutory federal income tax rate of 35% for 2003 and 34% for 2002 and 2001 as follows (amounts in
thousands):
“Expected” statutory tax expense
State income taxes, net of federal benefit
Income tax effect of goodwill amortization,
nondeductible expenditures and other
items, net
Adjustments to ending temporary difference
balances, net
Years ended December 31,
2002
(4,189)
(873)
2003
(9,156)
(1,695)
2001
(2,944)
(630)
$
(568)
(597)
(496)
1,345
(10,074)
$
---
(5,659)
---
(4,070)
121
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets
and deferred tax liabilities at December 31, 2003 and 2002 are presented below (amounts in
thousands):
Current deferred tax assets:
Accounts receivable, principally due to allowance
for doubtful accounts
$
4,117
5,649
December 31,
2003
2002
Compensated absences, accrued for financial
reporting purposes
Workers compensation and self insurance health
reserves, principally due to accrual for financial
reporting purposes
Other
Total current deferred tax assets
$
2,062
1,914
801
215
7,195
805
141
8,509
December 31,
2003
2002
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
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
Asset retirement obligations in excess of
amounts recognized for tax purposes
Other
Total long-term deferred tax assets
$
77,534
1,892
76,855
1,892
1,531
1,239
727
179
---
411
184
1,555
672
586
185
181
212
464
825
---
83,757
---
360
83,727
122
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
December 31,
2003
2002
Long-term deferred tax liabilities:
Plant and equipment, principally due to
differences in depreciation
Amortizable assets
Other
Total gross long-term deferred tax liabilities
Net combined long-term deferred tax liabilities $
93,928
13,997
---
107,925
24,168
90,522
8,920
346
99,788
16,061
We recorded net deferred tax assets of $15.8 million in 2002 associated with the Rogers and Kanas
acquisitions (see note 3), resulting in adjustments to the recorded financial statement cost basis of
associated goodwill and property and equipment.
In conjunction with the 1996 Cable Companies acquisition, the Company incurred a net deferred income
tax liability of $24.4 million and acquired net operating losses totaling $57.6 million. The Company
determined that approximately $20 million of the acquired net operating losses would not be utilized for
income tax purposes, and elected with its December 31, 1996 income tax returns to forego utilization of
such acquired losses under Internal Revenue Code section 1.1502-32(b)(4). Deferred tax assets were
not recorded associated with the foregone losses and, accordingly, no valuation allowance was
provided. At December 31, 2003, the Company has (1) tax net operating loss carryforwards of
approximately $188.6 million that will begin expiring in 2005 if not utilized, and (2) alternative minimum
tax credit carryforwards of approximately $1.9 million available to offset regular income taxes payable in
future years.
The following schedule shows our tax net operating loss carryforwards by year of expiration (amounts in
thousands):
Years ending December 31,
2005
2006
2007
2008
2009
2010
2011
2018
2019
2020
2021
2022
2023
$
Federal
292
393
4,017
8,077
11,767
9,134
6,919
19,995
27,910
45,403
30,973
15,320
8,361
State
---
---
3,006
7,509
11,482
8,935
6,685
19,390
27,905
45,400
31,922
15,002
8,187
Total tax net operating loss carryforwards
$ 188,561 185,423
Our utilization of remaining acquired net operating loss carryforwards is subject to annual limitations
pursuant to Internal Revenue Code section 382 which could reduce or defer the utilization of these
losses.
Tax benefits associated with recorded deferred tax assets are considered to be more likely than not
realizable through taxable income earned in carry back years, future reversals of existing taxable
temporary differences, and future taxable income exclusive of reversing temporary differences and
123
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
carryforwards. The amount of deferred tax asset considered realizable, however, could be reduced in
the near term if estimates of future taxable income during the carryforward period are reduced.
Our United States income tax return for 2000 was selected for examination by the Internal Revenue
Service during 2003. The examination began during the fourth quarter of 2003. We believe this
examination will not have a material adverse effect on our financial position, results of operations or our
liquidity.
(12) Stockholders' Equity
Common Stock
GCI's Class A common stock and Class B common stock are identical in all respects, except that each
share of Class A common stock has one vote per share and each share of Class B common stock has
ten votes per share. In addition, each share of Class B common stock outstanding is convertible, at the
option of the holder, into one share of Class A common stock.
MCI owned 3,751,509 shares of GCI's Class A common stock that represented approximately 7 percent
of the issued and outstanding Class A shares at December 31, 2003 and 2002. MCI owned 1,275,791
shares of GCI's Class B common stock that represented approximately 33 percent of the issued and
outstanding Class B shares at December 31, 2003 and 2002.
In October 2003, a Series B preferred stockholder converted 1,250 shares of Series B preferred stock to
GCI Class A common stock resulting in the issuance of approximately 225,000 shares of GCI Class A
common stock.
Stock Option Plan
In December 1986, GCI adopted a Stock Option Plan (the “Option Plan”) in order to provide a special
incentive to our officers, non-employee directors, and employees by offering them an opportunity to
acquire an equity interest in GCI. The Option Plan, as amended, provides for the grant of options for a
maximum of 10.7 million shares of GCI Class A common stock, subject to adjustment upon the
occurrence of stock dividends, stock splits, mergers, consolidations or certain other changes in
corporate structure or capitalization. If an option expires or terminates, the shares subject to the option
will be available for further grants of options under the Option Plan. The Option Committee of GCI’s
Board of Directors administers the Option Plan.
The Option Plan provides that all options granted under the Option Plan must expire not later than ten
years after the date of grant. If at the time an option is granted the exercise price is less than the
market value of the underlying common stock, the difference in these amounts at the time of grant is
expensed ratably over the vesting period of the option. Options granted pursuant to the Option Plan are
only exercisable if at the time of exercise the option holder is our employee, non-employee director, or a
consultant or advisor working on our behalf.
124
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
Information for the years 2001, 2002 and 2003 with respect to the Option Plan follows:
Outstanding at December 31, 2000
Granted
Exercised
Forfeited
Outstanding at December 31, 2001
Granted
Exercised
Forfeited
Outstanding at December 31, 2002
Granted
Exercised
Forfeited
Outstanding at December 31, 2003
Weighted
Average
Exercise
Price
$5.54
$7.34
$4.01
$6.53
$6.11
$6.90
$5.78
$7.42
$6.34
$6.24
$4.95
$5.93
$6.41
Shares
5,413,565
755,277
(1,044,511)
(24,200)
5,100,131
1,995,700
(583,888)
(223,177)
6,288,766
963,200
(377,487)
(98,200)
6,776,279
Available for grant at December 31, 2003
22,757
Stock Warrants Not Pursuant to a Plan
We entered into a stock warrant agreement in exchange for services in December 1998 with certain of
our legal counsel which provides for the purchase of 16,667 shares of GCI Class A common stock,
vesting in December 1999, with an exercise price of $3.00 per share, and expiring December 2003.
The fair value of the stock warrant when issued was approximately $23,000. The warrant was exercised
in November 2003 prior to its expiration.
We entered into a stock warrant agreement in exchange for services in June 1999 with certain of our
legal counsel which provides for the purchase of 25,000 shares of GCI Class A common stock, vesting
through December 2001, with an exercise price of $3.00 per share, and expiring December 2003. The
fair value of the stock warrant when issued was approximately $94,000. The warrant was exercised in
October 2003 prior to its expiration.
SFAS 123 Disclosures
Our stock options and warrants expire at various dates through December 2013. At December 31,
2003, 2002, and 2001, the weighted-average remaining contractual lives of options outstanding were
6.47, 6.93, and 6.95 years, respectively.
At December 31, 2003, 2002, and 2001, the number of exercisable shares under option was
3,495,361, 3,187,618, and 2,837,361, respectively, and the weighted-average exercise price of those
options was $6.11, $5.87, and $5.75, respectively.
The per share weighted-average fair value of stock options granted during 2003 was $4.30 per share
for compensatory and $2.99 for non-compensatory options; for 2002 was $3.05 per share for
compensatory and $0.61 for non-compensatory options; and for 2001 was $6.99 per share for
compensatory and $10.58 for non-compensatory options. The amounts were determined as of the
options’ grant dates using a Black-Scholes option-pricing model with the following weighted-average
125
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
assumptions: 2003 – risk-free interest rate of 3.45%, volatility of 0.53 and an expected life of 5.26
years; 2002 – risk-free interest rate of 3.08%, volatility of 0.68 and an expected life of 6.18 years; and
2001 – risk-free interest rate of 4.67%, volatility of 0.62 and an expected life of 6.67 years.
Summary information about our stock options outstanding at December 31, 2003 follows:
Options Outstanding
Options Exercisable
Range of
Exercise Prices
$3.11-$5.00
$5.40-$5.77
$6.00-$6.00
$6.05-$6.35
$6.50-$6.50
$6.63-$6.99
$7.00-$7.00
$7.25-$7.25
$7.40-$10.98
$11.25-$11.25
$3.11-$11.25
Number
outstanding
902,198
136,667
1,321,449
59,500
2,035,550
81,000
732,022
1,150,000
568,893
40,000
7,027,279
Weighted
Average
Remaining
Contractual
Life
5.12
7.89
7.29
7.32
6.31
4.14
4.62
8.11
6.21
7.50
6.47
Weighted
Average
Exercise Price
$4.20
$5.53
$6.00
$6.14
$6.50
$6.80
$7.00
$7.25
$7.99
$11.25
$6.42
Number
Exercisable
736,908
29,667
554,969
30,200
1,218,530
80,200
506,522
30,000
292,365
16,000
3,495,361
Weighted
Average Exercise
Price
$4.06
$5.61
$6.00
$6.13
$6.50
$6.80
$7.00
$7.25
$7.77
$11.25
$6.11
Class A Common Shares Held in Treasury
In 2003 we acquired a total of 21,700 shares of GCI Class A common stock for approximately $81,000
to fund a deferred compensation agreement for an employee. In 2002 we acquired a total of 20,000
shares of GCI Class A common stock for approximately $177,000 to fund a deferred compensation
agreement for an officer.
Employee Stock Purchase Plan
In December 1986, we adopted an Employee Stock Purchase Plan (“Plan”) qualified under Section 401
of the Internal Revenue Code of 1986 (“Code”). The Plan provides for acquisition of GCI’s Class A and
Class B common stock at market value. The Plan permits each employee who has completed one year
of service to elect to participate in the Plan. Through December 31, 2003, eligible employees could
elect to reduce their compensation in any even dollar amount up to 50 percent of such compensation
(subject to certain limitations) up to a maximum of $12,000. Beginning January 1, 2004, eligible
employees can elect to reduce their compensation in any even dollar amount up to 50 percent of such
compensation (subject to certain limitations) up to a maximum of $13,000. Eligible employees may
contribute up to 10 percent of their compensation with after-tax dollars, or they may elect a combination
of salary reductions and after-tax contributions.
Eligible employees were allowed to make catch-up contributions of no more than $2,000 during the year
ended December 31, 2003 and will be able to make such contributions limited to $3,000 during the
year ended December 31, 2004. We do not match employee catch-up contributions.
We may match employee salary reductions and after tax contributions in any amount, elected by our
Board of Directors each year, but not more than 10 percent of any one employee's compensation will be
matched in any year. Matching contributions vest over the initial six years of employment. For the years
126
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
ended December 31, 2002 and 2003 the combination of salary reductions, after tax contributions and
matching contributions cannot exceed the lesser of 100 percent of an employee's compensation or
$40,000 (determined after salary reduction) for any year. For the year ended December 31, 2004, the
combination of salary reductions, after tax contributions and matching contributions cannot exceed the
lesser of 100 percent of an employee's compensation or $41,000 (determined after salary reduction).
Employee contributions may be invested in GCI class A common stock, AT&T common stock, Comcast
Corporation common stock, AT&T Wireless Services common stock, or various mutual funds.
Employee contributions invested in GCI common stock receive up to 100% matching, as determined by
our Board of Directors each year, in GCI common stock. Employee contributions invested in other than
GCI common stock receive up to 50% matching, as determined by our Board of Directors each year, in
GCI common stock.
Our matching contributions allocated to participant accounts totaled approximately $4,035,000,
$3,665,000, and $3,194,000 for the years ended December 31, 2003, 2002, and 2001, respectively.
The Plan may, at its discretion, purchase shares of GCI common stock from GCI at market value or may
purchase GCI’s common stock on the open market. In 2002 we funded a portion of our employer-
matching contributions through the issuance of new shares of GCI common stock rather than market
purchases. In 2003 and 2001 we funded all of our employer-matching contributions through market
purchases.
Effective January 1, 2003 we allowed participating employees to diversify 100 percent of their holdings
of GCI common stock at December 31, 2002 in other investments offered by the Plan.
The Plan was amended in the first quarter of 2004 resulting in the following changes beginning in the
second quarter of 2004:
(cid:130) We will match up to 100% of all participants’ contributions with GCI common stock, as
determined by the Board of Directors each year, and
(cid:130) Participants will be able to reinvest up to 100% of their existing and future GCI common stock
holdings into other investment choices offered by the Plan.
(13)
Industry Segments Data
Our reportable segments are business units that offer different products. The reportable segments are
each managed separately and offer distinct products with different production and delivery processes.
We have four reportable segments as follows:
Long-distance services. We offer a full range of common carrier long-distance services to commercial,
government, other telecommunications companies and residential customers, through our networks of
fiber optic cables, digital microwave, and fixed and transportable satellite earth stations and our
SchoolAccess™ offering to rural school districts and a similar offering to rural hospitals and health
clinics.
Cable services. We provide cable television services to residential, commercial and government users
in the State of Alaska. Our cable systems serve 35 communities and areas in Alaska, including the
state's four largest urban areas, Anchorage, Fairbanks, the Matanuska-Susitna Valley, and Juneau. We
offer digital cable television services in Anchorage, the Matanuska-Susitna Valley, Fairbanks, Juneau,
Ketchikan, Kenai and Soldotna and retail cable modem service (through our Internet services
segment) in all of our locations in Alaska except Kotzebue.
127
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
Local access services. We offer facilities based competitive local exchange services in Anchorage,
Fairbanks and Juneau and plan to provide similar competitive local exchange services in other
locations pending regulatory approval and subject to availability of capital. Revenue, costs of sales
and service and operating expenses for our new phone directory are included in the local access
services segment.
Internet services. We offer wholesale and retail Internet services to both consumer and commercial
customers. We offer cable modem service as further described in Cable services above. Our undersea
fiber optic cable system allows us to offer enhanced services with high-bandwidth requirements.
Included in the “All Other” category in the tables that follow are our managed services, product sales and
cellular telephone services. None of these business units has ever met the quantitative thresholds for
determining reportable segments. Also included in the All Other category are corporate related expenses
including information technology, accounting, legal and regulatory, human resources and other general
and administrative expenses.
We evaluate performance and allocate resources based on (1) earnings or loss from operations before
depreciation, amortization and accretion expense, net other expense and income taxes, and (2)
operating income or loss. The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies in note 1. Intersegment sales are recorded
at cost plus an agreed upon intercompany profit.
We earn all revenues through sales of services and products within the United States. All of our long-
lived assets are located within the United States of America, except approximately 72% of our undersea
fiber optic cable system which transits international waters.
Summarized financial information for our reportable segments for the years ended December 31, 2003,
2002 and 2001 follows (amounts in thousands):
Long-
Distance
Services
Reportable Segments
Local
Access
Services
Cable
Services
Internet
Services
Total
Reportable
Segments
All
Other
Total
2003
Revenues:
Intersegment
External
Total revenues
Cost of sales and services:
$ 13,648
204,567
218,215
9,763
2,504
2,423
96,004 38,998 19,842
98,508 48,761 22,265
28,338
359,411
387,749
744 29,082
31,386 390,797
32,130 419,879
Intersegment
External
19,242
53,377
1
2,121
25,988 23,761
4,484
5,862
25,848
108,988
860 26,708
16,395 125,383
Total cost of sales and
services
Contribution:
Intersegment
External
Total contribution
Selling, general and
administrative expenses
Bad debt expense
(recovery)
Impairment charge
72,619
25,989
25,882
10,346
134,836
17,255
152,091
(5,594) 2,503
7,642
(2,061)
70,016 15,237 13,980
72,519 22,879 11,919
2,490
250,423
252,913
(116)
2,374
14,991 265,414
14,875 267,788
151,190
145,596
37,692
27,101
17,718
8,589
91,100
47,593
138,693
(1,104)
5,434
651
---
119
---
60
---
(274)
5,434
96
---
(178)
5,434
128
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
Long-
Distance
Services
Reportable Segments
Local
Access
Services
Cable
Services
Internet
Services
Total
Reportable
Segments
All
Other
Total
Earnings (loss) from
operations before
depreciation,
amortization, net interest
expense and income
taxes
Depreciation, amortization
and accretion expense
103,574
44,767
5,042
3,270
156,653
(32,814)
123,839
20,209
17,296
3,553
3,708
44,766
8,622
53,388
Operating income (loss)
$ 83,365
27,471
1,489
(438) 111,887
(41,436) 70,451
Total assets
$ 274,519 326,435 40,763 26,262
667,979
95,041 763,020
Capital expenditures
$ 30,331
15,223
3,608
2,993
52,155
10,324 62,479
2002
Revenues:
Intersegment
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
$ 21,297 2,094
9,723
2,026
88,688 32,071 15,584
90,782 41,794 17,610
---
23,649 20,205
2,100 14,988
4,792
204,930
226,227
16,942
60,053
35,140
341,273
376,413
744 35,884
26,569 367,842
27,313 403,726
34,030
108,699
752 34,782
14,865 123,564
76,995
23,649
22,305
19,780
142,729
15,617
158,346
4,355
144,877
149,232
2,094
7,623 (12,962)
65,039 11,866 10,792
67,133 19,489
1,110
232,574
(2,170) 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
92 13,124
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
$ 18,539 1,650
200,694
219,233
8,716
1,203
76,554 25,229 11,996
78,204 33,945 13,199
30,108
314,473
344,581
355 30,463
42,785 357,258
43,140 387,721
129
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
Long-
Distance
Services
15,039
73,257
Reportable Segments
Local
Access
Services
Cable
Services
Internet
Services
---
20,829 14,037
1,586 12,438
4,749
Total
Reportable
Segments
All
Other
Total
29,063
112,872
461 29,524
26,921 139,793
88,296
20,829
15,623
17,187
141,935
27,382
169,317
3,500
127,437
130,937
1,650
55,725 11,192
57,375 18,322
1,045
7,130 (11,235)
7,247
201,601
(3,988) 202,646
(106)
939
15,864 217,465
15,758 218,404
38,102
2,790
21,740
1,053
13,138
181
8,066
86
81,046
4,110
35,490
169
116,536
4,279
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
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
Operating income (loss)
$ 68,146
13,878
1,473 (15,019)
68,478
(26,564) 41,914
Total assets
$ 294,175 321,722 30,040 27,363
673,300
61,379 734,679
Capital expenditures
$ 24,497
16,433
8,085
6,516
55,531
10,107 65,638
Long-distance services, local access services and Internet services are billed utilizing a unified accounts
receivable system and are not reported separately by business segment. All such accounts receivable
are included above in the long-distance services segment for all periods presented.
A reconciliation of reportable segment revenues to consolidated revenues follows (amounts in
thousands):
Years ended December 31,
2003
2002
2001
Reportable segment revenues
Plus All Other revenues
Less intersegment revenues eliminated in
consolidation
Consolidated revenues
$ 387,749
32,130
376,413
27,313
344,581
43,140
29,082
$ 390,797
35,884
367,842
30,463
357,258
130
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
A reconciliation of reportable segment earnings from operations before depreciation, amortization and
accretion expense, net other expense and income taxes to consolidated net income before income taxes
and cumulative effect of a change in accounting principle follows (amounts in thousands):
Years ended December 31,
2003
2002
2001
Reportable segment earnings from operations
before depreciation, amortization and accretion
expense, net other expense and income taxes
Less All Other loss from operations before
depreciation, amortization and accretion expense,
net other expense and income taxes
Less intersegment contribution eliminated in
$
156,653
133,555
117,490
32,814
30,328
19,901
consolidation
2,374
1,102
939
Consolidated earnings from operations before
depreciation, amortization and accretion
expense, net other expense and income taxes
Less depreciation, amortization and accretion
expense
Consolidated operating income
Less other expense, net
Consolidated net income before income taxes
and cumulative effect of a change in
accounting principle
121,465
102,125
96,650
53,388
68,077
41,917
56,400
45,725
33,403
55,675
40,975
32,316
$
26,160
12,322
8,659
A reconciliation of reportable segment operating income to consolidated net income before income taxes
and cumulative effect of a change in accounting principle follows (amounts in thousands):
Years ended December 31,
2003
2002
2001
Reportable segment operating income
Less All Other operating loss
Less intersegment contribution eliminated in
consolidation
Consolidated operating income
Less other expense, net
Consolidated net income before income taxes
and cumulative effect of a change in
accounting principle
$ 111,887
41,436
85,593
38,766
68,478
26,564
2,374
68,077
41,917
1,102
45,725
33,403
939
40,975
32,316
$ 26,160
12,322
8,659
We provide long-distance services to MCI (see note 15), a major customer, and to Sprint. We earned
revenues from Sprint, net of discounts, included in the long-distance segment, totaling approximately
$36,899,000 during the year ended December 31, 2001. As a percentage of total revenues, Sprint
revenues totaled 10.3% for the year ended December 31, 2001. Sprint was a major customer for
segment disclosure purposes for the year ended December 31, 2001, but was not a major customer for
the years ended December 31, 2003 and 2002.
131
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
(14) Financial Instruments
Fair Value of Financial Instruments
The fair value of a financial instrument is the amount at which the instrument could be exchanged in a
current transaction between willing parties. The carrying amounts and estimated fair values of our
financial instruments at December 31, 2003 and 2002 follows (amounts in thousands):
Short-term assets
Notes receivable with related parties
Short-term liabilities
2003
Carrying
Amount
Fair
Value
$
$
$
81,439 81,439
3,443
3,443
72,144 72,144
2002
Carrying
Amount
65,715
5,142
61,632
Fair
Value
65,715
5,142
61,632
Long-term debt and capital lease obligations $
384,636 401,987
402,475 419,305
Cash flow hedge liability
Other liabilities
$
$
515
515
999
999
5,931
5,931
4,442
4,442
The following methods and assumptions were used to estimate fair values:
Short-term assets: The fair values of cash and cash equivalents, net receivables and current portion
of notes receivable from related parties approximate their carrying values due to the short-term
nature of these financial instruments.
Notes receivable from related parties: The carrying value of notes receivable from related parties is
estimated to approximate fair values. Although there are no quoted market prices available for
these instruments, the fair value estimates were based on the change in interest rates and risk
related interest rate spreads since the note origination dates.
Short-term liabilities: The fair values of current maturities of capital lease obligations, accounts
payable, payroll and payroll related obligations, accrued interest, accrued liabilities, and subscriber
deposits approximate their carrying value due to the short-term nature of these financial
instruments.
Long-term debt and capital lease obligations: The fair value of long-term debt is based primarily on
discounting the future cash flows of each instrument at rates currently offered to us for similar debt
instruments of comparable maturities by investment bankers.
Other Liabilities: Deferred compensation liabilities have no defined maturity dates therefore the fair
value is the amount payable on demand as of the balance sheet date. Asset retirement obligations
are recorded at their fair value and, over time, the liability is accreted to its present value each
period.
Derivative Instruments and Hedging Activities
Effective January 3, 2001, we entered into an interest rate swap agreement to convert $50 million of
9.75% fixed rate debt to a variable interest rate equal to the 90 day LIBOR rate plus 334 basis points.
This interest rate swap was cancelled by the counterparty on August 1, 2002. The differential paid to us
was recorded as a decrease in Interest Expense in the Consolidated Statements of Operations in the
period in which it was recognized. During the years ended December 31, 2002 and 2001 we recognized
approximately $1.2 million and $1.1 million, respectively, as a reduction of interest expense.
132
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
Effective September 21, 2001, we entered into an interest rate swap agreement to convert $25 million
of variable interest rate debt equal to the 90 day LIBOR rate plus 334 basis points to 3.98% fixed rate
debt plus applicable margins. Terms of the interest rate swap mirror the underlying variable rate debt,
except the interest rate swap terminates on September 21, 2004. We entered into the transaction to
help insulate us from future increases in interest rates. Under SFAS No. 133, the interest rate swap is
accounted for as a cash flow hedge. The change in the fair value of the interest rate swap net of income
taxes is recorded as an increase or decrease in Accumulated Other Comprehensive Loss in the
Consolidated Statements of Stockholders’ Equity. The associated cost is recognized in Interest Expense
in the Consolidated Statements of Operations. During the years ended December 31, 2003, 2002 and
2001 we recognized approximately $681,000, $555,000 and $112,000, respectively, in incremental
interest expense resulting from this transaction.
(15) Related Party Transactions
MCI
We earned revenues from MCI, a major shareholder of GCI (see note 12), net of discounts, of
approximately $81,996,000, $84,641,000 and $68,863,000 for the years ended December 31, 2003,
2002 and 2001, respectively. Revenues earned from MCI include approximately $11,004,000 and
$10,638,000 for the years ended December 31, 2002 and 2001, respectively, earned from a certain
MCI customer who considered itself to be a third party obligor that was ultimately liable for services
provided by GCI to the third party under a contract that had been assigned to MCI. Beginning January 1,
2003 we have billed this customer directly for services provided. Revenues earned from MCI net of
amounts earned from the third party obligor were approximately $73,637,000 and $58,225,000 for the
years ended December 31, 2002 and 2001, respectively. As a percentage of total revenues, MCI
revenues, net of amounts earned from the third party obligor, totaled 21.0%, 20.0% and 16.3% for the
years ended December 31, 2003, 2002 and 2001, respectively.
Amounts receivable, net of accounts payable, from MCI totaled $25,585,000 and $21,677,000 at
December 31, 2003 and 2002, respectively. We paid MCI to distribute our traffic in the contiguous 48
states and Hawaii approximately $5,100,000, $6,413,000 and $7,289,000 for the years ended
December 31, 2003, 2002 and 2001, respectively.
On July 21, 2002 MCI and substantially all of its active United States subsidiaries filed voluntary
petitions for reorganization under Chapter 11 of the United States Bankruptcy Code in the United States
Bankruptcy Court. Chapter 11 allows a company to continue operating in the ordinary course of
business in order to maximize recovery for the company’s creditors and shareholders.
At the time of the petition for bankruptcy, we had approximately $12.9 million in receivables
outstanding from MCI. At December 31, 2002 the bad debt reserve for uncollected amounts due from
MCI (“MCI reserve”) totaled $11.6 million and consisted of all billings for services rendered prior to July
21, 2002 that were not paid or deemed recoverable as of December 31, 2002. During the year ended
December 31, 2002 we recognized $11.0 million in bad debt expense for uncollected amounts due
from MCI.
On July 22, 2003, the United States Bankruptcy Court approved a settlement agreement for pre-petition
amounts owed to us by MCI and affirmed all of our existing contracts with MCI. The agreement settled
unpaid balances due from MCI for services rendered prior to their bankruptcy filing date, settled billing
disputes between us, and established a right to set-off certain of our pre-petition accounts payable to
MCI. Under the terms of the agreement, we reduced the pre-petition amounts receivable from MCI by
$800,000 and off-set our pre-petition accounts payable by $1.0 million. The majority of the difference
reduced the MCI reserve with the remainder recorded as bad debt expense.
133
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
The remaining pre-petition accounts receivable balance owed by MCI to us after this settlement was
$11.1 million (“MCI credit”) which we have and will use as a credit against amounts payable for
services purchased from MCI. At settlement, all of the remaining pre-petition amounts receivable due
from MCI, which were fully reserved, were removed from accounts receivable in our Consolidated
Balance Sheets.
After settlement, we began reducing the MCI credit as we utilized it for services otherwise payable to
MCI. The use of the credit is recorded as a reduction of bad debt expense. During 2003 we utilized
approximately $2.8 million of the MCI credit against amounts payable for services received from MCI.
The remaining unused MCI credit totaled $7.9 million at December 31, 2003. The credit balance is not
recorded on the Consolidated Balance Sheet as we are recognizing recovery of bad debt expense as the
credit is utilized.
On October 31, 2003, MCI’s reorganization plan was approved by the United States Bankruptcy Court.
The court order provided for a February 28, 2004 deadline for MCI to emerge from bankruptcy. In
February 2004 MCI asked the Court for a 60-day extension to the February 28 deadline to allow it to
complete financial filings with the SEC. The financial filings are reported to be the last major task left for
MCI to emerge from bankruptcy. We expect to evaluate the likelihood that we will receive full recovery of
bad debt expense for our remaining credit balance when MCI exits bankruptcy proceedings and may
change our recognition method at that time.
Other
We entered into a long-term capital lease agreement in 1991 with the wife of our president for property
occupied by us. The leased asset was capitalized in 1991 at the owner’s cost of $900,000 and the
related obligation was recorded in the accompanying financial statements. The lease agreement was
amended in September 2002. The amended lease terminates on September 30, 2011. Through
September 30, 2003 our monthly payment was $20,000, increasing to $20,860 per month October 1,
2003 through September 30, 2006 and increasing to $21,532 per month October 1, 2006 through
September 30, 2011. Since the property was not sold prior to the tenth year of the lease, the owner
was required to pay us the greater of one-half of the appreciated value of the property over $900,000,
or $500,000. Accordingly, we received $500,000 in the form of a note in 2002. The owner paid us
$135,000 in 2002 in the form of a note as additional consideration for the execution of the September
2002 amendment.
During the six-month period ended June 30, 2001 we provided management services to Kanas.
Effective June 30, 2001 we completed the acquisition of MCI’s 85% controlling interest in Kanas (see
note 3). During the six-month period ended June 30, 2001 we earned revenues of approximately
$618,000 for management services and long-distance services provided to Kanas. We paid
approximately $372,000 to Kanas for the lease and maintenance of fiber optic cable capacity during
the six-month period ended June 30, 2001. We advanced approximately $4.9 million to Kanas to
partially fund its operations during the six-month period ended June 30, 2001. During the year ended
December 31, 2002, we acquired the remaining 15% interest in Kanas in exchange for a total of 15,000
shares of GCI Class A common stock.
In January 2001 we entered into an aircraft operating lease agreement with a company owned by GCI’s
president. The lease was amended effective January 1, 2002. The lease is month-to-month and may be
terminated at any time upon one hundred and twenty days written notice. The monthly lease rate is
$50,000. Upon signing the lease, the lessor was granted an option to purchase 250,000 shares of GCI
Class A common stock at $6.50 per share, all of which are exercisable. We paid a deposit of $1.5
million in connection with the lease. The deposit will be repaid to us upon the earlier of six months after
the agreement terminates, or nine months after the date of a termination notice. The lessor may sell to
us the stock arising from the exercise of the stock option or surrender the right to purchase all or a
134
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
portion of the stock option to repay the deposit, if allowed by our debt and preferred stock instruments
in effect at such time.
(16) Commitments and Contingencies
Leases
Operating Leases as Lessee. We lease business offices, have entered into site lease agreements and
use satellite transponder capacity and certain equipment pursuant to operating lease arrangements.
Rental costs under such arrangements amounted to approximately $14,788,000, $13,445,000 and
$9,292,000 for the years ended December 31, 2003, 2002 and 2001, respectively.
Satellite Transponder Capacity Capital Lease
We lease satellite transponder capacity through a capital lease arrangement with a leasing company.
The capital lease was entered into in March 2000. The effective term of the lease is nine years from the
closing date. The capital lease includes certain covenants requiring maintenance of specific levels of
operating cash flow to indebtedness and limitations on additional indebtedness. We were in compliance
with all covenants during the year ending December 31, 2003.
We began operating the satellite transponders on April 1, 2000. The satellite transponders are recorded
at a cost of $48.0 million and are being depreciated over twelve years. We have financed $43.5 million
and $44.9 million under this capital lease at December 31, 2003 and 2002, respectively.
A summary of future minimum lease payments for all leases follows (amounts in thousands):
Years ending December 31:
2004
2005
2006
2007
2008
2009 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
$ 12,384
11,253
9,599
6,998
6,270
23,351
$ 69,855
Capital
8,448
9,923
9,278
8,385
7,390
18,478
61,902
(17,127)
(5,139)
39,636
(677)
$
38,959
The leases generally provide that we pay the taxes, insurance and maintenance expenses related to the
leased assets. We expect that in the normal course of business leases that expire will be renewed or
replaced by leases on other properties.
Telecommunication Services Agreement
We lease a portion of our 800-mile fiber optic system capacity that extends from Prudhoe Bay to Valdez
via Fairbanks, and provide management and maintenance services for this capacity to a customer. The
135
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
telecommunications service agreement is for fifteen years and may be extended for up to two successive
three-year periods and, upon expiration of the extensions, one additional year.
A summary of minimum future service revenues, assuming the agreement is not terminated pursuant to
contract provisions, follows (amounts in thousands):
Years ending December 31,
2004
2005
2006
2007
2008
2009 and thereafter
Total minimum future service revenues
$
7,620
7,620
7,620
7,620
7,620
56,847
$ 94,947
In December 2001 we signed a letter of agreement with our customer in which we agreed, amongst
other things, to upgrade the 800-mile fiber optic system, install multiple earth stations, and potentially
provide other services. We have completed the projects outlined in the letter of agreement and expect
testing and acceptance to be completed in the first half of 2004. We expect the contract to be amended
in 2004 consistent with the terms of the letter of agreement. We expect the following additional
minimum future service revenues, assuming the agreement is amended and is not terminated pursuant
to contract provisions (amounts in thousands):
Years ending December 31,
2004
2005
2006
2007
2008
2009 and thereafter
Total minimum future service revenues
Letters of Credit
We have letters of credit totaling $6.5 million as follows:
$
5,580
5,580
5,580
5,580
5,580
41,628
$ 69,528
(cid:130)
(cid:130)
$3.0 million of the Senior Credit Facility has been used to provide a letter of credit to secure
payment of certain access charges associated with our provision of telecommunications
services within the State of Alaska, and
$3.5 million of the Senior Credit Facility has been used to provide a letter of credit to secure
payment for our contract for the design, engineering, manufacture and installation of the new
undersea fiber optic cable system. The letter of credit will be reduced to $1.8 million after a
contract payment estimated to be made in March 2004. The letter of credit will be cancelled
after the final contract payment date estimated to be in April 2004.
Fiber Optic Cable System Construction Commitment
In June 2003 we began work on the construction of a fiber optic cable system connecting Seward,
Alaska and Warrenton, Oregon, with leased backhaul facilities to connect it to our switching and
distribution centers in Anchorage, Alaska and Seattle, Washington. A consortium of companies has
been selected to design, engineer, manufacture and install the undersea fiber optic cable system and a
contract has been signed at a total cost to us of $35.2 million. We expect to fund construction of the
fiber optic cable system through our operating cash flows and, to the extent necessary, with draws on
our new Senior Credit Facility. During the year ended December 31, 2003 our capital expenditures for
136
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
this project have totaled approximately $16.5 million, all of which has been funded through our
operating cash flows and are classified as Construction in Progress in our Consolidated Balance Sheets.
Digital Local Phone Service (“DLPS”) Equipment Purchase Commitment
We are testing the deployment of DLPS. We expect to begin implementing this service delivery method
in the second quarter of 2004. To ensure the necessary equipment is available to us we have entered
into an agreement to purchase a certain number of outdoor, network powered multi-media adapters.
The agreement has a remaining commitment at December 31, 2003 totaling $18.3 million.
Alaska Airline Miles Agreement
In August 2003 we entered into an agreement with Alaska Airlines, Inc. (“Alaska Airlines”) to offer our
residential and business customers who make qualifying purchases from us the opportunity to accrue
mileage awards in the Alaska Airlines Mileage Plan. The agreement requires the purchase of Alaska
Airlines miles during the year ended December 31, 2003 and in future years. The agreement has a
remaining commitment at December 31, 2003 totaling $16.0 million.
Deferred Compensation Plan
During 1995, we adopted a non-qualified, unfunded deferred compensation plan to provide a means by
which certain employees may elect to defer receipt of designated percentages or amounts of their
compensation and to provide a means for certain other deferrals of compensation. We may contribute
matching deferrals at a rate selected by us. Participants immediately vest in all elective deferrals and all
income and gain attributable thereto. Matching contributions and all income and gain attributable
thereto vest over a six-year period. Participants may elect to be paid in either a single lump sum
payment or annual installments over a period not to exceed 10 years. Vested balances are payable
upon termination of employment, unforeseen emergencies, death and total disability. Participants are
general creditors of us with respect to deferred compensation plan benefits. Compensation deferred
pursuant to the plan totaled approximately $0, $82,000 and $39,000 for the years ended December
31, 2003, 2002 and 2001, respectively.
Performance Based Incentive Compensation Plan
During 2002 we adopted a non-qualified, performance based incentive compensation plan. The
incentive compensation plan provides additional compensation to certain officers and key employees
based upon the Company’s achievement of specified financial performance goals. The Compensation
Committee of the Board of Directors establishes goals on which executive officers are compensated,
and management establishes the goals for other covered employees. Awards may be payable in cash or
GCI’s Class A common stock. Under this plan we recognized expenses of $672,000 and $0 during the
years ended December 31, 2003 and 2002, respectively.
Guaranteed Service Levels
Certain customers have guaranteed levels of service. In the event we are unable to provide the
minimum service levels we may incur penalties or issue credits to customers.
Self-Insurance
We are self-insured for losses and liabilities related primarily to health and welfare claims up to
predetermined amounts above which third party insurance applies. A reserve of $1.7 million and $1.6
million was recorded at December 31, 2003 and 2002, respectively, to cover estimated reported losses,
estimated unreported losses based on past experience modified for current trends, and estimated
expenses for investigating and settling claims. Beginning January 1, 2003, we were self-insured for
losses and liabilities related to workers’ compensation claims up to predetermined amounts above
which third party insurance applies. A reserve of $141,000 was recorded at December 31, 2003 to
cover estimated reported losses and estimated expenses for investigating and settling claims. Actual
losses will vary from the recorded reserves. While we use what we believe is pertinent information and
137
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
factors in determining the amount of reserves, future additions to the reserves may be necessary due to
changes in the information and factors used.
We are self-insured for damage or loss to certain of our transmission facilities, including our buried,
under sea, and above-ground transmission lines. If we become subject to substantial uninsured
liabilities due to damage or loss to such facilities, our financial position, results of operations or liquidity
may be adversely affected.
Litigation and Disputes
We are routinely involved in various lawsuits, billing disputes, legal proceedings and regulatory matters
that have arisen in the normal course of business.
ACS, through subsidiary companies, provides local services in Fairbanks and Juneau, Alaska. These ACS
subsidiaries are classified as Rural Telephone Companies under the 1996 Telecom Act, which entitles
them to an exemption of certain material interconnection terms of the 1996 Telecom Act, until and
unless such “rural exemption” is examined and discontinued by the RCA. On October 11, 1999, the RCA
issued an order terminating rural exemptions for the ACS subsidiaries operating in the Fairbanks and
Juneau markets so that we could compete with the companies in the provision of local services
pursuant to the 1996 Telecom Act. These rural exemptions limited the obligation of the ILECs in these
markets to provide us access to unbundled network elements at rates under the pricing standard
established by the Federal Communication Commission. Upon appeal by ACS on December 12, 2003,
the Alaska Supreme Court issued a decision in which it reversed the RCA’s rural exemption decision on
the procedural ground that the competitor, not the incumbent, must shoulder the burden of proof. The
Court remanded the matter to the RCA for reconsideration with the burden of proof assigned to us.
Additionally, the Court left it to the RCA to decide as a matter of discretion whether to change the state
of competition during the remand period. In accordance with the Court’s ruling, the RCA has re-opened
the rural exemption dockets and scheduled a hearing to take place on April 19, 2004. Additionally, the
RCA issued a ruling on January 16, 2004, in which they determined that we can continue to rely on
unbundled network elements from ACS to serve our existing customers in Juneau and Fairbanks but
that we may not serve new customers through purchase of unbundled network elements pending the
completion of the remand proceeding. Until this matter is resolved, we may serve new customers using
wholesale resale. The outcome of this proceeding could result in a change in our cost of serving these
markets via the facilities of ACS or via wholesale offerings and could adversely impact our ability to offer
local service in these markets. We believe it is unlikely that the rural exemptions will be restored in
these markets; however, if they are restored, we could be forced to discontinue providing service to
residential customers and perhaps to commercial customers in these locations.
While the ultimate results of these items cannot be predicted with certainty, except for the rural
exemption proceedings described above, we do not expect at this time the resolution of them to have a
material adverse effect on our financial position, results of operations or liquidity.
Cable Service Rate Reregulation
Federal law permits regulation of basic cable programming services rates. However, Alaska law provides
that cable television service is exempt from regulation by the RCA unless 25% of a system’s subscribers
request such regulation by filing a petition with the RCA. At December 31, 2002, only the Juneau system
is subject to RCA regulation of its basic service rates. No petition requesting regulation has been filed for
any other system. (The Juneau system serves 7.1% of our total basic service subscribers at December
31, 2003.) A cable rate increase in the Juneau system effective February 1, 2003, did not affect basic
programming service and therefore did not require RCA approval.
138
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
(17) Subsequent Events
Conversion of Series B Preferred Stock
In January 2004, a Series B preferred stockholder converted 3,108 shares of Series B preferred stock to
GCI Class A common stock resulting in the issuance of 560,000 shares of GCI Class A common stock.
Draw on New Senior Credit Facility
In January 2004 we drew $10.0 million under the revolving credit portion of our new Senior Credit
Facility. The draw was re-paid in February 2004 from our new Senior Notes offering proceeds.
Senior Notes Refinancing
In February 2004 GCI’s wholly owned subsidiary GCI, Inc. sold $250 million in aggregate principal
amount of senior debt securities due in 2014 (“new Senior Notes”). The new Senior Notes are an
unsecured senior obligation. We will pay interest of 7.25% on the new Senior Notes. The new Senior
Notes were sold at a discount of $4.3 million. The Senior Notes will be carried on our balance sheet net
of the unamortized portion of the discount, which will be amortized to Interest Expense over the life of
the new Senior Notes.
The net proceeds of the offering were primarily used to repay our existing $180.0 million 9.75% Senior
Notes and to repay approximately $43.8 million of the term portion and $10.0 million of the revolving
portion of our new Senior Credit Facility. Semi-annual interest payments of approximately $9.1 million
will be due beginning August 15, 2004. In connection with the issuance, we paid fees and other
expenses of approximately $6.3 million which will be amortized over the life of the new Senior Notes.
The new Senior Notes were offered only to qualified institutional buyers pursuant to Rule 144A and non-
United States persons pursuant to Regulation S. The new Senior Notes have not been registered under
the Securities Act and, unless so registered, may not be offered or sold except pursuant to an exemption
from, or in a transaction not subject to, the registration requirements of the Securities Act and applicable
state securities laws. We plan to register our new Senior Notes by May 14, 2004.
The new Senior Notes are not redeemable prior to February 15, 2009. At any time on or after February
15, 2009, the new Senior Notes are redeemable at our option, in whole or in part, on not less than thirty
days nor more than sixty days notice, at the following redemption prices, plus accrued and unpaid
interest (if any) to the date of redemption:
If redeemed during the twelve month
period commencing February 1 of the
year indicated:
2009
2010
2011
2012 and thereafter
Redemption Price
103.625%
102.417%
101.208%
100.000%
We may, on or prior to February 17, 2007, at our option, use the net cash proceeds of one or more
underwritten public offerings of our qualified stock to redeem up to a maximum of 35% of the initially
outstanding aggregate principal amount of our new Senior Notes at a redemption price equal to 107.25% of
the principal amount of the new Senior Notes, together with accrued and unpaid interest, if any, thereon to the
date of redemption, provided that not less than 65% of the principal amount of the new Senior Notes originally
issued remain outstanding following such a redemption.
139
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
The new Senior Notes restrict GCI, Inc. and certain of its subsidiaries from incurring debt in most
circumstances unless the result of incurring debt does not cause our leverage ratio to exceed 6.0 to one.
The new Senior Notes do not allow debt under the new Senior Credit Facility to exceed the greater of
(and reduced by certain stated items):
(cid:130) $250 million, reduced by the amount of any prepayments, or
(cid:130) 3.0 times earnings before interest, taxes, depreciation and amortization for the last four full fiscal
quarters of GCI, Inc. and certain of its subsidiaries.
The new Senior Notes limit our ability to make cash dividend payments.
We are conducting a Consent Solicitation and Tender Offer for the Senior Notes. Through February 13,
2004 we accepted for payment $114.6 million principal amount of notes which were validly tendered.
Such notes accepted for payment received additional consideration as follows:
(cid:130) $4.0 million based upon a payment of $1,035 per $1,000 principal amount, consisting of the
purchase price of $1,025 per $1,000 principal amount and the consent payment of $10 per
$1,000 principal amount, and
(cid:130) $497,000 in accrued and unpaid interest through February 16, 2004.
The remaining principal amount of $65.4 million will be redeemed by March 18, 2004 for additional
consideration as follows:
(cid:130) $2.1 million based upon a payment of $1032.50 per $1,000 principal amount, and
(cid:130) $815,000 in estimated accrued and unpaid interest through the date of redemption and no later
than March 17, 2004.
The total estimated redemption cost is expected to be $186.1 million. The premium to redeem our
Senior Notes is expected to be $6.1 million (excluding estimated interest cost of $1.3 million), which will
be recognized as a component of Other Income (Expense) during the three months ended March 31,
2004.
Compliance with the redemption notice requirements in the Indenture will result in a delay of up to sixty
days before final payment of some of the Senior Notes. As a result of such delay, our total debt will
increase during the overlap period between the redemption of the outstanding Senior Notes and the
issuance of the new Senior Notes making us out of compliance with Section 6.11 of our Credit,
Guaranty, Security and Pledge Agreement, dated as of October 30, 2003. We have received a waiver
from compliance with Section 6.11 until April 30, 2004.
140
Item 15(b). Reports on Form 8-K
The following Forms 8-K were filed or furnished during the quarter ended December 31, 2003:
• On October 27, 2003, we furnished a report on Form 8-K dated October 24, 2003 under Item 12
and 7 which included a copy of our press release dated that same day reporting a summary
description of our results of operations for the three and nine month periods ended September
30, 2003.
• On November 6, 2003, we furnished a report on Form 8-K dated November 5, 2003 under Item
12 and 7 which included a copy of our press release dated that same day reporting a detailed
description of our results of operations for the three and nine month periods ended September
30, 2003.
• On December 15, 2003, we filed a report on Form 8-K dated December 12, 2003 under Item 5
and Item 7 which included a copy of our press release dated that same day reporting that the
Alaska Supreme Court issued a decision that requires the Regulatory Commission of Alaska (RCA)
to reexamine its order that allows full local telephone competition in Fairbanks and Juneau,
Alaska.
• On December 18, 2003, we filed a report on Form 8-K dated December 18, 2003 under Item 5
and Item 7 which included a copy of our press release dated that same day reporting that we had
been awarded an agreement with the State of Alaska to provide a variety of telecommunication
services for the next 18 months.
Item 15(c). Exhibits
Listed below are the exhibits that are filed as a part of this Report (according to the number assigned to
them in Item 601 of Regulation S-K):
Exhibit No.
Description
3.1
3.2
10.3
10.4
10.5
10.6
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)
10.7
10.13
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
10.15
Promissory Note Agreement between General Communication, Inc. and Ronald A.
Corporation and General Communication, Inc. dated January 1, 1993 (8)
Duncan, dated August 13, 1993 (9)
10.16
Deferred Compensation Agreement between General Communication, Inc. and
Ronald A. Duncan, dated August 13, 1993 (9)
10.17
Pledge Agreement between General Communication, Inc. and Ronald A. Duncan,
dated August 13, 1993 (9)
10.19
Summary Plan Description pertaining to Qualified Employee Stock Purchase Plan
of General Communication, Inc., as amended and restated January 1, 2003
(37)
141
(Continued)
Exhibit No.
10.20
10.21
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
Description
The GCI Special Non-Qualified Deferred Compensation Plan (11)
Transponder Purchase Agreement for Galaxy X between Hughes Communications
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,
10.32
Asset Purchase Agreement, dated May 10, 1996, between General
Inc., and McCaw/Rock Homer Cable System, J.V. (12)
10.33
10.34
Communication, Inc., and McCaw/Rock Seward Cable System, J.V. (12)
Amendment No. 1 to Securities Purchase and Sale Agreement, dated October 31,
1996, among General Communication, Inc., and the Prime Sellers Agent (13)
First Amendment to Asset Purchase Agreement, dated October 30, 1996, among
General Communication, Inc., ACNFI, ACNJI and ACNKSI (13)
10.36
Order Approving Arbitrated Interconnection Agreement as Resolved and Modified
10.37
10.38
10.39
10.40
10.41
10.42
10.43
10.44
10.45
by 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
10.47
Radio Station Authorization (Personal Communications Service License), Issue
General Communication, Inc. dated April 13, 1994 (19)
Date June 23, 1995 (19)
10.50
Contract No. 92MR067A Telecommunications Services between BP Exploration
10.51
Amendment No. 03 to BP Exploration (Alaska) Inc. Contract No. 92MRO67A
(Alaska), Inc. and GCI Network Systems dated April 1, 1992 (20)
effective August 1, 1996 (20)
10.52
Lease Agreement dated September 30, 1991 between RDB Company and
General Communication, Inc. (3)
10.54
Order Approving Transfer Upon Closing, Subject to Conditions, and Requiring
Filings dated September 23, 1996 (19)
10.55
Order Granting Extension of Time and Clarifying Order dated October 21, 1996 (19)
142
(Continued)
Exhibit No.
10.58
Employment and Deferred Compensation Agreement between General
Communication, Inc. and John M. Lowber dated July 1992 (19)
Description
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
10.66
Supply Contract Between Submarine Systems International Ltd. And GCI
Approving Proposed Tariff on an Inception Basis, dated February 4, 1997 (19)
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
10.77
10.78
10.79
10.80
Third Amendment to Contract for Alaska Access Services between General
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 (37)
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)
10.82
Lease Intended for Security between GCI Satellite Co., Inc. and General Electric
10.89
10.90
10.91
10.99
10.100
10.101
10.102
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. (37)
10.103
Agreement and plan of merger of GCI American Cablesystems, Inc. a Delaware
143
(Continued)
Exhibit No.
Description
corporation and GCI Cablesystems of Alaska, Inc. an Alaska corporation each
with and into GCI Cable, Inc. an Alaska corporation, adopted as of December
10, 2002 (37)
10.104
Articles of merger between GCI Cablesystems of Alaska, Inc. and GCI Cable, Inc.,
adopted as of December 10, 2002 (37)
10.105
Aircraft lease agreement between GCI Communication Corp., and Alaska
corporation and 560 Company, Inc., an Alaska corporation, dated as of
January 22, 2001 (37)
10.106
First amendment to aircraft lease agreement between GCI Communication
10.107
Corp., and Alaska corporation and 560 Company, Inc., an Alaska corporation,
dated as of February 8, 2002 (37)
Amendment No. 1 to Credit, Guaranty, Security and Pledge Agreement between
GCI Holdings, Inc. and Credit Lyonnais New York Branch as Administrative
Agent, Issuing Bank, Co-Bookrunner and Co-Arranger, General Electric Capital
Corporation as Documentation Agent, Co-Arranger and Co-Bookrunner and CIT
Lending Services Corporation as Syndication Agent, dated as of November 1,
2002 (38)
10.108
Bonus Agreement between General Communication, Inc. and Wilson Hughes
(39)
10.109
Eighth Amendment to Contract for Alaska Access Services between General
Communication, Inc. and its wholly owned subsidiary GCI Communication
Corp., and MCI WorldCom Network Services, Inc. ♦ (39)
10.110
Settlement and Release Agreement between General Communication, Inc. and
10.111
WorldCom, Inc. (39)
Credit, Guaranty, Security and Pledge Agreement between GCI Holdings, Inc. and
Credit Lyonnais New York Branch as Administrative Agent, Issuing Bank, Co-
Bookrunner and Co-Arranger, General Electric Capital Corporation as
Documentation Agent, Co-Arranger and Co-Bookrunner and CIT Lending
Services Corporation as Syndication Agent, dated as of October 30, 2003 (40)
10.112
Waiver letter agreement dated as of February 13, 2004 for Credit, Guaranty,
Security and Pledge Agreement (cid:195)
10.113
Indenture dated as of February 17, 2004 between GCI, Inc. and The Bank of
10.114
21.1
23.1
31
32
99
99.1
99.2
99.7
99.8
99.15
99.16
99.17
99.18
99.19
99.20
New York, as trustee (cid:195)
Registration Rights Agreement dated as of February 17, 2004, among GCI, Inc.,
and Deutsche Bank Securities Inc., Jefferies & Company, Inc., Credit Lyonnais
Securities (USA), Inc., Blaylock & Partners, L.P., Ferris, Baker Watts,
Incorporated, and TD Securities (USA), Inc., as Initial Purchasers (cid:195)
Subsidiaries of the Registrant (cid:195)
Consent of KPMG LLP (Accountant for Company) (cid:195)
Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (cid:195)
Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (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)
144
(Continued)
Exhibit No.
99.21
99.22
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
99.37
99.38
99.39
99.40
Description
The Bylaws of Fiber Hold Co., Inc. (23)
The Articles of Incorporation of Fiber Hold Co., Inc. (23)
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)
The Articles of Incorporation of Wok 1, Inc. (38)
The Bylaws of Wok 1, Inc. (38)
The Articles of Incorporation of Wok 2, Inc. (38)
The Bylaws of Wok 2, Inc. (38)
-------------------------
♦
(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
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.
145
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
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.
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.
Incorporated by reference to The Company’s Annual Report on Form 10-K for
the year ended December 31, 2002.
Incorporated by reference to The Company’s Quarterly Report on Form 10-Q
for the period ended March 31, 2003.
Incorporated by reference to The Company’s Quarterly Report on Form 10-Q
for the period ended June 30, 2003.
Incorporated by reference to The Company’s Quarterly Report on Form 10-Q
for the period ended September 30, 2003.
18
19
20
21
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
146
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
GENERAL COMMUNICATION, INC.
By:
/s/ Ronald A. Duncan
Ronald A. Duncan, President
(Chief Executive Officer)
Date: March 9, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Signature
Title
Date
/s/ Donne F. Fisher
Donne F. Fisher
Chairman of Board and Director
March 9, 2004
March 9, 2004
March 9, 2004
March 4, 2004
March 9, 2004
March 9, 2004
March 9, 2004
March 9, 2004
March 9, 2004
/s/ Ronald A. Duncan
Ronald A. Duncan
President and Director
(Principal Executive Officer)
/s/ William P. Glasgow
William P. Glasgow
/s/ Stephen R. Mooney
Stephen R. Mooney
/s/ Stephen M. Brett
Stephen M. Brett
/s/ James M. Schneider
James M. Schneider
/s/ Stephen A. Reinstadtler
Stephen A. Reinstadtler
/s/ John M. Lowber
John M. Lowber
/s/ Alfred J. Walker
Alfred J. Walker
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