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, 2004
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 (as defined in Rule 12b-2 of the Act). 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, 2004 was approximately $324,817,000.
The number of shares outstanding of the registrant’s common stock as of February 28, 2005, was:
Class A common stock – 51,559,580 shares; and,
Class B common stock – 3,861,722 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement relating to its 2005 Annual Meeting of Shareholders are incorporated by
reference in Part III of this Annual Report on Form 10-K where indicated. Alternatively, the Registrant may file an amendment to this
Form 10-K to provide such information within 120 days following the end of Registrant's fiscal year ended December 31, 2004.
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GENERAL COMMUNICATION, INC.
2004 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Glossary........................................................................................................................................................................ 3
Cautionary Statement Regarding Forward-Looking Statements ............................................................................ 10
Part I ........................................................................................................................................................................... 12
Item 1. Business .................................................................................................................................................. 12
Item 2. Properties................................................................................................................................................. 62
Item 3. Legal Proceedings ................................................................................................................................... 64
Item 4. Submissions of Matters to a Vote of Security Holders .......................................................................... 65
Part II .......................................................................................................................................................................... 66
Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters................................. 66
Item 6. Selected Financial Data .......................................................................................................................... 68
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations ............. 69
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ..........................................................105
Item 8. Consolidated Financial Statements and Supplementary Data ..........................................................105
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure ..........105
Item 9A. Controls and Procedures ....................................................................................................................106
Item 9B. Other Information................................................................................................................................106
Part III .......................................................................................................................................................................107
Items 10, 11, 12, 13 and 14. Portions of the Registrant's definitive proxy statement relating to its 2005
Annual Meeting of Shareholders are incorporated by reference in Part III of this Annual Report on Form 10-K
where indicated. Alternatively, the Registrant may file an amendment to this Form 10-K to provide such
information within 120 days following the end of Registrant's fiscal year ended December 31, 2004.
Part IV .......................................................................................................................................................................108
Item 15. Exhibits, Consolidated Financial Statement Schedules ...................................................................108
Item 15(b). Exhibits............................................................................................................................................159
SIGNATURES ............................................................................................................................................................166
This Annual Report on Form 10-K is for the year ending December 31, 2004. This Annual Report modifies and
supersedes documents filed prior to this Annual Report. The Securities and Exchange Commission (“SEC”)
allows us to “incorporate by reference” information that we file with them, which means that we can disclose
important information to you by referring you directly to those documents. Information incorporated by
reference is considered to be part of this Annual Report. In addition, information that we file with the SEC in
the future will automatically update and supersede information contained in this Annual Report.
2
Glossary
Access Charges — Fees 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 connecting Seward, Alaska to Warrenton, Oregon which
was placed into service in June 2004.
Basic Service — The basic service tier includes, at a minimum, signals of local television broadcast stations,
any public, educational, and governmental programming required by the franchise to be carried on the basic
tier, and any additional video programming service added to the basic tier by the cable operator.
BOC — Bell System Operating 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. 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.
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.
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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 $320 million of senior notes.
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.
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.
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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 state regulatory body, in which calls generally
are transmitted without toll charges to the calling or called party.
Local Number Portability — The ability of an end user to change Local 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.
MCI, Inc. (“MCI”) — Owns approximately 2% of our common stock at December 31, 2004, presently has two
representatives 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, 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. On December 7, 2004, we closed a transaction with MCI to
repurchase 3,751,509 shares of our Class A common stock at $8.33 per share (for a total purchase price of
approximately $31.3 million). In addition to the common stock repurchase, the transaction included the
redemption of all issued and outstanding shares of our Series C preferred stock held by MCI for an aggregate
redemption price of $10 million. MCI will retain its ownership of almost 1.3 million shares of our Class B
common stock and will retain their two seats on our board of directors. You should see note 14 to the
accompanying “Notes to Consolidated Financial Statements” included in Part II of this Report for more
information.
6
MDU — Multiple Dwelling Unit — MDUs include multiple-family buildings, such as apartment and condominium
complexes.
MMDS — Multichannel Multipoint Distribution Service — Also known as wireless cable. The FCC established
the Multipoint Distribution Service (MDS) in 1972. Originally, the 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 MCI, which had previously entered into service
agreements with the Company on behalf of MCI.
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.
Private Network — A communications network with restricted (controlled) access usually made up of Private
Lines (with some PBX switching).
7
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.
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. The 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 2.25%. You should see note 7 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.
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.
8
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.
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 eliminated the old barriers that prevented three groups
of companies, the LECs, including the BOCs, the long-distance carriers, and the cable TV operators, from
competing head-to-head with each other. The act requires LECs to let new competitors into their business. It
also requires the LECs to open up their networks to ensure that new market entrants have a fair chance of
competing. The bulk of the act is devoted to establishing the terms under which the LECs, 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
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.
9
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.
• Local and general market conditions and obstacles, including possible material adverse changes in the
economic conditions in the markets we serve and in general economic conditions; the continuing
impact of the current stagnant communications industry due to high levels of competition in the long-
distance market resulting in continuing pressures to reduce prices; and an oversupply of long-haul
capacity and high debt loads;
• The efficacy of laws enacted by Congress and the State of Alaska legislature; rules and regulations to
be adopted by the Federal Communications Commission (“FCC”) and state public regulatory agencies
to implement the provisions of the 1996 Telecom Act; the outcome of litigation relative thereto; and
the impact of regulatory changes relating to access reform;
• The outcome of our negotiations with ILECs and state regulatory arbitrations and approvals with
respect to interconnection agreements;
• Changes in, or failure, or inability, to comply with, government regulations, including, without limitation,
regulations of the FCC, the RCA, and adverse outcomes from regulatory proceedings;
• Changes in regulations governing UNEs;
• Changes in the treatment or classification of services using a particular technology, including Internet
protocol;
• Our responses to competitive products, services and pricing, including pricing pressures, technological
developments, alternative routing developments, and the ability to offer combined service packages
that include long-distance, local, cable and Internet services;
• The extent and pace at which different competitive environments develop for each segment of our
business;
• The extent and duration for which competitors from each segment of the communications industries
are able to offer combined or full service packages prior to our being able to do so;
• Competitor responses to our products and services and overall market acceptance of such products
and services;
• Our ability to purchase network elements or wholesale services from ILECs at a price sufficient to
permit the profitable offering of local telephone service at competitive rates;
• Success and market acceptance for new initiatives, some of which are untested;
• The level and timing of the growth and profitability of existing and new initiatives, particularly local
telephone services expansion including deploying digital local telephone service, and wireless services;
• Start-up costs associated with entering new markets, including advertising and promotional efforts;
• Risks relating to the operations of new systems and technologies and applications to support new
initiatives;
• The risks associated with technological requirements, technology substitution and changes and other
technological developments;
10
• Prolonged service interruptions which could affect our business;
• Development and financing of communications, local telephone, wireless, Internet and cable
networks and services;
• Future financial performance, including the availability, terms and deployment of capital; the
impact of regulatory and competitive developments on capital outlays, and the ability to
achieve cost savings and realize productivity improvements and the consequences of
increased leverage;
• Availability of qualified personnel;
• Uncertainties in federal military spending levels in markets in which we operate;
• Uncertainties surrounding the 2005 base realignment and closure program and potential
military base closures in markets in which we operate;
• The effect on us of industry consolidation including the potential acquisition of one or more of
our large wholesale customers by a company with commercial relationships with other
providers; and the ongoing global and domestic trend towards consolidation in the
communications industry, which may result in our competitors being larger and better
financed, and provide these competitors with extensive resources and greater geographic
reach, allowing them to compete more effectively;
• The effect on us of pricing pressures, new program offerings and continuing market
consolidation in the markets served by our significant customers, MCI and Sprint; and
• Other risks detailed from time to time in our periodic reports filed with the SEC.
You should not place undue reliance on any such forward-looking statements. Further, any forward-
looking statement, and such risks, uncertainties and other factors speak only as of the date on which
they were originally made and we expressly disclaim any obligation or undertaking to disseminate any
updates or revisions to any forward-looking statement to reflect any change in our expectations with
regard to those statements or any other change in events, conditions or circumstances on which any
such statement is based, except as required by law. New factors emerge from time to time, and it is
not possible for us to predict what factors will arise or when. In addition, we cannot assess the impact
of each factor on our business or the extent to which any factor, or combination of factors, may cause
actual results to differ materially from those contained in any forward-looking statements.
11
Part I
Item 1. Business
General
In this Annual Report, “we,” “us” and “our” refer to General Communication, Inc. and its direct and
indirect subsidiaries.
GCI was incorporated in 1979 under the laws of the State of Alaska and has its principal executive
offices at 2550 Denali Street, Suite 1000, Anchorage, AK 99503-2781 (telephone number 907-868-
5600).
GCI is primarily a holding company and together with its direct and indirect subsidiaries, is a
diversified communications provider with a leading position in facilities-based long-distance service in
the State of Alaska and is Alaska's leading cable television and Internet services provider.
We are the leading integrated, facilities-based communications provider in Alaska, offering local and
long-distance voice, cable video, data and Internet communications services to residential and
business customers under our GCI brand. A substantial number of our customers subscribe to
product bundles that include two or more of our services.
Since our founding 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 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. Today, 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/. Our
online telephone directory and yellow pages are hosted at http://www.gcidirectory.com/. 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.
12
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 12 included in Part II, Item 8, Consolidated Financial Statements and Supplementary Data.
Recent Developments
Intrastate Access Charge Ruling. On May 15, 2003, AT&T filed a petition with the FCC requesting a
declaratory ruling that intrastate access charges do not apply to certain of its calling card offerings.
When AT&T Alascom, a subsidiary of AT&T, characterized calling card calls that originate and
terminate in Alaska as interstate, they shifted to us the charges for certain intrastate access payable
to Alaska LECs. In a proceeding before the RCA, the RCA had already declared this AT&T Alascom
practice to be improper. After AT&T petitioned the FCC, the RCA stayed AT&T Alascom's obligations to
make back payments of intrastate access charges to Alaska LECs for the period prior to April, 2004,
but ordered AT&T Alascom to pay such charges on an ongoing basis from April 1, 2004. On February
23, 2005, the FCC also ruled against AT&T, consistent with the RCA’s prior findings. With this ruling,
we can now seek to collect refunds for the intrastate access charge amounts that AT&T Alascom
improperly shifted to us prior to April 1, 2004. We have not completed our calculations of the
amounts due to us and cannot predict at this time the ultimate amount to be refunded pursuant to
this gain contingency, however it could be material to our results of operations, financial position and
cash flows.
Barrow Cable TV Asset Purchase. We closed the asset purchase of Barrow Cable TV in February
2005 for approximately $1.6 million, or approximately $1,700 per subscriber. We plan to upgrade
the plant of Barrow Cable TV in order to deliver digital services as well as high-speed cable modem
service. Upgrades are scheduled to be implemented by the beginning of 2006. In January 2005, the
RCA approved the transfer of the Certificate of Public Convenience and Necessity to us. We expect to
add additional subscribers totaling approximately 950 and additional homes passed totaling
approximately 1,600 as a result of this asset purchase.
Local Service Expansion Filing. In January 2005 we filed with the RCA to expand our provision of
competitive local telephone services into rural Alaska. We plan to invest approximately $60 million
dollars into local economies in construction, technologies and facilities. We requested authorization
to provide service in competition with the existing service provider’s entire service area in the service
area of Ketchikan Public Utilities, Cordova Telephone Cooperative, Copper Valley Telephone
Cooperative, Matanuska Telephone Cooperative, and the “Glacier State” study area, including Delta
Junction, Homer, Kenai, Kodiak, Soldotna, Nenana, and North Pole. In addition, we are seeking
approval to offer local service in Wrangell, Petersburg, Sitka, Seward, Bethel, and Nome. We are
seeking certification in these markets for the area covered by our cable facilities only.
We plan to offer service in these new areas using a combination of methods. To a large extent, we
will use our existing cable network to deliver local services. Where we do not have cable plant, we
may use wireless technologies and resale of other carrier’s services. We may lease portions of an
existing carrier’s network or seek wholesale discounts, but our application is not dependent upon
access to either the incumbent’s network or wholesale discount rates for resale of services.
The RCA may only decide this application on the basis of whether or not we are fit to provide the
service. It has already been decided, under federal law, that competition is permissible. Because we
are not requesting use of the existing carrier’s network, there is no public interest issue for the RCA to
decide. We are requesting that the RCA decide this application as soon as possible, and in any case,
within six months.
13
MTA Rural Exemption Determination. By letter, submitted also to the RCA, on January 12, 2004, we
made a bona fide request for interconnection for the purposes of local access competition with the
Matanuska Telephone Association (“MTA”), under the provisions of the Telecommunications Act of
1996. We submitted this request to MTA on the grounds that it waived its rural exemption under the
terms of Section 251(f)(1)(C) of the 1996 Telecom Act when it launched its new video service through
its wholly owned subsidiary MTA Vision, Inc. in competition with our cable television service. MTA,
however, refused to comply with the negotiation and arbitration provisions under the 1996 Telecom
Act claiming that it still retains a rural exemption. We filed a complaint with the RCA to resolve this
dispute, and the RCA conducted a public hearing on the matter on October 20, 2004. On February
22, 2005, the RCA released a ruling that MTA’s rural exemption for the areas served by MTA Vision,
Inc. had been lifted and that we may negotiate and arbitrate interconnection with MTA. We tendered
a new interconnection request to MTA on February 25, 2005 and are proceeding with such
negotiations. In the event negotiations are unsuccessful, an arbitration will be requested which must
be completed under the provisions of the 1996 Telecom Act by November 25, 2005. Following the
entry into an Interconnection Agreement, we intend to commence local service entry into the Mat-Su
Valley during 2007.
Cellular Service Expansion. We launched cellular services in the Southeast Alaska cities of
Petersburg and Wrangell in February 2005. This completes our cellular services roll-out. Our cellular
services are also provided in Anchorage, Fairbanks, Homer, Juneau, Kenai/Soldotna, Ketchikan,
Palmer/Wasilla, Seward, Sitka, and Valdez.
Rural Internet Program Expansion. We expect to complete during the first quarter of 2005 the last
of the 50 wireless internet (WISP) sites that we began work on in 2004. When these sites are
completed, we will have provided internet services to 150 remote communities in Alaska at faster
speeds and lower rates than they’ve experienced before.
AU East Capacity Expansion. We expect to complete a capacity expansion of our AULP East fiber
system during the first quarter of 2005. We are upgrading the system using wavelength division
multiplexing from its current five gigabit per second (“Gbps”) capacity to 20 Gbps.
Historical Development of our Business During the Past Fiscal Year
ConnectMD Services Expansion. We have developed an agreement with Alaska Psychiatric Institute
to expand our ConnectMD service to provide tele-psychiatry services to health clinics across the state
of Alaska. This new service will triple the number of communities that have access to clinical staff via
a video link and we believe it will allow for better and more cost-efficient care for patients. With this
service, behavioral health patients in remote areas of Alaska can now be treated in their own
environment, instead of having to travel to Anchorage for treatment.
Conversion to Digital Completed. In 2004 we completed the conversion of our Anchorage and
Fairbanks cable television systems from analog to digital service delivery for service levels above
basic. Digital service delivery allows us to offer more programming content and advanced digital
services, including digital local phone service.
New Telephone Directories. We completed the distribution of our new telephone directories to
Fairbanks and Juneau areas homes and businesses. The directories include an online version
(http://www.gcidirectory.com/) so users can link to advertisers’ websites and e-mail addresses. They
can also find arts, education, government organizations and public safety information.
Galaxy XR Satellite Propulsion System Failure. Galaxy XR, our primary satellite used to provide
voice, data and internet services to our rural Alaska customers, experienced a failure August 3, 2004
of its secondary xenon ion propulsion system (XIPS) that maintains the satellite’s proper orbital
position. The primary XIPS failed in February 2004. The satellite is now using its backup bi-propellant
14
thrusters to maintain its orbital position. These thrusters are a space flight proven technology. The
failure of the primary and secondary XIPS had no short term impact on service to our customers.
PanAmSat, the owner and operator of Galaxy XR, believes the satellite has sufficient fuel to continue
normal operations until November 2007. The terms of our Galaxy XR transponder purchase
agreement extends through March 2012. PanAmSat intends to replace the satellite before its
estimated end-of-life. We purchased a warranty with the original agreement to cover a loss of this
nature. We have had an agreement in place that provides backup transponder capacity on the Galaxy
XIII satellite in the event of a catastrophic failure of Galaxy XR.
Cellular Services Distribution Agreement. We closed a 10-year distribution agreement with a
cellular service provider Dobson Communications (“Dobson”) in 2004 that allows us to offer a full line
of state-of-the-art voice and data wireless products and services to our customers throughout Alaska.
We are marketing these products and services under our own brand as stand alone wireless products
and as additions to packaged offerings. The agreement also allows us to develop new products and
services combining both wireless and wireline technologies. We will provide billing and all customer
support services for our wireless services. Under a separate agreement, Dobson will lease 10 MHz of
our 1900 MHz wireless spectrum and will expand services in existing and new Alaska markets.
Dobson's wireless spectrum is in the 800 MHz spectrum band. The lease agreement enables us and
Dobson to expand overall system capacity. This will create a more efficient wireless system providing
better service to customers. Expansion of service under the terms of the agreement fulfills our
wireless buildout requirement to retain our PCS "B" block license.
Stock Repurchase Approvals. Our Board of Directors authorized us, and we obtained permission
from our lenders and preferred shareholder, to repurchase up to $10 million of our common stock
during the six-month period ended June 30, 2005. We expect to continue the purchases throughout
2005 subject to the availability of free cash flow, credit facilities, the price of the stock and the
requisite consents of lenders and our preferred shareholder. The purchases will comply with the
restrictions of Securities Exchange Commission rule 10b-18.
AULP East Cable System Repair. Our AULP East system experienced powering irregularities during
the first quarter of 2004. We completed the repair of AULP East in July 2004.
AULP West Cable System Completion. 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 was selected to design, engineer, manufacture, and install the undersea
fiber optic cable system. We placed AULP West into service in June 2004.
Anchorage Local Service Rates. The RCA released an order on June 28, 2004 that, among other
things, increased the Unbundled Network Element (UNE) rate we pay ACS each month from $14.92 to
$19.15 per line (subsequently reduced to $18.64 per line). In setting this rate, the RCA ruled on a
variety of factors such as depreciation, cost of capital, cost of the network, maintenance and
administrative overhead.
New Retail Store. In March 2004 we opened a new retail store in Eagle River that serves our
customers in Eagle River, Chugiak, and Peters Creek. Customers have a more convenient opportunity
to pay their bill, sign up for new services and obtain answers to their questions from one of our
customer service representatives.
HDTV and Digital Video Recorder Deployment. We began offering HDTV programming in our
Anchorage and Mat-Su Valley market areas in 2004. New HDTV converters with digital video recorder
capabilities were introduced to our customers in these markets.
15
New Senior Notes and Senior Credit Facility Waiver and Amendment. 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. used the proceeds from 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.
Compliance with the redemption notice requirements in the 2007 Notes Indenture resulted in a delay
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 temporarily increased during the overlap period between the
redemption of the outstanding 2007 Notes and the issuance of the new senior notes. This temporary
increase did not comply with certain provisions of our Senior Credit Facility. We received a waiver of
these provisions from the lenders under our Senior Credit Facility until April 30, 2004.
On November 19, 2004, we entered into an Amendment No. 3 to our Senior Credit Facility. The
amendment modifies the terms of the existing credit facility to permit the incurrence by GCI, Inc. of up
to $100 million in aggregate principal amount of additional senior notes due 2014. The amended
credit facility permits up to $70 million of the proceeds from such additional senior notes to be used
to purchase shares of GCI stock held by MCI and Toronto Dominion Investments, Inc. (or the proceeds
may be distributed to GCI for such purpose), so long as there exists no default under the credit facility
both before and after giving effect to such transaction. The amended credit facility also permits the
proceeds to be used for additional capital expenditures.
Add-on Senior Notes and Stock Retirements. On December 7, 2004, our subsidiary GCI, Inc. issued
$70 million of additional 7.25% senior notes due 2014. In a private transaction concurrent with the
closing of the additional senior notes, we repurchased 3,751,509 of our Class A common shares at
$8.33 per share and $10 million face value of our Series C preferred stock from MCI. The aggregate
amount of the equity repurchase totaled $41.3 million. In addition, $10 million of the proceeds of the
additional senior notes were used to repay the outstanding balance on our revolving credit facility.
The remaining balance of the bond proceeds of more than $17 million, after fees and expenses, will
be used for other general corporate purposes.
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.
16
Alaska Supreme Court Decision and Settlement. 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 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.
On April 20, 2004, we announced that a joint settlement was reached that substantially resolved a
number of legal and regulatory proceedings between ACS and us. Among other things, terms of the
settlement are as follows:
• ACS relinquishes all claims to exemptions from full local telephone competition in
Fairbanks and Juneau,
• New rates for unbundled loops in Fairbanks and Juneau beginning January 1, 2005,
• Resolution of UNE loops provided with ILEC switching (UNE-Platform) leasing issues for
the Fairbanks and Juneau markets, and
• Extension of existing interconnection agreements between ACS and us for Fairbanks and
Juneau until January 1, 2008.
See “Part I — Item 1 — Business — Regulation, Franchise Authorizations and Tariffs —
Communications Operations — Rural Exemption” for more information.
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 $424.8 million in 2004. We ended the year with
approximately 91,300 long-distance customers, 112,100 local access lines in service, 134,700 basic
cable subscribers, and 101,600 Internet subscribers, including 65,500 cable modem subscribers. A
substantial number of our customers subscribe to product bundles that include two or more of our
services. The National Cable and Telecommunications Association (“NCTA”) reports that we were the
25th largest MSO in the U.S. as of September 30, 2004.
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
17
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 we believe 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.
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-
18
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, 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 27% higher than the three-year United States
national average from 2001 to 2003, and according to the Alaska Department of Revenue, in 2003,
federal spending in Alaska was up 4%, 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 24 years of experience in the communications industry and more than 19 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-half of our cable video
subscribers also subscribe to 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
19
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
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 expect to continue to add new products to our product portfolio.
Management has a demonstrated history of evaluating potential new products for our customers,
and we will continue to assess revenue-enhancing opportunities that create value for our
customers. In addition to new services such as digital video recorders, HDTV and video-on-
demand, we are also expanding the reach of our core products to new markets. Where feasible
and where economic analysis supports geographic expansion of our network coverage, we expect
to 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
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, Seward, Kenai/Soldotna, Palmer/Wasilla, Homer 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 four fiber
optic cables, one of which was taken out of service in January 2004. See “Part I — Item 1 — Business
20
— Historical Development of our Business During the Past Fiscal Year — Fiber System Taken out of
Service” for more information.
Fiber optics is currently 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 900 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 2003, AT&T’s revenues had declined
to approximately 29% of all toll revenues. The two largest market entrants, MCI and Sprint, have
obtained a 28% combined market share through 2003. BellSouth, Quest, SBC and Verizon have
obtained a 15% combined market share in 2003 as compared to 9% in 2000.
The FCC reports that approximately $78.6 billion was derived from toll services in 2003 as compared
to $109.6 billion in 2000. In 2002, residential customers generated over 45% of toll revenues, and
35% of residential toll phone calls were interstate as opposed to 47% of minutes. In 2002,
approximately 31% of total toll services revenue was derived from intrastate, 51% was derived from
domestic interstate, and 18% was derived from international toll services. Interstate long distance
toll revenues increased approximately 62% from $26 billion in 1984 to $43 billion in 2002, and
intrastate toll revenues increased approximately 23% from $21 billion in 1984 to $26 billion in 2002,
despite significant rate reductions in both categories during this period. Significant decreases
occurred in 2002 as compared to 2001, with interstate long distance and intrastate toll revenues
each decreasing approximately 13%.
The FCC reports that total interstate switched access minutes have declined 21.7% from 2000 to
2003; from 566.9 billion to 444.1 billion, respectively. 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 $0.09 in 2002. This average price per minute represents a mix of international
calling (an average of 28 cents per minute) and domestic interstate calling (an average of 7 cents per
minute). The decline in prices since 1984 is more than 80% after adjusting for the impact of inflation.
The annual rate of change in the consumer price index for all telephone services between 2002 and
2003 was reported to be -2.7% as compared to 1.9% for all services. Local residential services
(based on monthly service charges, message unit charges, leased equipment, installation, enhanced
services, taxes, subscriber line charges, and all other consumer expenditures associated with
telephone services except long distance charges) increased 2.6% in 2003 as compared to 2002,
while interstate toll service decreased 10.9% and intrastate toll service decreased 9.4% during the
same period. The average revenue per minute for interstate and international calls in 1990 was
$0.28 (adjusted for inflation) as compared to $0.09 in 2002.
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 $996 in 2002.
The FCC reports that approximately 106 million U.S. households had telephone services as of March
2004, an increase of 28 million households since 1983. An estimated 93.8% of households and
21
virtually all businesses in the United States subscribed to telephone service in July 2004.
Approximately 92.9% of households subscribed to telephone service in 1980.
The FCC reports that primary lines in service in the United States have grown over time, averaging
approximately 3% per year, which, until 2000, had historically reflected growth in the population and
the economy. Since then, the number of lines provided by wireline carriers has declined. The FCC
reports that consumer substitution of wireless service for wireline service, and consumer elimination
of second lines when they move from dial-up Internet service to broadband service may explain the
decrease. The percentage of additional wirelines for households with telephone service has
increased significantly, from approximately 3% in 1988 to approximately 26% in 2000, and
decreased back to 18% in 2002.
International communications continues to be an 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 6.1 billion in 2002, and that Americans spent approximately $11.5 billion
on international telephone and private line services in 2002. Consistent with domestic toll rates per
minute, international toll rates per minute have decreased significantly. On average, carriers billed
28 cents per minute for international calls in 2002, a decline of more than 79% since 1980. Five
markets, Canada, Mexico, the United Kingdom, Germany, and India, accounted for approximately
41% of the international calls billed in the United States in 2002. AT&T, MCI, and Sprint combined
accounted for 82% of the international service billed in the United States in 2002.
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. Excess
capacity and new technology is expected to enable more competition.
The communications industry stabilized in 2003, but remains stagnant. Intense price competition
continues, with continuing technological innovations threatening established services.
Growth in demand for data services 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 with inevitable industry realignment expected to
continue.
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 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.
We believe that federal and state legislators, courts and regulators will continue to influence the
communications industry in 2005. Consummation of mergers between and spin-offs from long-
22
distance companies, local access services companies, ISPs and cable television companies is
expected to continue to occur which blurs 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 two self-constructed and financed digital
undersea fiber optic cables 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 back up 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, our 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 45.7%, 49.6% and 53.5% of our 2004,
2003 and 2002 revenues, respectively. Broadband services include our SchoolAccess™ and Rural
Health initiatives. Private Line and Private Network services utilize voice and data transmission
circuits, dedicated to particular subscribers, which link a device in one location to another in a
different location.
We have positioned ourselves as a price, 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.
23
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 $13.8 million, $11.9 million, and $12.4 million in the years ended December 31, 2004, 2003
and 2002, respectively, or approximately 3.2%, 3.0% and 3.4% 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.
We constructed a new undersea fiber optic cable system connecting Seward, Alaska to Warrenton,
Oregon that we placed into service in June 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 connects to our network in Anchorage and the Warrenton cable landing station
connects to our network in Seattle via long-term leased capacity. The combination of AULP West and
AULP East provides us with the ability to provide fully protected geographically diverse routing of
service between Alaska and the Lower 48 States.
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, Seward,
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-half second round trip 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, 2004 we have
completed interconnection of approximately 203 businesses and co-location facilities within the
Anchorage, Juneau and Fairbanks metropolitan areas, as well as the 800-mile long TransAlaska
Pipeline System right of way that connects Valdez 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.
24
A fiber optic cable system from our Anchorage distribution center connects to the MTA Eagle River
central office and to our major hub earth station in Eagle River. The Issaquah earth station is
connected with the Seattle distribution center by means of diversely routed leased fiber optic cable
transmission systems, each having the capability to restore the other in the event of failure. The
Juneau earth station and distribution centers are collocated. We have digital microwave facilities
serving the Kenai Peninsula communities. We maintain earth stations in Fairbanks (linked by digital
microwave to the Fairbanks distribution center), Juneau (collocated with the Juneau distribution
center), Anchorage (Benson earth station), and in Prudhoe Bay as fiber network restoration earth
stations. Our Benson earth station also uplinks our statewide video service; such service may be pre-
empted if earth station capacity is needed to restore our fiber network between Anchorage and
Prudhoe Bay.
We constructed an earth station in Platinum, Alaska in 2004. This station was constructed to support
our telemedicine network. Two additional earth stations in McGrath and Yakutat, Alaska are expected
to be placed into service in the first quarter of 2005.
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.
In addition, 72 (for a total of 129) C-band facilities provide dedicated Internet access, Telehealth and
Private Network services to rural public schools, hospitals, health clinics, and natural resource
development industries throughout Alaska. Our Network of 86 Ku- 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 13 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.
We have constructed a switching center and ILEC collocation offices in Fairbanks, and have installed
a Lucent switch to enable the provisioning of local telephone access services in that market.
Substantially all toll traffic originating in Fairbanks is routed to Anchorage. Fairbanks UNE loop
provisioning began in early 2002.
We installed a Lucent switch in our Juneau distribution center and collocation offices at several of the
Juneau ILEC central offices, enabling local services to be launched in the Juneau market in 2002.
Our collocation facilities enable UNE loop access to a portion of the Juneau ILEC’s loop facilities. See
“Part I — Item 1 — Business — Historical Development of our Business During the Past Fiscal Year —
Alaska Supreme Court Decision and Settlement” for more information.
We own and use Lucent 5ESS switches in Anchorage and Seattle. The Anchorage switch serves as
our primary long distance switch in Alaska, enabling additional network efficiencies.
25
Our operator services traffic is processed by an integrated services platform that also hosts 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. See “Part I
— Item 1 — Business — Historical Development of our Business During the Past Fiscal Year — Galaxy
XR Satellite Propulsion System Failure” for more information.
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. See “Part I — Item 1 —
Business — Historical Development of our Business During the Past Fiscal Year — AU East Capacity
Expansion” for more information.
In June 2004 we completed 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. Capital expenditures for this project totaled
approximately $50.1 million, most of which was funded through our operating cash flows.
We employ a packet data satellite transmission technology for the efficient transport of broadband
data in support of our rural health and SchoolAccessTM initiatives. We expect to further expand and
upgrade this network during 2005. An upgrade of the packet data satellite transmission equipment
to a more bandwidth efficient modulation scheme is expected to be completed during the first quarter
of 2005. 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 first quarter of 2005. 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 is expected to become available during the first quarter of 2005. This technology
allows fixed point-to-point transmissions between two earth stations to transmit at the same
frequency. Successful 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 efficiency of 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 terrestrial microwave nor fiber optic transmission technology is considered
to be economically feasible in rural Alaska in the foreseeable future.
Customers. We had approximately 91,300, 85,600 and 88,200 active Alaska long-distance message
telephone service subscribers at December 31, 2004, 2003 and 2002, respectively. Approximately
11,200, 11,300 and 11,600 of these were business and government users at December 31, 2004,
2003 and 2002, respectively, and the remainder were residential customers. Increases in our total
customer counts were primarily attributed to our successful efforts to acquire and retain customers
due to popular product bundle offerings. Decreases in our business and government customer
counts were primarily attributed to continuing competitive pressures in Anchorage and other markets
26
we serve. Message telephone service revenues (excluding broadband, operator services and Private
Line revenues) averaged approximately $9.9 million per month during 2004.
Equal access conversions have been completed in all communities we serve with owned facilities.
We estimate that we carry nearly 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
North-
bound
133,455
144,143
159,564
138,735
575,897
132,172
142,333
159,439
144,829
578,773
149,354
150,804
164,019
147,487
611,664
91,061
105,001
90,839
78,483
365,384
78,882
83,749
96,512
107,620
366,763
94,845
83,268
82,190
86,285
346,588
For Quarter ended
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
March 31, 2004
June 30, 2004
September 30, 2004
December 31, 2004
Total 2004
Combined
Interstate
and Inter-
national
Minutes
Inter-
national
Calling
Minutes
Card
(Amounts in thousands)
1,413
1,683
1,462
1,582
1,527
1,463
1,506
1,341
5,908
6,069
227,612
252,188
253,393
220,065
953,258
1,186
1,107
1,055
1,013
4,361
909
820
767
744
3,240
1,487
1,508
1,514
1,546
6,055
1,685
1,755
1,776
1,713
6,929
213,727
228,697
258,520
255,008
955,952
246,793
236,647
248,752
236,229
968,421
Intra-
state
Minutes
Total
Minutes
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
54,629
57,140
62,055
54,839
301,422
293,787
310,807
291,068
228,663 1,197,084
__________________________
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 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% of GCI's Common Stock and
presently two representatives serve on our 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. On December 7, 2004 we repurchased 3,751,509 of our Class A
common shares at $8.33 per share and $10 million face value of our Series C Preferred Stock from
MCI. The aggregate amount of the equity repurchase totaled $41.3 million. At December 31, 2004,
MCI owns approximately 2.0% of GCI's Common Stock.
27
Revenues attributed to MCI's message telephone traffic from these agreements (excluding Private
Line and other revenues) in 2004, 2003 and 2002 totaled $52.8 million, $57.8 million and $54.7
million, or 12.4%, 14.8% and 14.9% 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 and MCI emerged from bankruptcy protection on
April 20, 2004.
On February 14, 2005 Verizon Communications Inc. announced it has agreed to acquire MCI for $4.8
billion in equity and $488 million in cash. In addition, MCI will pay its shareowners quarterly and
special dividends of $4.50 per share, worth $1.463 billion. In total, the transaction values MCI
shares at $20.75 a share, or $6.746 billion. The board of directors of both companies are reported
to have approved the agreement. In addition to MCI shareowner approval, the acquisition requires
regulatory approvals, which the companies are targeting to obtain in about a year. Verizon has
allowed MCI two weeks beginning in early March 2005 to conduct additional talks with Quest
Communications International, Inc., another potential buyer. We are unable to predict the impact that
a merger with or an acquisition of MCI will have upon us in the long-term, however given the
materiality of MCI’s 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.
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 2004, 2003 and 2002 of
approximately $14.9 million, $18.3 million and $23.5 million, or approximately 3.5%, 4.7% and 6.4%
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 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 2004. Sprint met the threshold for
classification as a major customer through 1998, and met the threshold again in 2001.
Other common carrier traffic routed to us for termination in Alaska is largely dependent on traffic
routed to our carrier customers by their customers. Pricing pressures, new program offerings, revised
business plans, and market consolidation continue to evolve in the markets served by our carrier
customers. If, as a result, their traffic is reduced, or if their competitors' costs to terminate or
originate traffic in Alaska are reduced, our traffic will also likely be reduced, and we may have to
respond to competitive pressures, consistent with federal law. 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-
28
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, First National
Bank of 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 operating
income from them. There are no other individual customers, the loss of which would have a material
impact on our revenues or operating income.
We provided broadband, Private Line and Private Network communications products and services,
including SchoolAccessTM and rural health Private Line facilities, to 452 commercial and government
customers at the end of 2004. These products and services generated approximately 17.2%, 15.9%
and 14.8% of total revenues during the years ended December 31, 2004, 2003 and 2002,
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, MTA, 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.
On January 31, 2005 SBC Communications Inc. (“SBC”) and AT&T announced an agreement for SBC
to acquire AT&T. Under terms of the agreement, approved by the boards of directors of both
companies, shareholders of AT&T will receive total consideration currently valued at $19.71 per
share, or approximately $16 billion. The acquisition, which is subject to approval by AT&T's
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shareholders and regulatory authorities, and other customary closing conditions, is expected to close
by the first half of 2006. We cannot predict how this transaction will affect us at this time.
ACS and other LECs have entered the interstate and international long-distance market, and pursuant
to RCA authorization, entered the intrastate long-distance market. ACS and other LECs generally
lease or buy long-haul capacity on long-distance carriers' facilities to provide their interstate and
intrastate long-distance services.
Another carrier completed construction of fiber optic facilities connecting points in Alaska to the
Lower 48 States in 1999. The additional fiber system provides direct competition to services we
provide on our owned fiber optic facilities, however this fiber system also 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 completed construction of the AULP West
fiber optic cable system in June 2004 that provides us with owned capacity for route diversity.
In the wireless communications services market, we closed a 10-year distribution agreement with
Dobson in 2004 allowing us to resell Dobson cellular services. See “Part I — Item 1 — Business —
Historical Development of our Business During the Past Fiscal Year — Cellular Services Distribution
Agreement” for more information. We provide limited wireless local access and Internet services
using our own facilities. We compete against 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 October
2004 Cingular Wireless LLC, a joint venture between SBC Communications Inc. and BellSouth Corp.,
reported that it completed its previously announced merger with AT&T Wireless Services Inc. 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.
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 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.
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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.
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 NCTA reports that more than one-third of U.S.
cable customers were reported to have subscribed to digital cable television service at the end of
the third quarter of 2004.
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 2004 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. The NCTA reports that as of September 1, 2004, 90 million U.S. television households
were passed by a cable system that offered HDTV, a growth of 140% since January 1, 2003, when
HDTV was available to 37.5 million households. 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 readily available in retail outlets.
However, this first generation of standards does not address interactive services, including, among
other things, pay-per-view programming, video-on-demand, interactive program guides, interactive
gaming, and interactive retailing. Customers must still use set-top boxes to receive those services.
The NCTA reported that at December 31, 2004, more than 113 million homes were passed by cable
plant with a capacity of at least 550MHz, and over 99 million homes were passed by systems with a
capacity of 750MHz or higher. The FCC reports that the cable industry has upgraded almost 91% of
its plant to 750MHz capacity or higher. The NCTA reported that more than 105 million households
were reported to have been passed by activated two-way plant at the end of 2004. Industry analysts
forecast that more than 109 million households will be passed by activated two-way plant by the end
of 2005. 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”). In November 2004, the U.S. Congress passed a five-year extension of the
SHVIA, which allows DBS operators to retransmit distant broadcast TV signals to underserved areas.
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Continued DBS subscriber growth is expected as local programming is offered in more markets. The
FCC reports that DBS continues to increase its share of the MVPD market, while other MVPD
providers continue to experience losses in market share.
The NCTA reports that basic cable customers increased approximately 0.3% in 2004 to 73.6 million,
while non-cable MVPD customers increased 7.7% to 26.9 million customers during the first three
quarters of 2004. Between December 1994 and September 2004, the number of non-cable MVPD
customers increased from 4.2 million to 26.9 million.
The North American cable TV market was reported by the FCC to have remained stable in 2004, while
DBS subscriberships increased at double-digit rates of growth. The FCC reports that DBS
subscribership continues to grow at nearly double digit rates of growth every year, and its share of the
marketplace is increasing.
The NCTA reports that while the number of basic cable TV subscribers increased approximately 0.3%
in 2004, digital cable TV subscriber growth reached 13% during the year ended September 30, 2004.
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, video-on-demand, voice, and high-speed data services. Analysts
believe that expanded digital services allow cable operators to differentiate their services from
competing telecommunications and pay-TV service providers.
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, Ketchikan, Nome, North
Pole, Palmer, Petersburg, Seward, Sitka, Soldotna, Wasilla, Wrangell, and Valdez.
The cable industry has expanded its competitive offerings to include business and residential
telephone services delivered over its fiber optic infrastructure. Cable-delivered telephone service is a
natural extension of a network already capable of delivering digital and broadband services and
products. Once upgraded to a two-way capability, a cable system can offer telephone service over the
same cable line that already carries digital video, high speed Internet, and other advanced services to
consumers. Cable operators are beginning to deploy voice over 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 in the United States totaled an estimated
2.8 million through September 2004.
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With digital transmissions and compression, cable operators are better able to offer a variety and
quality of channels to rival DBS and 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
a video-on-demand 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 2004 total cable industry revenue reached $57.6 billion,
an approximate 12.3% increase from $51.3 billion in 2003. Operators face constant pressure to
keep rate increases at a minimum. According to the FCC, the average monthly rate for cable services
rose 5.4% over the 12-month period ending January 1, 2004 to $45.32, as compared to a 7.8
percent increase reported over the 12-month period ending January 1, 2003. Over the past several
years, the FCC reports that operators have averaged annual rate increases in the 5% range.
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 NCTA reports that cable penetration of TV households totaled 67.1% at December 31, 2004. Our
overall average penetration of homes passed was 65.0% at December 31, 2004 with individual
systems ranging from 49.8% to 83.4%.
In Alaska, cable television was introduced in the 1970s to provide television signals to communities
with few or no available off-air television signals and to communities with poor reception or other
reception difficulties caused by terrain interference. Since that time, as on the national level, the
cable television providers in Alaska have added non-broadcast programming, 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 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.
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 134,700
residential, commercial and government basic subscribers at December 31, 2004. Our cable
television systems serve 35 communities and areas in Alaska, including the state's four largest urban
areas, Anchorage, Fairbanks, the Mat-Su Valley and Juneau. Our statewide cable systems consist of
approximately 2,300 miles of installed cable plant having 450 to 625 MHz of channel capacity.
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Products. Programming services offered to our cable television systems subscribers differ by system.
The following information describes our service offerings as of December 31, 2004.
Anchorage and Mat-Su Valley system. The Anchorage and Mat-Su Valley system, which is
located in the urban center for Alaska, offers a basic analog service that includes approximately
18 channels and a fully addressable digitally delivered expanded basic service with 50 video
programming channels and 47 digital music channels. This system also carries three digital tiers
totaling 34 channels, two HD channels with the rental of an HD set-top converter, a five channel
HD tier, digital video recorders , and over 75 channels of premium (including two foreign language
channels and three HD channels) and pay-per-view products. Commercial subscribers such as
hospitals, hotels and motels are charged negotiated monthly service fees. Apartment and other
multi-unit dwelling complexes can receive service at a negotiated bulk rate with the opportunity
for additional services on a tenant-pay basis.
Fairbanks system. This system offers a basic analog service with 12 channels and a fully
addressable digitally delivered expanded basic service with 46 channels. This system also carries
17 digital special interest channels, 47 channels of digital music, and over 70 channels of
premium and pay-per-view products.
Juneau, Kenai, Soldotna, and Ketchikan systems. These systems offer a basic analog service
with 13 to 18 channels and an additional analog tier (analog and digital delivery technologies are
used in Ketchikan) with 35 to 44 channels. These systems also carry a digital programming tier
with over 17 special interest channels, 47 channels of digital music, and over 50 channels of
digitally delivered 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.
Cordova, Kodiak, Nome, Seward, and Valdez systems. These systems offer a basic analog
service with 12 to 15 channels and an additional analog tier (analog and digital delivery
technologies are used in Kodiak) with 35 to 38 channels. These systems also carry 47 channels
of digital music and over 56 channels of digitally delivered premium and pay-per-view products.
Other systems. We own systems in the Alaska communities and areas of Bethel, Homer,
Kotzebue, Petersburg, and Wrangell. These analog systems offer a basic service with 11 to 15
channels and an expanded basic service with 36 to 38 channels. Five channels of premium
service are also available in all systems. Music service is available in Petersburg and Wrangell.
Pay-per-view is available in Homer, Kotzebue, Petersburg, and Wrangell. Beginning in February,
2005, our Barrow system has one tier of service with 53 channels, four premium channels, and
three pay-per-view channels.
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 207,200, 202,200 and 196,900 homes at
December 31, 2004, 2003 and 2002, respectively, and served approximately 134,700, 134,400 and
136,100 basic subscribers at December 31, 2004, 2003 and 2002, respectively. Revenues derived
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from cable television services totaled $101.4 million, $96.0 million and $88.7 million in 2004, 2003
and 2002, respectively.
Competition. The 1996 Telecom Act removed barriers to telephone company or LEC entry into the
video marketplace to facilitate competition between incumbent cable operators and telephone
companies. At the time of the 1996 Telecom Act, it was expected that LECs would compete in the
video delivery market and that cable operators would provide local telephone exchange service. Two
of the largest ILECs have announced plans to offer video via Internet protocol technology. 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. In the past, the
majority of Alaska DBS subscribers were required to bear the cost of and install larger satellite dishes
(generally three to six feet in diameter) because of the weaker satellite signals available in northern
latitudes, particularly in communities surrounding, and north of, Fairbanks. In addition, the satellites
had a relatively low altitude above the horizon when viewed from Alaska, making their signals subject
to interference from mountains, buildings and other structures. 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 with HD programming. In addition to the dish and
equipment cost deterrents, DBS signals are subject to degradation from atmospheric conditions such
as rain and snow.
Our cable television systems face competition from alternative methods of receiving and distributing
television signals, including digital video service over telephone lines, broadband IP based services,
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 and in competitive
bundles, a greater variety of communication services than are available off-air or through other
alternative delivery sources. Additionally, we believe we offer superior technical performance and
responsive community-based customer service.
In November 2003, the ILEC in the Mat-Su Valley launched digital video service over telephone lines
in limited areas. Its product offerings and price points are similar to our product offerings. The ILEC
in Ketchikan has indicated its intent to launch a similar service in 2005.
Competitive forces will be counteracted by offering expanded programming through digital services
and by providing high-speed data services. System upgrades have been completed to make our
systems reverse activated, providing the necessary infrastructure to offer cable modem service to
greater than 99% of our homes passed. Digital delivery technology is being utilized in all but six of our
systems. We expect to utilize this technology in the remaining six systems within two years. These
plant upgrades combined with local broadcast programming and bundled packages 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, and local programming for our customers.
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High-speed data access competition takes two primary forms: cable modem access service and DSL
service. Wireless services are also becoming more prevalent. DSL service provides 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.
Wireless, both from a fixed and mobile implementation, is becoming more available. Fixed wireless
providers are using newer technologies to deliver broadband to subscribers. Wireless vendors in
Anchorage are competing for broadband subscribers. In other locations in the Lower 49 States,
public organizations such as municipalities and education organizations have begun implementing
mobile wireless broadband over specific geographic areas such as parks, campuses and major
downtown business areas. 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 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.
On December 30, 2004, GCI Cable, Inc, applied to the Regulatory Commission of Alaska to amend its
certificates to include areas where population growth has occurred and is likely to occur over the next
five years. The proposed service area changes are in Anchorage, Bethel, Cordova, Fairbanks, Homer,
Juneau-Douglas, Kenai, Soldotna, Sterling, Ketchikan, Kodiak, Kotzebue, Nome, Palmer-Wasilla,
Petersburg, Seward, Sitka, Valdez and Wrangell.
Our cable service 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.
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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 in the U.S. obtained local service at June 30,
2004 by means of 148 million ILEC switched access lines, 32 million CLEC switched access lines, and
167 million mobile wireless telephone service subscriptions.
The FCC reported that total CLEC end-user switched access lines increased by 7% during the first half
of 2004, from 30 million to 32 million lines. By comparison, total CLEC lines increased by 10% during
the preceding six months, from 27 to 30 million lines. For the full twelve month period ending June
30, 2004, CLEC end-user lines increased by 19%. Approximately 18% of the 180 million total end-
user switched access lines were reported by CLECs, compared to 16% a year earlier.
The FCC further reported that approximately 65% of reported CLEC switched access lines serve
residential and small business customers, compared to approximately 77% of ILEC lines. CLECs
reported 15% of total residential and small business switched access lines, and 25% of the total
medium and large business, institutional, and government customer access lines.
The FCC reported that CLECs reported providing about 16% (a decline from 43% in December 1999)
of their switched access lines by reselling the services of other carriers, about 61% (an increase from
24% in December 1999) by means of UNE loops leased from other carriers, and about 23% of
switched access lines over their own local loop facilities.
The FCC reports that since December 1999, the percentage of nationwide CLEC switched access
lines reported to be provisioned by reselling services has declined steadily, to 16% at the end of June
2004, and the percentage provisioned over UNE loops has grown steadily, to 61% at June 30, 2004.
The FCC reported that ILECs provided about 1.6 million switched access lines to unaffiliated carriers
on a resale basis at the end of June 2004, down from 1.8 million six months earlier. The FCC
reported that ILECS provided 21.4 million unbundled loops (with or without unbundled switching) to
unaffiliated carriers at June 30, 2004, up from 19.4 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 13% more UNE
loops with switching to unaffiliated carriers at the end of June 2003 than they reported six months
earlier (17.1 million compared to 15.2 million) and about 1% fewer UNE loops without switching
(about 4.3 million).
The FCC reports that at June 30, 2004 in the U.S., local telephone service was provided by CLECs to
over 3.3 million coaxial cable connections, which constituted approximately 45% of the 7.5 million
switched access lines provided by CLECs over their own local loop facilities, approximately 10% of all
switched access lines reported 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. A significant driver for cable
telephony is the bundling of telephony services with existing digital video and high speed data
services.
Industry analysts estimate that worldwide cable telephony subscribers totaled 11.8 million at the end
of 2004, are expected to exceed 14 million by late 2005, and will grow to over 22 million by the end
37
of 2008. The vast majority of cable-telephony subscribers reportedly rely on circuit-switched
technology. Of the 11.8 million worldwide cable-telephony subscribers at the end of 2004, less than
500,000 were using Voice over Internet Protocol (“VoIP”) technology.
We began deploying a cable telephony solution in the second quarter of 2004 that meets our needs
and we believe meets the needs of our customers.
The communications industry has been burdened by regulatory uncertainty as a result of successive
court reversals of the FCC’s core local competition rules. In response to such court reversals and to
remove uncertainty, the FCC adopted new rules for network unbundling obligations of ILECs in
December 2004. 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, 2004 we could access approximately 93%, 71%, and 48%
of Anchorage, Fairbanks, and Juneau area local loops, respectively, from our collocated remote
facilities and DLC installations, excluding Wainwright and Eielson areas.
Products. Our own DLPS facilities and collocated remote facilities that access the ILEC’s unbundled
network element loops allow us to offer full featured 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 our own DLPS facilities or access to ILEC loop facilities, we offer service using
total service resale of the ILEC’s local service in Anchorage, and either total service resale or UNE
platform in Fairbanks and Juneau.
Our package offerings are competitively priced and include popular features, such as the following.
(cid:130) Enhanced call waiting
(cid:130) Caller ID on call waiting
(cid:130) Anonymous call rejection
(cid:130) Call forward busy
(cid:130) Enhanced call waiting
(cid:130) Follow me call
(cid:130) Multi-distinctive ring
(cid:130) Selective call forwarding
(cid:130) Selective call rejection
(cid:130) Speed calling
(cid:130) Voice mail
(cid:130) Non-listed number
(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
(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 provide
our own facilities-based services to many of Anchorage’s larger business customers through
expansion and deployment of SONET fiber transmission facilities, DLC facilities, and leased HDSL and
T-1 facilities.
In April 2004 we successfully launched our Digital Local Phone Service (“DLPS”) deployment utilizing
our Anchorage coaxial cable facilities. This delivery method allows us to utilize our own cable facilities
to provide local access service to our customers and avoid paying local loop charges to the ILEC. To
38
ensure the necessary equipment is available to us we have committed to purchase a certain number
of outdoor network powered multi-media adapters.
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 112,100, 106,100 and 96,100 local lines in service from
Anchorage, Fairbanks, and Juneau, Alaska subscribers at December 31, 2004, 2003 and 2002,
respectively. We began providing local access services in Fairbanks in 2001 and in Juneau in 2002.
The 2004 line count consists of approximately 60.3% residential access lines and 35.3% business
access lines, including 4.4% Internet service provider access lines. We ended 2004 with market
share gains in substantially all market segments.
Revenues derived from local access services in 2004, 2003 and 2002 totaled $47.0 million, $39.0
million and $32.1 million, respectively, representing approximately 11.1%, 10.0% and 8.7% of our
total revenues in 2004, 2003 and 2002, respectively.
Competition. In the local access services market the 1996 Telecom Act, judicial decisions, and state
legislative and regulatory developments have increased the overall 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 17 CLECs certified to operate in
the State of Alaska. We compete against ACS, the ILEC in Anchorage, Juneau and Fairbanks, and with
AT&T Alascom in the Anchorage service area. AT&T Alascom 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 were classified as Rural Telephone Companies under the 1996
Telecom Act, which entitled them to an exemption of certain material interconnection terms of the
1996 Telecom Act, until and unless such “rural exemption” were 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. ACS appealed
these decisions.
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. In accordance with the Court’s ruling, the RCA re-opened the rural
exemption dockets and scheduled a hearing to take place on April 19, 2004. On April 18, 2004, we
and ACS entered into a comprehensive settlement that, in part, included a relinquishment by ACS of
its rural exemption for Juneau and Fairbanks. In accordance with the settlement, the parties moved
39
the RCA for a dismissal of the rural exemption inquiry, which the Commission granted on April 21,
2004.
By letter, submitted also to the RCA, on January 12, 2004, we made a bona fide request for
interconnection for the purposes of local access competition with MTA, under the provisions of the
1996 Telecom Act. We submitted this request to MTA on the grounds that it waived its rural
exemption under the terms of Section 251(f)(1)(C) when it launched its new video service through its
wholly owned subsidiary MTA Vision, Inc. in competition with our cable television service. MTA,
however, refused to comply with the negotiation and arbitration provisions under the Act claiming that
it still retains a rural exemption. We filed a complaint with the RCA to resolve this dispute, and the
RCA conducted a public hearing on the matter on October 20, 2004. On February 22, 2005, the RCA
released a ruling that MTA’s rural exemption for the areas served by MTA Vision, Inc. had been lifted
and that we may negotiate and arbitrate interconnection with MTA. We tendered a new
interconnection request to MTA on February 25, 2005 and are proceeding with such negotiations. In
the event negotiations are unsuccessful, an arbitration will be requested which must be completed
under the provisions of the 1996 Telecom Act by November 25, 2005. Following the entry into an
Interconnection Agreement by arbitration, we intend to commence local service entry into the Mat-Su
Valley during 2007.
We expect further competition in the marketplaces we serve as other companies may receive
certifications. We expect further 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, worldwide, approximately 285 million web sites were hosted at the end of July 2004, an
increase of 22% from 233 million at the end of January 2004. Jupiter Research reports that the
percent of U.S. households with a computer grew from 71.1 million in 2001 to a projected 80.8
million in 2004, which represents approximately 73% of U.S. households. Nielsen//NetRatings
reports that an estimated 197.8 million Internet users existed in the U.S. in November 2004,
representing approximately 66.8% of the total U.S. population.
For the first time broadband Internet service users exceed dial-up users. As of July 2004, an
estimated 49% 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 continues, but at a slower rate as compared to 2003. 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.
40
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 in the U.S. increased by 15%
during the first half of 2004, from 28.2 million to 32.5 million lines, compared to a 20% increase,
from 23.5 million to 28.2 million lines, during the second half of 2003. Approximately 30.1 million of
the 32.5 million total lines served residential and small business subscribers, a 16% increase from
the 26.0 million lines reported six months earlier.
The FCC further reported that of the 32.5 million high-speed lines, 23.5 million provided advanced
services, i.e., services at speeds exceeding 200 kbps in both directions. Advanced services lines
increased 15% from 20.3 million lines to 23.5 million lines during the first half of 2004.
Approximately 21.2 million of the 23.5 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 11.4
million U.S. subscribers through June 2004 according to FCC reports. High-speed asymmetric DSL
lines in service increased by 20% during the first half of 2004. Cable’s offering of high-speed Internet
access was reported by the FCC to have experienced customer growth of 13% during the first six
months of 2004. The FCC reports that U.S. cable modem subscribers totaled an estimated 18.6
million through June 2004. In-Stat reports that there were 42 million worldwide cable modem users
at the end of 2004, up from a total of 31 million at the end of 2003.
The FCC reports that high-speed connections to end users by means of satellite or terrestrial wireless
technologies increased by 15% in the U.S. during the first half of 2004, accounting for approximately
1.1 million connections at the end of June 2004.
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 74 million basic cable households in the United States and an
estimated 81 million households owning a computer, broadband cable Internet access growth is
expected to continue as new advanced services are deployed.
On December 3, 2004 President Bush signed into law a three-year moratorium on Internet access
taxes. The law extends a ban on Internet taxes that expired on November 1, 2003. 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.
41
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 4 Mbps access speeds as compared with up to 56 kbps access through standard
copper wire dial-up modem access. Our fixed wireless product is available in 129 communities with
plans to expand to 13 more in 2005. Three distinct products are offered; 56 kbps, 256 kbps, and
256 kbps for multiple computers. We provide 24-hour customer service and technical support via
telephone or online. An entry-level cable modem service also offers free data transfer up to one
gigabyte per month at a rate of 64 Kbps and can be connected 24-hours-a-day, 365-days-a-year,
allowing for real-time information and e-mail access. This product acts as a dialup replacement and
upgrade since it is always connected and provides more efficient data transfer. Cable modems use
our coaxial cable plant that provides cable television service, instead of the traditional ILEC copper
wire. Coaxial cable has a much greater carrying capacity than telephone copper wire and can be used
to simultaneously deliver both cable television (analog or digital) and Internet access services.
At the end of 2003 we launched an initiative to increase the speed of our entry level broadband cable
modem level service from 512 kbps to 1 mbps for new and current customers in Anchorage,
Kenai/Soldotna and the Mat-Su Valley. The initiative was completed in September 2004. This new
service level was available in Fairbanks in December of 2004 and Juneau in January 2005.
Additional cable modem service packages tailored to high-use 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 1.5 mbps over the same copper line
used for phone service. Business services also include a personalized web page, domain name
services, and e-mail.
We also provide dedicated access Internet service to commercial and public organizations in Alaska.
We offer a premium service and currently support many of the largest organizations in the state such
as 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 systems
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.
42
(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, wireless and DSL), and access servers for dial-in users.
(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)
(cid:130)
(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.
Dedicated Internet access is delivered to a router located at the service point. Our Internet
management platform constantly monitors this router and continual communications are maintained
with all of the core and distribution routers in the network. The availability and quality of service, as
well as statistical information on traffic loading, are continuously monitored for quality assurance.
The management platform has the capability to remotely access routers, servers and layer 2
switches, permitting changes in configuration without the need to physically be at the service point.
This management platform allows us to offer outsourced network monitoring and management
services to 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 101,600, 95,700 and 89,500 total active residential and
commercial Internet subscribers at December 31, 2004, 2003 and 2002, respectively. Included in
these totals were approximately 65,500, 46,000 and 36,200 active residential and commercial cable
modem Internet subscribers at December 31, 2004, 2003 and 2002, respectively. Revenues
derived from Internet services totaled $26.0 million, $19.8 million and $15.6 million, in 2004, 2003
and 2002, respectively, representing approximately 6.1%, 5.1% and 4.2% of our total revenues in
2004, 2003 and 2002, 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
43
of services offered, the technologies used, customer service, billing services, perceived quality,
reliability and availability. As of December 31, 2004, we competed with more than eight Alaska
based Internet providers, and competed with other domestic, non-Alaska based providers that provide
national service coverage. Several of the providers 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.
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 had no material effect on our consolidated
operations. The principal effect of our facilities on the environment would be in the form of
construction of facilities and networks at various locations in Alaska and between Alaska, Seattle,
Washington, and Warrenton, Oregon. Our facilities have been constructed in accordance with federal,
state and local building codes and zoning regulations whenever and wherever applicable. Some
facilities may be on lands that may be subject to state and federal wetland regulation.
Uncertainty as to the applicability of environmental regulations is caused in major part by the federal
government's decision to consider a change in the definition of wetlands. Most of our facilities are on
leased property, and, with respect to all of these facilities, we are unaware of any violations of lease
terms or federal, state or local regulations pertaining to preservation or protection of the environment.
Our Alaska United projects consist, in part, of deploying land-based and undersea fiber optic cable
facilities between Anchorage, Juneau, Seward, Valdez, and Whittier, Alaska, Seattle, Washington, and
Warrenton, Oregon. The engineered routes pass over wetlands and other environmentally sensitive
areas. We believe our construction methods used for buried cable have a minimal impact on the
environment. The agencies, among others, that are involved in permitting and oversight of our cable
deployment efforts are the United States Army Corps of Engineers, 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-
44
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, paint used to mark the location of our facilities, and pole treatment, and as
heating fuel, transformer oil, cable cleaner, batteries, diesel fuel, and in various other ways in the
operation of those systems. We do not believe that these materials, when used in accordance with
manufacturer instructions, pose an unreasonable hazard to those who use them or to the
environment.
Patents, Trademarks and Licenses
We do not hold patents, franchises or concessions for communications services or local access
services. We do hold registered service marks for the 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.
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.
45
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 were classified as Rural Telephone Companies under
the 1996 Telecom Act, which entitled them to an exemption of certain material interconnection terms
of the 1996 Telecom Act, until and unless such “rural exemption” were 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 with access to unbundled network elements at rates under the pricing standard
established by the FCC. ACS appealed these decisions.
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. In accordance with the Court’s ruling, the RCA re-opened the rural
exemption dockets and scheduled a hearing to take place on April 19, 2004. On April 18, 2004, we
and ACS entered into a comprehensive settlement that, in part, included a relinquishment by ACS of
its rural exemption for Juneau and Fairbanks. In accordance with the settlement, the parties moved
the RCA for a dismissal of the rural exemption inquiry, which the Commission granted on April 21,
2004.
By letter, submitted to the RCA, on January 12, 2004, we made a bona fide request for
interconnection for the purposes of local access competition with MTA, under the provisions of the
1996 Telecom Act. We submitted this request to MTA on the grounds that it waived its rural
exemption under the terms of Section 251(f)(1)(C) when it launched its new video service through its
wholly owned subsidiary MTA Vision, Inc. in competition with our cable television service. MTA,
however, refused to comply with the negotiation and arbitration provisions under the Act claiming that
it still retains a rural exemption. We filed a complaint with the RCA to resolve this dispute, and the
RCA conducted a public hearing on the matter on October 20, 2004. On February 2, 2005, the RCA
ruled that MTA’s rural exemption for the areas served by MTA Vision, Inc. had been lifted and that we
may negotiate and arbitrate interconnection with MTA. We are proceeding with such negotiations.
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 is considering other
proposals that would restructure and could reduce access charges. Changes in the access charge
46
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.
Carriers also pay fees for transport services in and out of Alaska. To the extent these services were
offered by AT&T Alascom, they were previously subject to tariffed rates filed at the FCC. As of January
22, 2005 and for a five-year period, the rates for such services offered by and to any provider are
governed by federal legislation effective December 8, 2004.
Access to Unbundled Network Elements. On March 2, 2004, the Court issued a decision affirming in
part, vacating in part, and remanding in part 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 February 4,
2005, the FCC issued its Order responding to the Court’s remand. Though the FCC adopted new
standards that generally curb access to certain ILEC high capacity loop and transport facilities, we do
not believe that any of these standards are met for the markets we serve. The FCC also eliminated
access to mass market switching, which we self-provision and have generally not relied on stand-
alone access to this network element. The outcome of either requests for reconsideration to the FCC
or further court appeals 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 exchange and exchange 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 any further 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.
An arbitration proceeding to revise the interconnection agreement with ACS for the Anchorage service
area went to hearing before the RCA, such hearing ending November 13, 2003. On June 25, 2004,
the RCA issued a comprehensive decision setting forth new rates for unbundled network elements,
resale, and terms and conditions for interconnection in the Anchorage arbitration. Significantly, the
RCA raised the loop rate in Anchorage to $19.15 but subsequently reduced the loop rate on
reconsideration to $18.64. The RCA also issued other various arbitration rulings adverse to us,
including adopting ACS’ non-recurring and collocation cost models. On December 7, 2004, the
Commission issued a final order approving an interconnection agreement. We have appealed various
of the Commission’s arbitration rulings.
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
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subsidy and our net cost of providing local telephone services in these areas would be materially
adversely affected.
In addition, the FCC had previously 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, and the FCC has reported that on
February 25, 2005, it adopted, among other things, minimum requirements to guide ETC
designations. We do not believe that the adopted changes, as reported, will have a material effect on
our operations. We cannot predict any further changes that may be adopted, but future regulatory
action or court appeals 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 other programming services. 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 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 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.
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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.
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
telecommunications service is. 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. The decision is on appeal to the Supreme Court, which is scheduled
to hear oral arguments in the case on March 29, 2005.
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. Further, on
February 23, 2005, the FCC released its order affirming its decisions not to impose a dual carriage
requirement on cable operators and not to require cable operators to carry more than a single digital
programming stream from any particular broadcaster.
Satellite Home Viewer Improvement Act. 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 has reauthorized this Act through December 31, 2009, and
we do not believe that changes to the requirements will have a material effect on our operations.
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
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the purchase or sale of a cable system or franchise, such authority may attempt to impose more
burdensome or onerous franchise requirements in connection with a request for such consent.
Historically, franchises have been renewed for cable operators that have provided satisfactory
services and have complied with the terms of their franchises. We believe that we have generally met
the terms of our franchises and have provided quality levels of service. Furthermore, our franchises
are issued by the state public utility commission (the RCA) and do not require periodic renewal.
Various courts have considered whether franchising authorities have the legal right to limit the
number of franchises awarded within a community and to impose certain substantive franchise
requirements (e.g. access channels, universal service and other technical requirements). These
decisions have been inconsistent and, until the United States Supreme Court rules definitively on the
scope of cable operators' First Amendment protections, the legality of the franchising process
generally and of various specific franchise requirements is likely to be in a state of flux.
Pole Attachment. The Communications Act requires the FCC to regulate the rates, terms and
conditions imposed by public utilities for cable systems' use of utility pole and conduit space unless
state authorities can demonstrate that they adequately regulate pole attachment rates. In the
absence of state regulation, the FCC administers pole attachment rates on a formula basis. This
formula governs the maximum rate certain utilities may charge for attachments to their poles and
conduit by companies providing communications services, including cable operators.
The RCA has largely retained the existing pole attachment formula that has been in state regulation
since 1987. This formula could be subject to further revisions upon petition to the RCA. We cannot
predict at this time the outcome of any such proceedings.
Copyright. Cable television systems are subject to federal copyright licensing covering carriage of
television and radio broadcast signals. In exchange for filing certain reports and contributing a
percentage of their revenues to a federal copyright royalty pool that varies depending on the size of
the system, the number of distant broadcast television signals carried, and the location of the cable
system, cable operators can obtain blanket permission to retransmit copyrighted material included in
broadcast signals. The United States Copyright Office adopted an industry agreement providing for an
increase in the copyright royalty rates. The possible modification or elimination of this compulsory
copyright license is the subject of continuing legislative review and could adversely affect our ability to
obtain desired broadcast programming. We cannot predict the outcome of this legislative activity.
Copyright clearances for nonbroadcast programming services are arranged through private
negotiations.
Cable operators distribute locally originated programming and advertising that use music controlled
by the two principal major music performing rights organizations, the American Society of Composers,
Authors and Publishers and Broadcast Music, Inc. The cable industry has had a long series of
negotiations and adjudications with both organizations. 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
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administrative sanctions, such as the revocation of FCC licenses needed to operate certain
transmission facilities often used in connection with cable operations.
Other Regulations of the FCC. The FCC has previously initiated an inquiry to determine whether the
cable industry's future provision of interactive services should be subject to regulations ensuring
equal access and competition among service vendors. The inquiry is another indication of regulatory
concern regarding control over cable capacity. In addition, other bills and administrative proposals
pertaining to cable communications are introduced in Congress from time to time or have been
considered by other governmental bodies over the past several years. It is possible that Congress
and other governmental bodies will make further attempts to regulate cable communications
services.
State and Local Regulation. Because our cable communications systems use local streets and
rights-of-way, our systems are subject to state and local regulation. Cable communications systems
generally are operated pursuant to franchises, permits or licenses granted by a municipality or other
state or local government entity. In Alaska, the RCA is the franchising authority for the state. We
provide cable television service throughout Alaska pursuant to various certificates of authority issued
by the RCA. These certificates are not subject to terms of renewal and continue in effect until and
unless the state commission were to seek to modify or revoke them for good cause.
Internet Operations
General. With significant growth in Internet activity and commerce over the past several years the
FCC and other regulatory bodies have been challenged to develop new models that allow them to
achieve the public policy goals of competition and universal service. Many aspects of regulation and
coordination of Internet activities and traffic are evolving and are facing unclear regulatory futures.
Changes in regulations and in the regulatory environment, including changes that affect
communications costs or increase competition from ILECs or other communications services
providers, could adversely affect the prices at which we sell ISP services.
Internet Governance and Standards. There is no one entity or organization that governs the Internet.
Each facilities-based network provider that is interconnected with the global Internet controls
operational aspects of their own network. Certain functions, such as IP addressing, domain name
routing and the definition of the TCP/IP protocol, are coordinated by an array of quasi-governmental,
intergovernmental, and non-governmental bodies.
The legal authority of 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
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predict the effect or outcome of such proceedings. The FCC has somewhat clarified VoIP regulation
by determining that it is not subject to local regional commission oversight.
Financial Information about our Foreign and Domestic Operations and Export Sales
Although we have several agreements to help originate and terminate international toll traffic, we do
not have foreign operations or export sales. We conduct our operations throughout the western
contiguous United States and Alaska and believe that any subdivision of our operations into distinct
geographic areas would not be meaningful. Revenues associated with international toll traffic were
$2.9 million, $2.9 million and $3.5 million for the years ended December 31, 2004, 2003 and 2002,
respectively.
Seasonality
Our long-distance and commercial cable television 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
residential cable television and Internet revenues are higher in the winter months because
consumers tend to watch more television and spend more time at home using the Internet during
these months. Our local services do not 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, 2004 and 2003, our long-distance services segment had a backlog of Private
Line orders of approximately $74,000 and $271,000, respectively, which represents recurring
monthly charges for Private Line and broadband services. As of December 31, 2004 and 2003, we
had a backlog of equipment sales orders of approximately $468,000 and $745,000, respectively for
services included in the All Other category described in note 12 to the “Notes to Consolidated
Financial Statements” included in Part II of this Report. The decrease in backlogs as of December 31,
2004 can be attributed to a combination of decreased private line circuit orders pending at
December 31, 2004 as compared to 2003 and faster completion of outstanding sales orders at
December 31, 2004 as compared to 2003. We expect that all of the Private Line orders and
equipment sales in backlog at the end of 2004 will be delivered during 2005.
Geographic Concentration and Alaska Economy
We offer voice and data communications and video services to customers primarily in the State of
Alaska. Because of this geographic concentration, growth of our business and operations depends
upon economic conditions in Alaska. The economy of the State of Alaska is dependent upon natural
resource industries, in particular oil production, as well as investment earnings (including earnings
from the State of Alaska Permanent Fund), tourism, government, and United States military spending.
Any deterioration in these markets could have an adverse impact on us. Oil revenues are the second
largest source of state revenues, following funds from investment sources. The slow economic
recovery 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
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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.
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 service, local telephone service, wireless telephone service, Internet
services and video services are increasingly becoming blurred. Through mergers and various service
integration strategies, major providers 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, MTA 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.
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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.
We believe that the greatest source of potential competition for video services could come from the
DBS industry. We also are subject to competition from providers of digital video over telephone lines
in the Mat-Su Valley and potentially in Ketchikan in 2005. With the addition of Anchorage local
broadcast stations, increased marketing, ILEC and DBS alliances, and emerging technologies creating
new opportunities, competition from these sources has increased and will likely continue to increase.
The changing nature of technology and of the DBS business may result in greater satellite coverage
within the State of Alaska. The resulting increase in competition may adversely affect our market
share and results of operations from our cable services segment.
Local Telephone Services. In the local telephone market, we compete against ACS (the ILEC), in
Anchorage, Juneau and Fairbanks. 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
overall likelihood that barriers to local telephone competition will be substantially reduced or
removed. These initiatives include requirements that local exchange carriers 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.
With respect to our high-speed cable modem service, ACS and other Alaska telephone service
providers are providing competitive high-speed Internet access over their telephone lines. 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.
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Our business is subject to extensive governmental legislation and regulation. Applicable legislation
and regulations and changes to them could adversely affect our business, financial position, results
of operations or liquidity.
Local Telephone Services. Our success in the local telephone market depends on our continued
ability to obtain interconnection, access and related services from local exchange carriers on terms
that are 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 the implementation of current regulations
and legislation, unfavorable changes in regulation or legislation or the introduction of new regulations.
Our ability to enter into the local telephone market depends on our negotiation or arbitration with
local exchange carriers to allow interconnection to the carrier’s existing local telephone network, to
allow the purchase, at cost-based rates, of access to unbundled network elements, to establish
dialing parity, to obtain access to rights-of-way and to resell services offered by the local exchange
carrier. 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, and on our ability to gain interconnection 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 via the facilities of the ILEC or via wholesale offerings.
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. 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 Regulatory Commission of Alaska, or RCA, in October 2000.
Other existing federal regulations, currently the subject of judicial, legislative, and administrative
review, could change, in varying degrees, the manner in which cable television systems operate.
Neither the outcome of these proceedings nor their impact upon the cable television industry in
general, or on our activities and prospects in the cable television business in particular, can be
predicted at this time. There can be no assurance that future regulatory actions taken by Congress,
the FCC or other federal, state or local government authorities will not have a material adverse effect
on our business, financial position, results of operations or liquidity.
Proposals may be made before Congress and the FCC to mandate cable operators provide “open
access” over their cable systems to Internet service providers. As of the date of this report, the FCC
has declined to impose such requirements. If the FCC or other authorities mandate additional access
to our cable systems, we cannot predict the effect that this would have on our Internet service
offerings.
Internet Services. Changes in the regulatory environment relating to the Internet access market,
including changes in legislation, FCC regulation, judicial action or local regulation that affect
communications costs or increase competition from the ILEC or other communications services
providers, could adversely affect the prices at which we sell Internet services.
We depend on a small number of customers for a substantial portion of our revenue and business.
The loss of any of such customers would have a material adverse effect on our financial position,
results of operations or liquidity.
For the year ended December 31, 2004, we provided long-distance services (excluding private lines
and other revenue) to MCI and to Sprint Corporation, or Sprint, which generated combined revenues
of approximately 15.9% of our total revenues for 2004. These two customers are free to seek out
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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 the occurrence
of certain contractually stipulated events including a default, the occurrence of a force majeure event,
or a substantial change in applicable law or regulation under the applicable contract. Additionally, the
contracts provide for periodic reviews to assure that the prices paid by MCI and Sprint for their
services remain competitive.
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 MCI or Sprint.
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 and liquidity.
Our businesses are currently geographically concentrated in Alaska. Any deterioration in the
economic conditions in Alaska could have a material adverse effect on our financial position, results
of operations or liquidity.
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, and government spending including substantial amounts
for the United States military. Any deterioration in these markets could have an adverse impact on
the demand for communication and cable television services and on our results of operations and
financial condition. In addition, the customer base in Alaska is limited. Alaska has a population of
approximately 649,000 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 contiguous
lower 48 states. There can be no assurance that we will find attractive opportunities to grow our
businesses outside the State of Alaska or that we will have the necessary expertise to take advantage
of such opportunities. The markets in Alaska for voice and data communications and video services
are unique and distinct within the United States due to Alaska’s large geographical size and its
distance from the rest of the United States. The expertise we have developed in operating our
businesses in the State of Alaska may not provide us with the necessary expertise to successfully
enter other geographic markets.
We may not develop our wireless services, in which case we could not meet the needs of our
customers who desire packaged services.
We offer wireless mobile services by distributing other providers’ wireless mobile services. We offer
wireless local telephone services over our own facilities, and have purchased personal
communications system, or PCS, and local multipoint distribution system, or LMDS, wireless
broadband licenses in FCC auctions covering markets in Alaska. We have fewer subscribers to our
wireless services than to our other service offerings. The geographic coverage of our wireless
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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 satisfy certain build-out
requirements on or before June, 2005. In February 2005 we submitted a filing to the FCC supporting
our compliance with such requirements.
Our efforts to deploy DLPS may be unsuccessful, in which case the margins on our local telephone
services business will not improve and we will not recover any capital investment that we have made
in DLPS.
An element of our business strategy is to deploy voice telephone service utilizing our hybrid fiber coax
cable facilities. In April 2004 we successfully launched our DLPS deployment utilizing our Anchorage
coaxial cable facilities. DLPS allows us to utilize our own cable facilities to provide local access to our
customers and avoid paying local loop charges to the ILEC. To continue to successfully deploy this
service, we must integrate new technology with our existing facilities and modify our operating
procedures to timely detect and effect repairs of our outside plant network. The long-term 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 a substantial capital
investment by us. If we are unable to successfully deploy DLPS to a sufficiently large portion of our
customer base, we will not be able to recover all of the 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 failures occur in our undersea fiber optic cables, our ability to immediately restore the entirety of
our service may be limited, which could lead to a material adverse effect on our business, financial
position, results of operations or liquidity.
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 contiguous lower 48 states. We completed
57
construction of AULP West in June 2004 that provides an alternative backup communications facility.
If a failure of both sides of the ring of our undersea fiber optic facilities occurs and we are not able to
secure alternative facilities, some of the communications services we offer to our customers could be
interrupted, which could have a material adverse effect on our business, financial position, results of
operations or liquidity.
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 XR, but we also lease capacity on two
other spacecraft for services we provide, SES Americom’s AMC-7 and AMC-8. On Galaxy XR, we use 7
C-band transponders. We have arranged for backup C-band satellite capacity on another PanAmSat
spacecraft, Galaxy XIII, 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 (Galaxy XR) 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 Galaxy XIII, although no pre-arrangement for its backup is currently in place.
We lease on a short-term basis an additional 27 megahertz of protected but un-backed up
transponder capacity on another Galaxy XR transponder. Such capacity is protected by the same
satellite for transponder failure, but in the event of total spacecraft failure, this leased space segment
would not be restored. We also lease approximately 13 megahertz 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-7 that 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. If we
do not obtain the necessary communications equipment, we will not be able to meet the needs of our
customers.
We depend on a limited number of third-party vendors to supply cable, Internet, DLPS 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, which could lead to the
incurrence of uninsured liabilities that adversely affect our financial position, results of operations or
liquidity.
We are self-insured for damage or loss to certain of our transmission facilities, including our buried,
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.
New corporate governance rules impose increased costs and internal control assessment
requirements on us.
The Sarbanes-Oxley Act of 2002, as well as new rules subsequently implemented by the SEC, the
Public Company Accounting Oversight Board, and the Nasdaq National Market, have required
changes in corporate governance practices of public companies. We expect to incur ongoing costs to
58
comply with these rules and regulations, as well as increased legal and financial compliance costs.
For example, Section 404 of the Sarbanes-Oxley Act of 2002 requires that we evaluate and report on
our system of internal controls over financial reporting and have our auditor attest to such evaluation.
In 2004 we incurred operating costs totaling $2.0 million and capital costs totaling $714,000 to
comply with Section 404. Since our systems, processes and internal controls thereon change over
time, we cannot assure you that there may not be material weaknesses that would be required to be
reported in the future.
We must apply a direct value method to determine the fair value of our cable certificate assets for
purposes of impairment testing on an annual basis. Impairment testing may result in a material, non-
cash write-down of our cable certificate or goodwill assets and could have a material adverse impact
on our results of operations.
Under Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets,”
we must test our goodwill and other intangible assets with indefinite lives for impairment at least
annually. On September 29, 2004, the SEC issued SEC Staff Announcement Topic “Use of the
Residual Method to Value Acquired Assets Other than Goodwill,” requiring us to apply no later than
January 1, 2005 a direct value method to determine the fair value of our intangible assets with
indefinite lives other than goodwill for purposes of impairment testing. We must also recognize
previously unrecognized intangible assets, if any, in the determination of fair value for impairment
testing purposes. Our cable certificate assets are our only indefinite-lived assets other than goodwill
as of December 31, 2004. Our cable certificate assets were originally valued and recorded using the
residual method. Impairment testing of our cable certificate assets in future periods under Statement
of Financial Accounting Standard No. 142 must use a direct value method pursuant to such SEC Staff
Announcement, which may result in a material, non-cash write-down of our cable certificate assets
and could have a material adverse impact on our results of operations.
Our significant debt could adversely affect our business and prevent us from fulfilling our obligations
under our senior notes.
We have and will continue to have a significant amount of debt. On December 31, 2004, we had
total debt of approximately $476.8 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 our Senior
Notes, the senior secured credit facility and our other debt, which will reduce the
availability of our cash flow to fund working capital, capital expenditures, research and
development expenditures and other business activities;
current and future debt under our senior secured credit facility will continue to be
secured;
increase our vulnerability to general adverse economic and industry conditions;
limit our flexibility in planning for, or reacting to, changes in our business and the
industry in which we operate;
restrict us from making strategic acquisitions or exploiting business opportunities;
make it more difficult for us to satisfy our obligations with respect to the senior notes
and our other debt;
place us at a competitive disadvantage compared to our competitors that have less
debt; and
limit, along with the financial and other restrictive covenants in our debt, among other
things, our ability to borrow additional funds, dispose of assets or pay cash dividends.
In addition, a substantial amount of our debt bears interest at variable rates. If market interest rates
increase, variable-rate debt will create higher debt service requirements, which would adversely affect
our financial position, results of operations or liquidity.
59
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.
Our business may not generate sufficient cash flow from operations and future borrowings may not be
available to us under our senior secured 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 may not 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 the indenture governing the senior
notes contains 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 restrictions on us that may affect our ability to successfully operate our
business and our ability to make payments on the senior notes.
The indenture governing our senior notes contains and/or the credit agreement governing our senior
secured credit facility contains covenants that, among other things, limit our ability to:
•
incur additional debt and issue preferred stock;
• pay dividends or make other restricted payments;
• make certain investments;
• create liens;
• allow restrictions on the ability of certain of our subsidiaries to pay dividends or make
other payments to us;
• sell assets;
• merge or consolidate with other entities; and
• enter into transactions with affiliates.
The senior secured credit facility also requires us to comply with specified financial ratios and tests,
including, but not limited to, minimum interest coverage ratio, maximum leverage ratio and maximum
annual capital expenditures.
These covenants could materially and adversely affect our ability to finance our future operations or
capital needs and to engage in other business activities that may be in our best interest.
All of these covenants may restrict our ability to expand or to pursue our business strategies. Our
ability to comply with these covenants may be affected by events beyond our control, such as
prevailing economic conditions and changes in regulations, and if such events occur, we cannot be
sure that we will be able to comply. A breach of these covenants could result in a default under the
indenture governing our senior notes and/or the senior secured credit facility. If there were an event
of default under the indenture for the senior notes and/or the senior secured credit facility, holders of
such defaulted debt could cause all amounts borrowed under these instruments to be due and
payable immediately. Additionally, if we fail to repay the debt under the senior secured credit facility
60
when it becomes due, the lenders under the senior secured credit facility could proceed against
certain of our assets and capital stock of our subsidiaries that we have pledged to them as security.
Our assets or cash flow may not be sufficient to repay borrowings under our outstanding debt
instruments in the event of a default thereunder.
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, 2004, our executive officers and directors and their affiliates owned
approximately 9.4% of our combined outstanding Class A and class B common stock, representing
approximately 25.9% 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.
Employees
We employed 1,345 persons as of January 31, 2005, and we are not party to union contracts with our
employees. We believe our future success will depend upon our continued ability to attract and retain
highly skilled and qualified employees. We believe that relations with our employees are satisfactory.
Other
No material portion of our businesses is subject to renegotiation of profits or termination of contracts
at the election of the federal government.
61
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
2004
59.0%
22.9%
6.7%
6.9%
3.0%
0.9%
0.6%
100.0%
2003
53.5%
24.9%
7.1%
7.9%
5.2%
0.9%
0.5%
100.0%
These properties are divided among our operating segments at December 31, 2004 as follows: long-
distance services, 49.7%; cable services, 24.3%; local access services, 9.1%; Internet services, 6.0%;
and all other, 10.9%.
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 7 to the “Notes to Consolidated Financial Statements” included in Part II of this Report for
more information.
Our construction in progress totaled $22.5 million at December 31, 2004, consisting of long-
distance, cable, local and Internet services, and support systems projects that were incomplete at
December 31, 2004. 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.
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
2004, we completed 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 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
62
lease of transponder capacity on the PanAmSat Galaxy IX satellite through the delivery of the
purchased transponders on Galaxy XR in March 2000. See “Part I — Item 1 — Business — Historical
Development of our Business During the Past Fiscal Year — Galaxy XR Satellite Propulsion System
Failure” for more information.
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,
2004, the Cable Systems consisted of approximately 2,300 miles of installed cable plant having
between 450 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 the communities served by our systems and for our principal executive offices.
We own the receiving and distribution equipment of each system. In order to keep pace with
technological advances, we are maintaining, periodically upgrading and rebuilding the physical
components of our cable communications systems. Such properties are in good condition. We own
all of our service vehicles. We consider our properties suitable and adequate for our present and
anticipated future needs.
Local Access Services. We operate a modern, competitive local access communications network
employing analog and the latest digital transmission technology based upon fiber optic facilities
within Anchorage, Fairbanks and Juneau, Alaska. Our outside plant consists of connecting lines
(aerial, underground and buried cable), the majority of which is on or under public roads, highways or
streets, while the remainder is on or under private property. Central office equipment primarily
consists of digital electronic switching equipment and circuit carrier transmission equipment.
Operating equipment consists of motor vehicles and other equipment.
Substantially all of our local access services’ central office equipment, administrative and business
offices, and customer service centers are in leased facilities. Such properties are in good condition.
We consider our properties suitable and adequate for our present and anticipated future needs.
Internet Services. We operate a modern, competitive Internet network employing the latest available
technology. We provide access to the Internet using a platform that includes many of the latest
advancements in technology. The physical platform is concentrated in Anchorage and is extended
into many remote areas of Alaska. Our Internet platform includes trunks connecting our Anchorage,
Fairbanks, and Juneau facilities to Internet access points in Seattle through multiple, diversely routed
upstream Internet networks, and various other routers, servers and support equipment.
63
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 $507.9 million at
January 1, 2000 to $745.3 million at December 31, 2004, 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 2000 through 2004 were as follows (in millions):
2000
2001
2002
2003
2004
$ 50.9
$ 65.6
$ 65.1
$ 62.5
$ 111.8
We project capital expenditures of $80 million to $85 million for 2005. We have made purchase
commitments totaling approximately $43 million at December 31, 2004. A majority of the
expenditures are expected to expand, enhance and modernize our current networks, facilities and
operating systems, and to develop other businesses.
During 2004, we funded our normal business capital requirements substantially through internal
sources and, to the extent necessary, from external financing sources. We expect expenditures for
2005 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
64
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. 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 2004 to a vote of security holders, through
the solicitation of proxies or otherwise.
65
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 System 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 System quotation system. Market price
data for Class B shares were obtained from reported Over-the-Counter market transactions. The
prices represent prices between dealers, do not include retail markups, markdowns, or commissions,
and do not necessarily represent actual transactions.
Class A
Class B
High
Low
High
Low
$
$
$
$
$
$
$
$
7.49
8.85
9.10
10.44
9.91
9.78
9.12
11.20
4.98
5.44
7.59
8.32
8.30
7.49
7.25
8.92
7.20
8.70
9.40
10.01
9.50
9.50
9.00
11.25
5.20
5.70
7.25
8.60
8.60
8.10
7.60
8.91
2003:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2004:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Holders
As of December 31, 2004 there were 1,962 holders of record of our Class A common stock and 423
holders of record of our Class B common stock (amounts do not include the number of shareholders
whose shares are held of record by brokers, but do include the brokerage house as one
shareholder).
Dividends
We have never paid cash dividends on our common stock and we have no present intention of doing
so. Payment of cash dividends in the future, if any, will be determined by our Board of Directors in
light of our earnings, financial condition and other relevant considerations. Our existing bank loan
agreements contain provisions that prohibit payment of dividends on common stock, other than
stock dividends (you should see note 7 to the “Consolidated Financial Statements” included in Part II
of this Report for more information).
Stock Transfer Agent and Registrar
Mellon Investor Services is our stock transfer agent and registrar.
66
Unregistered Sales of Equity Securities and Use of Proceeds
(a) Not applicable.
(b) Not applicable.
(c) Repurchase made in the quarter ended December 31, 2004.
Issuer Purchases of Equity Securities
(c) Total
Number of
Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs 1
(d) Maximum
Number (or
approximate Dollar
Value) of Shares
that May Yet Be
Purchased Under
the Plans or
Programs 2
(a) Total
Number of
Shares
Purchased
(b)
Average
Price Paid
per Share
137,600 3
$9.21
165,600
$8.479 million
---
---
---
---
3,852,090 4
$8.39
266,181
$7.425 million
Period
October 1,
2004 to
October 31,
2004
November 1,
2004 to
November 30,
2004
December 1,
2004 to
December 31,
2004
1 The repurchase plan was publicly announced on November 3, 2004. Our plan does not
have an expiration date, however transactions pursuant to the plan are subject to periodic
approval by our Board of Directors and must receive the consents of our lenders and
preferred shareholder. We expect to continue the repurchases throughout 2005 subject
to the availability of free cash flow, credit facilities, the price of our Class A and Class B
common stock and the requisite consents of our lenders and preferred shareholder. We
do not intend to terminate this plan in 2005. No plan has expired during the quarter
ended December 31, 2004.
2 The total amount approved for repurchase was $10.0 million.
3 Open-market purchases.
4 Consists of 3,751,509 shares at $8.33 per share purchased from MCI not pursuant to the
repurchase plan, and other private party purchases pursuant to the repurchase plan of
100,581 shares at an average price of $10.49 per share.
67
Item 6. Selected Financial Data
The following table presents selected historical information relating to financial condition and results
of operations over the past five years.
Revenues
Net 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
Years ended December 31,
2004
2000
2001
2002
2003
(Amounts in thousands except per share amounts)
$ 424,826 390,797 367,842 357,258 292,605
$ 38,715
26,160
12,322
8,659
(21,649)
$
---
(544)
---
---
---
Net income (loss)
$ 21,252
15,542
6,663
4,589
(13,234)
Basic net income (loss) per common share
Diluted net income (loss) per common
share
Total assets
Long-term debt, including current portion
Obligations under capital leases, including
$
$
0.35
0.24
0.08
0.05
(0.29)
0.34
0.24
0.08
0.05
(0.29)
$ 849,191 763,020 738,782 734,679 679,007
$ 437,137 345,000 357,700 351,700 334,400
current portion
$ 39,661
44,775
46,632
47,282
48,696
Redeemable preferred stock:
Series B
Series C
$
$
4,249
15,664
16,907
16,907
22,589
---
10,000
10,000
10,000
---
Total stockholders’ equity
$ 234,270 226,642 208,220 202,392 183,480
Dividends declared per common share
$
0.00
0.00
0.00
0.00
0.00
The Selected Financial Data should be read in conjunction with “Part II — Item 7 —
Management’s Discussion and Analysis of Financial Condition and Results of Operations.“
68
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
In the following discussion, General Communication, Inc. and its direct and indirect subsidiaries are
referred to as “we,” “us” and “our.”
Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses
our consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States 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 Goods Sold (exclusive of depreciation, amortization and accretion shown
separately) (“Cost of Goods Sold”) 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 strive to
consistently grow our revenues and expand our margins. We have historically met our cash needs
for operations, regular capital expenditures and maintenance capital expenditures through our cash
flows from operating activities. Historically, cash requirements for significant acquisitions and major
capital expenditures have been provided largely through our financing activities. We funded the
construction of a new fiber optic cable system through our operating cash flows and 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 segment
Cable services segment
Local access services segment
Internet services segment
All other
Total revenues
Year Ended December 31,
Percentage Change 1
2004
2003
2002
2004
vs.
2003
2003
vs.
2002
49.5%
23.9%
11.0%
6.1%
9.5%
52.3%
24.6%
10.0%
5.1%
8.0%
100.0% 100.0%
55.7%
24.1%
8.7%
4.3%
7.2%
100.0%
2.7%
5.7%
20.4%
30.9%
28.5%
8.7%
(0.2%)
8.2%
21.6%
27.3%
18.1%
6.2%
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Cost of goods sold
Selling, general and administrative
expenses
Bad debt expense (recovery)
Impairment charge
Depreciation, amortization and
accretion expense
Operating income
Net income before income taxes
and cumulative effect of a
change in accounting principle in
2003
Net income before cumulative
effect of a change in accounting
principle in 2003
Net income
Other Operating Data:
Long-distance services segment
operating income 2
Cable services segment operating
income 3
Local access services segment
operating loss 4
Internet services segment operating
income (loss) 5
__________________________
Year Ended December 31,
Percentage Change 1
2004
32.8%
2003
32.1%
2002
33.6%
2004
vs.
2003
11.3%
2003
vs.
2002
1.5%
34.7%
(0.3%)
0.0%
35.5%
0.0%
1.4%
35.1%
3.6%
0.0%
6.2%
(503.4%)
NM
7.5%
(101.4%)
NM
14.9%
17.9%
13.6%
17.4%
15.3%
12.4%
18.2%
11.4%
(5.3%)
48.9%
9.1%
6.7%
3.3%
48.0%
112.3%
5.0%
5.0%
4.1%
4.0%
3.3%
1.8%
32.1%
37.7%
141.4%
133.3%
44.4%
43.5%
34.7%
5.0%
25.3%
26.0%
26.0%
26.5%
5.8%
6.4%
(12.1%)
(15.8%)
(26.1%)
7.9%
26.4%
21.0%
8.2%
(10.5%) 236.6% 198.9%
1 Percentage change in underlying data.
2 Computed by dividing total external long-distance services segment operating income by total
external long-distance services segment revenues.
3 Computed by dividing total external cable services segment operating income by total external
cable services segment revenues.
4 Computed by dividing total external local access services segment operating loss by total external
local access services segment revenues.
5 Computed by dividing total external Internet services segment operating income (loss) by total
external Internet services segment revenues.
NM – Not meaningful.
__________________________
Year Ended December 31, 2004 (“2004”) Compared To Year Ended December 31, 2003 (“2003”)
Overview of Revenues and Cost of Goods Sold
Total revenues increased 8.7% from $390.8 million in 2003 to $424.8 million in 2004. All of our
segments and All Other Services contributed to the increase in total revenues. See the discussion
below for more information by segment.
Total Cost of Goods Sold increased 11.3% from $125.4 million in 2003 to $139.6 million in 2004. All
of our segments and All Other Services contributed to the increase in total Cost of Goods Sold. See
the discussion below for more information by segment.
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Long-Distance Services Segment Overview
Long-distance services segment revenue in 2004 represented 49.5% of consolidated revenues. Our
provision of interstate and intrastate long-distance services, private line and leased dedicated
capacity services, and broadband services accounted for 92.3% of our total long-distance services
segment revenues during 2004.
Factors that have the greatest impact on year-to-year changes in long-distance services segment
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.
On July 21, 2002 MCI and substantially all of its active United States subsidiaries, on a combined
basis a major customer, filed voluntary petitions for reorganization under Chapter 11 of the United
States Bankruptcy Code in the United States Bankruptcy Court. 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. MCI emerged from bankruptcy protection on April 20,
2004. The remaining pre-petition accounts receivable balance owed by MCI to us after this
settlement was $11.1 million (“MCI credit”) which we have used and will continue to use as a credit
against amounts payable for services purchased from MCI.
After settlement, we began reducing the MCI credit as we utilized it for services otherwise payable to
MCI. We have accounted for our use of the MCI credit as a gain contingency, and, accordingly, are
recognizing a reduction of bad debt expense as services are provided by MCI and the credit is
realized. During 2004 and 2003 we realized approximately $4.2 million and $2.8 million,
respectively, of the MCI credit against amounts payable for services received from MCI.
The remaining unused MCI credit totaled $3.7 million and $7.9 million at December 31, 2004 and
2003, respectively. The credit balance is not recorded on the Consolidated Balance Sheet as we are
recognizing recovery of bad debt expense as the credit is realized.
In February 2005 Verizon Communications, Inc. agreed to purchase MCI. The agreement requires
approval of shareholders and anti-trust regulators. Verizon has allowed MCI two weeks beginning in
early March 2005 to conduct additional talks with Quest Communications International, Inc., another
potential buyer. We are unable to predict the impact that a merger with or an acquisition of MCI will
have upon us in the long-term, however given the materiality of MCI’s 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.
The initial term of our contract to provide interstate and intrastate long-distance services to Sprint
ends in March 2007 with two one-year automatic extensions to March 2009. In June 2004 we
amended the original agreement resulting in new annual rate reductions beginning July 2004.
Contractual rate reductions will continue to occur annually through the end of the initial term of the
contract.
In December 2004 Sprint and Nextel Communications, Inc. announced a merger. The agreement
requires approval of shareholders and anti-trust regulators, as well as state utility commissions that
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license phone service. We are unable to predict the outcome this merger will have upon us in the
long-term.
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, 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, consistent with federal law. Additionally, disruption in
the economy resulting from terrorist attacks and other attacks or acts of war could affect our carrier
customers. We are unable to predict the effect on us of such changes, however given the materiality
of other common carrier revenues to us, a significant reduction in traffic or pricing could have a
material adverse effect on our financial position, results of operations and liquidity.
Long-distance Services Segment Revenues
Total long-distance services segment revenues increased 2.7% to $210.1 million in 2004. The
components of long-distance services segment revenues are as follows (amounts in thousands):
2004
2003
Percentage
Change
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
$
81,873
91,700
(10.7%)
39,045
42,885
30,173
16,159
$ 210,135
39,701
37,123
25,167
10,876
204,567
(1.7%)
15.5%
19.9%
48.6%
2.7%
Common Carrier Message Telephone Services Revenue
The 2004 decrease in message telephone service revenues from other common carriers (principally
MCI and Sprint) resulted 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 June
2004 amendment of our contract to provide interstate and intrastate long-distance services
to Sprint and in the July 2003 extension of our contract to provide interstate and intrastate
long-distance services to MCI,
(cid:130) A $708,000 credit given to a certain other common carrier customer in the fourth quarter of
2004 resulting from a rate per minute overcharge in 2004 and 2003, and
(cid:130) A $411,000 increase in 2004 as compared to 2003 in a discount given to a certain other
common carrier customer which started in the third quarter of 2003.
The decrease in message telephone service revenues from other common carriers in 2004 was
partially off-set by a 1.9% increase in wholesale minutes carried to 891.2 million minutes.
72
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 1
Number of active residential,
commercial and governmental
customers 2
2004
2003
305.9 million
284.3 million
$0.131
$0.138
Percentage
Change
7.6%
(5.1%)
91,300
85,600
6.7%
1 Residential, commercial and governmental message telephone services excluding
plan fees associated with the carriage of data services divided by the retail minutes
carried.
2 All current subscribers who have had calling activity during December 2004 and
2003, respectively.
The decrease in message telephone service revenues from residential, commercial, and
governmental customers in 2004 is primarily due to a decrease in the average rate per minute. Our
average rate per minute decrease is primarily due to our promotion of and customers' enrollment in
calling plans offering a certain number of minutes for a flat monthly fee.
The decrease in message telephone service to residential, commercial and governmental customers
in 2004 is partially off-set by the following:
(cid:130)
Increased minutes carried for these customers primarily due to our contract to provide
services to the State of Alaska starting in the first quarter of 2004, and
(cid:130) An increase in the number of active residential, commercial, and governmental customers
billed primarily due to our promotion of and our customers’ enrollment in a new bundled
offering to our residential customers, partially off-set by 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 2004 is primarily due to the
following:
(cid:130) An increased number of circuits leased to rural hospitals, health clinics, and rural school
districts to both existing and a new customer resulting in increased revenue of $2.2 million,
and
(cid:130) A $2.7 million increase in special project revenue for services sold to the federal government.
Fiber Optic Cable System Capacity Lease Revenue
The increase in revenues from the lease of fiber optic cable system capacity is primarily due to a
lease of capacity on the AULP East fiber optic cable system resulting in increased monthly revenue of
approximately $430,000 starting in July 2004.
Long-distance Services Segment Cost of Goods Sold
Long-distance services segment Cost of Goods Sold increased 1.4% to $54.1 million in 2004
primarily due to the following:
(cid:130) A 7.6% increase in retail minutes carried,
(cid:130) A 1.9% increase in wholesale minutes carried, and
73
(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 that did not
recur in 2004.
The increase in the long-distance services segment Cost of Goods Sold is partially off-set by the
following:
(cid:130)
In the course of business we estimate unbilled long-distance services Cost of Goods Sold
based upon minutes of use processed through our network and established rates. Such
estimates are revised when subsequent billings are received, payments are made, billing
matters are researched and resolved, tariffed billing periods lapse, or when disputed charges
are resolved. Our favorable adjustments decreased to $2.2 million in 2004 from $3.4
million in 2003.
(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 $.010 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.
Long-distance Services Segment Operating Income
Long-distance services segment operating income increased 5.0% to $93.4 million from 2003 to
2004 primarily due to the following:
(cid:130)
The 2.7% increase in long-distance services segment revenues to $210.1 million in 2004,
(cid:130) Realization of approximately $4.2 million of the MCI credit through a reduction to bad debt
expense in 2004, as further discussed in the “Long Distance Service Overview” above. We
realized approximately $2.8 million of the MCI credit through a reduction to bad debt
expense in 2003, and
In 2003, we reported an impairment charge of $5.4 million representing the remaining net
book value recorded for our North Pacific Cable asset as further described in the
“Impairment Charge” section below.
(cid:130)
The long-distance services segment operating income increase was partially off-set by the following:
(cid:130)
The 1.4% increase in long-distance services segment costs of goods sold to $54.1 million in
2004, as discussed above,
(cid:130) A 6.3% increase in long-distance services segment selling, general and administrative
expenses to $40.1 million primarily due to an approximately $1.0 million increase in fiber
repair expenses in 2004 compared to 2003. The increase in fiber repair expenses is the
result of the repair of AULP East in July 2004 with a total repair cost of approximately
$311,000 and the reversal of an accrual for estimated fiber repair costs of $700,000 in
2003, and
(cid:130) A 26.3% increase in long-distance services segment depreciation, amortization and accretion
expense to $25.5 million in 2004 as compared to 2003 primarily due to our investment in
long-distance services segment equipment and facilities placed into service during the year
ended December 31, 2003 for which a full year of depreciation was recorded in the year
ended December 31, 2004, and our investment in long-distance services segment
equipment and facilities placed into service during the year ended December 31, 2004 for
which a partial year of depreciation was recorded in the year ended December 31, 2004.
Cable Services Segment Overview
Cable services segment revenues in 2004 represented 23.9% of consolidated revenues. Our cable
systems serve 35 communities and areas in Alaska, including the state's four largest population
centers, Anchorage, Fairbanks, the Mat-Su Valley and Juneau. On February 1, 2005 we acquired all
74
of the assets of Barrow Cable TV, Inc. (“BCTV”) for approximately $1.6 million. We expect the BCTV
asset purchase to result in additional subscribers totaling approximately 950 and additional homes
passed totaling approximately 1,600.
We generate cable services segment 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 2004
programming services generated 72.6% of total cable services segment revenues, cable services’
allocable share of cable modem services accounted for 12.6% of such revenues, equipment rental
and installation fees accounted for 9.6% of such revenues, advertising sales accounted for 4.3% of
such revenues, and other services accounted for the remaining 0.9% of total cable services segment
revenues.
The primary factors that contribute to year-to-year changes in cable services segment revenues
include average monthly subscription rates and pay-per-view buys, the mix among basic, premium
and digital tier services, the average number of cable television and cable modem subscribers during
a given reporting period, set-top box utilization and related rates, revenues generated from new
product offerings, and sales of cable advertising services.
We distribute local Anchorage broadcaster signals 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 the third quarter of 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 Goods Sold
Selected key performance indicators for our cable services segment follow:
Basic subscribers
Digital programming tier
subscribers
Cable modem subscribers
Homes passed
December 31,
Percentage
2004
134,700
46,100
65,500
207,200
2003
134,400
34,900
46,000
202,200
Change
0.2%
32.1%
42.4%
2.5%
A basic cable subscriber is defined as one basic tier of service delivered to an address or separate
subunits thereof regardless of the number of outlets purchased. A digital programming tier
subscriber is defined as one digital programming tier of service delivered to an address or separate
subunits thereof regardless of the number of outlets purchased.
A cable modem subscriber is defined by the purchase of cable modem service regardless of the level
of service purchased. If one entity purchases multiple cable modem service access points, each
access point is counted as a subscriber.
Total cable services segment revenues increased 5.7% to $101.4 million and average gross revenue
per average basic subscriber per month increased $3.27 or 5.4% in 2004.
The increase in cable services segment revenues is primarily due to the following:
(cid:130) A 76.8% increase in digital set-top box rental revenue to $8.2 million in 2004 primarily
caused by the increased use of digital distribution technology,
75
(cid:130) A 17.1% increase in its share of cable modem revenue (offered through our Internet services
segment) to $12.8 million in 2004 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, and
(cid:130) A 33.1% increase in advertising sales revenue to $4.3 million in 2004 primarily caused by an
increase in Olympic and national and local political advertising.
Cable services segment Cost of Goods Sold increased 3.7% to $27.0 million in 2004 due to
programming cost increases for most of our cable programming service offerings. The increase in
Cable services segment Cost of Goods Sold is partially off-set by a refund received in 2004 from a
supplier retroactive to August 2003 and arrangements with suppliers in which we received rebates in
2004 upon us meeting specified goals.
Cable Services Segment Operating Income
Cable services segment operating income increased $1.4 million to $26.4 million from 2003 to 2004
primarily due to the 5.7% increase in cable services segment revenues to $101.4 million in 2004,
partially off-set by the following:
(cid:130)
The 3.7% increase in cable services segment Costs of Goods Sold to $27.0 million in 2004,
as described above,
(cid:130) A $999,000 increase in cable services segment selling, general and administrative expenses
to $28.1 million primarily due to a $408,000 increase in labor and employee benefits costs,
and
(cid:130) A 10.1% increase in cable services segment depreciation, amortization and accretion expense
to $19.0 million in 2004 as compared to 2003 primarily due to our investment in cable
services segment equipment and facilities placed into service during the year ended
December 31, 2003 for which a full year of depreciation was recorded in the year ended
December 31, 2004, and our investment in cable services segment equipment and facilities
placed into service during the year ended December 31, 2004 for which a partial year of
depreciation was recorded in the year ended December 31, 2004.
Multiple System Operator (“MSO”) Operating Statistics
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 segment’s facilities.
Our capital expenditures by standard reporting category for the year ended December 31, 2004 and
2003 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
$
2004
16,772
574
4,979
1,752
9,476
1,427
34,980
76,824
$ 111,804
2003
10,713
705
2,221
1,270
3,800
503
19,212
43,267
62,479
The standardized definition of a customer relationship is the number of customers that receive at
least one level of service utilizing our cable services segment’s facilities, encompassing voice, video,
76
and data services, without regard to which services customers purchase. At December, 2004 and
2003 we had 122,700 and 121,900 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, 2004 and 2003 we had 208,300 and 180,400 revenue generating units,
respectively.
Local Access Services Segment Overview
During 2004 local access services segment revenues represented 11.0% of consolidated revenues.
We generate local access services segment 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.
The primary factors that contribute to year-to-year changes in local access services segment
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, 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. in Anchorage for
residential services. 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.
At December 31, 2004, 112,100 lines were in service as compared to approximately 106,100 lines
in service at December 31, 2003. We estimate that our 2004 lines in service represents a statewide
market share of approximately 24%. A line in service is defined as a revenue generating circuit or
channel connecting a customer to the public switched telephone network.
Our access line mix at December 31, 2004 follows:
(cid:130) Residential lines represent approximately 60% of our lines,
(cid:130) Business customers represent approximately 35% of our lines, and
(cid:130)
Internet access customers represent approximately 5% of our lines.
In April 2004 we successfully launched our DLPS deployment utilizing our Anchorage coaxial cable
facilities. This service delivery method allows us to utilize our own cable facilities to provide local
access service to our customers and avoid paying local loop charges to the ILEC. To ensure the
necessary equipment is available to us, we have committed to purchase a certain number of outdoor,
network powered multi-media adapters. At December 31, 2004 we had approximately 8,000 DLPS
lines in service. We plan to continue to deploy additional DLPS lines during the year ended December
31, 2005.
Approximately 85% of our lines are provided on our own facilities and leased local loops.
Approximately 6% of our lines are provided using the UNE platform delivery method.
In January 2005 we applied to the RCA to expand our existing certification for the provision of
competitive local service. We requested to provide service in competition with the existing service
provider in five service areas which include the communities of Ketchikan, Cordova, Chitina,
Glenallen, McCarthy, Mentasta, Tatitlek, Valdez, Delta Junction, Homer, Kenai, Kodiak, Soldotna,
Nenana, North Pole, and the area from Eagle River to Healy. In addition, we have requested approval
77
to offer local service in six areas covered by our cable facilities only which include the communities of
Wrangell, Petersburg, Sitka, Seward, Bethel, and Nome.
We plan to offer service in these new areas using a combination of methods. To a large extent, we
plan to use our existing cable network to deliver local services. Where we do not have cable plant, we
may use wireless technologies and resale of other carrier’s services. We may lease portions of an
existing carrier’s network or seek wholesale discounts, but our application is not dependent upon
access to either unbundled network elements of the ILEC’s network or wholesale discount rates
for resale of ILEC services. We have requested the RCA decide this application within at least six
months.
On June 25, 2004 the RCA issued an order in our arbitration with ACS to revise the rates, terms, and
conditions that govern access to UNEs in the Anchorage market. The RCA's ruling set rates for
numerous elements of ACS' network, the most significant being the lease rate for local loops. The
order initially increased the loop rate from $14.92 to $19.15 per loop per month. We immediately
filed a petition for reconsideration with the RCA to correct computational errors and raise other
issues. On August 20, 2004, the RCA ruled on the petition and retroactively lowered the loop rate to
$18.64 per month. We estimate the ruling, absent other measures would increase our local access
services segment Cost of Goods Sold by as much as approximately $4.0 million during the year ended
December 31, 2005. In January 2005 we appealed the RCA ruling to the Federal Circuit
Court arguing that the pricing and methodology used by ACS and approved by the RCA was flawed
and in violation of federal law. We cannot predict at this time the outcome of the petition for
reconsideration or the lawsuit.
In December 2003 we distributed our new Anchorage phone directory and began recognizing
revenue and Cost of Goods Sold in the local access services segment. We recognized one month of
revenue and Cost of Goods Sold in the fourth quarter of 2003 and the remaining eleven months of
revenue and Cost of Goods Sold were recognized in 2004. In December 2004 we distributed a
second Anchorage phone directory and are using the same recognition method for revenue and Cost
of Goods Sold.
In October 2004 we completed distribution of our new Fairbanks and Juneau area directories. We
recognized three months of revenue and Cost of Goods Sold in 2004 and will recognize the
remaining nine months of revenue and Cost of Goods Sold in 2005.
Local Access Services Segment Revenues and Cost of Goods Sold
Local access services segment revenues increased 20.4% in 2004 to $47.0 million primarily due to
the following:
(cid:130) Growth in the number of lines in service from 106,100 to 112,100,
(cid:130) $1.5 million increase to $4.1 million in support from the Universal Service Program, and
(cid:130) $2.0 million increase in revenues to $2.2 million from our phone directories.
The increase in local access services segment revenues is partially off-set by access rate decreases.
Local access services segment Cost of Goods Sold increased 22.4% to $29.1 million in 2004
primarily due to the growth in the average number of lines in service and the increased costs
resulting from the RCA’s Anchorage UNE arbitration settlement order in June 2004 discussed above.
Local Access Services Segment Operating Loss
Local access services segment operating loss decreased 7.9% to ($5.7) million from 2003 to 2004
primarily due to the 20.4% revenue increase to $47.0 million partially off-set by the following:
(cid:130)
The 22.4% increase in Cost of Goods Sold to $29.1 million,
78
(cid:130) A $598,000 increase in local services segment selling, general and administrative expenses
to $18.3 million, and
(cid:130) A 39.1% increase in local services segment depreciation, amortization and accretion expense
to $4.9 million in 2004 as compared to 2003 primarily due to our investment in local access
services segment equipment and facilities placed into service during the year ended
December 31, 2003 for which a full year of depreciation was recorded in the year ended
December 31, 2004, and our investment in local access services segment equipment and
facilities placed into service during the year ended December 31, 2004 for which a partial
year of depreciation was recorded in the year ended December 31, 2004.
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 loss would have improved by approximately
$7.1 million and the long distance services segment operating income would have been reduced by
an equal amount in 2004. Avoided access charges totaled approximately $6.9 million in 2003. The
amount of allocated access cost savings is affected by access rate decreases from 2003 to 2004.
Internet Services Segment Overview
During 2004 Internet services segment revenues represented 6.1% of consolidated revenues. We
generate Internet services segment 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 segment’s allocable share of cable modem revenue
(a portion of cable modem revenue is also recognized by our cable services segment).
The primary factors that contribute to year-to-year changes in Internet services segment 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 various combinations of our
long-distance, cable, and local access services segments’ offerings and provide free or discounted
basic or premium Internet services. Value-added premium Internet features are available for
additional charges.
We compete with a number of Internet service providers in our markets. We believe our approach to
developing, pricing, and providing Internet services allows us to be competitive in providing those
services.
Internet Services Segment Revenues and Cost of Goods Sold
Selected key performance indicators for our Internet services segment follow:
Total Internet subscribers
Cable modem subscribers
Dial-up subscribers
December 31,
Percentage
2004
101,600
65,500
36,100
2003
95,700
46,000
49,600
Change
6.2%
42.4%
(27.2%)
Total Internet subscribers are defined by the purchase of Internet access service regardless of the
level of service purchased. If one entity purchases multiple Internet access service points, that entity
is included in our total Internet subscriber count at a rate equal to the number of access points
purchased. A subscriber with both cable modem and dial-up service is included once as a cable
modem subscriber.
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A dial-up subscriber is defined by the purchase of dial-up Internet service regardless of the level of
service purchased. If one entity purchases multiple dial-up service access points, each access point
is counted as a subscriber.
Total Internet services segment revenues increased 30.9% to $26.0 million in 2004 primarily due to
the 26.1% increase in its allocable share of cable modem revenues to $11.4 million in 2004 as
compared to 2003. The increase in cable modem revenues is primarily due to growth in cable
modem subscribers.
Internet services Cost of Goods Sold increased 19.3% to $7.0 million in 2004 associated with
increased Internet services segment revenues.
Internet Services Segment Operating Income
Internet services segment operating income increased 236.7% to $5.5 million from 2003 to 2004
primarily due to the 30.9% increase in Internet services segment revenues to $26.0 million in 2004
partially off-set by the 19.3% increase in Internet services segment Cost of Goods Sold to $7.0
million in 2004, and a $788,000 increase in selling, general and administrative expenses to $9.4
million. The increase in selling, general and administrative expenses is due to an approximately
$771,000 increase in labor and employee benefits costs.
All Other Overview
Revenues reported in the All Other category as described in note 12 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 9.5% of total revenues in 2004.
All Other Revenues and Cost of Goods Sold
All Other revenues increased 28.5% to $40.3 million in 2004. The increase is primarily due to the
following:
(cid:130) $4.8 million in special project revenue earned from our fiber system that transits the Trans
(cid:130)
Alaska oil pipeline corridor in 2004,
Increased monthly revenue earned from our fiber system that transits the Trans Alaska oil
pipeline corridor,
(cid:130) Revenue generated from our contract to provide services to the State of Alaska starting in the
first quarter of 2004, and
(cid:130) Special project revenue for services sold to the State of Alaska.
The increase described above is partially off-set by a $685,000 decrease in product sales revenue to
$2.2 million in 2004. The decrease is due to sales of product to two customers in 2003 that were
not repeated in 2004.
All Other Cost of Goods Sold increased 36.5% to $22.4 million in 2004. The increase in All Other
Cost of Goods Sold is primarily due to a $5.7 million increase to $5.8 million in costs associated with
special project revenue earned from our fiber system that transits the Trans Alaska oil pipeline
corridor in 2004, costs associated with increased monthly revenue earned from our recurring service
contracts in 2004, and costs associated with the special project revenue described above.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 6.2% to $147.4 million in 2004 primarily due
to the following:
(cid:130) A $7.1 million increase in labor and health insurance costs,
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(cid:130) A $4.6 million increase in contract labor and contract services expenses associated with our
Sarbanes-Oxley Act of 2002 (“SOX”) Section 404 compliance efforts and other special
projects,
(cid:130) A $1.2 million write-off of previously capitalized mobile wireless network costs upon
finalization of a long-term distribution agreement, and
(cid:130) A $1.0 million increase in fiber repair expenses in 2004 and compared to 2003. The
increase in fiber repair expenses is the result of the repair of AULP East in July 2004 with a
total repair cost of approximately $311,000 and the reversal of an accrual for estimated
fiber repair costs of $700,000 in 2003.
The increases previously described are partially off-set by a $4.1 million decrease in our company-
wide success sharing bonus accrual. As a percentage of total revenues, selling, general and
administrative expenses decreased to 34.7% in 2004 from 35.5% in 2003, primarily due to an
increase in revenues without a corresponding increase in selling, general and administrative
expenses.
Bad Debt Recovery
Bad debt recovery increased $896,000 to a net recovery of $1.1 million in 2004. The 2004
increase is primarily due to realization of approximately $4.2 million of the MCI credit through a
reduction to bad debt expense in 2004, as further discussed in the “Long Distance Service
Overview” above. We realized approximately $2.8 million of the MCI credit through a reduction to
bad debt expense in 2003.
Impairment Charge
In 2003, we reported an impairment charge of $5.4 million in our long-distance services segment
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 owned 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 were relieved of all future obligations required by our purchase agreement and
ceased 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 AULP West fiber optic
cable system we built was put into service in June 2004 and provides us with route diversity and
redundancy in excess of that previously provided by the North Pacific Cable.
Depreciation, Amortization and Accretion Expense
Depreciation, amortization and accretion expense increased 18.2% to $63.1 million in 2004. The
increase is primarily attributed to our $45.8 million investment in equipment and facilities placed
into service during 2003 for which a full year of depreciation was recorded in 2004, and the $122.9
million investment in equipment and facilities placed into service during 2004 for which a partial
year of depreciation was recorded in 2004.
Other Expense, Net
Other expense, net of other income, decreased 11.4% to $37.1 million in 2004 primarily due to a
$7.9 million decrease in interest expense in 2004 on our new Senior Credit Facility due to a
decrease in the average outstanding balance owed on our new Senior Credit Facility and a
decreased average new Senior Credit Facility interest rate as compared to 2003.
Partially offsetting the decreases described above were the following:
In 2004 we paid bond call premiums totaling $6.1 million to redeem our old Senior Notes,
(cid:130)
(cid:130) As a result of redeeming our old Senior Notes in 2004 we recognized $2.3 million in
unamortized old Senior Notes fee expense, and
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(cid:130) A $1.6 million increase in interest expense on our new Senior Notes due to an increase in the
outstanding balance owed, partially off-set by a decreased interest rate in 2004 as compared
to 2003.
Income Tax Expense
Income tax expense was $17.5 million in 2004 and $10.1 million in 2003. The change was due to
increased net income before income taxes in 2004 as compared to 2003 and an approximately $3.1
million increase in income tax expense resulting from a true-up of the deferred tax assets and
liabilities associated primarily with fixed assets and net operating loss carryforwards. Our effective
income tax rate increased from 38.5% in 2003 to 45.1% in 2004 due to an adjustment of deferred
tax assets and liabilities in 2004.
At December 31, 2004, we have (1) tax net operating loss carryforwards of approximately $175.6
million that will begin expiring in 2007 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. We utilized net operating loss carryforwards of approximately $11.3 million during the year
ended December 31, 2004. 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 annual income tax rate for financial statement purposes
will be 42% to 44% in 2005.
On October 22, 2004 the American Jobs Creation Act of 2004 was signed into law. We believe this
new law will not have a material effect on our results of operations, financial position and cash flows.
Cumulative Effect of a Change in Accounting Principle
On January 1, 2003 we adopted Statement of Financial Accounting Standard (“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, 2003 (“2003”) Compared To Year Ended December 31, 2002 (“2002”)
Overview of Revenues and Cost of Goods Sold
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 goods sold increased 1.5% from $123.6 million in 2002 to $125.4 million in 2003. The
cable services, local access services and Internet services segments and All Other Services
contributed to the increase in total cost of goods sold, partially off-set by decreased cost of goods sold
in the long-distance services segment. See the discussion below for more information by segment.
Long-Distance Services Segment Overview
Long-distance services segment revenue in 2003 represented 52.3% of consolidated revenues. Our
provision of interstate and intrastate long-distance services, Private Line and leased dedicated
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capacity services, and broadband services accounted for 94.7% of our total long-distance services
segment revenues during 2003.
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
$
39,701
37,123
25,167
10,876
$ 204,567
2002
95,947
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.
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
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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 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 Goods Sold
Long-distance services segment cost of goods sold decreased 11.1% to $53.4 million 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 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.
The decrease in the long-distance services segment cost of goods sold is partially off-set by increased
costs associated with additional transponder and network back-up capacity in 2003 as compared to
2002.
Long-distance Services Segment Operating Income
Long-distance services segment operating income increased 20.3% to $89.0 million from 2002 to
2003 primarily due to the following:
(cid:130)
The 11.1% decrease in long-distance services segment cost of goods sold to $53.4 million in
2003,
(cid:130) An increase of 108.9% to a net bad debt recovery of $1.1 million in 2003 due to realization
of approximately $2.8 million of the MCI credit through a reduction to bad debt expense in
2003, as further discussed in the “Long Distance Service Overview” above. We recognized
bad debt expense of approximately $11.0 million due to the MCI bankruptcy in 2002, and
(cid:130) A 8.8% decrease in long-distance services segment depreciation, amortization and accretion
expense to $20.2 million in 2003 as compared to 2002 primarily due to a 2003 reduction of
$1.3 million in depreciation expense associated with a portion of the 2002 Kanas Telecom,
Inc. acquisition included in the long-distance services segment partially off-set by our
investment in long-distance services segment equipment and facilities placed into service
during the year ended December 31, 2003 for which a full year of depreciation was recorded
in the year ended December 31, 2004, and our investment in long-distance services
segment equipment and facilities placed into service during the year ended December 31,
2004 for which a partial year of depreciation was recorded in the year ended December 31,
2004.
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The long-distance services segment operating income increase was partially off-set by the following:
(cid:130)
(cid:130)
The 0.2% decrease in long-distance services segment revenue to $204.6 million in 2003, as
discussed above,
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 as further described in the
“Impairment Charge” section below, and
(cid:130) A 3.6% increase in long-distance services segment selling, general and administrative
expenses to $37.7 million primarily due to an increase of approximately $1.8 for labor and
employee benefit costs and the reversal of an accrual for estimated fiber repair costs
$700,000 in 2003.
Cable Services Segment Overview
Cable television revenues in 2003 represented 24.6% of consolidated revenues. During 2003
programming services generated 76.3% of total cable services segment 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 segment
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.
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 broadcaster
signals 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 Goods Sold
Selected key performance indicators for our cable services segment follow:
Basic subscribers
Digital programming tier
subscribers
Cable modem subscribers
Homes passed
2003
134,400
2002
136,100
Change
(1.2%)
Percentage
34,900
46,000
202,200
30,500
36,200
196,900
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.
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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 36.6% to $10.9 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 able to subscribe to cable modem service.
At December 31, 2003 we offered digital programming service in Anchorage, the Mat-Su Valley,
Fairbanks, Juneau, Ketchikan, Kenai, and Soldotna, representing approximately 89% of our total
homes passed. We launched digital programming services in the Mat-Su Valley and Ketchikan cable
systems in 2003.
Cable services cost of goods sold increased 9.9% to $26.0 million in 2003 due to programming cost
increases for most of our cable programming services offerings.
Cable Services Segment Operating Income
Cable services segment operating income increased $1.5 million to $25.0 million from 2002 to 2003
primarily due to the 8.2% increase in cable services segment revenues to $96.0 million in 2003,
partially off-set by the following:
(cid:130)
The 9.9% increase in cable services segment Costs of Goods Sold to $26.0 million in 2003,
as described above,
(cid:130) A $1.8 million increase in cable services segment selling, general and administrative
expenses to $27.1 million primarily due to an increase of approximately $913,000 in labor
and employee benefits costs and an increase of approximately $981,000 in promotion
expenses, and
(cid:130) A 8.9% increase in cable services segment depreciation, amortization and accretion expense
to $17.3 million in 2003 as compared to 2002 primarily due to our investment in cable
services segment equipment and facilities placed into service during the year ended
December 31, 2002 for which a full year of depreciation was recorded in the year ended
December 31, 2003, and our investment in cable services segment equipment and facilities
placed into service during the year ended December 31, 2003 for which a partial year of
depreciation was recorded in the year ended December 31, 2003.
MSO Operating Statistics
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.
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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
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 Segment Overview
During 2003 local access services segment revenues represented 10.0% of consolidated revenues.
We began providing service in the Juneau market in the first quarter of 2002.
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 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.
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Local Access Services Segment Revenues and Cost of Goods Sold
Local access services segment revenues increased 21.6% in 2003 to $39.0 million primarily due to
the following:
(cid:130) Growth in the 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 benefited 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 goods sold increased 17.6% to $23.8 million in 2003
primarily due to the growth in the average number of lines in service.
Local Access Services Segment Operating Loss
Local access services segment operating loss decreased 26.4% to ($6.2) million from 2002 to 2003
primarily due to the 21.6% revenue increase to $39.0 million partially off-set by the following:
The 17.6% increase in Cost of Goods Sold to $23.8 million, and
(cid:130)
(cid:130) A $1.1 million increase in local services segment selling, general and administrative
expenses to $17.7 million primarily due to an approximately $591,000 increase in costs
associated with State of Alaska regulatory affairs.
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 in 2003 were affected by our evaluation and
testing of digital local phone service and Internet protocol-based technology to deliver phone service
through our cable facilities.
Internet Services Segment Overview
During 2003 Internet services segment revenues represented 5.1% of consolidated revenues.
Internet Services Segment Revenues and Cost of Goods Sold
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.
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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 goods sold increased 22.3% to $5.9 million in 2003 primarily due to the
increased number of cable modems deployed.
Internet Services Segment Operating Income
Internet services segment operating income increased 198.9% to $1.6 million from 2002 to 2003
primarily due to the 27.3% increase in Internet services segment revenues to $19.8 million in 2003
partially off-set by the 22.3% increase in Internet services segment Cost of Goods Sold to $5.9
million in 2003.
All Other Services Overview
Revenues included in the All Other category represented 8.0% of total revenues in 2003.
All Other Revenues and Cost of Goods Sold
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 in 2003 as compared to 2002 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.
All Other costs of sales and services increased 10.3% to $16.4 million in 2003 primarily due to
increased costs associated with the increased monthly revenue from our GCI fiber system.
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.
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, and
(cid:130) Provision in 2002 of a $11.0 million bad debt reserve for uncollected amounts due from MCI.
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
89
from Alaska and the Lower 48 States. The section of the North Pacific Cable in which we owned
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. Our AULP West
fiber optic cable system provides us with route diversity and redundancy in excess of that previously
provided by the North Pacific Cable.
Depreciation, Amortization and Accretion Expense
Depreciation, amortization and accretion expense decreased 5.3% 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.
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) 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 November 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)
(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.
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.
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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, 2004 and 2003 (amounts in thousands, except per share amounts):
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Total
Year
2004
$ 108,916 103,786 106,622 105,502 424,826
Total revenues
$ 19,406 19,210
Operating income
75,864
Net income
$
21,252
7,725
Basic net income per common share $
0.35
0.13
Diluted net income per common
21,406 15,842
2,307
0.04
9,295
0.15
1,925
0.03
share
$
0.02
0.13
0.15
0.04
0.34
2003
Total revenues
Operating income
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
$ 92,777 95,939
$ 15,438 17,972
98,327 103,754 390,797
17,595 17,072 68,077
$
$
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
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 2004 and 2003:
(cid:130)
(cid:130)
(cid:130)
(cid:130)
In the first, second, third and fourth quarters of 2004 we recognized approximately $1.2 million,
$1.1 million, $1.1 million and $824,000, respectively, in recoveries of bad debt expense for
uncollected accounts due from MCI. In the first and second quarters of 2003 we recognized no
recoveries of 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,
In the fourth quarter of 2004 we recognized an approximately $3.1 million increase in income
tax expense resulting from a true-up of the deferred tax assets and liabilities associated
primarily with fixed assets and net operating loss carryforwards,
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, and
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 as a
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substantial modification of the April 22, 2003 amended Senior Credit Facility.
Liquidity and Capital Resources
Cash flows from operating activities totaled $98.8 million in 2004 as compared to $85.7 million in
2003. The 2004 increase is primarily due to increased cash flow from all of our reportable segments
and a $1.4 million increase in the MCI credit recovery, as further discussed in the “Long Distance
Service Overview” above, partially off-set by decreased cash flow from All Other Services, a $4.3
million payment of our company-wide success sharing bonus in 2004, and a $2.3 million refund in
2003 from a local exchange carrier in respect of its earnings that exceeded regulatory requirements.
Other sources of cash during 2004 include $315.7 million from the issuance of our new Senior
Notes, draws of $20.0 million under the revolving credit portion of our new Senior Credit Facility, $6.2
million from the issuance of our Class A common stock, and $3.9 million in payments of notes
receivable from related parties. Uses of cash during 2004 included expenditures of $111.8 million
for property and equipment, including construction in progress, the $180.0 million repayment of our
old Senior Notes, the $63.8 million repayment of the term and revolving credit portions of our new
Senior Credit Facility, the purchase of $33.6 million of common stock to be retired and to be held in
treasury for general corporate purposes, the redemption of $10.0 million of preferred stock Series C,
payment of $8.3 million in fees associated with the new Senior Notes and new Senior Credit Facility,
payment of bond call premiums totaling $6.1 million to redeem our old Senior Notes, and repayment
of $5.1 million in capital lease obligations.
Net receivables increased $3.8 million from December 31, 2003 to December 31, 2004 primarily
due to an increase in trade receivables for broadband services provided to hospitals and health
clinics and private line and private network services.
Working capital totaled $49.0 million at December 31, 2004, a $40.9 million increase as compared
to $8.1 million at December 31, 2003. The increase is primarily due to the $18.8 million in cash
proceeds from our $70.0 million bond issuance in December 2004, an $8.3 million current deferred
tax asset for the net operating loss carryforward we expect to utilize during the year ended December
31, 2005, a $4.1 million decrease in accrued payroll primarily due to a decreased accrual for
company-wide success sharing bonus costs, and a $7.0 million decrease in accrued capital
expenditures related to AULP West. The $7.0 million payment was funded by a $10.0 million draw
under the revolving credit portion of our new Senior Credit Facility in January 2004. The $10.0 million
draw under the revolving credit portion of our new Senior Credit Facility was repaid in February 2004
with proceeds from the $250.0 million bond issuance described below.
In February 2004 GCI’s wholly owned subsidiary GCI, Inc. sold $250.0 million in aggregate principal
amount of senior unsecured debt securities due in 2014 (“February Senior Notes”). In December
2004 GCI, Inc. sold $70.0 million in aggregate principal amount of senior unsecured debt securities
due in 2014 (“December Senior Notes”). The February and December Senior Notes are treated as a
single class (“new Senior Notes”).
February Senior Notes
The February Senior Notes were sold at a discount of $4.3 million. The February Senior Notes are
carried on our Consolidated Balance Sheet net of the unamortized portion of the discount, which is
being amortized to Interest Expense over the 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 original Senior Credit Facility. In connection with the issuance, we paid fees
and other expenses of approximately $6.5 million that are being amortized over the life of the new
Senior Notes.
92
The February Senior Notes were offered only to qualified institutional buyers pursuant to exemptions
from registration under the Securities Act. On July 7, 2004, GCI, Inc. commenced an offer to
exchange the privately issued February Senior Notes for a like amount of February Senior Notes that
have been registered under the Securities Act and have otherwise identical terms to the privately
issued original Senior Notes (except for provisions relating to GCI, Inc.'s obligations to consummate
the exchange offer). The exchange offer closing occurred on August 11, 2004, at which time all
$250.0 million in aggregate principal amount of the privately issued February Senior
Notes were tendered and exchanged for the February Senior Notes that have been registered under
the Securities Act.
December Senior Notes
The December Senior Notes were sold at face value.
The net proceeds of the offering were primarily used to repurchase 3,751,509 of our Class A common
shares at $8.33 per share and $10.0 million of our Series C preferred stock from MCI. The aggregate
amount of the equity repurchase totaled $41.3 million. In addition we used the proceeds to repay
$10.0 million of the revolving portion of our new Senior Credit Facility. In connection with the
issuance, we paid fees and other expenses of approximately $1.6 million that are being amortized
over the life of the new Senior Notes.
The December Senior Notes were offered only to qualified institutional buyers pursuant to Rule 144A
and non-United States persons pursuant to Regulation S. The December 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. Beginning April 6, 2005, we plan to commence an
offer to exchange the privately issued December Senior Notes that have been registered under the
Securities Act and have otherwise identical terms to the privately issued original Senior Notes (except
for provisions relating to GCI Inc.’s obligations to consummate the exchange offer).
New Senior Notes
We pay interest of 7.25% on the new Senior Notes.
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.
93
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 conducted 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 was redeemed on March 18, 2004 for additional
consideration as follows:
(cid:130) $2.1 million based upon a payment of $1,032.50 per $1,000 principal amount, and
(cid:130) $833,000 in accrued and unpaid interest through March 18, 2004.
The total redemption cost was $186.1 million. The premium to redeem our old Senior Notes was
$6.1 million (excluding interest cost of $1.3 million) and was recognized as a loss on early
extinguishment of debt, a component of Other Income (Expense), during the year ended December
31, 2004.
Compliance with the redemption notice requirements in the Indenture resulted in a delay before final
payment of some of the old Senior Notes. As a result of such delay, our total debt increased during
the overlap period between the redemption of the old Senior Notes and the issuance of the February
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 received a waiver from compliance with
Section 6.11 until April 30, 2004. After the final redemption payment on March 18, 2004 we were in
compliance with Section 6.11.
A semi-annual interest payment of approximately $9.0 million was paid in August 2004. We will
make semi-annual interest payments of $11.6 million in February and August 2005.
We were in compliance with all loan covenants at December 31, 2004.
New Senior Credit Facility
In 2004 we drew the following amounts under the revolving credit portion of our new Senior Credit
Facility (amounts in millions):
January 2004
May 2004
August 2004
$ 10.0
5.0
5.0
$ 20.0
94
Our ability to draw down on the revolving 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 February 2004 we used a portion of the proceeds
from the issuance of our February Senior Notes to repay approximately $43.8 million of the term
portion and $10.0 million of the revolving portion of our new Senior Credit Facility. In December
2004 we used a portion of the proceeds from the issuance of our December Senior Notes to repay
approximately $10.0 million of the revolving portion of our new Senior Credit Facility.
On May 21, 2004 we amended our $220.0 million new Senior Credit Facility. The amendment
reduced the interest rate on the $170.0 million term portion of the credit facility from LIBOR plus
3.25% to LIBOR plus 2.25%. The amendment reduced the interest rate on the $50.0 million revolving
portion of the credit facility from LIBOR plus 3.25% to LIBOR plus a margin dependent upon our Total
Leverage Ratio (as defined) as follows:
Total Leverage
Ratio (as defined)
>3.75
>3.25 but <3.75
>2.75 but <3.25
< 2.75
LIBOR Plus:
2.50%
2.25%
2.00%
1.75%
The commitment fee we are required to pay on the unused portion of the commitment was amended
as follows:
Total Leverage
Ratio (as defined)
>3.75
>2.75 but <3.75
< 2.75
Commitment Fee
0.625%
0.50%
0.375%
Under certain circumstances the amendment allows for an increase in the term and revolving
commitments not to exceed an aggregate commitment increase of $50.0 million. Any additional term
and revolving credit facility commitments are payable in full on October 31, 2007.
In connection with the May 21, 2004 amended Senior Credit Facility, we paid bank fees and other
expenses of approximately $215,000 during the year ended December 31, 2004.
On November 17, 2004 we amended our $220.0 million new Senior Credit Facility. The amendment
allows us to repurchase up to $10.0 million of our common stock each year and to complete the
repurchase of 3,751,509 of our Class A common shares and $10.0 million of our Series C preferred
stock from MCI as described below.
The November 2004 amendment reduced our leverage ratios for certain periods as follows:
Period
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 final maturity date
Total Leverage Ratio
4.25:1
4.00:1
3.75:1
3.50:1
3.25:1
3.00:1
The November amendment also increased our allowable capital expenditures during the year ended
December 31, 2004 by the $18.8 million net proceeds from the December Senior Notes.
95
In connection with the November 17, 2004 amended Senior Credit Facility, we paid bank fees and
other expenses of approximately $129,000 during the year ended December 31, 2004.
The term loan is fully drawn and we have letters of credit totaling $4.7 million, which left $45.3
million available at December 31, 2004 to draw under the revolving credit facility if needed. Our
ability to draw down the revolving 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.
We are required to pay down $168,000 in term loan principal on our new Senior Credit Facility by
December 31, 2005. The new Senior Credit Facility is due October 31, 2007.
We were in compliance with all loan covenants at December 31, 2004.
Our expenditures for property and equipment, including construction in progress, totaled $111.8
million and $62.5 million during 2004 and 2003, 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 2005 expenditures for
property and equipment for our core operations, including construction in progress, to total $80.0
million to $85.0 million, depending on available opportunities and the amount of cash flow we
generate during 2005.
In June 2004 we placed into service our AULP West fiber optic cable system connecting Seward,
Alaska and Warrenton, Oregon, with leased backhaul facilities connecting 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. The cable
complements our existing fiber optic cable system between Whittier, Alaska and Seattle, Washington.
The two cables provide physically diverse backup to each other in the event of an outage. During
2004 our capital expenditures for this project have totaled approximately $32.2 million, and from
inception have totaled $50.3 million, most of which have 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 deployment of DLPS, and upgrades to and expansions of our
cable television plant.
In April 2004 we successfully launched our DLPS service delivery method. 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, 2004 of $13.5 million of which approximately $5.5 million and $8.0
million will be paid during the years ended December 31, 2005 and 2006, respectively.
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 was amended in October 2004.
The agreement as amended requires the purchase of Alaska Airlines miles during the year ended
December 31, 2004 and in future years. The agreement has a remaining commitment at December
31, 2004 totaling $13.9 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
96
utility to MCI. See “Long Distance Services Overview” for a discussion of the settlement of the
uncollected amounts due from MCI.
In December 2004 Sprint and Nextel Communications, Inc. announced a merger. The agreement
requires approval of shareholders and anti-trust regulators, as well as state utility commissions that
license phone service. We are unable to predict the outcome this merger will have on us in the long-
term.
In February 2005 Verizon Communications, Inc. agreed to purchase MCI. The agreement requires
approval of shareholders and anti-trust regulators. We are unable to predict the outcome this merger
will have on us in the long-term, however given the materiality of MCI’s 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.
A migration of MCI’s or Sprint’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 $592,000 and $484,000 on
April 30, 2004 and October 31, 2004, respectively. Our next Series B preferred stock dividend is due
April 30, 2005. Redemption is required on April 30, 2011.
In January 2004, 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. In August 2004, 3,328
shares of our Series B preferred stock was converted to 599,640 shares of our Class A common
stock at the stated conversion price of $5.55 per share. In November 2004, 4,995 shares of our
Series B preferred stock was converted to 900,000 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.
GCI’s board of directors has authorized a common stock buyback program for the repurchase of our
Class A and Class B common stock. Our Board of Directors authorized us and we obtained
permission from our lenders and preferred shareholder to repurchase up to $5.0 million per quarter
during the third and fourth quarters of 2004. The repurchase of MCI’s 3,751,509 shares of our Class
A common stock using proceeds from our December Senior Notes offering was not part of our
buyback program. During the year ended December 31, 2004 we have repurchased 252,600 shares
of our Class A common stock at a cost of approximately $2.4 million through our buyback program.
Our Board of Directors authorized us and we obtained permission from our lenders and preferred
shareholder for up to $10.0 million of repurchases during the six month period ended June 30, 2005.
During the months of January and February 2005 we repurchased 252,600 shares of our Class A
common stock at a cost of approximately $2.6 million. We expect to continue the repurchases
throughout 2005 subject to the availability of free cash flow, credit facilities, the price of our Class A
and Class B common stock and the requisite consents of our lenders and preferred shareholder. The
repurchases will comply with the restrictions of SEC rule 10b-18.
The long-distance, local access, cable, Internet and wireless services industries continue to
experience substantial competition, regulatory uncertainty, and continuing technological changes.
Our future results of operations will be affected by our ability to react to changes in the competitive
and regulatory environment and by our ability to fund and implement new or enhanced technologies.
We are unable to determine how competition, economic conditions, and regulatory and technological
changes will affect our ability to obtain financing under acceptable terms and conditions.
97
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 our financial condition and
results, and require management to make estimates that are difficult, subjective or complex. Most
accounting policies are not considered by management to 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 our Audit Committee.
Those policies considered to be critical accounting policies for the year ended December 31, 2004
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 also maintain an allowance for doubtful
accounts based on our assessment of the likelihood that our customers will satisfactorily
comply with rules necessary to obtain supplemental funding from the Universal Service
Administration Company (“USAC”) for services provided by us under our packaged
communications offerings to rural hospitals, health clinics and school districts. We base our
estimates on the aging of our accounts receivable balances, financial health of specific
customers, regional economic data, changes in our collections process, our customers’
compliance with USAC rules, and our historical write-off experience, net of recoveries. If the
financial condition of our customers were to deteriorate or if they are unable to emerge from
reorganization proceedings, resulting in an impairment of their ability to make payments,
additional allowances may be required. If their financial condition improves or they emerge
successfully from reorganization proceedings, allowances may be reduced. Such allowance
changes could have a material effect on our consolidated financial condition and results of
operations.
(cid:130) We record all assets and liabilities acquired in purchase acquisitions, including goodwill and
other intangibles, at fair value as required by SFAS No. 141, “Business Combinations.”
Goodwill and indefinite-lived assets such as our cable certificates are not amortized but are
subject, at a minimum, to annual tests for impairment and quarterly evaluations of whether
events and circumstances continue to support an indefinite useful life as required by SFAS
No. 142. 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 as required by SFAS No. 142. The initial
goodwill and other intangibles recorded and subsequent impairment analysis requires
98
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. The SEC Staff Announcement issued on September 29, 2004 requires
us to value our indefinite-lived intangible assets other than goodwill using the direct value
method for impairment testing purposes no later than January 1, 2005. Our cable certificate
assets are our only indefinite-lived intangible assets other than goodwill and were originally
valued and recorded using the residual method. Because of the significance of the identified
intangible assets and goodwill to our consolidated balance sheet, our annual impairment
analysis pursuant to the SEC Staff Announcement and quarterly evaluation of remaining
useful life will be critical. Any changes in key assumptions about the business and its
prospects, changes in market conditions or other externalities, or recognition of previously
unrecognized intangible assets for impairment testing purposes could result in an impairment
charge and such a charge could have a material adverse effect on our consolidated results of
operations. Refer to note 1(m) in the accompanying “Notes to Consolidated Financial
Statements” for additional information regarding the SEC Staff Announcement and intangible
assets, respectively.
(cid:130) We estimate unbilled long-distance services segment Cost of Goods Sold based upon minutes
of use carried through our network and established rates. We estimate unbilled costs for new
circuits and services, and when network changes occur that result in traffic routing changes or
a change in carriers. Carriers that provide service to us regularly make network changes that
can lead to new, revised or corrected billings. Such estimates are revised or removed when
subsequent billings are received, payments are made, billing matters are researched and
resolved, tariffed billing periods lapse, or when disputed charges are resolved. Revisions to
previous estimates could either increase or decrease costs in the year in which the estimate
is revised which could have a material effect on our consolidated financial condition and
results of operations.
(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 $71.9 million
associated with income tax net operating losses that were generated from 1990 to 2003, and
that expire from 2007 to 2024. 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 $20.0 million
of the acquired net operating losses would not be utilized for income tax purposes, and
99
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 utilized approximately $5.6 million of
our tax net operating loss carryforwards in 2004. We have not recorded a valuation
allowance on the deferred tax assets as of December 31, 2004 based on management’s
belief that future reversals of existing taxable temporary differences and estimated future
taxable income exclusive of reversing temporary differences and carryforwards, will, more
likely than not, be sufficient to realize the benefit of these assets over time. In the event that
actual results differ from these estimates or if our historical trends change, we may be
required to record a valuation allowance on deferred tax assets, which could have a material
adverse effect on our consolidated financial position or results of operations.
Other significant accounting policies, not involving the same level of measurement uncertainties as
those discussed above, are nevertheless important to an understanding of the financial statements.
Policies related to revenue recognition and financial instruments require difficult judgments on
complex matters that are often subject to multiple sources of authoritative guidance. Certain of
these matters are among topics currently under reexamination by accounting standards setters and
regulators. No specific conclusions reached by these standard setters appear likely to cause a
material change in our accounting policies, although outcomes cannot be predicted with confidence.
A complete discussion of our significant accounting policies can be found in note 1 in the
accompanying “Notes to Consolidated Financial Statements.”
New Accounting Standards
In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R,
"Share-Based Payment,” requiring all companies to measure compensation cost for all share-based
payments (including employee stock options) at fair value. SFAS No. 123R is effective for public
companies for interim or annual periods beginning after June 15, 2005. As of July 1, 2005, all public
entities will apply SFAS No. 123R using a modified version of prospective application. Under that
transition method, compensation cost is recognized on or after July 1, 2005 for the portion of
outstanding awards for which the requisite service has not yet been rendered, based on the grant-
date fair value of those awards calculated under SFAS 123 for either recognition or pro forma
disclosures. We estimate the application of SFAS No. 123R will result in an increase in our
compensation cost for all share-based payments of approximately $1.4 million during the year ended
December 31, 2005.
In December 2004, the FASB issued SFAS 153, “Exchanges of Nonmonetary Assets,” which amends
Accounting Principle Board (“APB”) Opinion No. 29, “Accounting for Nonmonetary Transactions”. The
guidance in APB Opinion No. 29 is based on the principle that exchanges of nonmonetary assets
should be measured based on the fair value of the assets exchanged. The guidance in that Opinion,
however, included certain exceptions to that principle. SFAS No. 153 amends APB Opinion No. 29 to
eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have commercial substance. A
nonmonetary exchange has commercial substance if the future cash flows of the entity are expected
to change significantly as a result of the exchange. We will adopt this statement July 1, 2005 and do
not expect it to have a material effect on our results of operations, financial position and cash flows.
In November 2004, the FASB ratified the consensus reached by the Emerging Issues Task Force
(“EITF”) with respect to EITF Issue No. 03-13, "Applying the Conditions in Paragraph 42 of FASB
Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” in
Determining Whether to Report Discontinued Operations." A number of issues have arisen in
practice in applying the criteria in paragraph 42, and the following broad categories of issues related
to the application of both criteria in that paragraph have been identified: (a) whether the intent of the
paragraph is that all operations and cash flows of the disposal component be eliminated from the
100
ongoing operations of the entity or whether some minor level of operations or cash flows may
remain; (b) if some insignificant level of operations or cash flows of the disposal component can
continue without precluding discontinued operations reporting, the level at which "significance"
should be measured; and (c) in applying the paragraph, the factors to consider in determining
whether the selling entity has retained "significant continuing involvement" in the disposed
component. At December 31, 2004 we do not have a component that has been identified for
disposal. We will adopt this EITF January 1, 2005 and do not expect it to have a material effect on
our results of operations, financial position and cash flows.
In November 2004, the FASB ratified the consensus reached by the EITF with respect to EITF Issue
No. 04-8, "The Effect of Contingently Convertible Instruments on Diluted Earnings per Share." This
Issue addresses when contingently convertible instruments should be included in diluted earnings
per share. For purposes of this Issue, contingently convertible instruments are instruments that
have embedded conversion features that are contingently convertible or exercisable based on (a) a
market price trigger or (b) multiple contingencies if one of the contingencies is a market price trigger
and the instrument can be converted or share settled based on meeting the specified market
condition. A market price trigger is a market condition that is based at least in part on the issuer's
own share price. Examples of contingently convertible instruments subject to this Issue include
contingently convertible debt, contingently convertible preferred stock, and Instrument C in EITF
Issue No. 90-19, "Convertible Bonds with Issuer Option to Settle for Cash upon Conversion," all with
embedded market price triggers. The EITF decided that contingently convertible instruments should
be included in diluted earnings per share (if dilutive) regardless of whether the market price trigger
has been met. Additionally, the consensus should be applied to instruments that have multiple
contingencies if one of the contingencies is a market price trigger and the instrument is convertible
or can be settled in shares based on meeting a market condition-that is, the conversion is not
dependent (or no longer dependent) on a substantive non-market-based contingency. At December
31, 2004 we do not have any contingently convertible instruments. We will adopt this EITF January
1, 2005 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 2004 the State’s actual results indicate that Alaska’s oil revenues, federal
funding and investment revenues supplied 28%, 22% and 40%, respectively, of the state’s total
revenues. In fiscal 2005 state economists forecast that Alaska’s oil revenues, federal funding and
investment revenues will supply 34%, 32% and 23%, respectively, of the state’s total projected
revenues.
The volume of oil transported by the TransAlaska Oil Pipeline System over the past 20 years has
been as high as 2.0 million barrels per day in fiscal 1988. Production has been declining over the
last several years with an average of 0.980 million barrels produced per day in fiscal 2004. The
state forecasts the production rate to decline from 0.934 million barrels produced per day in fiscal
2005 to 0.850 million barrels produced per day in fiscal 2015.
Market prices for North Slope oil averaged $31.74 in fiscal 2004 and are forecasted to average
$43.61 in fiscal 2005. The closing price per barrel was $42.76 on February 14, 2005. To the extent
101
that actual oil prices vary materially from the state’s projected prices the state’s projected revenues
and deficits will change. When the price of oil is greater than $25.00 per barrel and production of oil
is between 0.9 and 1.0 million barrels per day, every $1 change in the price per barrel of oil is
forecasted to result in a $40.0 million to $140.0 million change in the state’s fiscal 2005 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 2010. 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 evaluate cost cutting and revenue
enhancing measures.
Should new oil discoveries or developments not materialize or the price of oil become depressed, the
long term trend of continued decline in oil production from the Prudhoe Bay area is inevitable with a
corresponding adverse impact on the economy of the state, in general, and on demand for
telecommunications and cable television services, and, therefore, on us, in particular. Periodically
there are renewed efforts to allow exploration and development in the Arctic National Wildlife Refuge
(“ANWR”). The United States Energy Information Agency 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 could provide a substantial stimulus to the Alaska economy. In October 2004
both houses of Congress passed and the President signed legislation allowing loan guarantees of up
to $18.0 billion, certain favorable income tax provisions and tax credits, and expedited permitting
and judicial review for the construction of an Alaska natural gas pipeline. To support the
construction of a natural gas pipeline, the governor of the State of Alaska has announced that he
believes the state must assume some level of shipper risk, serve as an equity partner or both. The
State of Alaska is actively negotiating two applications to construct a natural gas pipeline. The
governor of the State of Alaska has indicated his desire to submit a contract from one or more of
these groups to the Alaska legislature during the legislative session beginning in January 2005.
Development of the ballistic missile defense system may have a significant impact on Alaskan
communication requirements and the Alaska economy. The system is a fixed, land-based, non-
nuclear missile defense system with a land and space based detection system capable of
responding to limited strategic ballistic missile threats to the United States. The system includes
deployment of up to 100 ground-based interceptor silos and battle management command and
control facilities at Fort Greely, Alaska.
The United States Army Corps of Engineers awarded a construction contract 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. Construction
began on the Fort Greely test bed in 2002. The first ground-based missile interceptor was placed in
an underground silo in July 2004 and a total of eight were in place at the end of 2004. The Missile
Defense Agency is reported to expect to have activated the first missile interceptors in 2005.
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.
102
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 649,000 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) 11% are located in the Mat-Su Borough,
(cid:130) 8% are located in the Kenai Peninsula Borough,
(cid:130) 5% are located in the City and Borough of Juneau, and
(cid:130)
The remaining 21% 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 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.
103
Schedule of Certain Known Contractual Obligations
The following table details future projected payments associated with our certain known contractual
obligations as of December 31, 2004.
Payments Due by Period
Long-term debt
Interest on long-term debt
Capital lease obligations,
including interest
Operating lease commitments
Redeemable preferred stock
Purchase obligations
Total contractual obligations
Total
Less than
1 Year
4 to 5
Years
1 to 3
Years
(Amounts in thousands)
168 121,000
46,400
---
46,400
$ 441,168
220,400 23,200
More
Than 5
Years
320,000
104,400
53,560
9,461
72,771 14,564
---
43,168 24,076
17,849
21,080
---
15,183
$ 835,316 71,469 221,512
4,249
25,798
15,070
---
3,909
91,177
452
22,057
4,249
---
451,158
For long-term debt included in the above table, we have included principal payments on our new
Senior Credit Facility and on our new 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
new Senior Notes require semi-annual interest payments of $11.6 million through August 2014. For
a discussion of our long-term debt see note 7 to the accompanying “Notes to Consolidated Financial
Statements.”
For a discussion of our capital and operating leases, see note 15 to the accompanying “Notes to
Consolidated Financial Statements.”
We have included only the maturity redemption amount on our Series B 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. For
more information about our redeemable preferred stock, see note 1(e) to the accompanying “Notes
to Consolidated Financial Statements.”
Purchase obligations include the remaining DLPS equipment purchase commitment of $13.5 million
and the remaining $13.9 million commitment for our Alaska Airlines agreement as further described
in note 15 to the accompanying “Notes to Consolidated Financial Statements” and a $411,000
maintenance contract commitment. The contracts associated with these commitments are non-
cancelable. Purchase obligations also includes open purchase orders for goods and services for
capital projects and normal operations totaling $15.4 million which are not included in our
Consolidated Balance Sheets at December 31, 2004, because the goods had not been received or
the services had not been performed at December 31, 2004. The open purchase orders are
cancelable.
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.
104
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);
(cid:130) Audit-related (employee benefit plan audits and accounting consultation on proposed
(cid:130)
transactions);
Income tax services (review of corporate and partnership income tax returns, and consultations
regarding income tax matters); and
(cid:130) Professional services (planning, scoping and documentational assistance of internal controls
over financial reporting).
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 2.25% or less depending upon our Total Leverage Ratio (as defined).
Should the Libor rate change, our interest expense will increase or decrease accordingly. As of
December 31, 2004, we have borrowed $121.2 million subject to interest rate risk. On this amount,
a 1% increase in the interest rate would result in $1,212,000 in additional gross interest cost on an
annualized basis. The interest rate swap agreement to convert $25.0 million of variable interest rate
debt to 3.98% fixed rate debt plus applicable margin terminated on September 21, 2004.
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, 2004, we have borrowed $38.7 million
subject to interest rate risk. On this amount, a 1% increase in the interest rate would result in
$387,000 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 108.
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
None.
105
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 - 15(e)) under the
supervision and with the participation of our management, including our Chief Executive Officer and
our Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and our Chief
Financial Officer concluded that our disclosure controls and procedures are effective.
Disclosure controls and procedures are controls and other procedures that are designed to ensure
that information required to be disclosed in our reports filed or submitted under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules
and forms. Disclosure controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed in our reports filed under the Exchange
Act is accumulated and communicated to management to allow timely decisions regarding required
disclosure.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision
and with the participation of our management, including our Chief Executive Officer and our Chief
Financial Officer, we conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
Based on our evaluation under the framework in Internal Control—Integrated Framework, our
management concluded that our internal control over financial reporting was effective as of
December 31, 2004. Our management’s assessment of the effectiveness of our internal control over
financial reporting as of December 31, 2004 has been audited by KPMG LLP, an independent
registered public accounting firm, as stated in their report which is included herein.
Changes in Internal Controls
There were no changes in our internal control over financial reporting during the fourth quarter of
2004 that have materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even
those systems determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
We may enhance, modify, and supplement internal controls and disclosure controls and procedures
based on experience.
Item 9B. Other Information
None
106
Part III
Items 10, 11, 12, 13 and 14. Portions of the Registrant's definitive proxy statement relating to its
2005 Annual Meeting of Shareholders are incorporated by reference in Part III of this Annual Report
on Form 10-K where indicated. Alternatively, the Registrant may file an amendment to this Form 10-K
to provide such information within 120 days following the end of Registrant's fiscal year ended
December 31, 2004.
107
Part IV
Item 15. Exhibits, Consolidated Financial Statement Schedules
(l) Consolidated Financial Statements
Included in Part II of this Report:
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets, December 31, 2004 and 2003
Consolidated Statements of Operations,
Years ended December 31, 2004, 2003 and 2002
Consolidated Statements of Stockholders’ Equity,
Years ended December 31, 2004, 2003 and 2002
Consolidated Statements of Cash Flows,
Years ended December 31, 2004, 2003 and 2002
Notes to Consolidated Financial Statements
Page No.
109 — 111
112 — 113
114
115 — 117
118
119 — 158
(2) Consolidated Financial Statement Schedules
Schedule II – Valuation and Qualifying Accounts is included in note 3 in Notes to
Consolidated Financial Statements included in Part II of this report.
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.
(3) Exhibits
159
108
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
General Communication, Inc.
We have audited the accompanying consolidated balance sheets of General Communication, Inc.
and subsidiaries as of December 31, 2004 and 2003, 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, 2004. These consolidated financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of General Communication, Inc. and subsidiaries as of December 31,
2004 and 2003, and the results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2004, in conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of General Communication, Inc.’s internal control over
financial reporting as of December 31, 2004, based on criteria established in Internal Control—
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated March 11, 2005 expressed an unqualified opinion on
management’s assessment of, and the effective operation of, internal control over financial
reporting.
/signed/ KPMG LLP
Anchorage, Alaska
March 11, 2005
109
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
General Communication, Inc.
We have audited management's assessment, included in the accompanying Management’s Report
on Internal Control Over Financial Reporting, that General Communication, Inc. maintained effective
internal control over financial reporting as of December 31, 2004, based on criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). General Communication, Inc.’s management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company’s internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, evaluating management's assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles. A company's
internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that General Communication, Inc. maintained effective
internal control over financial reporting as of December 31, 2004, is fairly stated, in all material
respects, based on criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion,
General Communication, Inc. maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2004, based on criteria established in Internal Control—
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
110
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of General Communication, Inc. and
subsidiaries as of December 31, 2004 and 2003, 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, 2004, and our report dated March 11, 2005 expressed an unqualified opinion on
those consolidated financial statements.
/signed/ KPMG LLP
Anchorage, Alaska
March 11, 2005
111
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
Deferred income taxes, net
Prepaid expenses
Property held for sale
Inventories
Notes receivable from related parties
Other current assets
Total current assets
Property and equipment in service, net of depreciation
Construction in progress
Net property and equipment
Cable certificates
Goodwill
Other intangible assets, net of amortization of $1,625 and $1,656 at
December 31, 2004 and 2003, respectively
Deferred loan and senior notes costs, net of amortization of $2,602 and
$5,308 at December 31, 2004 and 2003, respectively
Notes receivable from related parties
Other assets
Total other assets
Total assets
See accompanying notes to consolidated financial statements.
December 31,
2004
2003
$ 31,452
10,435
74,429
2,317
72,112
70,235
1,954
68,281
13,893
7,907
2,282
1,215
475
2,429
7,195
10,436
2,173
1,513
1,885
1,723
131,765 103,641
432,249 369,039
22,505
33,618
454,754 402,657
191,241 191,241
41,972
41,972
6,265
4,195
10,341
3,345
9,508
5,757
4,281
9,276
262,672 256,722
$ 849,191 763,020
112
(Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
(Amounts in thousands)
LIABILITIES, REDEEMABLE PREFERRED STOCK, AND
STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of obligations under capital leases and long-term debt
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
maturity
Deferred income taxes, net of deferred income tax benefit
Other liabilities
Total liabilities
Redeemable preferred stock
Stockholders’ equity:
Common stock (no par):
December 31,
2004
2003
$
6,407
28,742
16,253
15,350
8,747
6,849
437
82,785
5,139
34,133
21,275
17,545
8,645
8,156
651
95,544
436,969
32,750
345,000
38,959
672
49,111
8,385
610,672
677
24,168
6,366
510,714
4,249
25,664
Class A. Authorized 100,000 shares; issued 51,825 and 52,589 shares
at December 31, 2004 and December 31, 2003, respectively
186,883
202,362
Class B. Authorized 10,000 shares; issued 3,862 and 3,868 shares at
December 31, 2004 and December 31, 2003, respectively; convertible
on a share-per-share basis into Class A common stock
Less cost of 426 and 338 Class A common shares held in treasury at
December 31, 2004 and December 31, 2003, respectively
Paid-in capital
Notes receivable with related parties issued upon stock option exercise
Retained earnings
Accumulated other comprehensive loss
Total stockholders' equity
Commitments and contingencies
3,248
3,269
(1,702)
(1,917)
14,957
(3,016)
33,900
---
12,836
(4,971)
15,371
(308)
234,270
226,642
Total liabilities, redeemable preferred stock, and stockholders' equity
$ 849,191
763,020
See accompanying notes to consolidated financial statements.
113
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Amounts in thousands, except per share amounts)
2004
2003
2002
Revenues
$ 424,826
390,797
367,842
Cost of goods sold (exclusive of depreciation,
amortization and accretion shown separately below)
Selling, general and administrative expenses
Bad debt expense (recovery)
Impairment charge
Depreciation, amortization and accretion expense
Operating income
Other income (expense):
Interest expense
Loss on early extinguishment of debt
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
139,563
147,360
(1,074)
---
63,113
75,864
125,383
138,693
(178)
5,434
53,388
68,077
(27,586)
(6,136)
(3,790)
363
(37,149)
(34,745)
---
(7,732)
560
(41,917)
123,564
129,029
13,124
---
56,400
45,725
(29,316)
---
(4,612)
525
(33,403)
38,715
17,463
26,160
10,074
12,322
5,659
Net income before cumulative effect of a change in
accounting principle
21,252
16,086
6,663
Cumulative effect of a change in accounting principle,
net of income tax benefit of $367
---
(544)
Net income
Preferred stock dividends
21,252
1,503
Net income available to common stockholders
$
19,749
Basic 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
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
$
$
$
$
0.35
---
0.35
0.34
---
0.34
See accompanying notes to consolidated financial statements.
15,542
2,018
13,524
0.25
(0.01)
0.24
0.25
(0.01)
0.24
---
6,663
2,045
4,618
0.08
---
0.08
0.08
---
0.08
114
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
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 (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.
115
(Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(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)
---
---
---
---
---
---
---
---
538
---
---
---
---
---
---
---
---
679
---
(750)
---
---
---
750
1,076
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
1,243
---
---
---
$202,362
---
---
---
---
3,269
---
(831)
---
---
---
---
---
---
(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
---
1,243
(831)
(1,418)
(600)
226,642
See accompanying notes to consolidated financial statements
116
(Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Continued)
(Amounts in thousands)
Balances at December 31, 2003
Net income
Change in fair value of cash flow
hedge, net of change in income tax
effect of $207
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
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
Conversion of Series B preferred
stock to Class A common stock
Common stock repurchases
Common stock retirements
Sale of treasury stock
Reclassification from treasury stock
to be held for general corporate
purposes to common stock to be
retired
Preferred stock series B dividends
Preferred stock series C dividends
Balances at December 31, 2004
Class A
Common
Stock
Class B
Common
Stock
Class A
Shares
Held in
Treasury
Paid-in
Capital
Notes
Receivable
Issued to
Related
Parties
$202,362
---
3,269
---
(1,917) 12,836
---
---
(4,971)
---
Accumulated
Other
Compre-
hensive
Income (Loss)
(308)
---
Retained
Earnings
15,371
21,252
---
---
---
---
---
---
308
---
21
---
(21)
6,161
---
---
---
---
---
---
---
1,730
---
---
---
---
---
---
1,955
---
11,415
---
(33,076)
---
---
---
---
---
---
---
391
---
(483)
---
228
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
(33,826)
33,076
---
---
---
---
$186,883
---
---
---
3,248
470
---
---
---
---
---
(1,702) 14,957
---
---
---
(3,016)
(470)
(942)
(561)
33,900
---
---
---
---
---
---
---
---
---
---
---
---
---
Total
226,642
21,252
308
21,560
1,730
---
6,161
1,955
391
11,415
(34,309)
---
228
---
(942)
(561)
234,270
See accompanying notes to consolidated financial statements
117
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Amounts in thousands)
Cash flows from operating activities:
2004
2003
2002
Net income
Adjustments to reconcile net income to net cash provided by operating
$
21,252
15,542
6,663
activities:
Depreciation, amortization and accretion expense
Deferred income tax expense
Loss on early extinguishment of debt
Amortization of loan and senior notes fees
Deferred compensation
Compensatory stock options
Bad debt expense (recovery), net of write-offs
Impairment charge
Cumulative effect of a change in accounting principle, net
Employee Stock Purchase Plan expense funded with issuance of
General Communication, Inc. Class A common stock
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
Proceeds from sales of assets
Refund of deposit
Purchases of and additions to property held for sale
Notes receivable issued to related parties
Net cash used in investing activities
Cash flows from financing activities:
Issuance of new Senior Notes
Repayment of old Senior Notes
Repayment of Senior Credit Facility
Purchase of common stock to be retired
Borrowings on Senior Credit Facility
Redemption of Series C preferred stock
Payment of debt issuance costs
Proceeds from common stock issuance, net of notes receivable from
related parties issued upon stock option exercise
Payment of bond call premiums
Repayments of capital lease obligations
Payment of preferred stock dividends
Payment received on note receivable from related parties issued upon
stock option exercise
Purchase of treasury stock
Sale 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
63,113
18,245
6,136
3,790
657
390
363
---
---
---
791
(15,888)
98,849
(111,804)
(4,692)
2,607
1,190
699
(626)
(52)
(112,678)
315,720
(180,000)
(63,832)
(33,076)
20,000
(10,000)
(8,274)
6,161
(6,136)
(5,114)
(1,637)
1,289
(483)
228
34,846
21,017
10,435
53,388
9,673
---
7,732
689
1,076
(1,084)
5,434
544
---
99
(7,395)
85,698
(62,479)
(6,249)
74
---
---
(138)
(99)
(68,891)
---
---
(12,700)
---
---
---
(3,528)
1,961
---
(1,857)
(2,036)
679
(831)
---
(18,312)
(1,505)
11,940
56,400
5,754
---
4,612
430
548
9,844
---
---
791
90
(10,654)
74,478
(65,140)
(1,657)
946
---
---
(38)
(3,055)
(68,944)
---
---
(15,575)
---
14,766
---
(352)
396
---
(1,704)
(2,045)
---
(177)
---
(4,691)
843
11,097
Cash and cash equivalents at end of year
$
31,452
10,435
11,940
See accompanying notes to consolidated financial statements.
118
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,
(cid:130) Cable television services throughout Alaska,
(cid:130)
(cid:130)
(cid:130) Origination and termination of traffic in Alaska for certain common carriers,
(cid:130) Private line and private network services,
(cid:130) Managed services to certain commercial customers,
(cid:130) Broadband services, including our SchoolAccess™ offering to rural school districts and a similar
offering to rural hospitals and health clinics,
(cid:130) Sales and service of dedicated communications systems and related equipment,
(cid:130)
Lease and sales of capacity on our undersea fiber optic cable systems 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, and
(cid:130) Distribution of white and yellow pages directories to residential and business customers in
certain markets we serve and on-line directory products.
(b) Principles of Consolidation
The consolidated financial statements include the consolidated accounts of GCI and all 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):
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:
Year Ended December 31,
2004
Shares
(Denom-
inator)
Per-share
Amounts
Income
(Num-
erator)
$21,252
942
561
1,503
19,749 56,989
$ 0.35
--- 1,207
---
Net income available to common stockholders
$19,749 58,196
$ 0.34
119
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
Years Ended December 31,
Income
(Num-
erator)
2003
Shares
(Denom-
inator)
Per-share
Amounts
Income
(Num-
erator)
2002
Shares
(Denom-
inator)
Per-share
Amounts
Net income before cumulative
effect of a change in
accounting principle in 2003,
net of income tax benefit of
$367
$16,086
Less preferred stock dividends:
Series B
Series C
1,418
600
2,018
$ 6,663
1,445
600
2,045
Basic EPS:
Net income before cumulative
effect of a change in
accounting principle in 2003,
net of income tax benefit of
$367, available to common
stockholders
Effect of Dilutive Securities:
Unexercised stock options
Diluted EPS:
Net income before cumulative
effect of a change in
accounting principle in 2003,
net of income tax benefit of
$367, available to common
stockholders
14,068
55,675
$ 0.25
4,618
55,081
$ 0.08
---
765
---
---
584
---
$14,068
56,440
$ 0.25
$ 4,618
55,665
$ 0.08
Common equivalent shares outstanding which are anti-dilutive for purposes of calculating EPS for
the years ended December 31, 2004, 2003 and 2002, 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
2004
1,964
779
2,743
2003
2,837
833
3,670
2002
3,062
833
3,895
In December 2004 we redeemed all of the Series C preferred stock.
Weighted average shares associated with outstanding stock options for the years ended
December 31, 2004, 2003 and 2002 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
312
380
2,545
2004
2003
2002
120
(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, 2004, 2003 and 2002
(shares, in thousands):
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 retired
Balances at December 31, 2003
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 retired
Balances at December 31, 2004
Class A
50,967
8
584
Class B
3,883
(8)
---
221
---
15
51,795
---
3,875
7
416
225
(7)
---
---
223
(77)
52,589
6
1,118
---
---
3,868
(6)
---
2,060
(3,948)
51,825
---
---
3,862
(e) Redeemable Preferred Stock
Redeemable preferred stock at December 31, 2004 and 2003 consist of (amounts in thousands):
Series B
Series C
2004
$ 4,249
---
$ 4,249
2003
15,664
10,000
25,664
We have 1,000,000 shares of preferred stock authorized with the following shares issued at
December 31, 2004, 2003 and 2002 (shares, in thousands):
Balances at December 31, 2001 and 2002
Shares converted to GCI Class A common stock
Balance at December 31, 2003
Shares converted to GCI Class A common stock
Stock redemption
Balance at December 31, 2004
Series B
17
(1)
16
(12)
---
4
Series C
10
---
10
---
(10)
---
121
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
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, 2004 and 2003
was $4,338,000 and $15,887,000, respectively. The difference between the carrying and
redemption amounts of approximately $89,000 is due to accrued dividends which are included in
Accrued Liabilities until paid in cash.
Series C
We issued 10,000 shares of convertible redeemable accreting Series C preferred stock as of June
30, 2001. In December 2004 we redeemed all of the Series C preferred stock.
(f) Treasury Stock
We intend to hold repurchased shares of our common stock in treasury for general corporate
purposes. We account for treasury stock under the cost method and include treasury stock as a
component of Stockholders’ Equity.
Treasury stock purchased with the intent of retiring the stock (whether or not the retirement is
actually accomplished) is charged entirely to Retained Earnings.
(g) Cash Equivalents
Cash equivalents consist of repurchase interest investments and certificates of deposit which are
short-term and readily convertible into cash.
(h) Accounts Receivable and Allowance for Doubtful Receivables
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The
allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our
existing accounts receivable. We base our estimates on our historical collections experience,
industry standards, regulatory requirements, regional economic data, and our collections process.
We review our allowance for doubtful accounts methodology at least annually. During the review
process we consider a change to our methodology if there are any changes to these factors.
Depending upon the type of account receivable our allowance is calculated using a pooled basis
with an allowance for all accounts greater than 120 days past due, a specific identification method,
or a combination of the two methods. When a specific identification method is used past due
balances over 90 days and balances less than 90 days old but potentially uncollectible due to
bankruptcy or other issues are reviewed individually for collectibility. Account balances are charged
off against the allowance when we feel it is probable the receivable will not be recovered. We do
not have any off-balance-sheet credit exposure related to our customers.
(i)
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.
(j) 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
122
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
systems and support equipment not placed in service on December 31, 2004; management
intends to place this equipment in service during 2005.
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
12-15 years
Amortization of property and equipment under capital leases is included in Depreciation,
Amortization, and Accretion Expense on the Consolidated Statements of Operations.
Repairs and maintenance are charged to expense as incurred. Expenditures for major renewals
and betterments are capitalized. Accumulated depreciation is removed and gains or losses are
recognized at the time of retirements, sales or other dispositions of property.
(k) Long-lived Assets to be Disposed of
Long-lived assets to be disposed of by sales, including those of discontinued operations, are
measured at the lower of carrying amount or fair value less cost to sell, if applicable. We classify a
long-lived asset to be disposed of other than by sale as held and used until it is disposed of. We
classify a long-lived asset to be sold as held for sale in the period in which all of certain criteria
established by SFAS 144, “Accounting for the Impairment or Disposal of Long-lived Assets” are met.
We do not depreciate or amortize long-lived assets to be sold.
A loss is recognized for any initial or subsequent write-down to fair value less cost to sell. A gain is
recognized for any subsequent increase in fair value less cost to sell, but not in excess of the
cumulative loss previously recognized (for a write-down to fair value less cost to sell). The loss or
gain adjusts only the carrying amount of a long-lived asset, whether classified as held for sale
individually or as part of a disposal group. A gain or loss not previously recognized that results from
the sale of a long-lived asset (disposal group) is recognized at the date of sale.
(l)
Intangible Assets
Goodwill and cable certificates (certificates of convenience and public necessity) are not amortized.
Cable certificates represent certain perpetual operating rights to provide cable services. Goodwill
represents the excess of cost over fair value of net assets acquired. 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 12.
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 5-20 year periods using the straight-line method.
(m) Impairment of Intangibles, Goodwill, and Long-lived Assets
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
123
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
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.
On September 29, 2004, the Securities and Exchange Commission (“SEC”) issued SEC Staff
Announcement Topic “Use of the Residual Method to Value Acquired Assets Other than Goodwill,”
(“SEC Staff Announcement”) requiring us to apply no later than January 1, 2005 a direct value
method to determine the fair value of our intangible assets with indefinite lives other than goodwill
for purposes of impairment testing. We adopted the SEC Staff Announcement on December 31,
2004. Our cable certificate assets are our only indefinite-lived assets other than goodwill as of
December 31, 2004. Our cable certificate assets were originally valued and recorded using the
residual method. Impairment testing of our cable certificate assets as of December 31, 2004
used a direct value method pursuant to the SEC Staff Announcement.
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.
(n) 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.
(o) Other Assets
Other Assets primarily include long-term deposits and prepayments, a performance bond, and non-
trade accounts receivable.
(p) Accounting for Derivative Instruments and Hedging Activities
We record derivatives on the balance sheet as assets or liabilities, measured at fair value and
establish criteria for designation and effectiveness of hedging relationships consistent with SFAS
No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended.
In 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.”
124
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
(q) Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity
We classify and measure certain financial instruments with characteristics of both liabilities and
equity according to SFAS No. 150, “Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity.” SFAS No. 150 requires that an issuer classify a
financial instrument that is within its scope as a liability (or an asset in some circumstances).
(r) Asset Retirement Obligations
On January 1, 2003 we adopted SFAS No. 143, “Accounting for Asset Retirement Obligations.” We
record the fair value of a liability for an asset retirement obligation in the period in which it is
incurred in Other Liabilities on the Consolidated Balance Sheets. When the liability is initially
recorded, we capitalize a cost by increasing the carrying amount of the related long-lived asset.
Over time, the liability is accreted to its present value each period, and the capitalized cost is
depreciated over the useful life of the related asset. Upon settlement of the liability, we either
settle the obligation for its recorded amount or incur a gain or loss upon settlement. Upon
adoption of SFAS No. 143, “Accounting for Asset Retirement Obligations” on January 1, 2003, 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.
The majority of our asset retirement obligation is the estimated cost to remove telephony
distribution equipment and support equipment from leased property.
Following is a reconciliation of the beginning and ending aggregate carrying amount of our liability
for asset retirement obligations at December 31, 2004 (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
Liability incurred during the year ended December 31, 2004
Accretion expense for the year ended December 31, 2004
Liability settled
Other
Balance at December 31, 2004
$
$
---
1,565
277
163
2,005
775
242
(6)
(45)
2,971
If SFAS No. 143 had been applied at December 31, 2002 the liability for asset retirement
obligations would have been $1,565,000.
At the date of adoption we recorded additional capitalized costs of $654,000 in Property and
Equipment in Service, Net of Depreciation. During the years ended December 31, 2004 and 2003
we recorded additional capitalized costs of $775,000 and $277,000, respectively, in Property and
Equipment in Service, Net of Depreciation.
(s) Alaska Airlines, Inc. (“Alaska Airlines”) Contract
Our contract with Alaska Airlines provides that we purchase a specific minimum number of mileage
awards in the Alaska Airlines Mileage Plan each year at a specific price per mile. If we exceed the
minimum purchase commitment in any of the specified periods, the excess miles are priced at a
reduced fixed cost per mile. Alaska Airlines invoices us for all mileage credited during the prior
month. Our contractual cost for purchased miles is not tied or related in any way to our customers’
usage of the awarded miles. Use of the miles is a transaction between our customers and Alaska
125
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
Airlines and does not involve us in any way. Accordingly we do not account for or record our
customers’ usage of miles purchased.
We have recorded a liability for the estimated obligation under the contract as of December 31,
2004 and 2003. We estimated the amount of the obligation based on the amount of mileage
awards purchased through December 31, 2004 and 2003 in comparison to the required minimum
commitment. We have recorded the expense for the miles purchased from Alaska Airlines in
Selling, General and Administrative expenses for each of our benefiting segments.
(t) Revenue Recognition
All revenues are recognized when the earnings process is complete in accordance with SEC Staff
Accounting Bulletins No. 101 and No. 104, “Revenue Recognition” as follows:
• 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,
• The majority of our equipment sale transactions involve the sale of communications
equipment with no other services involved. Such equipment is subject to standard
manufacturer warranties and we do not manufacture any of the equipment we sell. In such
instances the customer takes title to the equipment generally upon delivery. We recognize
revenue for such transactions when title passes to the customer and the revenue is earned
and realizable pursuant to the provisions of SAB 101 and SAB 104. On certain occasions
we enter into agreements to sell and satisfactorily install or integrate telecommunications
equipment for a fixed fee. Customers may have refund rights if the installed equipment
does not meet certain performance criteria. We defer revenue recognition until we have
received customer acceptance per the contract or agreement, and all other required
revenue recognition elements have been achieved. Revenues from contracts with multiple
element arrangements, such as those including installation and integration services, are
recognized as each element is earned based on objective evidence regarding the relative
fair value of each element and when there are no undelivered elements that are essential
to the functionality of the delivered elements,
• 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, and
• We recognize unbilled revenues when the service is provided based upon minutes of use
processed or established rates, net of credits and adjustments.
(u) Payments Received from Suppliers
In 2003 we adopted Emerging Issues Task Force (“EITF”) Issue No. 02-16, “Accounting by a
Reseller for Cash Consideration Received from a Vendor.” 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.
126
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
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.
(v) Advertising Expense
We expense advertising costs in the year during which the first advertisement appears.
Advertising expenses were approximately $3,281,000, $3,727,000 and $2,967,000 for the years
ended December 31, 2004, 2003 and 2002, respectively.
(w) Leases
We account for capital and operating leases as lessee as required by SFAS No. 13, “Accounting for
Leases” and in subsequently issued amendments and interpretations of SFAS No. 13. Scheduled
rent increases are amortized over the lease term on a straight-line basis. Contingent rent expense
results from increases in the Consumer Price Index. Rent holidays are recognized on a straight-line
basis over the lease term.
Leasehold improvements are amortized over the shorter of their economic lives or the lease term.
We may amortize a leasehold improvement over a term that includes assumption of a lease renewal
if the renewal is reasonably assured. Leasehold improvements made by us and funded by landlord
incentives or allowances under an operating lease are recorded as deferred rent and amortized as
reductions to lease expense over the lease term.
(x)
(y)
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. We capitalized interest cost
of approximately $1.1 million and $403,000 during the years ended December 31, 2004 and
2003, respectively, during the construction of the AULP West fiber optic cable system. No interest
was capitalized during the year ended December 31, 2002.
Income Taxes
Income taxes are accounted for using the asset and liability method. Deferred tax assets and
liabilities are recognized for their future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply
to taxable earnings in the years in which those temporary differences are expected to be
recovered or settled. Deferred tax assets are recognized to the extent that the benefits are more
likely to be realized than not.
(z) Costs Associated with Exit or Disposal Activities
In 2003 we adopted SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal
Activities.” We record exit or disposal costs when they are incurred and can be measured at fair
value. The recorded liability is subsequently adjusted for changes in estimated cash flows.
(aa) 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
127
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
for such refundable amounts as gain contingencies, and, accordingly, do not recognize them until
realization is a certainty upon receipt.
(ab) Stock Option Plan
At December 31, 2004, we had one stock-based employee compensation plan, which is described
more fully in note 11. We account for this plan under the recognition and measurement principles
of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to
Employees,” and related interpretations. We use the intrinsic-value method and compensation
expense is recorded on the date of grant only if the current market price of the underlying stock
exceeds the exercise price. We have adopted SFAS 123, “Accounting for Stock-Based
Compensation,” which permits entities to recognize as expense over the vesting period the fair
value of all stock-based awards on the date of grant. Alternatively, SFAS 123 also allows entities
to continue to apply the provisions of APB Opinion No. 25.
We have adopted SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and
Disclosure.” This Statement amends SFAS No. 123 to provide alternative methods of transition
for a voluntary change to the fair value based method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123
to require prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the method used
on reported results. We have elected to continue to apply the provisions of APB Opinion No. 25
and provide the pro forma disclosure as required by SFAS 148.
Stock-based employee compensation cost is reflected over the options’ vesting period of generally
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,
2004, 2003 and 2002, 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 after cumulative effect of a
change in accounting principle in 2003, 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 after cumulative
effect of a change in accounting principle
in 2003
Basic EPS after cumulative effect of a change
in accounting principle in 2003, as reported
Diluted EPS after cumulative effect of a
change in accounting principle in 2003, as
reported
Basic and diluted EPS after cumulative effect
of a change in accounting principle in 2003,
pro forma
2004
2003
2002
$ 21,252
15,542
6,663
215
630
257
(2,047)
(1,981)
(2,504)
$ 19,420
14,191
4,416
$
0.35
0.24
0.08
$
0.34
0.24
0.08
$
0.31
0.22
0.04
128
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
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.
(ac) 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, 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.
(ad) 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.
(ae) Concentrations of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk are primarily cash
and cash equivalents and accounts receivable. Excess cash is invested in high quality short-term
liquid money instruments issued by highly rated financial institutions. At December 31, 2004 and
2003, 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 14). 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, the
concentration of credit risk with respect to our receivables is minimized due to the large number of
customers, individually small balances, and short payment terms.
(af) Software Capitalization Policy
Internally used software, whether purchased or developed, is capitalized and amortized using the
straight-line method over an estimated useful life of five years. 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
129
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
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.
(ag) Rescission of Financial Accounting Standard Board (“FASB”) Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections
In accordance with SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment
of FASB Statement No. 13, and Technical Corrections,” 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.
(ah) Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others
Certain of our customers have guaranteed levels of service and we account for these guarantees
according to FASB Interpretation (“FIN”) No. 45, “Guarantor’s Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” We
accrue for guarantees as they become probable and estimable.
(ai) Participating Securities and the Two-Class Method under FASB Statement No. 128, “Earnings per
Share”
In March 2004, the EITF reached final consensuses on Issue No. 03-6, “Participating Securities and the
Two-Class Method under FASB Statement No. 128, Earnings per Share.” EITF Issue No. 03-6 addresses
the computation of earnings per share by companies that have issued securities other than common stock
that contractually entitle the holder to participate in dividends and earnings of the company when, and if,
it declares dividends on its common stock. The issue also provides further guidance in applying the two-
class method of calculating earnings per share. EITF Issue No. 03-6 is effective for fiscal periods
beginning after March 31, 2004, and prior period earnings per share amounts presented for comparative
purposes should be restated to conform to the consensus guidance. We have not issued securities other
than common stock that contractually entitle the holder to participate in dividends and earnings when,
and if, we declare dividends on our common stock. EITF Issue No. 03-6 has not effected our EPS.
(aj) Aggregate Operating Segments That Do Not Meet the Quantitative Thresholds
In October 2004, the FASB ratified the consensus reached by the EITF with respect to EITF Issue
No. 04-10, "Determining Whether to Aggregate Operating Segments That Do Not Meet the
Quantitative Thresholds," which clarifies the guidance in paragraph 19 of SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." According to EITF Issue
No. 04-10, operating segments that do not meet the quantitative thresholds can be aggregated
only if aggregation is consistent with the objective and basic principles of SFAS No. 131, the
segments have similar economic characteristics, and the segments share a majority of the
aggregation criteria listed in items (a)-(e) in paragraph 17 of SFAS No. 131. The consensus applies
to fiscal years ending after October 13, 2004. EITF 04-10 has not resulted in a change to our SFAS
No. 131 disclosure.
(ak) New Accounting Standards
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment,” requiring all
companies to measure compensation cost for all share-based payments (including employee stock
options) at fair value. SFAS No. 123R is effective for public companies for interim or annual
periods beginning after June 15, 2005. As of July 1, 2005, all public entities will apply SFAS No.
123R using a modified version of prospective application. Under that transition method,
compensation cost is recognized on or after July 1, 2005 for the portion of outstanding awards for
which the requisite service has not yet been rendered, based on the grant-date fair value of those
awards calculated under SFAS 123 for either recognition or pro forma disclosures. We estimate
130
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
the application of SFAS No. 123R will result in an increase in our compensation cost for all share-
based payments of approximately $1.4 million during the year ended December 31, 2005.
In December 2004, the FASB issued SFAS 153, “Exchanges of Nonmonetary Assets,” which
amends APB Opinion No. 29, “Accounting for Nonmonetary Transactions.” The guidance in APB
Opinion No. 29 is based on the principle that exchanges of nonmonetary assets should be
measured based on the fair value of the assets exchanged. The guidance in that Opinion, however,
included certain exceptions to that principle. SFAS No. 153 amends APB Opinion No. 29 to
eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it
with a general exception for exchanges of nonmonetary assets that do not have commercial
substance. A nonmonetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. We will adopt this statement
July 1, 2005 and do not expect it to have a material effect on our results of operations, financial
position and cash flows.
In November 2004, the FASB ratified the consensus reached by the EITF with respect to EITF Issue
No. 03-13, ”Applying the Conditions in Paragraph 42 of FASB Statement No. 144, “Accounting for
the Impairment or Disposal of Long-Lived Assets,” in Determining Whether to Report Discontinued
Operations.” A number of issues have arisen in practice in applying the criteria in paragraph 42,
and the following broad categories of issues related to the application of both criteria in that
paragraph have been identified: (a) whether the intent of the paragraph is that all operations and
cash flows of the disposal component be eliminated from the ongoing operations of the entity or
whether some minor level of operations or cash flows may remain; (b) if some insignificant level of
operations or cash flows of the disposal component can continue without precluding discontinued
operations reporting, the level at which "significance" should be measured; and (c) in applying the
paragraph, the factors to consider in determining whether the selling entity has retained
"significant continuing involvement" in the disposed component. At December 31, 2004 we do not
have a component that has been identified for disposal. We will adopt this EITF January 1, 2005
and do not expect it to have a material effect on our results of operations, financial position and
cash flows.
In November 2004, the FASB ratified the consensus reached by the EITF with respect to EITF Issue
No. 04-8, "The Effect of Contingently Convertible Instruments on Diluted Earnings per Share." This
Issue addresses when contingently convertible instruments should be included in diluted earnings
per share. For purposes of this Issue, contingently convertible instruments are instruments that
have embedded conversion features that are contingently convertible or exercisable based on (a) a
market price trigger or (b) multiple contingencies if one of the contingencies is a market price
trigger and the instrument can be converted or share settled based on meeting the specified
market condition. A market price trigger is a market condition that is based at least in part on the
issuer's own share price. Examples of contingently convertible instruments subject to this Issue
include contingently convertible debt, contingently convertible preferred stock, and Instrument C in
EITF Issue No. 90-19, ”Convertible Bonds with Issuer Option to Settle for Cash upon Conversion,”
all with embedded market price triggers. The EITF decided that contingently convertible
instruments should be included in diluted earnings per share (if dilutive) regardless of whether the
market price trigger has been met. Additionally, the consensus should be applied to instruments
that have multiple contingencies if one of the contingencies is a market price trigger and the
instrument is convertible or can be settled in shares based on meeting a market condition-that is,
the conversion is not dependent (or no longer dependent) on a substantive non-market-based
contingency. At December 31, 2004 we do not have any contingently convertible instruments. We
will adopt this EITF January 1, 2005 and do not expect it to have a material effect on our results of
operations, financial position and cash flows.
131
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
(al) Reclassifications
Reclassifications have been made to the 2003 financial statements to make them comparable
with the 2004 presentation.
(2) Consolidated Statements of Cash Flows Supplemental Disclosures
Changes in operating assets and liabilities consist of (amounts in thousands):
Year ended December 31,
Increase in accounts receivable
(Increase) decrease in prepaid expenses
(Increase) decrease in inventories
Increase in other current assets
Increase (decrease) in accounts payable
Increase (decrease) in deferred revenue
Increase (decrease) in accrued payroll and
payroll related obligations
Increase (decrease) in accrued interest
Increase (decrease) in accrued liabilities
Decrease in subscriber deposits
Increase (decrease) in components of other
long-term liabilities
$
2004
(4,976)
2,529
298
(706)
(5,391)
(5,022)
(2,195)
102
(792)
(214)
2003
2002
(16,549)
(1,830)
(1,113)
(1,158)
2,465
2,985
5,724
707
1,909
(238)
(5,476)
(5,623)
446
(382)
(2,859)
6,161
(3,468)
(111)
825
(232)
479
$ (15,888)
(297)
(7,395)
65
(10,654)
We paid interest totaling approximately $28,581,000, $34,441,000 and $29,427,000 during the years
ended December 31, 2004, 2003 and 2002, respectively.
We paid income taxes totaling $205,000 during the year ended December 31, 2004. 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, 2004 and 2003.
We recorded $1,730,000, $538,000 and $319,000 during the years ended December 31, 2004, 2003
and 2002, respectively, in paid-in capital in recognition of the income tax effect of excess stock
compensation expense for tax purposes over amounts recognized for financial reporting purposes.
During the year ended December 31, 2004 our President and CEO tendered 70,028 shares of his GCI
Class A common stock to us at an agreed-upon value of $10.71 per share for a total value of $750,000.
The stock tender was in lieu of a cash payment on a note receivable with related parties issued upon
stock option exercise.
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, 2004
and 2003 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 GCI Fiber Communication Co., Inc., a
wholly-owned subsidiary of GCI Holdings, Inc. (“Holdings”) by issuing 15,000 shares of GCI Class A
132
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
common stock in 2002. Holdings is a wholly-owned subsidiary of GCI, Inc.; GCI, Inc. is a wholly-owned
subsidiary of GCI.
(3) Receivables and Allowance for Doubtful Receivables
Receivables consist of the following at December 31, 2004 and 2003 (amounts in thousands):
Trade
Employee
Other
Total receivables
2004
$ 71,034
277
3,118
$ 74,429
2003
67,186
284
2,765
70,235
Following are the changes in the allowance for doubtful receivables during the years ended December
31, 2004, 2003 and 2002 (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, 2004
$
1,954
3,136
---
2,773
2,317
December 31, 2003
$ 14,010
2,640
---
14,696
1,954
December 31, 2002
$
4,166
13,124
---
3,280
14,010
As further described in note 12, 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 years ended December 31, 2004 and 2003 we utilized approximately $4.2 million and $2.8
million, respectively, of the MCI credit against amounts otherwise payable for services received from
MCI.
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.
(4) Net Property and Equipment in Service
Net property and equipment in service consists of the following at December 31, 2004 and 2003
(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
Less accumulated amortization
Net property and equipment in service
2004
4,061
2003
$
3,151
440,050 345,984
170,843 161,054
46,219
5,500
51,214
722,805 613,122
269,626 227,071
17,012
$ 432,249 369,039
50,211
6,648
50,992
20,930
133
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
(5)
Intangible Assets
As of December 31, 2004 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, 2004. The remaining useful lives of our cable certificates and goodwill were evaluated as of
December 31, 2004 and events and circumstances continue to support an indefinite useful life.
No intangible assets subject to amortization have been impaired based upon impairment testing performed as
of December 31, 2004.
No indicators of impairment have occurred since the impairment testing was performed.
Amortization expense for amortizable intangible assets for the years ended December 31, 2004, 2003
and 2002 follow (amounts in thousands):
Amortization expense for amortizable intangible assets
$
856
660
790
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,
2002
2003
2004
Years ending
December 31,
2005
2006
2007
2008
2009
$ 1,100
$ 1,095
$ 1,034
$ 784
$ 504
Following are the changes in Other Intangible Assets (amounts in thousands):
Balance, December 31, 2002
Asset additions
Less amortization expense
Balance, December 31, 2003
Asset additions
Less amortization expense
Balance, December 31, 2004
$
$
3,460
1,395
660
4,195
2,926
856
6,265
134
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
(6) 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 at
the rate paid by us on our senior indebtedness,
secured by GCI common stock, due through
December 1, 2006
Notes receivable from other related parties bearing
interest up to 7.6% 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,
2004
2003
$
5,452
7,480
350
919
185
849
6,836
1,126
1,612
11,137
3,016
4,971
475
1,885
receivable
$
3,345
4,281
(7) Long-term Debt
Long-term debt consists of the following (amounts in thousands):
Senior Notes, net of unamortized bond discount of
$4,031 (a)
Senior Credit Facility (b)
Long-term debt
December 31,
2004
2003
$ 315,969
121,000
$ 436,969
180,000
165,000
345,000
(a) In February 2004 GCI’s wholly owned subsidiary GCI, Inc. sold $250.0 million in aggregate principal
amount of senior unsecured debt securities due in 2014 (“February Senior Notes”). In December
2004 GCI, Inc. sold $70.0 million in aggregate principal amount of senior unsecured debt securities
due in 2014 (“December Senior Notes”). The February and December Senior Notes are treated as a
single class (“new Senior Notes”).
February Senior Notes
The February Senior Notes were sold at a discount of $4.3 million. The February Senior Notes are
carried on our Consolidated Balance Sheet net of the unamortized portion of the discount, which is
being amortized to Interest Expense over the 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 original Senior Credit Facility. In connection with the issuance, we paid fees
135
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
and other expenses of approximately $6.5 million that are being amortized over the life of the new
Senior Notes.
The February Senior Notes were offered only to qualified institutional buyers pursuant to exemptions
from registration under the Securities Act. On July 7, 2004, GCI, Inc. commenced an offer to
exchange the privately issued February Senior Notes for a like amount of February Senior Notes that
have been registered under the Securities Act and have otherwise identical terms to the privately
issued original Senior Notes (except for provisions relating to GCI, Inc.'s obligations to consummate
the exchange offer). The exchange offer closing occurred on August 11, 2004, at which time all
$250.0 million in aggregate principal amount of the privately issued February Senior Notes were
tendered and exchanged for the February Senior Notes that have been registered under the
Securities Act.
December Senior Notes
The December Senior Notes were sold at face value.
The net proceeds of the offering were primarily used to repurchase 3,751,509 of our Class A
common shares at $8.33 per share and $10.0 million of our Series C preferred stock from MCI. The
aggregate amount of the equity repurchase totaled $41.3 million. In addition we used the proceeds
to repay $10.0 million of the revolving portion of our new Senior Credit Facility. In connection with
the issuance, we paid fees and other expenses of approximately $1.6 million that are being
amortized over the life of the new Senior Notes.
The December Senior Notes were offered only to qualified institutional buyers pursuant to Rule
144A and non-United States persons pursuant to Regulation S. The December 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. Beginning April 6, 2005, we
plan to commence an offer to exchange the privately issued December Senior Notes that have been
registered under the Securities Act and have otherwise identical terms to the privately issued
original Senior Notes (except for provisions relating to GCI Inc.’s obligations to consummate the
exchange offer).
New Senior Notes
We pay interest of 7.25% on the new Senior Notes.
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
136
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
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 conducted 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 was redeemed on March 18, 2004 for additional
consideration as follows:
(cid:130) $2.1 million based upon a payment of $1,032.50 per $1,000 principal amount, and
(cid:130) $833,000 in accrued and unpaid interest through March 18, 2004.
The total redemption cost was $186.1 million. The premium to redeem our old Senior Notes was
$6.1 million (excluding interest cost of $1.3 million) and was recognized as a loss on early
extinguishment of debt, a component of Other Income (Expense), during the year ended December
31, 2004.
Compliance with the redemption notice requirements in the Indenture resulted in a delay before
final payment of some of the old Senior Notes. As a result of such delay, our total debt increased
during the overlap period between the redemption of the old Senior Notes and the issuance of the
February 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 received a waiver from
compliance with Section 6.11 until April 30, 2004. After the final redemption payment on March 18,
2004 we were in compliance with Section 6.11.
A semi-annual interest payment of approximately $9.0 million was paid in August 2004. We will
make semi-annual interest payments of $11.6 million in February and August 2005.
The new Senior Notes are subordinate to our new Senior Credit Facility.
We were in compliance with all loan covenants at December 31, 2004.
137
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
(b) On May 21, 2004 we amended our $220.0 million new Senior Credit Facility. The amendment
reduced the interest rate on the $170.0 million term portion of the credit facility from LIBOR plus
3.25% to LIBOR plus 2.25%. The amendment reduced the interest rate on the $50.0 million
revolving portion of the credit facility from LIBOR plus 3.25% to LIBOR plus a margin dependent
upon our Total Leverage Ratio (as defined) as follows:
Total Leverage
Ratio (as defined)
>3.75
>3.25 but <3.75
>2.75 but <3.25
< 2.75
LIBOR Plus:
2.50%
2.25%
2.00%
1.75%
The commitment fee we are required to pay on the unused portion of the commitment was amended
as follows:
Total Leverage
Ratio (as defined)
>3.75
>2.75 but <3.75
< 2.75
Commitment Fee
0.625%
0.50%
0.375%
Under certain circumstances the amendment allows for an increase in the term and revolving
commitments not to exceed an aggregate commitment increase of $50.0 million. Any additional
term and revolving credit facility commitments are payable in full on October 31, 2007.
In connection with the May 21, 2004 amended Senior Credit Facility, we paid bank fees and other
expenses of approximately $215,000 during the year ended December 31, 2004.
On November 17, 2004 we amended our $220.0 million new Senior Credit Facility. The amendment
allowed us to repurchase up to $10.0 million of our common stock each year and to complete the
repurchase of 3,751,509 of our Class A common shares and $10.0 million of our Series C preferred
stock from MCI as described in notes 1(e) and 11.
The November 2004 amendment reduced our leverage ratio requirements for certain periods as
follows:
Period
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 final maturity date
Total Leverage Ratio
4.25:1
4.00:1
3.75:1
3.50:1
3.25:1
3.00:1
The November amendment also increased our allowable capital expenditures during the year ended
December 31, 2004 by the $18.8 million excess proceeds from the December Senior Notes.
In connection with the November 17, 2004 amended Senior Credit Facility, we paid bank fees and
other expenses of approximately $129,000 during the year ended December 31, 2004.
138
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
The term loan is fully drawn and we have letters of credit totaling $4.7 million, which left $45.3
million available at December 31, 2004 to draw under the revolving credit facility if needed. 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.
Our new Senior Notes are subordinate to our new Senior Credit Facility.
Substantially all of Holdings’ assets collateralize the new Senior Credit Facility. The capital lease is
secured by the leased satellite transponders.
We were in compliance with all loan covenants at December 31, 2004.
In October 2003 we amended our Senior Credit Facility, a portion of which was a substantial
modification of the previous Senior Credit Facility agreement. We therefore recognized
approximately $5.0 million in Amortization of Loan and Senior Notes Fees during the year ended
December 31, 2003. The $2.2 million in amended Senior Credit Facility deferred loan costs
associated with the portion that was not a substantial modification continues to be amortized over
the life of the new Senior Credit Facility.
As of December 31, 2004 maturities of long-term debt were as follows (amounts in thousands):
Years ending December 31,
2005
2006
2007
2008
2009
2010 and thereafter
Less unamortized bond discount paid on
February Senior Notes
Less current portion of long-term debt
Long-term debt, at December 31, 2004
$
168
32,000
89,000
---
---
320,000
441,168
(4,031)
(168)
$ 436,969
(8)
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 owned 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 were relieved of all future obligations
required by our purchase agreement and ceased 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 AULP West fiber optic cable system we built was put into service in June 2004 and provides
us with route diversity and redundancy in excess of that previously provided by the North Pacific Cable.
(9)
Comprehensive Income (Loss)
During the years ended December 31, 2004, 2003 and 2002 we had other comprehensive income (loss)
of approximately $308,000, 232,000 and ($548,000), respectively. Total comprehensive income during
the years ended December 31, 2004, 2003 and 2002 was $21,560,000, $15,774,000 and $6,115,000,
respectively.
139
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
(10)
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
$
(17,463)
(10,074)
(5,659)
Years ended December 31,
2003
2004
2002
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
---
(17,463)
367
(9,707)
---
(5,659)
1,730
(15,733)
$
538
(9,169)
319
(5,340)
Income tax (expense) benefit consists of the following (amounts in thousands):
Current tax expense:
Federal taxes
State taxes
Deferred tax expense:
Federal taxes
State taxes
Years ended December 31,
2003
2004
2002
606
176
782
(297)
(104)
(401)
(1,754)
(536)
(2,290)
(14,151)
(4,094)
(18,245)
(17,463)
(7,169)
(2,504)
(9,673)
(10,074)
(2,580)
(789)
(3,369)
(5,659)
$
$
Total income tax expense differed from the “expected” income tax expense determined by applying the
statutory federal income tax rate of 35% for 2004 and 2003 and 34% for 2002 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
and other balances, net
Years ended December 31,
2003
(9,156)
(1,695)
2002
(4,189)
(873)
2004
(13,550)
(2,439)
$
(668)
(568)
(597)
(806)
(17,463)
$
1,345
(10,074)
---
(5,659)
140
(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, 2004 and 2003 are presented below (amounts in
thousands):
December 31,
2004
2003
Current deferred tax assets:
Net operating loss carryforwards
Accounts receivable, principally due to allowance
$
for doubtful accounts
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
$
8,344
2,450
2,186
854
59
13,893
---
4,117
2,062
801
215
7,195
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
Asset retirement obligations 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
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
Other
Total long-term deferred tax assets
Long-term deferred tax liabilities:
Plant and equipment, principally due to
differences in depreciation
Amortizable assets
Total gross long-term deferred tax liabilities
Net combined long-term deferred tax liabilities $
December 31,
2004
2003
$
63,524
1,892
77,534
1,892
1,729
1,531
1,218
825
601
178
727
179
405
672
---
185
---
118
69,665
212
---
83,757
101,603
17,173
118,776
49,111
93,928
13,997
107,925
24,168
141
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
We recorded net deferred tax assets of $15.8 million in 2002 associated with the Rogers American
Cablesystems, Inc. and Kanas Telecom, Inc. acquisitions in 2001, resulting in adjustments to the
recorded financial statement cost basis of associated goodwill and property and equipment.
In conjunction with the 1996 Cable Companies acquisition, we incurred a net deferred income tax
liability of $24.4 million and acquired net operating losses totaling $57.6 million. We determined that
approximately $20 million of the acquired net operating losses would not be utilized for income tax
purposes, and elected with our December 31, 1996 income tax returns to forego utilization of such
acquired losses under Internal Revenue Code section 1.1502-32(b)(4). Deferred tax assets were not
recorded associated with the foregone losses and, accordingly, no valuation allowance was provided. At
December 31, 2004, we have (1) tax net operating loss carryforwards of approximately $175.6 million
that will begin expiring in 2007 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. We utilized
tax net operating loss carryforwards of approximately $5.6 million in 2004.
The following schedule shows our tax net operating loss carryforwards by year of expiration (amounts in
thousands):
Years ending December 31,
2007
2008
2009
2010
2011
2018
2019
2020
2021
2022
2023
2024
$
Federal
705
6,435
11,767
9,134
6,919
19,995
27,910
44,747
29,614
14,080
3,967
362
State
17
6,434
11,767
9,134
6,919
18,253
26,516
43,799
28,998
13,796
3,909
362
Total tax net operating loss carryforwards
$ 175,635 169,904
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 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.
Our United States income tax return for 2000 was selected for examination by the Internal Revenue
Service during 2003. The examination was completed in July 2004 and did not have a material adverse
effect on our financial position, results of operations, or our liquidity.
Our United States income tax return for 2001 was selected for examination by the Internal Revenue
Service during 2004. The examination was completed in December 2004 and did not have a material
adverse effect on our financial position, results of operations, or our liquidity.
142
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
(11) 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.
In December 2004 we used a portion of the proceeds of the December Senior Notes offering to
repurchase from MCI 3,751,509 of our Class A common shares at $8.33 per share; the shares were
retired in December 2004. At December 31, 2004 MCI owned none of our issued and outstanding Class
A shares. At December 31, 2003 MCI owned 3,751,509 shares of our Class A common stock that
represented approximately 7 percent of the issued and outstanding Class A shares at December 31,
2003. MCI owned 1,275,791 shares of our Class B common stock that represented approximately 33
percent of the issued and outstanding Class B shares at December 31, 2004 and 2003.
In January 2004, 3,108 shares of our Series B preferred stock was converted to approximately 560,000
shares of our Class A common stock at the stated conversion price of $5.55 per share. In August 2004,
3,328 shares of our Series B preferred stock was converted to 599,640 shares of our Class A common
stock at the stated conversion price of $5.55 per share. In November 2004, 4,995 shares of our Series
B preferred stock was converted to 900,000 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.
In October 2003, 1,250 shares of our Series B preferred stock was converted to approximately 225,000
shares of our GCI Class A common stock.
In 2004 we repurchased 266,181 shares of our Class A common stock at a cost of approximately $2.6
million pursuant to the Class A and Class B common stock repurchase program authorized by our Board
of Directors and approved by our lenders and preferred shareholder. In 2004 we retired 196,153
shares of our Class A common stock that we purchased pursuant to the Class A and Class B common
stock repurchase program.
During the year ended December 31, 2004 our President and CEO tendered 70,028 shares of his GCI
Class A common stock to us at an agreed-upon value of $10.71 per share for a total value of $750,000.
The stock tender was in lieu of a cash payment on a note receivable with related parties issued upon
stock option exercise. We held the shares at December 31, 2004 and intend to retire them in 2005.
Treasury Stock
In 2004 we acquired 15,000 shares of our Class A common stock for approximately $165,000 to fund
deferred compensation agreements for employees and we purchased 8,716 shares of our Class A
common stock for approximately $71,000 to fund various stock awards for our employees.
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.
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 13.2 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
143
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
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 Compensation Committee of
GCI’s Board of Directors administers the Option Plan.
The Option Plan provides that all options granted under the Option Plan must expire not later than ten
years after the date of grant. If at the time an option is granted the exercise price is less than the market
value of the underlying common stock, the difference in these amounts at the time of grant is expensed
ratably over the vesting period of the option. Options granted pursuant to the Option Plan are only
exercisable if at the time of exercise the option holder is our employee, non-employee director, or a
consultant or advisor working on our behalf.
Information for the years 2004, 2003 and 2002 with respect to the Option Plan follows:
Outstanding at December 31, 2001
Granted
Exercised
Forfeited
Outstanding at December 31, 2002
Granted
Exercised
Forfeited
Outstanding at December 31, 2003
Granted
Exercised
Forfeited
Outstanding at December 31, 2004
Weighted
Average
Exercise
Price
$6.11
$6.90
$5.78
$7.42
$6.34
$6.24
$4.95
$5.93
$6.41
$8.19
$5.49
$7.07
$6.81
Shares
5,100,131
1,995,700
(583,888)
(223,177)
6,288,766
963,200
(377,487)
(98,200)
6,776,279
881,500
(1,116,704)
(104,200)
6,436,875
Available for grant at December 31, 2004
1,745,457
Our stock options and warrants expire at various dates through December 2013. At December 31,
2004, 2003, and 2002, the weighted-average remaining contractual lives of options outstanding were
6.16, 6.47, and 6.93 years, respectively.
At December 31, 2004, 2003, and 2002, the number of exercisable shares under option was
3,473,340, 3,495,361, and 3,187,618, respectively, and the weighted-average exercise price of those
options was $6.45, $6.11, and $5.87, respectively.
The per share weighted-average fair value of stock options granted during 2004 was $4.65 per share
for compensatory and $4.48 for non-compensatory options; for 2003 was $4.30 per share for
compensatory and $2.99 for non-compensatory options; and for 2002 was $3.05 per share for
compensatory and $0.61 for non-compensatory options. The amounts were determined as of the
options’ grant dates using a Black-Scholes option-pricing model with the following weighted-average
assumptions: 2004 – risk-free interest rate of 3.62%, volatility of 0.52 and an expected life of 5.69
years; 2003 – risk-free interest rate of 3.45%, volatility of 0.53 and an expected life of 5.26 years; and
2002 – risk-free interest rate of 3.08%, volatility of 0.68 and an expected life of 6.18 years.
144
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
Summary information about our stock options outstanding at December 31, 2004 follows:
Options Outstanding
Options Exercisable
Range of
Exercise Prices
$3.11-$5.69
$5.77-$5.77
$6.00-$6.00
$6.05-$6.35
$6.50-$6.50
$6.94-$7.00
$7.25-$7.25
$7.40-$8.40
$8.50-$10.98
$11.25-$11.25
$3.11-$11.25
Number
outstanding
671,542
2,000
1,028,030
58,000
1,817,610
680,300
1,150,000
794,893
463,500
36,000
6,701,875
Weighted
Average
Remaining
Contractual
Life
5.01
8.14
6.73
6.27
5.46
3.69
7.11
7.16
8.74
6.50
6.16
Weighted
Average
Exercise Price
$4.65
$5.77
$6.00
$6.14
$6.50
$7.00
$7.25
$7.98
$9.15
$11.25
$6.80
Number
Exercisable
514,342
400
466,190
40,600
1,323,150
531,366
151,665
363,687
57,940
24,000
3,473,340
Weighted
Average Exercise
Price
$4.49
$5.77
$6.00
$6.13
$6.50
$6.99
$7.25
$7.70
$9.48
$11.25
$6.45
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.
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, 2004, 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 $13,000. Beginning January 1, 2005, 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 $14,000. 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 $3,000 during the year
ended December 31, 2004 and will be able to make such contributions limited to $4,000 during the
year ended December 31, 2005. We do not match employee catch-up contributions.
145
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
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
ended December 31, 2003 and 2002 the combination of salary reductions, after tax contributions and
matching contributions could not exceed the lesser of 100 percent of an employee's compensation or
$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 could not 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, or various mutual funds.
As of April 1, 2004 employee contributions receive up to 100% matching, as determined by our Board of
Directors each year, in GCI common stock. Prior to April 1, 2004 employee contributions invested in GCI
common stock received up to 100% matching, as determined by our Board of Directors each year, in GCI
common stock and employee contributions invested in other than GCI common stock received 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 $4,858,000,
$4,035,000, and $3,665,000 for the years ended December 31, 2004, 2003, and 2002, 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 2004 and 2003 we funded all of our employer-
matching contributions through market purchases. 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.
(12)
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, Soldotna, Kodiak, Seward, Cordova, Valdez, and Nome and retail cable modem
service (through our Internet services segment) in all of our locations in Alaska except Kotzebue.
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 directories are included in the local access
services segment.
146
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
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 systems allow 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 82% of our undersea
fiber optic cable systems which transit international waters.
Summarized financial information for our reportable segments for the years ended December 31, 2004,
2003 and 2002 follows (amounts in thousands):
Long-
Distance
Services
Reportable Segments
Local
Access
Services
Cable
Services
Internet
Services
2004
Revenues:
Intersegment
External
Total revenues
Cost of goods sold
(exclusive of depreciation,
amortization and accretion
shown separately below)
(“Cost of goods sold”):
2,596
$ 14,447
3,731
210,135 101,437 46,957 25,969
224,582 104,033 56,393 29,700
9,436
Total
Reportable
Segments
All
Other
Total
30,210
384,498
414,708
794 31,004
40,328 424,826
41,122 455,830
Intersegment
External
Total cost of good sold
20,441
54,143
74,584
1
4,322
2,624
26,959 29,088
6,991
26,960 31,712 11,313
27,388
117,181
144,569
482 27,870
22,382 139,563
22,864 167,433
Contribution:
Intersegment
External
Total contribution
Selling, general and
administrative expenses
Bad debt expense
(recovery)
(5,994) 2,595
6,812
(591)
74,478 17,869 18,978
77,073 24,681 18,387
2,822
267,317
270,139
312
3,134
17,946 285,263
18,258 288,397
155,992
149,998
40,065
28,100
18,316
9,377
95,858
51,502
147,360
(2,962)
932
279
154
(1,597)
523
(1,074)
147
(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
118,889
45,446
(726)
9,447
173,056
(34,079)
138,977
25,519
19,038
4,941
3,984
53,482
9,631 63,113
Operating income (loss)
$ 93,370
26,408
(5,667) 5,463
119,574
(43,710) 75,864
Total assets
$ 310,820 328,887 55,120 30,101
724,928 124,263 849,191
Capital additions
$ 46,892
20,350 19,280
9,085
95,607
16,972 112,579
2003
Revenues:
Intersegment
External
Total revenues
Cost of goods sold:
Intersegment
External
Total cost of good sold
Contribution:
Intersegment
External
Total contribution
Selling, general and
administrative expenses
Bad debt expense
(recovery)
Impairment charge
Earnings (loss) from
operations before
depreciation,
amortization, net interest
expense and income
taxes
Depreciation, amortization
and accretion expense
Operating income (loss)
$ 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
19,242
53,377
72,619
1
4,484
2,121
25,988 23,761
5,862
25,989 25,882 10,346
25,848
108,988
134,836
860 26,708
16,395 125,383
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
109,168
42,264
(2,600)
5,331
154,163
(32,698)
121,465
20,209
17,296
3,553
3,708
44,766
8,622
53,388
$ 88,959
24,968
(6,153) 1,623
109,397
(41,320) 68,077
Total assets
$ 274,519 326,435 40,763 26,262
667,979
95,041 763,020
Capital additions
$ 30,331
15,223
3,608
2,993
52,155
10,324 62,479
2002
Revenues:
Intersegment
External
Total revenues
$ 21,297 2,094
204,930
226,227
9,723
2,026
88,688 32,071 15,584
90,782 41,794 17,610
35,140
341,273
376,413
744 35,884
26,569 367,842
27,313 403,726
148
(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
Cost of goods sold:
Intersegment
External
Total cost of good sold
Contribution:
Intersegment
External
Total contribution
Selling, general and
administrative expenses
Bad debt expense
Earnings (loss) from
operations before
depreciation and
amortization, net interest
expense and income
taxes
Depreciation and
amortization expense
16,942
60,053
76,995
---
2,100 14,988
23,649 20,205
4,792
23,649 22,305 19,780
34,030
108,699
142,729
752 34,782
14,865 123,564
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
96,111
39,347
(4,896)
1,883
132,445
(30,320)
102,125
22,167
15,882
3,466
3,524
45,039
11,361
56,400
Operating income (loss)
$ 73,945
23,465
(8,362)
(1,641)
87,407
(41,682) 45,725
Total assets
$ 261,978 322,899 35,276 28,102
648,255
90,527 738,782
Capital additions
$ 22,832
17,395 10,388
4,215
54,830
10,310 65,140
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,
2004
2003
2002
Reportable segment revenues
Plus All Other revenues
Less intersegment revenues eliminated in
consolidation
Consolidated revenues
$ 414,708
41,122
387,749
32,130
376,413
27,313
31,004
$ 424,826
29,082
390,797
35,884
367,842
149
(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,
2004
2003
2002
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
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
$
173,056
154,163
132,445
34,079
32,698
30,320
138,977
121,465
102,125
63,113
75,864
37,149
53,388
68,077
41,917
56,400
45,725
33,403
$
38,715
26,160
12,322
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,
2004
2003
2002
Reportable segment operating income
Less All Other operating loss
Consolidated operating income
Less other expense, net
$ 119,574
43,710
75,864
37,149
109,397
41,320
68,077
41,917
84,483
38,758
45,725
33,403
Consolidated net income before income taxes
and cumulative effect of a change in
accounting principle
$ 38,715
26,160
12,322
We earn revenues included in the long-distance services segment from MCI, a major customer. We
earned revenues from MCI, net of discounts, of approximately $81,741,000, $81,996,000 and
$84,641,000 for the years ended December 31, 2004, 2003 and 2002, respectively. Revenues
earned from MCI include approximately $11,004,000 for the year ended December 31, 2002 earned
from a certain MCI customer who considered itself to be a third party obligor that was ultimately liable
for services provided by us 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 for the year ended
December 31, 2002. As a percentage of total revenues, MCI revenues, net of amounts earned from the
third party obligor, totaled 19.2%, 21.0% and 20.0% for the years ended December 31, 2004, 2003 and
2002, 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. 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. MCI emerged from bankruptcy protection on April 20, 2004. The remaining pre-petition accounts
150
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
receivable balance owed by MCI to us after this settlement was $11.1 million (“MCI credit”) which we
have used and will continue to use as a credit against amounts payable for services purchased from
MCI.
After settlement, we began reducing the MCI credit as we utilized it for services otherwise payable to
MCI. We have accounted for our use of the MCI credit as a gain contingency, and, accordingly, are
recognizing a reduction of bad debt expense as services are provided by MCI and the credit is realized.
During the years ended December 31, 2004 and 2003 we realized approximately $4.2 million and $2.8
million, respectively, of the MCI credit against amounts payable for services received from MCI. During
the year ended December 31, 2002 we recorded bad debt expense of approximately $11.0 million
associated with MCI’s bankruptcy.
The remaining unused MCI credit totaled $3.7 million and $7.9 million at December 31, 2004 and
2003, respectively. The credit balance is not recorded on the Consolidated Balance Sheet as we are
recognizing recovery of bad debt expense as the credit is realized.
(13) Financial Instruments
Fair Value of Financial Instruments
The fair value of a financial instrument is the amount at which the instrument could be exchanged in a
current transaction between willing parties. At December 31, 2004 and 2003 the fair values of cash
and cash equivalents, net receivables, current portion of notes receivable from related parties, current
maturities of capital lease obligations and long-term debt, accounts payable, accrued payroll and payroll
related obligations, accrued interest, accrued liabilities, and subscriber deposits approximate their
carrying value due to the short-term nature of these financial instruments. We expect our Series B
preferred stock to be fully redeemed by December 31, 2005 therefore the fair value approximates the
carrying value at December 31, 2004. The carrying amounts and estimated fair values of our financial
instruments at December 31, 2004 and 2003 follows (amounts in thousands):
Notes receivable with related parties
$
3,345
2004
Carrying
Amount
Fair
Value
3,345
2003
Carrying
Amount
3,443
Fair
Value
3,443
Long-term debt and capital lease obligations $
470,391 474,422
384,636 401,987
Cash flow hedge liability
Other liabilities
$
$
---
---
515
515
8,108
8,108
5,931
5,931
The following methods and assumptions were used to estimate fair values:
Notes receivable from related parties: Substantially all of the carrying value of the long-term portion
of notes receivable from related parties is estimated to approximate fair value because these
instruments are subject to variable interest rates.
Long-term debt and capital lease obligations: The fair value of our Senior Notes is estimated based
on the quoted market price for the same issue. The fair value of our Senior Credit Facility and
obligations under capital leases is estimated to approximate the carrying value because these
instruments are subject to variable interest rates.
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
151
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
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 year ended December 31, 2002 we recognized
approximately $1.2 million as a reduction of interest expense.
Effective September 21, 2001, we entered into an interest rate swap agreement to convert $25.0
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 terminated 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
was accounted for as a cash flow hedge. The change in the fair value of the interest rate swap net of
income taxes was recorded as an increase or decrease in Accumulated Other Comprehensive Loss in the
Consolidated Statements of Stockholders’ Equity. The associated cost was recognized in Interest
Expense in the Consolidated Statements of Operations. During the years ended December 31, 2004,
2003 and 2002 we recognized approximately $526,000, $681,000 and $555,000, respectively, in
incremental interest expense resulting from this transaction.
(14) Related Party Transactions
MCI
MCI was a related party through December 7, 2004 and during the years ended December 31, 2003
and 2002. In December 2004 we repurchased from MCI 3,751,509 shares of our Class A common
stock after which MCI no longer qualifies as a related party. We earned revenues from MCI, net of
discounts, of approximately $81,741,000, $81,996,000 and $84,641,000 for the years ended
December 31, 2004, 2003 and 2002, respectively. Revenues earned from MCI include approximately
$11,004,000 for the year ended December 31, 2002 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 for the year ended December 31, 2002. As a
percentage of total revenues, MCI revenues, net of amounts earned from the third party obligor, totaled
19.2%, 21.0% and 20.0% for the years ended December 31, 2004, 2003 and 2002, respectively.
Amounts receivable, net of accounts payable, from MCI totaled $25,585,000 at December 31, 2003.
We paid MCI to distribute our traffic in the contiguous 48 states and Hawaii approximately $4,174,000,
$4,570,000 and $4,911,000 for the years ended December 31, 2004, 2003 and 2002, respectively.
Other
We entered into a long-term capital lease agreement in 1991 with the wife of our President and CEO for
property occupied by us. The leased asset was capitalized in 1991 at the owner’s cost of $900,000 and
the related obligation was recorded in the accompanying financial statements. The lease agreement
was amended in 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,
152
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
or $500,000. Accordingly, we received a $500,000 payment in 2002. The owner paid us $135,000 in
2002 as additional consideration for the execution of the September 2002 amendment.
In January 2001 we entered into an aircraft operating lease agreement with a company owned by our
President and CEO. The lease was amended effective January 1, 2002. 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 portion of the stock option to repay the deposit, if allowed by our debt and preferred
stock instrument in effect at such time.
(15) 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, including immaterial amounts of contingent rent expense, under such arrangements
amounted to approximately $18,146,000, $15,899,000 and $13,795,000 for the years ended
December 31, 2004, 2003 and 2002, 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 lease matures through March 2009 and a final payment of $16.1 million is due March
31, 2009. The interest rate is Libor plus 3.25%. The lease is subordinate to our new Senior Notes and
new Senior Credit Facility. 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, 2004.
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 $38.7 million
and $43.5 million under this capital lease at December 31, 2004 and 2003, respectively.
We entered into a long-term capital lease agreement in 1991 with the wife of our President and CEO for
property occupied by us as further described in note 14.
153
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
A summary of future minimum lease payments for all leases follows (amounts in thousands):
Years ending December 31:
2005
2006
2007
2008
2009
2010 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
$ 14,564
11,676
9,404
8,362
6,708
22,057
$ 72,771
Capital
9,461
9,232
8,617
7,706
18,092
452
53,560
(13,899)
(6,239)
33,422
(672)
$
32,750
The leases generally provide that we pay the taxes, insurance and maintenance expenses related to the
leased assets. Several of our leases include renewal options, escalation clauses and immaterial
amounts of contingent rent expense. We have no leases that include rent holidays. We expect that in
the normal course of business leases that expire will be renewed or replaced by leases on other
properties.
Telecommunication Services Agreements
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. 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 completed the projects outlined in the letter of agreement and our work was
accepted by the customer in 2004. The contract was amended in 2004 consistent with the terms of the
letter of agreement. The telecommunications service agreement is for fifteen years and may be
extended for up to two successive three-year periods and, upon expiration of the extensions, one
additional year. The agreement may be canceled by either party with 180 days written notice.
We lease a portion of our AULP East fiber optic system capacity to a customer. The lease agreement is
for five years and may be extended on a month-to-month basis following the expiration of the initial term
in June 2009.
154
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
A summary of minimum future service revenues, assuming the agreement for a portion of our 800-mile
fiber optic system capacity is not terminated pursuant to contract provisions, follows (amounts in
thousands):
Years ending December 31,
2005
2006
2007
2008
2009
2010 and thereafter
Total minimum future service revenues
$
18,360
18,360
18,360
18,360
15,780
85,276
$ 174,496
Letters of Credit
We have letters of credit totaling $4,750,000 as follows:
(cid:130)
(cid:130)
(cid:130)
(cid:130)
$3.0 million of the new 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,
$1.5 million of the new Senior Credit Facility has been used to provide a letter of credit in lieu of
a deposit for the self-insured portion of our workers compensation insurance,
$150,000 of the new Senior Credit Facility has been used to provide a letter of credit to secure
general liability insurance, and
$100,000 of the new Senior Credit Facility has been used to provide a letter of credit to secure
right of way access.
Digital Local Phone Service (“DLPS”) Equipment Purchase Commitment
To ensure the necessary equipment is available to us to provision DLPS service delivery, we have
entered into an agreement to purchase a certain number of outdoor, network powered multi-media
adapters. During the year ended December 31, 2004 we purchased adapters totaling $6.0 million
pursuant to our commitment. The agreement has a remaining outstanding commitment at December
31, 2004 of $13.5 million of which approximately $5.5 million and $8.0 million will be paid during the
years ended December 31, 2005 and 2006, respectively.
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 was amended in October 2004.
The agreement as amended requires the purchase of Alaska Airlines miles during the year ended
December 31, 2004 and in future years. The agreement has a remaining commitment at December 31,
2004 totaling approximately $13.9 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
155
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
pursuant to the plan totaled approximately $37,000, $0 and $82,000 for the years ended December
31, 2004, 2003 and 2002, respectively.
Performance Based Incentive Compensation Plan
During 2003 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 $673,000 and $672,000
during the years ended December 31, 2004 and 2003, respectively.
Guaranteed Service Levels
Certain customers have guaranteed levels of service with varying terms. In the event we are unable to
provide the minimum service levels we may incur penalties or issue credits to customers.
Self-Insurance
We are self-insured for losses and liabilities related primarily to health and welfare claims up to
$150,000 per incident and $1.0 million per lifetime per beneficiary above which third party insurance
applies. A reserve of $2.0 million and $1.7 million was recorded at December 31, 2004 and 2003,
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 $500,000 and $250,000 during the years ended December 31, 2004 and 2003, respectively,
above which third party insurance applies. A reserve of $122,000 and $141,000 was recorded at
December 31, 2004 and 2003, respectively, 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 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.
Anchorage Unbundled Network Elements (“UNEs”) Arbitration
On June 25, 2004 the Regulatory Commission of Alaska (“RCA”) issued an order in our arbitration with
Alaska Communications Systems Group, Inc. (“ACS”) to revise the rates, terms, and conditions that
govern access to UNEs in the Anchorage market. The RCA's ruling set rates for numerous elements of
ACS' network, the most significant being the lease rate for local loops. The order initially increased the
loop rate from $14.92 to $19.15 per loop per month. We immediately filed a petition for
reconsideration with the RCA to correct computational errors and raise other issues. On August 20,
2004, the RCA ruled on the petition and retroactively lowered the loop rate to $18.64 per month. We
estimate the ruling will increase our local access services segment Cost of Goods Sold by as much as
approximately $4.0 million during the year ended December 31, 2005. In January 2005 GCI appealed
the RCA ruling to the Federal Circuit Court arguing that the pricing and methodology used by ACS and
approved by the RCA was flawed and in violation of federal law. We cannot predict at this time the
outcome of the lawsuit.
156
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
Rural Exemption
ACS, through subsidiary companies, provides local services in Fairbanks and Juneau, Alaska. These ACS
subsidiaries were classified as Rural Telephone Companies under the 1996 Telecom Act, which entitled
them to an exemption of certain material interconnection terms of the 1996 Telecom Act, until and
unless such “rural exemption” were examined and discontinued by the RCA. An April 2004 proceeding
to decide the matter of rural exemption was canceled upon our and ACS’ joint settlement. The
settlement agreement includes the following terms, among others:
(cid:130) ACS relinquishes all claims to exemptions from full local telephone competition in Fairbanks and
Juneau,
(cid:130) New rates for unbundled loops in Fairbanks and Juneau began on January 1, 2005. We
estimate the agreed upon rates will increase our local services segment cost of sales and
service approximately $600,000 to $700,000 during the year ended December 31, 2005,
(cid:130) Extension of existing interconnection agreements between ACS and us for Fairbanks and Juneau
until January 1, 2008, and
(cid:130) Resolution of UNE leasing issues for the Fairbanks and Juneau markets.
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, 2004, 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 7.3% of our total basic service subscribers at December
31, 2004.) 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.
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.
(16) Subsequent Events
Acquisition of Barrow Cable TV, Inc. Assets
On February 1, 2005 we acquired all of the assets of Barrow Cable TV, Inc. (“BCTV”) for approximately
$1.6 million. We expect the BCTV asset purchase to result in additional subscribers totaling
approximately 950 and additional homes passed totaling approximately 1,600.
157
(Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
Intrastate Access Refund
On May 15, 2003, AT&T filed a petition with the FCC requesting a declaratory ruling that intrastate
access charges do not apply to certain of its calling card offerings. When AT&T Alascom, a subsidiary of
AT&T, characterized calling card calls that originate and terminate in Alaska as interstate, they shifted
certain intrastate access charges payable to Alaska LECs to us. In a proceeding before the RCA, the RCA
had already declared this AT&T Alascom practice to be improper. After AT&T petitioned the FCC, the RCA
stayed AT&T Alascom's obligations to make back payments for the period prior to April, 2004, but
ordered AT&T Alascom to pay on an ongoing basis from April 1, 2004. On February 23, 2005, the FCC
also ruled against AT&T, consistent with the RCA’s prior findings. With this ruling, we can now seek to
collect refunds for the intrastate access charge amounts that AT&T Alascom unlawfully shifted to us
prior to April 1, 2004. We have not completed our calculations of the amounts due to us and cannot
predict at this time the ultimate amount to be refunded pursuant to this gain contingency, however it
could be material to our results of operations, financial position and cash flows.
Amended Related Party Lease
On February 25, 2005 we amended the aircraft operating lease agreement with a company owned by
our President and CEO. The lease was amended to accommodate the lessor’s purchase of a
replacement aircraft. The amendment increases the monthly lease rate from $50,000 to $75,000 upon
the earlier of the sale of the aircraft covered by the original lease agreement or May 25, 2005. Prior to
the sale of the aircraft covered by the original lease agreement or May 25, 2005 we pay a monthly lease
rate of $125,000. Other terms of the lease were not changed.
158
Item 15(b). Exhibits
Listed below are the exhibits that are filed as a part of this Report (according to the number assigned to
them in Item 601 of Regulation S-K):
Exhibit No.
Description
3.1
3.2
10.3
10.4
10.5
10.6
10.7
10.13
Restated Articles of Incorporation of the Company dated December 18, 2000 (30)
Amended and Restated Bylaws of the Company dated January 28, 2000 (28)
Westin Building Lease (5)
Duncan and Hughes Deferred Bonus Agreements (6)
Compensation Agreement between General Communication, Inc. and William C.
Behnke dated January 1, 1997 (19)
Order approving Application for a Certificate of Public Convenience and Necessity to
operate as a Telecommunications (Intrastate Interexchange Carrier) Public Utility
within Alaska (3)
1986 Stock Option Plan, as amended (21)
MCI Carrier Agreement between MCI Telecommunications Corporation and General
Communication, Inc. dated January 1, 1993 (8)
10.14
Contract for Alaska Access Services Agreement between MCI Telecommunications
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
10.19
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
August 13, 1993 (9)
Summary Plan Description pertaining to Qualified Employee Stock Purchase Plan of
General Communication, Inc., as amended and restated January 1, 2003 (37)
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, Inc.,
and McCaw/Rock Homer Cable System, J.V. (12)
10.32
Asset Purchase Agreement, dated May 10, 1996, between General Communication,
Inc., and McCaw/Rock Seward Cable System, J.V. (12)
10.33
10.34
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
159
(Continued)
Exhibit No.
Description
10.36
Order Approving Arbitrated Interconnection Agreement as Resolved and Modified by
General Communication, Inc., ACNFI, ACNJI and ACNKSI (13)
10.37
10.38
10.39
10.40
10.41
10.42
10.43
10.44
10.45
Order U-96-89(8) dated January 14, 1997 (18)
Amendment to the MCI Carrier Agreement executed April 20, 1994 (18)
Amendment No. 1 to MCI Carrier Agreement executed July 26, 1994 (16)
MCI Carrier Addendum—MCI 800 DAL Service effective February 1, 1994 (16)
Third Amendment to MCI Carrier Agreement dated as of October 1, 1994 (16)
Fourth Amendment to MCI Carrier Agreement dated as of September 25, 1995 (16)
Fifth Amendment to the MCI Carrier Agreement executed April 19, 1996 (18)
Sixth Amendment to MCI Carrier Agreement dated as of March 1, 1996 (16)
Seventh Amendment to MCI Carrier Agreement dated November 27, 1996 (20)
First Amendment to Contract for Alaska Access Services between General
Communication, Inc. and MCI Telecommunications Corporation dated April 1,
1996 (20)
10.46
Service Mark License Agreement between MCI Communications Corporation and
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
10.58
Order Granting Extension of Time and Clarifying Order dated October 21, 1996 (19)
Employment and Deferred Compensation Agreement between General
10.59
Deferred Compensation Agreement between GCI Communication Corp. and Dana
Communication, Inc. and John M. Lowber dated July 1992 (19)
L. Tindall dated August 15, 1994 (19)
10.60
Transponder Lease Agreement between General Communication Incorporated and
Hughes Communications Satellite Services, Inc., executed August 8, 1989 (9)
10.61
Addendum to Galaxy X Transponder Purchase Agreement between GCI
Communication Corp. and Hughes Communications Galaxy, Inc. dated August
24, 1995 (19)
10.62
Order Approving Application, Subject to Conditions; Requiring Filing; and Approving
10.66
Proposed Tariff on an Inception Basis, dated February 4, 1997 (19)
Supply Contract Between Submarine Systems International Ltd. And GCI
Communication Corp. dated as of July 11, 1997. (23)
10.67
Supply Contract Between Tyco Submarine Systems Ltd. And Alaska United Fiber System
10.71
Third Amendment to Contract for Alaska Access Services between General
Partnership Contract Variation No. 1 dated as of December 1, 1997. (23)
10.77
10.78
10.79
10.80
Communication, Inc. and MCI Telecommunications Corporation dated February
27, 1998 (25)
General Communication, Inc. Preferred Stock Purchase Agreement (26)
Qualified Employee Stock Purchase Plan of General Communication, Inc., as amended and
restated January 01, 2003 (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
Capital Corporation (29)
160
(Continued)
Exhibit No.
10.89
Description
Fifth Amendment to Contract for Alaska Access Services between General
Communication, Inc. and its wholly owned subsidiary GCI Communication Corp.,
and MCI WorldCom Network Services, Inc., formerly known as MCI
Telecommunications Corporation dated August 7, 2000 ♦ (31)
10.90
Sixth Amendment to Contract for Alaska Access Services between General
Communication, Inc. and its wholly owned subsidiary GCI Communication Corp.,
and MCI WorldCom Network Services, Inc., formerly known as MCI
Telecommunications Corporation dated February 14, 2001 ♦ (31)
10.91
Seventh Amendment to Contract for Alaska Access Services between General
10.99
10.100
10.101
10.102
10.103
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)
Agreement and plan of merger of GCI American Cablesystems, Inc. a Delaware
corporation and GCI Cablesystems of Alaska, Inc. an Alaska corporation each
with and into GCI Cable, Inc. an Alaska corporation, adopted as of December
10, 2002 (37)
10.104
Articles of merger between GCI Cablesystems of Alaska, Inc. and GCI Cable, Inc.,
adopted as of December 10, 2002 (37)
10.105
Aircraft lease agreement between GCI Communication Corp., and Alaska
corporation and 560 Company, Inc., an Alaska corporation, dated as of January
22, 2001 (37)
10.106
First amendment to aircraft lease agreement between GCI Communication Corp.,
10.107
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
10.109
Bonus Agreement between General Communication, Inc. and Wilson Hughes (39)
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,
161
(Continued)
Exhibit No.
Description
Security and Pledge Agreement (41)
10.113
Indenture dated as of February 17, 2004 between GCI, Inc. and The Bank of New
10.114
10.115
10.116
10.117
10.119
10.120
York, as trustee (41)
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 (41)
Amended and Restated 1986 Stock Option Plan of General Communication, Inc.
as of June 7, 2002 (filed as an exhibit to the Company’s Proxy Statement dated
April 30, 2004) (44)
Audit Committee Charter (filed as Appendix I to the Company’s Proxy Statement
dated April 30, 2004) (42)
Nominating and Corporate Governance Committee Charter (42)
Amendment No. 1 dated February 2, 2004 to the Credit, Guaranty, Security and
Pledge Agreement between GCI Holdings, Inc. and Credit Lyonnais New York
Branch as administrative agent for the Lenders, issuing bank, co-bookrunner
and co-arranger (the “Administrative Agent”), General Electric Capital
Corporation as documentation agent, co-arranger and co-bookrunner and CIT
Lending Services Corporation as Syndication Agent (43)
Amendment No. 2 dated May 21, 2004 to the Credit, Guaranty, Security and
Pledge Agreement between GCI Holdings, Inc. and Calyon New York Branch
(successor-in-interest to Credit Lyonnais New York Branch) as administrative
agent for the Lenders, issuing bank, co-bookrunner and co-arranger (the
“Administrative Agent”), General Electric Capital Corporation as documentation
agent, co-arranger and co-bookrunner and CIT Lending Services Corporation as
Syndication Agent (43)
10.121
First amendment to contract for Alaska Access Services between Sprint
10.122
Communications Company L.P. and General Communication, Inc. and its wholly
owned subsidiary GCI Communication Corp. dated July 24, 2002 ♦ (43)
Second amendment to contract for Alaska Access Services between Sprint
Communications Company L.P. and General Communication, Inc. and its wholly
owned subsidiary GCI Communication Corp. dated December 31, 2003 (43)
10.123
Third amendment to contract for Alaska Access Services between Sprint
Communications Company L.P. and General Communication, Inc. and its wholly
owned subsidiary GCI Communication Corp. dated February 19, 2004 ♦ (43)
10.124
Fourth amendment to contract for Alaska Access Services between Sprint
Communications Company L.P. and General Communication, Inc. and its wholly
owned subsidiary GCI Communication Corp. dated June 30, 2004 ♦ (43)
10.125
Amendment No. 3 dated November 17, 2004 to the Credit, Guaranty, Security and
Pledge Agreement between GCI Holdings, Inc. and Calyon New York Branch
(successor-in-interest to Credit Lyonnais New York Branch) as administrative
agent for the Lenders, issuing bank, co-bookrunner and co-arranger (the
“Administrative Agent”), General Electric Capital Corporation as documentation
agent, co-arranger and co-bookrunner and CIT Lending Services Corporation as
Syndication Agent (cid:195)
Code Of Business Conduct and Ethics (originally reported as exhibit 10.118) (42)
Subsidiaries of the Registrant (cid:195)
Consent of KPMG LLP (Independent Public 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)
162
(Continued)
14
21.1
23.1
31
32
99
99.1
Exhibit No.
Description
99.2
99.7
99.8
99.15
99.16
99.17
99.18
99.19
99.20
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
The Bylaws of GCI Communication Corp. (2)
The Bylaws of GCI Cable, Inc. (14)
The Articles of Incorporation of GCI Cable, Inc. (14)
The Bylaws of GCI Holdings, Inc. (19)
The Articles of Incorporation of GCI Holdings, Inc. (19)
The Articles of Incorporation of GCI, Inc. (18)
The Bylaws of GCI, Inc. (18)
The Bylaws of GCI Transport, Inc. (23)
The Articles of Incorporation of GCI Transport, Inc. (23)
The Bylaws of Fiber Hold Co., Inc. (23)
The Articles of Incorporation of Fiber Hold Co., Inc. (23)
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
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.
163
(Continued)
Exhibit
Reference
12
13
14
16
18
19
20
21
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
Description
Incorporated by reference to The Company’s Form S-4 Registration Statement
dated October 4, 1996.
Incorporated by reference to The Company’s Current Report on Form 8-K
dated November 13, 1996.
Incorporated by reference to The Company’s Annual Report on Form 10-K for
the year ended December 31, 1996.
Incorporated by reference to The Company’s Current Report on Form 8-K
dated March 14, 1996, filed March 28, 1996.
Incorporated by reference to The Company's Form S-3 Registration Statement
(File No. 333-28001) dated May 29, 1997.
Incorporated by reference to The Company's Amendment No. 1 to Form S-3/A
Registration Statement (File No. 333-28001) dated July 8, 1997.
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.
164
(Continued)
Exhibit
Reference
39
40
41
42
43
44
Description
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.
Incorporated by reference to The Company’s Annual Report on Form 10-K for
the year ended December 31, 2003.
Incorporated by reference to The Company’s Quarterly Report on Form 10-Q
for the period ended March 31, 2004.
Incorporated by reference to The Company’s Quarterly Report on Form 10-Q
for the period ended June 30, 2004.
Incorporated by reference to The Company’s Annual Definitive Proxy Statement
on Form 14A filed on April 30, 2004.
165
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.
SIGNATURES
GENERAL COMMUNICATION, INC.
By:
/s/ Ronald A. Duncan
Ronald A. Duncan, President
(Chief Executive Officer)
Date:
March 7, 2005
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 8, 2005
/s/ Ronald A. Duncan
Ronald A. Duncan
President and Director
(Principal Executive Officer)
/s/ Stephen M. Brett
Stephen M. Brett
Jerry A. Edgerton
William P. Glasgow
/s/ Stephen R. Mooney
Stephen R. Mooney
/s/ Stephen A. Reinstadtler
Stephen A. Reinstadtler
/s/ James M. Schneider
James M. Schneider
/s/ John M. Lowber
John M. Lowber
/s/ Alfred J. Walker
Alfred J. Walker
Director
Director
Director
Director
Director
Director
Senior Vice President, Chief Financial
Officer, Secretary and Treasurer
(Principal Financial Officer)
Vice President, Chief Accounting
Officer
(Principal Accounting Officer)
166
March 7, 2005
March 11, 2005
March 8, 2005
March 10, 2005
March 9, 2005
March 7, 2005
March 7, 2005