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, 2007
or
(cid:134) 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)
State of Alaska
(State or other jurisdiction of
incorporation or organization)
2550 Denali Street
Suite 1000
Anchorage, Alaska
(Address of principal executive offices)
92-0072737
(I.R.S Employer
Identification No.)
99503
(Zip Code)
Registrant’s telephone number, including area code: (907) 868-5600
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Class A common stock
(Title of class)
Class B common stock
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes (cid:134) No ⌧
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Exchange Act.
Yes (cid:134) No ⌧
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Exchange Act 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 (cid:134)
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. (cid:134)
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See the definitions of “large accelerated filer,” "accelerated filer" and "smaller reporting
company" in Rule 12b-2 of the Exchange Act (Check one).
Large accelerated filer (cid:134)
Non-accelerated filer (cid:134) (Do not check if a smaller reporting company)
Accelerated filer ⌧
Smaller reporting company (cid:134)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes (cid:134) 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 as of the last business day of the registrant’s most
recently completed second fiscal quarter of June 30, 2007 was approximately $389,157,000. Shares of voting stock held
by each officer and director and by each person who owns 5% or more of the outstanding voting stock (as publicly
reported by such persons pursuant to Section 13 and Section 16 of the Exchange Act) have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination
for other purposes.
The number of shares outstanding of the registrant’s common stock as of February 20, 2008, was:
Class A common stock – 49,913,996 shares; and,
Class B common stock – 3,256,623 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive proxy statement relating to its 2008 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, 2007.
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GENERAL COMMUNICATION, INC.
2007 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Glossary
Cautionary Statement Regarding Forward-Looking Statements
Part I
Part II
Part III
Part IV
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submissions of Matters to a Vote of Security Holders
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 8. Consolidated Financial Statements and Supplementary Data
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial
Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
Item 15. Exhibits, Consolidated Financial Statement Schedules
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SIGNATURES
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This Annual Report on Form 10-K is for the year ending December 31, 2007. This Annual Report modifies and
supersedes documents filed prior to this Annual Report. The Securities and Exchange Commission (“SEC”) allows us to
“incorporate by reference” information that we file with them, which means that we can disclose important information to
you by referring you directly to those documents. Information incorporated by reference is considered to be part of this
Annual Report. In addition, information that we file with the SEC in the future will automatically update and supersede
information contained in this Annual Report.
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Glossary
We and our industry use many terms and acronyms that may not be familiar to you. To assist you in reading this
document, we have provided below definitions of some of these terms.
Alaska DigiTel — An Alaska based wireless communications company of which we acquired an 81.9% equity interest on
January 2, 2007.
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 — An undersea fiber optic cable system connecting Seward, Alaska to Warrenton, Oregon which was placed
into service in June 2004.
Basic Service — The basic service tier includes, at a minimum, signals of local television broadcast stations, any public,
educational, and governmental programming required by the franchise to be carried on the basic tier, and any additional
video programming service added to the basic tier by the cable operator.
CDMA —Code Division Multiple Access — A digital wireless phone technology offered under our Alaska DigiTel brand
name.
CLEC — Competitive Local Exchange Carrier — A company that provides its customers with an alternative to the ILEC
for local transport of communications services, as allowed under the 1996 Telecom Act.
Collocation — The ability of a competitive access provider or CLEC to connect its network to the LEC’s central offices.
Physical collocation occurs when a connecting carrier places its network connection equipment inside the LEC’s central
offices. Virtual collocation is an alternative to physical collocation pursuant to which the LEC permits a competitive access
provider or CLEC to connect its network to the LEC’s central offices on comparable terms, even though the competitive
access provider’s or CLEC’s network connection equipment is not physically located inside the central offices.
DAMA — Demand Assigned Multiple Access — Digital satellite earth station technology that allows calls to be made
between remote villages using only one satellite hop thereby reducing satellite delay and capacity requirements while
improving quality.
DBS — Direct Broadcast Satellite — Subscription television service obtained from satellite transmissions using frequency
bands that are internationally allocated to the broadcast satellite services. The major providers of DBS are currently The
DirecTV Group, Inc. and EchoStar Communications Corporation (marketed as the DISH Network).
DLC — Digital Loop Carrier — A digital transmission system designed for subscriber loop plant. 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.
DSL — Digital Subscriber Line — Technology that allows Internet access and other high-speed data services at data
transmission speeds greater than those of modems over conventional telephone lines.
DVR — Digital Video Recorder — A service that allows digital cable subscribers to select, record and store programs and
play them at whatever time is convenient. DVR service also provides the ability to pause and rewind “live” television.
Equal Access — Connection provided by a LEC permitting a customer to be automatically connected to the Interexchange
carrier of the customer’s choice when the customer dials “1.” Also refers to a generic concept under which the Bell
system operating companies (“BOC”) must provide access services to AT&T’s competitors that are equivalent to those
provided to AT&T.
ETC — Eligible Telecommunications Carrier — A telephone service provider that has agreed to hold out service to all
customers (excluding those who fail to pay for service) in the area for which the carrier is designated as an ETC. In return,
the carrier is eligible for state and federal universal service funds.
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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.
GCI — General Communication, Inc. — An Alaska corporation and the Registrant.
GSM — Global System for Mobile Communications — A digital wireless phone technology offered under our GCI brand
name.
HDTV — High-Definition Television — A digital television format delivering theater-quality pictures and CD-quality sound.
HDTV offers an increase in picture quality by providing up to 1,920 active horizontal pixels by 1,080 active scanning lines,
representing an image resolution of more than two million pixels. In addition to providing improved picture quality with
more visible detail, HDTV offers a wide screen format and Dolby® Digital 5.1 surround sound.
ILEC — Incumbent Local Exchange Carrier — With respect to an area, the LEC that — (A) on the date of enactment of
the Telecommunications Act of 1996, provided telephone exchange service in such area; and (B)(i) on such date of
enactment, was deemed to be a member of the exchange carrier association pursuant to section 69.601(b) of the FCC’s
regulations (47 C.F.R. 69.601(b)); or (ii) is a person or entity that, on or after such date of enactment, became a successor
or assign of a member described in clause (i).
Interexchange — Communication between two different local access and transport areas or, in Alaska, between two
different Local Exchange serving areas.
IP — Internet Protocol — The method or protocol by which data is sent from one computer to another on the Internet.
Each computer (known as a host) on the Internet has at least one IP address that uniquely identifies it from all other
computers on the Internet.
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.
LAN — Local Area Network — The interconnection of computers for sharing files, programs and various devices such as
printers and high-speed modems. LANs may include dedicated computers or file servers that provide a centralized source
of shared files and programs.
LEC — Local Exchange Carrier — A company providing local telephone access services. Each BOC is a LEC.
LMDS — Local Multipoint Distribution System — LMDS uses microwave signals (millimeter wave signals) in the 28 GHz
spectrum to transmit voice, video, and data signals within small cells 3-10 miles in diameter. LMDS allows license holders
to control up to 1.3 GHz of wireless spectrum in the 28 GHz Ka-band. The 1.3 GHz can be used to carry digital data at
speeds in excess of one gigabit per second. The extremely high frequency used and the need for point to multipoint
transmissions limits the distance that a receiver can be from a transmitter. This means that LMDS will be a “cellular”
technology, based on multiple, contiguous, or overlapping cells. LMDS is expected to provide customers with multichannel
video programming, telephony, video communications, and two-way data services. ILECs and cable companies may not
obtain the in-region 1150 MHz license for three years following the date of the license grant. Within 10 years following the
date of the license grant, licensees will be required to provide ‘substantial service’ in their service regions.
Local Exchange — A geographic area generally determined by a state regulatory body, in which calls generally are
transmitted without toll charges to the calling or called party.
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Local Number Portability — The ability of an end user to change local or wireless service providers while retaining the
same telephone number.
Lower 48 States or Lower 48 — Refers to the 48 contiguous states south of or below Alaska.
Lower 49 States or Lower 49 — Refers to Hawaii and the Lower 48 States.
MAN — Metropolitan Area Network — LANs interconnected within roughly a 50-mile radius. MANs typically use fiber optic
cable to connect various wire LANs. 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.
PCS — Personal Communication Services — PCS encompasses a range of advanced wireless mobile technologies and
services. It promises to permit communications to anyone, anywhere and anytime while on the move. The Cellular
Telecommunications Industry Association defines PCS as a “wide range of wireless mobile technologies, chiefly cellular,
paging, cordless, voice, personal communications networks, mobile data, wireless private branch exchange, specialized
mobile radio, and satellite-based systems.” The Federal Communications Commission 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.”
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
Interexchange carrier circuit.
Private Network — A communications network with restricted (controlled) access usually made up of Private Lines (with
some private branch exchange switching).
RCA — Regulatory Commission of Alaska — A state regulatory body empowered to establish and enforce rules and
regulations governing public utility companies and others, such as the Company, within the State of Alaska (sometimes
referred to as Public Service Commissions, or PSCs, or Public Utility Commissions, or PUCs).
SchoolAccess® — Our Internet and related services offering to schools in Alaska, and some sites in Arizona, Montana
and New Mexico. The federal mandate through the 1996 Telecom Act to provide universal service resulted in schools
across Alaska qualifying for varying levels of discounts to support the provision of Internet services. The 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.
SMATV — Satellite Master Antenna Television — (Also known as “private cable systems”) are multichannel video
programming distribution systems that serve residential, multiple-dwelling units, and various other buildings and
complexes. A SMATV system typically offers the same type of programming as a cable system, and the operation of a
SMATV system largely resembles that of a cable system — a satellite dish receives the programming signals, equipment
processes the signals, and wires distribute the programming to individual dwelling units. The primary difference between
the two is that a SMATV system typically is an unfranchised, stand-alone system that serves a single building or complex,
or a small number of buildings or complexes in relatively close proximity to each other.
SONET — Synchronous Optical Network — A 1984 standard for optical fiber transmission on the public network. 51.84
Mbps to 9.95 Gigabits per second, effective for ISDN services including asynchronous transfer mode.
T-1 — A data communications circuit capable of transmitting data at 1.5 Mbps.
TCP/IP — Transmission Control Protocol/Internet Protocol — A suite of network protocols that allows computers with
different architectures and operating system software to communicate with other computers on the Internet.
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UNE — Unbundled Network Element — A discrete component of a telephone network. Unbundled network elements are
the basic network functions, i.e., the components needed to provide a full range of communications services. They are
physical facilities as well as all the features and capabilities provided by those facilities.
VoIP – Voice over Internet Protocol — Technology that allows voice telephone service over broadband Internet
connections via digital packets rather than traditional protocols.
VSAT — Very Small Aperture Terminal — A small, sometimes portable satellite terminal that allows connection via a
satellite link.
WAN — Wide Area Network — A remote computer communications system. WANs allow file sharing among
geographically distributed workgroups (typically at higher cost and slower speed than LANs or MANs). WANs typically use
common carriers’ circuits and networks. WANs may serve as a customized communication backbone that interconnects
all of an organization’s local networks with communications trunks that are designed to be appropriate for anticipated
communication rates and volumes between nodes.
1992 Cable Act — The Cable Television Consumer Protection and Competition Act of 1992.
1996 Telecom Act — The Telecommunications Act of 1996 — The 1996 Telecom Act was signed into law February 8,
1996. Under its provisions, BOCs were allowed to immediately begin manufacturing, research and development; GTE
Corp. could begin providing Interexchange services through its telephone companies nationwide; laws in 27 states that
foreclosed competition were pre empted; co-carrier status for CLECs was ratified; and the physical collocation of
competitors’ facilities in LECs central offices was allowed.
The purpose of the 1996 Telecom Act was to move from a regulated monopoly model of telecommunications to a
deregulatory competitive markets model. The act eliminated the old barriers that prevented three groups of companies,
the LECs, including the BOCs, the long-distance carriers, and the cable TV operators, from competing head-to-head with
each other. The act requires LECs to let new competitors into their business. It also requires the LECs to open up their
networks to ensure that new market entrants have a fair chance of competing. The bulk of the act is devoted to
establishing the terms under which the LECs must open up their networks.
The 1996 Telecom Act substantially changed the competitive and regulatory environment for telecommunications
providers by significantly amending the Communications Act of 1934 including certain of the rate regulation provisions
previously imposed by the Cable Television Consumer Protection and Competition Act of 1992 (the “1992 Cable Act”).
The 1996 Telecom Act eliminated rate regulation of the cable programming service tier in 1999. Further, the regulatory
environment will continue to change pending, among other things, the outcome of legal challenges, legislative activity, and
FCC rulemaking and enforcement activity in respect of the 1992 Cable Act and the completion of a significant number of
continuing FCC rulemakings under the 1996 Telecom Act.
Cautionary Statement Regarding Forward-Looking Statements
You should carefully review the information contained in this Annual Report, but should particularly consider any risk
factors that we set forth in this Annual Report and in other reports or documents that we file from time to time with the
SEC. In this Annual Report, in addition to historical information, we state our future strategies, plans, objectives or goals
and our beliefs of future events and of our future operating results, financial position and cash flows. In some cases, you
can identify those so-called “forward-looking statements” by words such as “may,” “will,” “should,” “expects,” “plans,”
“anticipates,” “believes,” “estimates,” “predicts,” “potential,” “project,” or “continue” or the negative of those words and
other comparable words. All forward-looking statements involve known and unknown risks, uncertainties and other
important factors that may cause our actual results, performance, achievements, plans and objectives to differ materially
from any future results, performance, achievements, plans and objectives expressed or implied by these forward-looking
statements. In evaluating those statements, you should specifically consider various factors, including those identified
under “Risk Factors,” and elsewhere in this Annual Report. Those factors may cause our actual results to differ materially
from any of our forward-looking statements. For these statements, we claim the protection of the safe harbor for forward-
looking statements provided by the Private Securities Litigation Reform Act of 1995.
You should not place undue reliance on any such forward-looking statements. Further, any forward-looking statement,
and such risks, uncertainties and other factors speak only as of the date on which they were originally made and we
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expressly disclaim any obligation or undertaking to update or revise 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. 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.
Item 1. Business
General
Part I
In this Annual Report, “we,” “us,” “our” and “the Company” refer to GCI and its direct and indirect subsidiaries.
GCI was incorporated in 1979 under the laws of the State of Alaska and has its principal executive offices at 2550 Denali
Street, Suite 1000, Anchorage, AK 99503-2781 (telephone number 907-868-5600).
GCI is primarily a holding company and together with its direct and indirect subsidiaries, is a diversified communications
provider in the state of Alaska.
Availability of Reports and Other Information
Internet users can access information about the Company and its services at http://www.gci.com/,
http://www.gcinetworksolutions.com/, and http://www.alaskaunited.com/. The Company hosts Internet services at
http://www.gci.net/, broadband delivery of health services at http://www.connectmd.com, and SchoolAccess® services at
http://www.schoolaccess.net/. Our online telephone directory and yellow pages are hosted at
http://www.gcidirectory.com/. Internet users can access information about our majority-owned subsidiary, Alaska DigiTel,
and its services at http://www.alaskadigitel.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 websites or
the SEC’s website is not part of this document.
Financial Information about Industry Segments
Our four reportable segments are Consumer, Network Access, Commercial and Managed Broadband services.
For financial information about our reportable segments, see “Part II — Item 7 — Management’s Discussion and Analysis
of Financial Condition and Results of Operations.” Also refer to note 11 included in “Part II — Item 8 — Consolidated
Financial Statements and Supplementary Data.”
Narrative Description of our Business
General
We are Alaska’s leading provider of long-distance, cable television, data and Internet services, as measured by revenues,
we are the second largest local access provider, as measured by local access lines, and we are the third largest wireless
service provider as measured by lines in service. A pioneer in bundled service offerings, we provide facilities-based local
and long distance voice, cable video, Internet and data communication services, and resell wireless telephone services, to
consumer, network access, commercial and managed broadband customers under our GCI brand. As of our January 2,
2007 acquisition of a majority ownership position in Alaska DigiTel, we provide wireless telephone services over our own
facilities under the Alaska DigiTel brand name. Over the next three years we plan to expand our CDMA wireless facilities
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and construct GSM wireless facilities throughout the terrestrially served portions of Alaska and become a facilities-based
wireless telephone provider.
We generated consolidated revenues of $520.3 million in 2007. We ended 2007 with 100,400 long-distance subscribers,
120,000 local access lines in service, 143,300 basic cable subscribers, 77,300 wireless lines in service, and 96,500 cable
modem subscribers. A substantial number of our customers subscribe to product bundles that include two or more of our
services.
Since our founding in 1979, we have consistently expanded our product portfolio to satisfy our customers’ needs. We
have benefited from the attractive and unique demographic and economic characteristics of the Alaska market. We
believe our integrated strategy of providing innovative bundles of voice, video, data and wireless services provides us with
an advantage over our competitors and will allow us to continue to attract new customers, retain existing customers and
expand our addressable market. We hold leading market shares in long-distance, cable video and Internet services and
have gained significant market share in the local access market against an incumbent provider. We are increasing our
market share in the wireless services market against the incumbent providers.
Through our focus on long-term results and strategic capital investments, 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. We use our extensive
communications networks to provide our customers with integrated communication services packages that we believe are
unmatched by any other competitor in Alaska.
We 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 commercial
communications and entertainment services — including local access 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 also offer wireless communications under the Alaska DigiTel brand name.
We believe that the size and growth potential of the voice, video and data market, the increasing deregulation of
communication services, and the increased convergence of telephony, wireless, and cable services continue to offer us
considerable opportunities to integrate our communications, Internet and cable services and expand into communications
markets within Alaska.
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 access and cable providers being lowered. We believe our continued
development of cable video service, local access service, Internet services, broadband services, and wireless services
leave us well positioned to continue to take advantage of deregulated markets.
Recent Developments
Wireless Business Strategy. During 2007 we finalized our wireless business strategy. We plan to expand Alaska DigiTel’s
CDMA network and construct a GSM network. We estimate we will spend approximately $100.0 million to construct
wireless facilities throughout the terrestrially served portions of Alaska including the cities of Anchorage, Fairbanks, and
Juneau. We expect that sixty percent of that amount will be expended in 2008 with the remainder spread about equally
over the subsequent two years.
Dobson /AT&T Agreement. AT&T Mobility, LLC (“AT&T”) acquired Dobson Communications (“Dobson”), including its
Alaska properties, on November 15, 2007. In December 2007 we signed an agreement with AT&T that provides for an
orderly four-year transition of our wireless customers from the Dobson/AT&T network in Alaska to our wireless facilities to
be built in 2008 and 2009. The agreement allows our current and future customers to use the AT&T wireless network for
local access and roaming during the transition period. The four-year transition period, which expires June 30, 2012,
provides us adequate time to replace the Dobson/AT&T network in Alaska with our own wireless facilities. Under the
agreement, AT&T’s obligation to purchase network services from us will terminate as of July 1, 2008. AT&T will provide us
with a large block of wireless network usage at no charge to facilitate the transition of our customers to our facilities. We
will pay for usage in excess of that base transitional amount. Under the previous agreement with Dobson, our margin was
fixed. Under the new agreement with AT&T we will pay for usage on a per minute basis. The block of wireless network
usage at no charge will reduce cost of goods sold exclusive of depreciation and amortization (“Cost of Goods Sold”)
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during the four year period ended June 30, 2012, that we would have otherwise recognized in accordance with the new
agreement, however, we are unable to estimate the impact this change will have on our Cost of Goods Sold.
UUI and Unicom Acquisition. In October 2007 we signed an agreement to purchase the stock of the United Utilities, Inc.
(“UUI”) and Unicom Telecommunications (“Unicom”) subsidiaries of United Companies, Inc. (“UCI”) for $40.0 million
expected to be paid upon closing. Additionally we may assume approximately $37.0 million in net debt as part of the
acquisition. We expect to fund the transaction by drawing down additional debt. UUI together with its subsidiary, United-
KUC, provides local telephone service to 60 rural Alaska communities across Alaska. Unicom operates DeltaNet, a long-
haul broadband microwave network ringing the Yukon-Kuskokwim Delta – a region of approximately 30,000 square miles
in western Alaska. By the summer of 2008, DeltaNet, which is still under construction but has already commenced
operations where completed microwave towers have been placed into service, will link more than 40 villages to Bethel,
the region’s hub. We have filed applications with the RCA and FCC seeking the requisite regulatory consent for the
transaction. The FCC comment cycle is completed and the parties are awaiting FCC action. GCI is currently filing replies
to comments and the statutory date for a final RCA decision is May 16, 2008. This transaction will close upon regulatory
approval which is expected in the second or third quarter of 2008.
Alaska Wireless Acquisition. In December 2007 we signed a purchase agreement to acquire all of the interests in Alaska
Wireless, LLC (“Alaska Wireless”) for $13.0 million to $14.0 million, expected to be paid upon closing. In addition to the
initial payment we have agreed to a contingent payment of approximately $3.0 million in 2010 if certain financial
conditions are met. We will fund the transaction from cash on hand, by drawing down additional debt, or a combination of
the two. Alaska Wireless is a GSM cellular provider serving approximately 4,000 subscribers in the Dutch Harbor, Alaska
area. In addition to the acquisition, we will enter into a management agreement with the existing owners of Alaska
Wireless. The business will continue to operate under the Alaska Wireless name and the current management team will
continue to manage its day-to-day operations. We filed an FCC application seeking the requisite regulatory consent for
this transaction on January 18, 2008. This transaction will close upon regulatory approval which is expected in the
second or third quarter of 2008.
Acquisition of Remaining Alaska DigiTel Interest. In December 2007, we signed a definitive agreement to acquire the
remaining minority interest in Alaska DigiTel for a total consideration of approximately $10.0 million. On January 22,
2008, the FCC initiated its proceedings to review our application seeking requisite regulatory approval of the proposed
change in control. Following the expected FCC approval of the change in control, we will own 100% of Alaska DigiTel.
Alaska DigiTel will construct and operate the CDMA portion of our statewide wireless platform. Please see the discussion
of our initial acquisition of Alaska DigiTel below.
Southeast Alaska Fiber Optic Cable Network. In November 2008 we expect to complete construction of a fiber optic cable
network in Southeast Alaska. The 802 miles of fiber optic cable will connect Ketchikan, Wrangell, Petersburg, Angoon
and Sitka, Alaska to our Alaska United West undersea fiber optic cable currently connecting Alaska to the Lower 48. The
fiber optic cable will also provide a second fiber link to Juneau, Alaska creating a SONET ring which will provide
alternative routing and overflow traffic-handling capabilities. In 2007 we entered into agreements to purchase the
submarine cable, amplifiers and line terminal equipment for this project.
Development of our Business During the Past Fiscal Year
Alaska DigiTel Initial Acquisition and Loan. On January 1, 2007 we invested $29.5 million in Alaska DigiTel in exchange
for an 81.9% equity interest. In exchange for our investment, we received a majority equity interest in Alaska DigiTel but
do not have voting control of Alaska DigiTel. Our existing wireless products continue to compete with Alaska DigiTel in
the Alaska market.
We also entered into a loan agreement with Alaska DigiTel dated as of January 2, 2007. Under the loan agreement, we
made available to Alaska DigiTel a $15.0 million revolving credit facility. In January 2008 the revolving credit facility
available to Alaska DigiTel was increased to $25.0 million. The advances under the loan agreement are secured by all
personal property of Alaska DigiTel and its subsidiaries, and by the membership interests in Alaska DigiTel held by AKD
Holdings, LLC. The agreement provides that the outstanding loans under the revolving credit facility will convert to a term
loan on December 31, 2008. Principal on the term loan will be due in quarterly installments beginning March 31, 2009
equal to 1.25% of the term loan, increasing to 2.50% beginning March 31, 2010. The remaining balance of the term loan
is due on June 30, 2011.
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Capital Lease Obligation. On March 31, 2006, through our subsidiary GCC, we entered into an agreement to lease
transponder capacity on Intelsat, Ltd.’s (“Intelsat”) Galaxy 18 spacecraft that is expected to be launched May 3, 2008. We
will continue to lease capacity on the Horizons 1 satellite, which is owned jointly by Intelsat and JSAT International, Inc.
The leased capacity is expected to replace our existing transponder capacity on Intelsat’s Galaxy XR satellite when it
reaches its end of life which is estimated to be May 18, 2008.
We will lease C-band and Ku-Band transponders over an expected term of 14 years once the satellite is placed into
commercial operation in its assigned orbital location, and the transponders meet specific performance specifications and
are made available for our use. We will record the capital lease obligation of $98.6 million and the addition to our Property
and Equipment when the satellite is made available for our use which is expected to occur May 18, 2008.
There is uncertainty whether the Galaxy 18 spacecraft will launch on schedule as discussed in “Part I — Item 1A. Risk
Factors — If a failure occurs in our satellite communications systems, our ability to immediately restore the entirety of our
service may be limited.”
Senior Credit Facility. In September 2007 we exercised our right to add an Incremental Facility of up to $100.0 million to
our existing Senior Credit Facility. The Incremental Facility was structured in the form of a $55.0 million increase to the
existing term loan component of our Senior Credit Facility and a $45.0 million increase to the existing revolving loan
component of our Senior Credit Facility. The $100.0 million Incremental Facility will become due under the same terms
and conditions as set forth in the existing Senior Credit Facility.
You should see “Part I — Item 1. Business — Regulation” for regulatory developments since 2006.
Competition in the Communications Industry
There is substantial competition in the communications industry. The traditional dividing lines between providers offering
long-distance, local and wireless telephone services, Internet services and video services are increasingly becoming
blurred. Through mergers and various service integration and product bundling strategies, major providers, including us,
are striving to provide integrated communications service offerings within and across geographic markets. The converging
communications industry is competing to deliver service bundles that include voice, broadband Internet access, and video
content. We maintain a strong competitive position; however, there is active competition in the sale of substantially all
services and products we offer. For more information about competition in each of our reportable segments, you should
refer to each section titled “Competition” in “Description of our Business by Reportable Segment” below.
Competitive Strengths
Market Leader. We are Alaska’s leading provider of long-distance, cable television and data and Internet services, as
measured by revenues, we are the second largest local access provider, as measured by local access lines, and we are
the third largest wireless service provider as measured by wireless revenues and lines in service. We attribute our
leadership position to our commitment to provide our customers with high-quality products in bundled offerings that
maximize their satisfaction.
Advanced Infrastructure and Robust Network Assets. We own and operate advanced networks that provide integrated
end-to-end solutions. Our hybrid-fiber coax cable network enables us to offer last-mile broadband connectivity to our
customers. Our interstate and undersea fiber optic cable systems connect our major markets in Alaska to the Lower 48
States. We employ satellite transmission for rural intrastate and interstate traffic in markets where terrestrial based
network alternatives are not available. We have or expect to be able to obtain satellite transponders to meet our long-term
satellite capacity requirements. In our local access 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, mobile wireless and other services.
Well-recognized Brand Name. Our GCI brand is the oldest brand among major communications providers in Alaska and
positively differentiates our services from those of our competitors. We believe our customers associate our brand name
with quality products. We continue to benefit from high name recognition and strong customer loyalty, and the majority of
our customers purchase multiple services from us. We have been successful in selling new and enhanced products to our
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customers based on perceived quality of products and brand recognition. Our Alaska DigiTel brand name has been in the
Alaska marketplace since 1998 and we believe our customers associate this brand name with quality wireless products.
Favorable Alaskan Market Dynamics. The Alaskan communications market is characterized by its large geographic size
and isolated markets that include a combination of major metropolitan areas and small, dense population clusters, which
create a deterrent to potential new entrants. Due to the remote nature of its communities, the state’s residents and
businesses rely extensively on our systems to meet their communications needs. We believe that, when compared to
national averages, Alaskan households spend more on communication services. According to the United States Census
Bureau, the median household income in Alaska was 22% higher than the 2006 United States national average. Please
see the “Geographic Concentration and the Alaska Economy” section of “Part II — Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations” for a discussion of Alaska’s economic outlook. We believe
there is a positive outlook for continued growth due to our planned facilities expansion and marketing strategy.
Experienced Management Team. Our experienced management team has a proven track record and has consistently
expanded our business and improved our operations. Our senior management averages more than 27 years of
experience in the communications industry and more than 18 years with our Company.
Business Strategy
We intend to continue to increase revenues and cash flow using the following strategies:
Continue to Offer Bundled Products. We offer innovative service bundles to meet the needs of our consumer and
commercial customers. We believe that bundling our services significantly improves customer retention, increases
revenue per customer and reduces customer acquisition expenses. Our experience indicates that our bundled customers
are significantly less likely to churn, and we experience less price erosion when we effectively combine our offerings.
Bundling improves our top line revenue growth, provides operating cost efficiencies that expand our margins and drives
our overall business performance. As a measure of success to date, over 51,000 of our consumer customers subscribe to
one of our service bundles.
Maximize Sales Opportunities. We successfully sell new and enhanced services and products between and within our
business segments to our existing customer base to achieve increased revenues and penetration of our services.
Through close coordination of our customer service and sales and marketing efforts, our customer service representatives
cross-sell and up-sell our products. Many calls into our customer service centers result in sales of additional services and
products. We actively encourage our existing customers to acquire higher value, enhanced services.
Deliver Industry Leading Customer Service. We have positioned ourselves as a customer service leader in the Alaska
communications market. We have organized our operations to effectively focus on our customers. We operate our own
customer service department and maintain and staff our own call centers. We have empowered our customer service
representatives to handle most service issues and questions on a single call. We prioritize our customer services to
expedite handling of our most valuable customers’ issues, particularly for our largest commercial customers. We believe
our integrated approach to customer service, including service set-up, programming various network databases with the
customer’s information, installation, and ongoing service, allows us to provide a customer experience that fosters
customer loyalty.
Leverage Communications Operations. We continue to expand and evolve our integrated network for the delivery of our
services. Our bundled strategy and integrated approach to serving our customers creates efficiencies of scale and
maximizes network utilization. By offering multiple services, we are better able to leverage our network assets and
increase returns on our invested capital. We periodically evaluate our network assets and continually monitor
technological developments that we can potentially deploy to increase network efficiency and performance.
Expand Our Product Portfolio and Footprint in Alaska. Throughout our history, we have successfully added and expect to
continue to add new products to our product portfolio. Management has a demonstrated history of new product
evaluation, development and deployment for our customers, and we will continue to assess revenue-enhancing
opportunities that create value for our customers. In addition to new services such as additional HDTV channels, video-
on-demand, on-line advertising placement, on-line content delivery such as streaming music, and mobile high speed data
we are also expanding the reach of our core products to new markets. Where feasible and where economic analysis
supports geographic expansion of our network coverage, we are currently pursuing and expect to pursue opportunities to
increase the scale of our facilities, enhance our ability to serve our existing customers’ needs and attract new customers.
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Description of our Business by Reportable Segment
Overview
Our four reportable segments are Consumer, Network Access, Commercial and Managed Broadband. Our reportable
segments are business units that offer different products, are each managed separately, and serve distinct types of
customers.
Following are our segments and the services and products each offers to its customers:
Services and Products
Consumer
Reportable Segments
Network
Access Commercial
Managed
Broadband
Voice:
Long-Distance
Local Access
Directories
Video
Data:
Internet
Private Line and Private Networks
Managed Services
Managed Broadband Services
Wireless
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
Our Consumer segment customers include residential customers. Our Commercial segment customers include small
businesses, local, national and global businesses, governmental entities, and public and private educational institutions.
Our Network Access segment customers are other common carriers. Our Managed Broadband segment customers are
rural school districts and hospitals and health clinics. We distribute information about our services and products to these
customers through a variety of channels, including direct sales, telemarketing and media advertising.
Many of our networks and facilities are utilized by more than one segment to provide services and products to our
customers. The following description of our business by reportable segment includes a comprehensive discussion within
the Consumer segment section with references to that section if such common network and facility use exists in another
segment. Similarly, many of the same services and products are sold to our customers in different segments. The
following description of our business by reportable segment includes a comprehensive discussion of services and
products within the Consumer Segment section with references to that section if such common services and products
exist in another segment.
The following discussion includes information about significant services and products, sales and marketing, facilities,
customers, competition and seasonality for each of our four reportable segments. For a discussion and analysis of
financial condition and results of operations please see “Part II – Item 7 – Management’s Discussion and Analysis of
Financial Condition and Results of Operations.”
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Consumer Segment
We offer a full range of communications services and products to our consumer customers. Consumer segment revenues
for 2007, 2006 and 2005 are summarized as follows:
2007
Year Ended December 31,
2006
(in thousands)
2005
Total revenues 1
$ 223,502
178,951
162,928
1 See “Part II — Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” and
note 11 included in “Part II — Item 8 — Consolidated Financial Statements and Supplementary Data” for more information
regarding the financial performance of our Consumer segment.
Services and Products
Our Consumer segment offers a full range of voice, video, data and wireless services and products to residential
customers.
Voice Services and Products
Long-Distance
We are engaged in the transmission of interstate and intrastate-switched message telephone service 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.
We have positioned ourselves as a price, quality, and customer service leader in the Alaska communications market. The
value of our long-distance services is generally designed to be equal to or greater than that for comparable services
provided by our competitors.
Local Access
We offer Local Access services in many communities and areas in Alaska, including the state’s five largest population
centers, Anchorage, Fairbanks, the Matanuska-Susitna Valley, the Kenai Peninsula, and Juneau. Our own DLPS facilities
and collocated remote facilities that access the ILEC’s UNE loops allow us to offer full featured local service products to
consumer customers. In areas where we do not have our own DLPS facilities or access to ILEC loop facilities, we offer
service using total service resale of the ILEC’s local service or UNE platform.
Our package offerings are competitively priced and include popular features, including caller ID, voice messaging, call
forwarding, and call waiting.
Video Services and Products
Our cable television systems serve 40 communities and areas in Alaska, including the state’s five largest population
centers, Anchorage, Fairbanks, the Matanuska-Susitna Valley, the Kenai Peninsula, and Juneau.
We offer a full range of video services over our broadband cable systems. We tailor our channel offerings for each system
serving a particular geographic area according to applicable local and federal regulatory requirements, programming
preferences, demographics and the capabilities of our cable facilities in each system. Our video service offerings include
the following:
Basic cable. Our basic cable service consists of a limited analog or digital Basic Service with access to between 12 and
19 channels of programming and an expanded analog Basic Service with access to between 36 and 59 additional
channels of programming. These services generally consist of programming provided by national and local broadcast
networks, national and regional cable networks, and governmental and public access programming. In January 2008 we
began to digitize our basic cable service. We have made a commitment to the FCC to transmit an entirely digital signal for
all cable television channels in all markets we serve by December 31, 2008.
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Digital cable. Our digital cable service uses a digital set-top box to deliver up to 52 channels of video programming, 48
music channels and an interactive program guide.
High-Definition Television. Our HDTV service provides our digital subscribers with improved, high-resolution picture
quality, improved audio quality and a wide-screen, theater-like display. Our HDTV service offers a broad selection of high-
definition programming with access of up to 23 high-definition channels including most major broadcast networks, leading
national cable networks, premium channels and national sports networks.
Digital Video Recorder. Our advanced DVR service lets digital cable subscribers select, record and store programs and
play them at whatever time is convenient. DVR service also provides the ability to pause and rewind “live” television.
Premium channel programming. Our premium channel programming service, which includes cable networks such as
Home Box Office, Showtime, Starz and Cinemax, generally offers, without commercial interruption, feature motion
pictures, live and taped sporting events, concerts and other special features.
Pay-per-view programming. Our pay-per-view service permits our cable subscribers to order, for a separate fee, individual
feature motion pictures and special event programs, such as professional boxing, professional wrestling and concerts, on
an unedited, commercial-free basis.
In March 2008 we expect to begin offering video-on-demand services to our consumer customers.
Data Services and Products
Internet
We primarily offer three types of Internet access for consumer use: high-speed cable modem, dial-up and fixed wireless.
Value-added Internet features, such as email virus prevention, personal web site and domain hosting, and additional
email accounts, are available for additional charges. Our consumer high-speed cable modem Internet service offers up to
10 Mbps download and 2 Mbps upload speeds as compared with up to 56 Kbps upload and download speeds through
standard copper wire dial-up modem access. Our fixed wireless Internet product is available in 139 communities. Three
distinct products are offered; 56 Kbps, 256 Kbps, and 256 Kbps for multiple computers. We provide 24-hour customer
service and technical support via telephone or online.
An entry-level cable modem service also offers free data transfer up to one gigabyte per month at a rate of 64 Kbps and
can be connected 24-hours-a-day, 365-days-a-year, allowing for real-time information and e-mail access. This product
acts as a dialup replacement and upgrade since it is always connected and provides more efficient data transfer. Cable
modems use our coaxial cable plant that provides cable television service, instead of the traditional ILEC copper wire.
Coaxial cable has a much greater carrying capacity than telephone copper wire and can be used to simultaneously deliver
both cable television (analog or digital) and Internet access services.
Wireless Services and Products
We offer mobile wireless services by reselling Dobson’s services under our brand name and selling Alaska DigiTel’s
service under its brand name. We offer fixed wireless local access services over our own facilities, and have purchased
PCS and LMDS wireless broadband licenses in FCC auctions covering markets in Alaska. We offer mobile wireless
service to our customers located in Anchorage, Fairbanks, Fort Greely, Juneau, Kenai/Soldotna, Kodiak, Nome, North
Pole, Palmer/Wasilla, Homer, Ketchikan, Petersburg, Prudhoe Bay, Seward, Sitka, Valdez and Wrangell, Alaska.
In November 2007, AT&T acquired Dobson including its Alaska properties. In December 2007 we signed an agreement
with AT&T that provides for an orderly four-year transition of our wireless customers from the Dobson/AT&T network in
Alaska to our wireless facilities to be built in 2008 and 2009. The agreement allows our current and future customers to
use the AT&T wireless network for local access and roaming during the transition period, which expires June 30, 2012.
The four-year transition period provides us adequate time to replace the Dobson/AT&T network in Alaska with our own
wireless facilities.
We offer our customers a variety of rate plans so they can choose the plan that best fits their expected calling needs. We
focus our offers to take advantage of the GSM network using the GCI brand name or the CDMA network using the Alaska
DigiTel brand name. Consumer voice service is generally offered on a contract basis for one or two year periods. Under
15
the terms of these contracts, service is billed and provided on a monthly basis according to the applicable rate plan
chosen. Our offerings include regional and national rate plans at a variety of pricing tiers. Our rate plans generally
combine a fixed monthly access charge, a designated number of minutes-of-use, per minute usage charges for minutes in
excess of the included amount and additional charges for certain custom-calling features. Most of our plans include basic
features such as voice messaging, caller ID, call forwarding and call waiting, and two-way text messaging.
We sell a variety of handsets and personal computer wireless data cards manufactured by various suppliers for use with
our wireless services. We also sell accessories, such as carrying cases, hands-free devices, batteries, battery chargers
and other items. We provide contract subscribers substantial equipment subsidies to initiate or upgrade service.
Bundled Services and Products
We combine one or more of our individual service and product offerings into bundles that we sell to our Consumer
segment customers at attractive prices. Our most popular bundled offering includes long-distance, cable television, cable
modem Internet access and local access services. In addition to several other bundled offerings we also offer a bundle of
wireless services, cable television and cable modem Internet access.
Sales and Marketing
Our Consumer segment sales efforts are primarily directed toward increasing the number of subscribers we serve, selling
bundled services, and generating incremental revenues through product and feature up-sell opportunities. We sell our
Consumer segment services through telemarketing, direct mail advertising, door-to-door selling, up-selling by our
customer service and call center personnel, local media advertising, retail stores, and through our website.
Facilities
Voice Facilities
We operate a modern, competitive communications network employing the latest digital transmission technology based
upon fiber optic facilities within and between Anchorage, Fairbanks, Prudhoe Bay, and Juneau, Alaska. Our facilities
include two self-constructed digital undersea fiber optic cable systems linking our Alaska terrestrial networks to the
networks of other carriers in the Lower 49 States. AULP East was placed into service in February 1999 and connects
Whittier, Valdez and Juneau, Alaska and Seattle, Washington. AULP West was placed into service in June 2004 and
connects Seward, Alaska to Warrenton, Oregon. The Seward cable landing station connects to our switching and
distribution center in Anchorage and the Warrenton cable landing station connects to our switching and distribution center
in Seattle via long-term leased capacity. The combination of our AULP East and AULP West systems provides us with the
ability to provide fully protected geographically diverse routing of service between Alaska and the Lower 48 States.
We have IRU capacity in the Kodiak-Kenai Cable Company, LLC’s marine-based fiber optic cable system linking
Anchorage to Kenai, Homer, Kodiak, Narrow Cape on Kodiak Island, and Seward, Alaska.
These undersea fiber optic cable systems allow us to carry our military base traffic and our Anchorage, Delta Junction,
Eagle River, Fairbanks, Glenallen, Homer, Juneau, Kenai, Kodiak, Palmer, Prudhoe Bay, Seward, Soldotna, Valdez,
Wasilla, and Whittier, Alaska traffic to and from the Lower 48 States and between these instate locations over terrestrial
circuits, eliminating the one-half second round trip delay associated with satellite circuits.
Another carrier completed construction of fiber optic facilities connecting points in Alaska to the Lower 48 States in 1999.
The additional fiber system provides direct competition to services we provide on our owned fiber optic facilities; however,
this fiber system also provides an alternative routing path for us for a limited amount of traffic in case of a major fiber
outage in our systems. A competitor has announced its intention to construct an undersea fiber optic cable system
between Homer, Alaska and Florence, Oregon to be completed by the end of 2008.
We use satellite transponders to transmit voice and data traffic to remote areas of Alaska. We acquired satellite
transponders on the Intelsat Galaxy XR satellite in March 2000 to meet our long-term satellite capacity requirements. We
further augmented capacity on Galaxy XR with the lease of a seventh C-band transponder in October 2002. As previously
discussed we have entered into an agreement to lease transponder capacity on Intelsat’s Galaxy 18 spacecraft that is
expected to be launched May 3, 2008. We will also lease capacity on the Horizons 1 satellite. The leased capacity is
expected to replace our capacity on Intelsat’s Galaxy XR satellite when it reaches its end of life which is estimated to be
May 18, 2008.
16
We continue to develop and deploy new technology to further increase the efficiency of bandwidth utilization for our
satellite network. With a sparse population spread over a large geographic area, neither terrestrial microwave nor fiber
optic transmission technology is considered to be economically feasible in rural Alaska in the foreseeable future. See
“Part I — Item 1A — Risk Factors — If a failure occurs in our satellite communications systems, our ability to immediately
restore the entirety of our service may be limited.” for more information.
We operate digital microwave systems to link Anchorage with the Kenai Peninsula, and our Prudhoe Bay Earth Station
with Deadhorse, Alaska. Digital microwave facilities are also used between our Fairbanks earth station and our Fairbanks
distribution center. Virtually all switched services are computer controlled, digitally switched, and interconnected by a
packet switched SS7 signaling network.
Other facilities include major earth stations at Adak, Barrow, Bethel, Cordova, Dillingham, Dutch Harbor, Eagle River,
Galena, Juneau, Ketchikan, King Salmon, Kodiak, Kotzebue, McGrath, Nome, Prudhoe Bay, Sitka, Unalakleet, and
Yakutat, all in Alaska, serving the communities in their vicinity, and at Issaquah, Washington, which provides
interconnection to Seattle and the Lower 48 States for traffic to and from major Alaska earth stations. The Eagle River
earth station is linked to the Anchorage distribution center by fiber optic facilities.
We use SONET as a service delivery method for our terrestrial metropolitan area networks as well as our long-haul
terrestrial and undersea fiber optic cable networks.
A fiber optic cable system from our Anchorage distribution center connects to the Matanuska Telephone Association
(“MTA”) Eagle River central office and to our major hub earth station in Eagle River. The Issaquah earth station is
connected with the Seattle distribution center by means of diversely-routed leased fiber optic cable transmission systems,
each having the capability to restore the other in the event of failure. The Juneau earth station and distribution centers are
collocated. We have digital microwave facilities serving the Kenai Peninsula communities. We maintain earth stations in
Fairbanks (linked by digital microwave to the Fairbanks distribution center), Juneau (collocated with the Juneau
distribution center), Anchorage (Benson earth station), and in Prudhoe Bay as fiber network restoration earth stations. Our
Benson earth station also uplinks our statewide video service; such service may be pre-empted if earth station capacity is
needed to restore our fiber network between Anchorage and Prudhoe Bay.
We use our DAMA facilities to serve 69 additional locations throughout Alaska. DAMA is a digital satellite earth station
technology that allows calls to be made between remote villages using only one satellite hop, thereby reducing satellite
delay and capacity requirements while improving quality. In addition, 54 (for a total of 123) C-band facilities provide
dedicated Internet access and private network services to rural public schools, hospitals, health clinics, and natural
resource development industries throughout Alaska. Our network of 83 Ku-band facilities provides dedicated Internet
access and private network services to rural public schools, hospitals, health clinics, and natural resource development
industries throughout Alaska, and in 10 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 Verizon Communications Inc. (“Verizon”), Sprint Nextel
Corporation (“Sprint Nextel”) and other carriers to distribute our southbound traffic to the remaining 49 states and
international destinations. Our extensive metropolitan area fiber network in Anchorage supports cable television, Internet
and telephony services. The Anchorage, Fairbanks, and Juneau facilities also include digital access cross-connect
systems, frame relay data switches, Internet platforms, and in Anchorage and Fairbanks, collocation facilities for
interconnecting and hosting equipment for other carriers. We also maintain an operator and customer service center in
Wasilla, Alaska. Our operator services traffic is processed by an integrated services platform that also hosts answering
services, directory assistance, and internal conferencing services.
In 1997 we entered the local services market in Anchorage. At December 31, 2007 we could access approximately 96%,
75% and 90% of Anchorage, Fairbanks, and Juneau area local loops, respectively, from our collocated remote facilities
and DLC installations, excluding Fort Wainwright and Eielson Air Force Base areas.
We continue our DLPS deployment utilizing our coaxial cable facilities. This delivery method allows us to utilize our own
cable facilities to provide local access service to our customers and avoid paying local loop charges to the ILEC.
Video Facilities
Our statewide cable systems consist of 2,853 miles of installed cable plant having 450 to 625 MHz of channel capacity.
Our cable television businesses are located throughout Alaska and serve 40 communities and areas in Alaska, including
17
the state’s five largest population centers, Anchorage, Fairbanks, the Matanuska-Susitna Valley, the Kenai Peninsula, and
Juneau. Our facilities include cable plant and head-end distribution equipment. Certain of our head-end distribution
centers are collocated with customer service, sales and administrative offices.
Data Facilities
We provide access to the Internet using a platform that includes many of the latest advancements in technology. The
physical platform is concentrated in Anchorage and is extended into many remote areas of the state. Our Internet platform
includes the following:
• Our Anchorage facilities are connected to multiple Internet access points in Seattle through multiple, diversely
routed networks;
• We use multiple routers on each end of the circuits to control the flow of data and to provide resiliency; and
• Our Anchorage facility consists of routers, a bank of servers that perform support and application functions,
database servers providing authentication and user demographic data, layer 2 gigabit switch networks for
intercommunications and broadband services (cable modem, wireless and DSL), and access servers for dial-
up users.
Our dedicated Internet access and IP data services are delivered to a router located at the service point. Our Internet
management platform constantly monitors this router and continual communications are maintained with all of the core
and distribution routers in the network. The availability and quality of service, as well as statistical information on traffic
loading, are continuously monitored for quality assurance. The management platform has the capability to remotely
access routers, servers and layer two switches, permitting changes in configuration without the need to be physically
located at the service point.
Bandwidth is made available for our Internet services through our AULP East and AULP West undersea fiber cable
systems and our Galaxy XR transponders.
Our GCI.net product offers a unique combination of innovative network design and aggressive performance management.
Our Internet platform has received a certification that places it in the top one percent of all service providers worldwide
and is the only ISP in Alaska with such a designation. We operate and maintain what we believe is the largest, most
reliable, and highest performance Internet network in Alaska.
Wireless Facilities
We had a distribution agreement with Dobson allowing us to resell Dobson cellular services. In November 2007 AT&T
acquired Dobson, including its Alaska properties, and in December 2007 we signed an agreement with AT&T that
provides for an orderly four-year transition of our wireless customers from the Dobson/AT&T network in Alaska to our
wireless facilities to be built in 2008 and 2009. The agreement allows our current and future customers to use the AT&T
wireless network for local access and roaming during the transition period, which expires June 30, 2012. The four-year
transition period provides us adequate time to replace the Dobson/AT&T network in Alaska with our own wireless
facilities. Commencing in 2008 we plan to expand Alaska DigiTel’s CDMA network and construct a GSM network
throughout the terrestrially served portions of Alaska including the cities of Anchorage, Fairbanks, and Juneau.
We provide limited wireless local access and Internet services using our own facilities utilizing our 30-MHz PCS license
and unlicensed 2.4 GHz spectrum. We provide the service through 802.11 (a set of wireless standards), and wireless
DOCSIS (a data over cable service interface specification).
Alaska DigiTel owns the 30-MHz “A” Block PCS license in Major Trading Area 49, the state of Alaska. The Alaska DigiTel
network includes a Lucent 5ESS wireless switch located in Anchorage, and more than 100 cell sites that cover more than
75% of the populated areas of Alaska, including Anchorage and Eagle River, the Matanuska-Susitna Valley, Kenai
Peninsula, Juneau and Fairbanks. Alaska DigiTel extends its network coverage in Alaska, the Lower 49 States and
Canada through roaming arrangements with other CDMA carriers.
18
Customers
A discussion of Consumer segment customers by product type follows.
Voice Customers
Long-Distance
We had 89,900, 89,800, and 95,000 Consumer segment long-distance subscribers at December 31, 2007, 2006 and
2005, respectively. The decrease from 2005 to 2006 is primarily due to a decrease in the total number of long-distance
services subscribers in the markets we serve resulting from customers substituting wireless phone, prepaid calling card,
VoIP and email usage for direct dial minutes.
Equal Access conversions have been completed in all communities where we serve with owned facilities. Equal Access is
in progress in several small communities where we are expanding our owned facilities. We estimate that we carry greater
than 50% of combined consumer and commercial traffic as a statewide average for both originating interstate and
intrastate message telephone service.
Revenues derived from Consumer segment long-distance services in 2007, 2006 and 2005 totaled $20.3 million, $20.6
million and $23.5 million, respectively, or 3.9%, 4.3% and 5.5% of our total revenues, respectively.
A summary of our Consumer segment switched long-distance message telephone service traffic (in minutes) follows:
Consumer long-distance minutes: 1
Interstate
Intrastate
International
Total
2007
Year Ended December 31,
2006
(in millions)
109.1
27.2
5.6
141.9
105.0
25.0
5.8
135.8
2005
125.5
32.0
5.5
163.0
1 All minutes data were taken from our internal billing statistics reports.
Although we have several agreements to facilitate the origination and termination of international toll traffic, we have
neither foreign operations nor export sales. See “Part I — Item 1 — Business — Financial Information about our Foreign
and Domestic Operations and Export Sales” for more information.
Local Access
We had 74,400, 66,200 and 68,400 Consumer segment local access lines in service subscribers at December 31, 2007,
2006 and 2005, respectively. We ended 2007 with market share gains in substantially all market segments.
Revenues derived from Consumer segment local access services in 2007, 2006 and 2005 totaled $25.9 million, $25.0
million and $23.3 million, respectively, or 5.0%, 5.2% and 5.3% of our total revenues, respectively.
Video Customers
Our cable systems passed 224,700, 219,900 and 215,000 homes at December 31, 2007, 2006 and 2005, respectively,
and served 128,000, 124,000 and 122,600 basic Consumer segment subscribers at December 31, 2007, 2006 and 2005,
respectively. Revenues derived from Consumer segment video services totaled $96.3 million, $90.2 million and $84.7
million in 2007, 2006 and 2005, respectively, or 18.5%, 18.9% and 19.1% of our total revenues, respectively.
Data Customers
We had 88,000, 78,500 and 70,800 active Consumer segment cable modem Internet subscribers at December 31, 2007,
2006 and 2005, respectively. Revenues derived from Consumer segment Internet services totaled $34.2 million, $29.4
million and $25.3 million, in 2007, 2006 and 2005, respectively, or 6.6%, 6.2% and 5.7% of our total revenues,
respectively.
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Wireless Customers
We had 70,000 and 24,400 total Consumer segment wireless lines in service at December 31, 2007 and 2006,
respectively. The total wireless lines in service at December 31, 2007 include Alaska DigiTel lines in service. We had
16,000 total Consumer segment and Commercial segment wireless lines in service at December 31, 2005. Data was not
available to separately identify the number of Consumer segment and Commercial segment lines in service at December
31, 2005. Our Consumer segment wireless services revenue totaled $46.7 million, $13.7 million and $6.1 million in the
years ended December 31, 2007, 2006 and 2005, respectively, or 9.0%, 2.9% and 1.4% of total revenues, respectively.
The total wireless revenue at December 31, 2007 includes Alaska DigiTel revenue.
Competition
A discussion of competition by product and service in our Consumer segment follows. See “Item 1A. — Risk Factors —
We face intense competition that may reduce our market share and harm our financial performance.”
Voice Services and Products Competition
Long-Distance
The long-distance industry is intensely competitive and subject to constant technological change. Competition is based
upon price and pricing plans, the type of services offered, customer service, billing services, performance, perceived
quality, reliability and availability. Current or future competitors could be substantially larger than we are, or have greater
financial, technical and marketing resources than we do.
In the intrastate, interstate and international long-distance market, we compete against AT&T Alascom, Inc. (“AT&T
Alascom”), Alaska Communications Systems Group, Inc. (“ACS”), MTA, long-distance resellers, and certain smaller rural
local telephone companies. AT&T Alascom, as a subsidiary of AT&T, has access to greater financial, technical and
marketing resources than we have. There is also the possibility that new competitors will enter the Alaska market. In
addition, wireless and VoIP services continue to grow as an alternative to wireline services as a means of reaching
customers. Wireless Local Number Portability allows consumers to retain the same phone number as they change service
providers allowing for interchangeable and portable fixed-line and wireless numbers. Some consumers now use wireless
service as their primary voice phone service for local and long-distance calling.
We have competed in the long-distance market by offering discounts from rates charged by our competitors and by
providing desirable bundles of services. Discounts have been eroded in recent years due to lowering of prices by AT&T
Alascom and entry of other competitors into the long-distance markets we serve. In addition, our competitors offer their
own bundles of services.
Our ability to compete successfully will depend on our ability to anticipate and respond to various competitive factors
affecting the industry, including new services that may be introduced, changes in consumer preferences, demographic
trends, economic conditions and pricing strategies.
Under the terms of the acquisition of Alascom by AT&T Inc., which were retained in the subsequent acquisition of AT&T
by SBC Communications Inc., AT&T Alascom rates and services must mirror those offered by AT&T Inc., so changes in
AT&T Inc. prices indirectly affect our rates and services. AT&T Inc.’s and AT&T Alascom’s interstate prices are regulated
under a price cap plan whereby their rate of return is not regulated or restricted. Price increases by AT&T Inc. and AT&T
Alascom generally improve our ability to raise prices while price decreases pressure us to follow. We believe we have, so
far, successfully adjusted our pricing and marketing strategies to respond to AT&T Inc. and other competitors’ pricing
practices. However, if competitors significantly lower their rates, we may be forced to reduce our rates, which could have
a material adverse effect on our financial position, results of operations or liquidity.
Local Access
Data obtained from the RCA indicates that there are 23 ILECs and 12 CLECs certified to operate in the State of Alaska at
December 31, 2007. We compete against ACS, the ILEC, and AT&T Alascom in Anchorage, Juneau and Fairbanks.
AT&T Alascom offers Local Exchange service only to consumer customers through total service resale. We compete
against MTA, the ILEC, in the Mat-Su Valley and ACS, the ILEC, in the Kenai-Soldotna area. We compete against other
smaller ILECs in certain smaller communities.
We plan to provide local telephone service in other locations in the future where we would face other competitors. The
RCA granted amendments to our certificates of convenience and public necessity to provide local service in areas where
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population growth has occurred and is likely to occur over the next five years. The 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. The RCA also granted amendments
to our certificates of convenience and public necessity to provide local service to the entire service areas of Ketchikan
Public Utilities, Cordova Telephone Cooperative, Copper Valley Telephone Cooperative (“CVTC”), MTA, the Glacier State
service area, and Arctic Slope Telephone Association Cooperative (“ASTAC”) as well as the cities of Wrangell,
Petersburg, Sitka, Seward, Bethel and Nome. We expect further competition in the marketplaces we serve as other
companies may receive certifications in the future.
In the local telephone services market, the 1996 Telecom Act, judicial decisions, state and federal legislative and
regulatory developments, and new technologies have increased the overall likelihood that barriers to local telephone
competition will be substantially reduced or removed. These initiatives include requirements that ILECs negotiate with
entities, including us, to provide interconnection to the existing local telephone network, to allow the purchase, at cost-
based rates, of access to UNEs, to establish dialing parity, to obtain access to rights-of-way and to resell services offered
by the ILEC. We have been able to obtain interconnection, access and related services from the ILECs, at rates that allow
us to offer competitive services. However, if we are unable to continue to obtain these services and access at acceptable
rates, our ability to offer local access services, and our revenues and net income, could be materially adversely affected.
To date, we have been successful in capturing a significant portion of the local telephone market in the locations where
we are offering these services. However, there can be no assurance that we will continue to be successful in attracting or
retaining these customers.
We believe that we have certain advantages over ILECs in providing communications services, including awareness by
Alaskan customers of the GCI brand name, our facilities-based communications network, and our prior experience in, and
knowledge of, the Alaskan market.
See “Regulation — Wireline Voice Services and Products” below for more information.
Video Services and Products Competition
Our cable television systems face competition from alternative methods of receiving and distributing television signals,
including DBS and digital video over telephone lines, broadband IP-based services, wireless and SMATV systems, and
from other sources of news, information and entertainment such as Internet services, off-air television broadcast
programming, newspapers, movie theaters, live sporting events, interactive computer services, and home video products,
including video disks. Our cable television systems also face competition from potential overbuilds of our existing cable
systems by other cable television operators and municipally-owned cable systems, and alternative methods of receiving
and distributing television signals. The extent to which our cable television systems are competitive depends, in part, upon
our ability to provide quality programming and other services at competitive prices.
We believe that the greatest source of potential competition for video services could come from the DBS industry. Two
major companies, The DirecTV Group, Inc. and EchoStar Communications Corporation are currently offering nationwide
high-power DBS services. We also are subject to competition from providers of digital video over telephone lines in the
Mat-Su Valley and in Ketchikan. With the addition of Anchorage local broadcast stations, increased marketing, ILEC and
DBS alliances, and emerging technologies creating new opportunities, competition from these sources has increased and
will likely continue to increase.
DBS is more competitive with cable in the Alaska market than it once was because technological advances have
improved signal quality and reduced equipment costs and local programming is more widely available than it once was.
In the past, the majority of Alaska DBS subscribers were required to bear the cost of and install larger satellite dishes
(generally three to six feet in diameter) because of the weaker satellite signals available in northern latitudes, particularly
in communities surrounding, and north of, Fairbanks. In addition, the satellites had a relatively low altitude above the
horizon when viewed from Alaska, making their signals subject to interference from mountains, buildings and other
structures. Satellite placements have provided Alaska residents with a DBS package that requires a smaller satellite dish
(typically 18 inches); however, a second larger dish is required if the subscriber wants to receive a channel line-up similar
to that provided by our cable systems with high-definition programming. In addition to the dish and equipment cost
deterrents, DBS signals are subject to degradation from atmospheric conditions such as rain and snow. The changing
nature of technology and of the DBS business may result in greater satellite coverage within Alaska.
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The largest ILEC in Alaska has engaged in 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. DirecTV
and EchoStar have satellites that can transmit a stronger signal and deliver local network programming in certain
communities in Alaska.
The ILECs in the Mat-Su Valley and Ketchikan offer digital video service over telephone lines in limited areas. Their
product offerings and price points are similar to our product offerings.
Competitive forces will be counteracted by offering expanded programming through digital services and by providing high-
speed data services. System upgrades have been completed to make our systems reverse activated, providing the
necessary infrastructure to offer cable modem service to greater than 99% of our homes passed. Digital delivery
technology is being utilized in all of our systems. We have retransmission agreements with Anchorage broadcasters that
expire in 2009 and provide for the uplink/downlink of their signals into all our systems, and local programming for our
customers.
Other new technologies may become competitive with non-entertainment services that cable television systems can offer.
The FCC has authorized television broadcast stations to transmit textual and graphic information useful to both
consumers and businesses. The FCC also permits commercial and non-commercial FM stations to use their subcarrier
frequencies to provide non-broadcast services including data transmissions. The FCC established an over-the-air
interactive video and data service that will permit two-way interaction with commercial and educational programming
along with informational and data services. LECs and other common carriers also provide facilities for the transmission
and distribution to homes and businesses of interactive computer-based services, including the Internet, as well as data
and other non-video services. The FCC has conducted spectrum auctions for licenses to provide PCS, as well as other
services. PCS and other services will enable license holders, including cable operators, to provide voice and data
services. We own a statewide license to provide PCS in Alaska.
Cable television systems generally operate pursuant to franchises granted on a non-exclusive basis. The 1992 Cable Act
gives local franchising authorities jurisdiction over basic cable service rates and equipment in the absence of “effective
competition,” prohibits franchising authorities from unreasonably denying requests for additional franchises and permits
franchising authorities to operate cable systems. Well-financed businesses from outside the cable industry (such as the
public utilities that own certain of the poles on which cable is attached) may become competitors for franchises or
providers of competing services.
We expect to continue to provide, at reasonable prices and in competitive bundles, a greater variety of communication
services than are available off-air or through other alternative delivery sources. Additionally, we believe we offer superior
technical performance and responsive community-based customer service. Increased competition, however, may
adversely affect our market share and results of operations from our cable services product offerings.
Data Services and Products Competition
The Internet industry is highly competitive, rapidly evolving and subject to constant technological change. Competition is
based upon price and pricing plans, service bundles, the types of services offered, the technologies used, customer
service, billing services, perceived quality, reliability and availability. As of December 31, 2007, we competed with more
than eight Alaska based Internet providers, and competed with other domestic, non-Alaska based providers that provide
national service coverage. Several of the providers headquartered outside of Alaska have substantially greater financial,
technical and marketing resources than we do.
With respect to our high-speed cable modem service, ACS and other Alaska telephone service providers are providing
competitive high-speed DSL services over their telephone lines in direct competition with our high-speed cable modem
service. Competitive local fixed wireless providers are providing service in certain of our markets as is a national WiMax-
based provider in Anchorage with plans for Juneau and Fairbanks. WiMax is a standards-based wireless technology that
provides high-throughput broadband connections over long distances. WiMax can be used for a number of applications,
including last mile broadband connections, hotspots and cellular backhaul, and high-speed enterprise connectivity for
business. DBS providers and others provide wireless high speed Internet service in competition with our high-speed cable
modem services.
Niche providers in the industry, both local and national, compete with certain of our Internet service products, such as web
hosting, list services and email.
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Wireless Services and Products Competition
We compete against AT&T Wireless, ACS, MTA, and resellers of those services in Anchorage and other markets. We
competed against Dobson until its acquisition by AT&T in November 2007. The GCI and Alaska DigiTel brands compete
against each other.
We also compete, to a lesser extent, with mobile satellite service providers, as well as from resellers of these services.
The FCC has granted mobile satellite service providers the flexibility to deploy an ancillary terrestrial component to their
satellite services. This added flexibility may enhance their ability to offer more competitive mobile services.
Regulatory policies favor robust competition in wireless markets. Wireless Local Number Portability, which was
implemented by the FCC late in 2003, has also increased the level of competition in the industry. Number portability
allows subscribers to switch carriers without having to change their telephone numbers.
The communications industry continues to experience significant technological changes, as evidenced by the increasing
pace of improvements in the capacity and quality of digital technology, shorter cycles for new products and enhancements
and changes in consumer preferences and expectations. Accordingly, we expect competition in the wireless
communications industry to continue to be dynamic and intense as a result of the development of new technologies,
services and products.
We compete for customers based principally upon price, bundled services, the services and enhancements offered,
network quality, customer service, network coverage and capacity, and the availability of differentiated features and
services. Our ability to compete successfully will depend, in part, on our marketing efforts and our ability to anticipate and
respond to various competitive factors affecting the industry.
Seasonality
Our Consumer segment voice, video, and data services do not exhibit significant seasonality. Our ability to implement
construction projects is hampered during the winter months because of cold temperatures, snow and short daylight hours.
Network Access Segment
We offer wholesale voice and data services and products to other common carrier customers. Network Access segment
revenues for 2007, 2006 and 2005 are summarized as follows:
2007
Year Ended December 31,
2006
(in thousands)
2005
Total revenues 1
$ 163,377
166,471
148,333
1 See “Part II — Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” and
note 11 included in “Part II — Item 8 — Consolidated Financial Statements and Supplementary Data” for more information
regarding the financial performance of our Network Access segment.
Services and Products
Our Network Access segment offers wholesale voice and data services and products to other common carrier customers.
We provide network transport, billing services and access to our network to other common carriers. These services allow
other common carriers to provide services to their customers that originate or terminate on our network, or on the
networks of other communication companies to which we connect.
We are engaged in the transmission of interstate and intrastate-switched message telephone service, Internet service,
and 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 and interstate direct dial, toll-
free 800, 888, 877 and 866 services, our calling card, directory assistance, operator and enhanced conference calling,
frame relay, Multi-Protocol Label Switching (“MPLS”), IP, SDN, and ISDN technology based services. MPLS is a data-
carrying mechanism which emulates certain properties of a circuit-switched network over a packet-switched network. We
23
terminate northbound message telephone service traffic for Verizon, Sprint Nextel and several large resellers who do not
have facilities of their own in Alaska. We also provide origination of southbound calling card and toll-free 800, 888, 877
and 866 toll services for Verizon, Sprint Nextel, and other Interexchange carriers. Services are generally provided
pursuant to contracts with terms of up to five years in length. Toll, Private Line and Private Network, and related services
account for 31.4%, 34.7%, and 33.5% of our 2007, 2006 and 2005 revenues, respectively. 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 voice and data services is generally designed to be equal to or greater than that for comparable services
provided by our competitors.
Sales and Marketing
Our Network Access segment sales and marketing efforts are primarily directed toward increasing the number of other
common carriers we serve, the number of billable minutes of long-distance traffic we carry over our network and the
number of voice and data transmission circuits leased. We sell our voice and data services primarily through direct
contact marketing.
Facilities
Our Network Access segment shares common facilities used for voice and data services by other segments. You should
refer to “Consumer Segment — Facilities” above for additional information.
Customers
A summary of our Network Access segment switched long-distance message telephone service traffic (in minutes)
follows:
Network Access long-distance minutes: 1
South-bound Interstate
North-bound Interstate
Intrastate
Other
Total
2007
690.2
476.5
62.8
20.7
1,250.2
Year Ended December 31,
2006
(in millions)
662.0
574.6
60.9
19.1
1,316.6
2005
576.5
408.1
66.8
21.7
1,073.1
1 All minutes data were taken from our internal billing statistics reports.
Our largest customer was MCI through December 31, 2005. On January 6, 2006, Verizon announced the completion and
closing of its merger with MCI and consequently Verizon is now our largest customer. During the year ended December
31, 2005, MCI was classified as a major customer of our Network Access segment. During the years ended December 31,
2007 and 2006, Verizon is classified as a major customer. At December 31, 2007 and 2006, Verizon (previously MCI)
owned 0% and 37.9%, respectively, of GCI’s outstanding Class B common stock. Each share of Class B common stock
has ten votes per share.
Revenues attributed to Verizon during the years ended December 31, 2007 and 2006, totaled $71.5 million and $93.4
million or 13.8% and 19.6% of total revenues, respectively. Revenues attributed to MCI’s message telephone traffic during
the year ended December 31, 2005, totaled $85.4 million or 19.3% of total revenues. Our contract with Verizon has a
term through December 2009, with five, one year automatic extensions thereafter. We believe that Verizon will continue
to make use of our services during the extended term.
We also provide Network Access segment services to Sprint Nextel and Dobson. Although these customers do not meet
the threshold for classification as a major customer, we do derive significant revenues and operating income from them.
Our contract with Sprint Nextel was renewed in January 2007 to extend the term through March 2009, with two, one-year
renewal options. Our majority-owned subsidiary, Alaska DigiTel, entered into a roaming agreement with Sprint Nextel in
November 2007.
24
In November 2007, AT&T acquired Dobson, including its Alaska properties. In December 2007, we signed an agreement
with AT&T that terminates AT&T’s obligation to purchase network services from us as of July 1, 2008. AT&T will provide
us with a large block of wireless network usage at no charge to facilitate the transition of our customers to our facilities.
We will pay for usage in excess of that base transitional amount. Under the previous agreement with Dobson, our margin
was fixed. Under the new agreement with AT&T we will pay for usage on a per minute basis. The block of wireless
network usage at no charge will reduce Cost of Goods Sold during the four year period ended June 30, 2012, that we
would have otherwise recognized in accordance with the new agreement, however, we are unable to estimate the impact
this change will have on our Cost of Goods Sold. We expect our message telephone and Private Line revenues earned
from Dobson to decrease in 2008 and forward. Dobson revenues were $23.2 million in 2007. We do not believe the
termination of the agreement with Dobson will have a material adverse effect on our financial position, results of
operations or liquidity.
The loss of Verizon or Sprint Nextel as customers or a material adverse change in our relationships with them could have
a material adverse effect on our financial position, results of operations or liquidity. There are no other individual Network
Access segment customers, the loss of which would have a material impact on our revenues or operating income.
Voice Customers
Long-Distance
Revenues derived from Network Access segment long-distance services totaled $93.1 million, $105.1 million and $90.1
million, respectively, or 17.9%, 22.0% and 20.3% of our total revenues in 2007, 2006 and 2005, respectively.
Local Access
Revenues derived from Network Access segment local access services totaled $3.8 million, $5.7 million and $5.4 million,
respectively, or 1.0%, 1.2% and 1.2% of our total revenues in 2007, 2006 and 2005, respectively.
Data Customers
Revenues derived from Network Access segment data services, including Internet and Private Line and Private Network
services, totaled $61.2 million, $55.6 million and $52.8 million, or 11.8%, 11.9% and 11.9% of our total revenues in 2007,
2006 and 2005, respectively.
Wireless Customers
Revenues derived from Network Access segment wireless services totaled $5.3 million or 1.0% of our total revenues in
2007. Alaska DigiTel provides roaming services to other CDMA wireless carriers in Alaska. In October 2007, Alaska
DigiTel entered a long-term roaming agreement with Sprint Nextel, becoming a Sprint Rural Alliance partner. Under this
agreement, Sprint Nextel and Alaska DigiTel will provide each other seamless access to voice and high speed data
platforms on a reciprocal basis.
Competition
Our Network Access segment competes against AT&T Alascom, ACS, MTA, and certain smaller rural local telephone
carrier affiliates. There is also the possibility that new competitors will enter the Alaska market. You should refer to
“Consumer Segment — Competition” above for additional information.
Other common carrier traffic routed to us for termination in Alaska is largely dependent on traffic routed to our carrier
customers by their customers. Pricing pressures, new program offerings, revised business plans, and market
consolidation continue to evolve in the markets served by our carrier customers. If, as a result, their traffic is reduced, or if
their competitors’ costs to terminate or originate traffic in Alaska are reduced, our traffic will also likely be reduced, and we
may have to respond to competitive pressures, consistent with federal law. We are unable to predict the effect of such
changes on our business.
Historically, we have competed in the Network Access segment market by offering rates comparable to or less than our
competitors, by providing a comprehensive service model to meet the complete needs of our carrier customers, and by
providing responsive customer service.
See “Item 1A. — Risk Factors — We face intense competition that may reduce our market share and harm our financial
performance.”
25
Seasonality
Network Access segment long-distance services revenues derived from our other common carrier customers have
historically been highest in the summer months because of temporary population increases attributable to tourism and
increased seasonal economic activity such as construction, commercial fishing, and oil and gas activities. Our Network
Access segment data services do not exhibit significant seasonality.
Commercial Segment
We offer a full range of communications services and products to commercial and governmental customers. Commercial
segment revenues for 2007, 2006 and 2005 are summarized as follows:
2007
Year Ended December 31,
2006
(in thousands)
2005
Total revenues 1
$ 104,640
105,929
105,663
1 See “Part II — Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” and
note 11 included in “Part II — Item 8 — Consolidated Financial Statements and Supplementary Data” for more information
regarding the financial performance of our Commercial segment.
Services and Products
Our Commercial segment offers a full range of voice, video, data and wireless services and products to commercial and
governmental customers.
Voice Services and Products
Long-Distance
We are engaged in the transmission of interstate and intrastate-switched message telephone service between the major
communities in Alaska, and the remaining United States and foreign countries. Our message toll services include
intrastate, interstate and international direct dial, toll-free 800, 888, 877 and 866 services, our calling card, operator and
enhanced conference calling services. Small business subscribers generally may cancel long-distance service at any
time. Certain small business and most large commercial and governmental customers generally contract with us for
service over one to five year periods.
We have positioned ourselves as a price, quality, and customer service leader in the Alaska communications market. The
value of our long-distance services is generally designed to be equal to or greater than that for comparable services
provided by our competitors.
Local Access
We offer full featured local access service to our Commercial segment customers using our own fiber facilities and
collocated remote facilities that access the ILEC’s UNE loops. In areas where we do not have our own facilities or access
to ILEC loop facilities, we offer service using total service resale of the ILEC’s local service or UNE platform.
Our package offerings are competitively priced and include popular features, including caller ID, voice messaging, call
forwarding, and call waiting.
Directories Services
We sell advertising in our yellow pages directories to commercial customers, distribute white and yellow pages directories
to customers in certain markets we serve, and offer an on-line directory. We offer three yellow pages directories with
each directory covering multiple locations and including custom features for each area. Our directories cover the following
communities:
• Anchorage, Elmendorf Air Force Base, Fort Richardson, Bird, Girdwood, Hope, Indian, Portage, Rainbow,
Sunrise, Eagle River, Chugiak, Big Lake, Houston, Palmer, Wasilla, Willow, Talkeetna, Anderson, Clear,
26
Cantwell, Healy, Denali National Park, Tyonek, Beluga, Kenai, North Kenai, Soldotna, Kasilof, Clam Gulch,
Sterling, Cooper Landing, Homer, Anchor Point, Halibut Cove, Nanwalek, Ninilchik, Port Gaham, Seldovia;
• Fairbanks, North Pole, Eielson Air Force Base, Fort Wainwright, Delta Junction, Fort Greeley, Nenana; and
• Juneau, Auke Bay, Douglas, Lemon Creek, Mendenhall Valley
Video Services and Products
Commercial segment subscribers such as hospitals, hotels and motels are charged negotiated monthly service fees.
Programming services offered to our cable television systems subscribers differ by system as described in the Consumer
segment Video Services and Products section above. You should refer to “Consumer Segment — Services and Products”
above for additional information.
Data Services and Products
Internet
We currently offer several Internet service packages for commercial use: dial-up access, DSL, passive optical networking,
fixed wireless, T-1 and fractional T-1 leased line, metro Ethernet, multi-megabit and high-speed cable modem Internet
access. Our business high-speed cable modem Internet service offers access speeds ranging from 512 Kbps to 2.4
Mbps, free monthly data transfers of up to 30 gigabytes and free 24-hour customer service and technical support. Our
DSL offering can support speeds of up to 1.5 Mbps over the same copper line used for phone service. Business services
also include a personalized web page, domain name services, and e-mail.
We also provide dedicated access Internet service to commercial and public organizations in Alaska. We offer a premium
service and currently support many of the largest organizations in the state such as BP Exploration (Alaska) Inc., the
State of Alaska and the Anchorage School District. We have hundreds of other enterprise customers, both large and
small, using this service. Additional cable modem service packages tailored to high-use commercial Internet users are
also available.
Private Lines and Private Networks
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. private IP, Private Lines, metro Ethernet and frame
relay offer a secure solution for frequent communication of large amounts of data between sites.
Managed Services
We design, sell, install, service and operate, on behalf of certain customers, communications and computer networking
equipment and provide field/depot, third party, technical support, communications consulting and outsourcing services.
We supply integrated voice and data communications systems incorporating private IP, interstate and intrastate digital
Private Lines, point-to-point and multipoint Private Network and small earth station services.
Wireless Services and Products
Wireless services and products offered to our Commercial segment customers are the same as those described in the
Consumer Wireless Services and Products section above. You should refer to “Consumer Segment — Services and
Products” above for additional information.
Bundled Services and Products
We combine one or more of our individual service or product offerings into bundles that we sell to our Commercial
segment customers at attractive prices as described further in the Consumer segment Services and Products section
above. You should refer to “Consumer Segment — Services and Products” above for additional information.
Sales and Marketing
Our Commercial segment sales and marketing efforts focus on increasing the number of subscribers we serve, selling
bundled services, and generating incremental revenues through product and feature up-sell opportunities. We sell our
Commercial segment services and products primarily through direct contact marketing. We also use direct mail
advertising, door-to-door selling, up-selling by our customer service and call center personnel, local media advertising,
retail stores, and our website.
27
Facilities
Our Commercial segment uses many facilities to provide services and products that are common to the Consumer
segment. You should refer to “Consumer Segment — Facilities” above for additional information.
We provide our own facilities-based local access services to many of Anchorage’s larger business customers through
expansion and deployment of SONET, Ethernet, and Gigabit Passive Optical Network fiber transmission facilities, DLC
facilities, and leased T-1 facilities.
Our dedicated Internet access and IP data services are delivered to an Ethernet port located at the service point. Our
management platform constantly monitors this port and continual communications are maintained with all of the core and
distribution routers in the network. The availability and quality of service, as well as statistical information on traffic
loading, are continuously monitored for quality assurance. The management platform has the capability to remotely
access routers, servers and layer two switches, permitting changes in configuration without the need to physically be at
the service point. This management platform allows us to offer outsourced network monitoring and management services
to businesses and governmental entities. Many of the largest commercial networks in Alaska use this service, including
the state government.
Customers
A discussion of Commercial segment customers by product type follows.
Voice Customers
Long-Distance
We had 10,500, 11,100 and 11,700 active Commercial segment long-distance subscribers at December 31, 2007, 2006
and 2005, respectively. The 2007 and 2006 decrease is primarily due to a decrease in the total number of long-distance
services subscribers in the markets we serve resulting from customers substituting wireless phone, prepaid calling card,
VoIP and email usage for direct dial minutes.
Commercial segment long-distance services revenues totaled $12.8 million, $12.94 million and $14.4 million, or 2.5%,
2.7% and 3.2% of our total revenues in 2007, 2006 and 2005, respectively.
Equal Access conversions have been completed in all communities where we serve with owned facilities. Equal Access is
in progress in several small communities where we are expanding our owned facilities. We estimate that we carry greater
than 50% of combined commercial and consumer traffic as a statewide average for both originating interstate and
intrastate message telephone service.
A summary of our Commercial segment switched long-distance message telephone service traffic (in minutes) follows:
Commercial long-distance minutes: 1
Intrastate
Interstate
International
Total
2007
Year Ended December 31,
2006
(in millions)
2005
79.4
49.7
2.2
131.3
79.7
49.8
2.3
131.8
84.2
52.7
2.0
138.9
1 All minutes data were taken from our internal billing statistics reports.
We provide various services to the State of Alaska and BP Exploration (Alaska) Inc. Although these customers do not
meet the threshold for classification as major customers, we do derive significant revenues and operating income from
them.
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.
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Local Access
We had 43,100, 41,900 and 40,700 Commercial segment local access lines in service at December 31, 2007, 2006 and
2005, respectively.
Commercial segment local access services revenues totaled $17.1 million, $16.6 million and $16.8 million, or 3.3%, 3.5%
and 3.8% of our total revenues in 2007, 2006 and 2005, respectively.
Video Customers
We served 15,300, 15,200 and 14,400 basic Commercial segment subscribers at December 31, 2007, 2006 and 2005,
respectively. Commercial segment video services revenues totaled $8.0 million, $8.0 million and $7.2 million, or 1.5%,
1.7% and 1.6% of our total revenues in 2007, 2006 and 2005, respectively.
Data Customers
Internet
We had 8,500, 7,800 and 6,500 active Commercial segment cable modem subscribers at December 31, 2007, 2006 and
2005, respectively. Commercial segment Internet services revenues totaled $14.4 million, $16.3 million and $16.9 million,
or 2.8%, 3.4% and 3.8% of our total revenues in 2007, 2006 and 2005, respectively.
Private Line and Private Networks
We had 230, 237 and 241 total active Commercial segment Private Line and Private Networks subscribers at December
31, 2007, 2006 and 2005, respectively. Commercial segment Private Line and Private Networks services revenues totaled
$16.8 million, $16.8 million and $14.3 million, or 3.2%, 3.5% and 3.2% of our total revenues in 2007, 2006 and 2005,
respectively.
Managed Services
We design, sell, install, service and operate, on behalf of certain customers, communications and computer networking
equipment and provide field/depot, third party, technical support, communications consulting and outsourcing services
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 Managed Services revenues totaled $29.8 million, $30.1 million and $32.4 million, or 5.7%, 6.3%
and 7.3% of total revenues in 2007, 2006 and 2005, respectively.
Wireless Customers
We had 7,300 and 4,600 total Commercial segment wireless lines in service at December 31, 2007 and 2006,
respectively. The total wireless lines in service at December 31, 2007 include Alaska DigiTel lines in service. At
December 31, 2005 we had 16,000 total Consumer and Commercial segment wireless lines in service. Data is not
available to separately identify the number of Consumer and Commercial segment lines in service at December 31, 2005.
Our Commercial segment wireless services revenue totaled $4.8 million, $2.5 million and $1.2 million, respectively, or
0.9%, 0.5% and 0.3% of total revenues in 2007, 2006 and 2005, respectively. Total wireless revenue at December 31,
2007 includes Alaska DigiTel revenue.
Competition
Many of our Commercial segment voice, video, data and wireless services and products are also common to the
Consumer segment. You should refer to “Consumer Segment — Competition” above for additional information.
We expect further competition in commercial customer telephone access, Internet access, DSL and data markets.
Competition is based upon price and pricing plans, the type of services offered, customer service, billing services,
performance, perceived quality, reliability and availability.
Presently, there are a number of competing companies in Alaska that actively sell and maintain data and voice
communications systems. Our ability to integrate communications networks and data communications equipment has
allowed us to maintain our market position based on “value added” support services rather than price competition. These
services are blended with other transport products into unique customer solutions, including managed services and
outsourcing.
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We compete with two other major yellow page directories and several local community directories. We compete based on
reduced advertising and listing prices, broad circulation, and directory quality and features.
See “Item 1A. — Risk Factors — We face intense competition that may reduce our market share and harm our financial
performance.”
Seasonality
Our Commercial segment voice, video, and data services do not exhibit significant seasonality. Our ability to implement
construction projects is hampered during the winter months because of cold temperatures, snow and short daylight hours.
Managed Broadband Segment
We offer Internet access and related services for schools and health organizations using a platform including many of the
latest advancements in technology. Managed Broadband segment revenues for 2007, 2006 and 2005 are summarized as
follows:
2007
Year Ended December 31,
2006
(in thousands)
2005
Total revenues 1
$ 28,792
26,131
26,102
1 See “Part II — Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” and
note 11 included in “Part II — Item 8 — Consolidated Financial Statements and Supplementary Data” for more information
regarding the financial performance of our Managed Broadband segment.
Services and Products
Our Managed Broadband segment offers Internet access and related services to schools and health organizations.
SchoolAccess® is a suite of services designed to advance the educational opportunities of students in underserved
regions of the country. Our SchoolAccess® division provides Internet and distance learning services designed exclusively
for the school environment. The Schools and Libraries Program of the Universal Service Fund (“USF”) makes discounts
available to eligible rural school districts for telecommunication services and monthly Internet service charges. The
program is intended to ensure that rural school districts have access to affordable services.
Our network, Internet and software application services provided through our Managed Broadband segment’s Medical
Services division are branded as ConnectMD®. Our ConnectMD® services are currently provided under contract to
medical businesses in Alaska, Washington and Montana. The Rural Health Care Program of the USF makes discounts
available to eligible rural health care providers for telecommunication services and monthly Internet service charges. The
program is intended to ensure that rural health care providers pay no more for telecommunications services in the
provision of health care services than their urban counterparts. Customers utilize ConnectMD® services to securely move
data, images, voice traffic, and real time multipoint interactive video.
We offer a managed video conferencing product for use in distance learning, telemedicine and group communication and
collaboration environments. The product is designed to offer customers enhanced communication services that support
video, audio and data presentation. Our product benefits customers by reducing travel costs, improving course equity in
education and increasing the quality of health services available to patients. The product bundles our data products, video
conferencing services and optional rental of video conferencing endpoint equipment. Our video conferencing services
include multipoint conferencing, integrated services digital network gateway and transcoding services, online scheduling
and conference control, and videoconference recording, archiving and streaming. We provide 24-hour technical support
via telephone or online.
Our videoconferencing network is the largest in Alaska, and network coverage expanded in 2006 to parts of the state of
Washington. The network supports all H.323 IP videoconferencing standards including the newer H.264 standard, and
supports call data rates from 128 kilobits per second up to and including multi-megabit high definition calls. In 2007 and
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2006, we terminated over 37,000 and 30,000, respectively, videoconferencing endpoint connections amounting to over
2.8 and 2.0 million, respectively, videoconferencing minutes on our network.
Sales and Marketing
Our Managed Broadband segment sales and marketing efforts focus on increasing the number of subscribers we serve,
selling bundled services, and generating incremental revenues through product and feature up-sell opportunities. We sell
our Managed Broadband segment services and products primarily through direct contact marketing.
Facilities
Our Managed Broadband segment services and products are delivered using a platform including many of the latest
advancements in technology through a locally available circuit, our existing lines, and/or satellite earth stations. Our
Internet services are partially provisioned over a satellite based digital video broadcast carrier that reduces the
requirement for new satellite transponder bandwidth to support growth in rural health, SchoolAccess® and other
broadband services.
We employ a packet data satellite transmission technology for the efficient transport of broadband data in support of our
rural health and SchoolAccess® initiatives. Our SchoolAccess® Internet service is delivered as follows:
•
•
•
In communities where we have terrestrial interconnects or provide existing service over regional earth stations,
we have configured intermediate distribution facilities. Schools that are within these service boundaries are
connected locally to one of those facilities;
In communities where we have extended communications services via our DAMA earth station program,
SchoolAccess® is provided via a satellite circuit to an intermediate distribution facility at the Eagle River Earth
Station; and
In communities or remote locations where we have not extended communications services, SchoolAccess® is
provided via a dedicated (usually on premise) VSAT satellite station. The VSAT connects to an intermediate
distribution facility located in Anchorage.
In October 2007 we signed an agreement to purchase the stock of Unicom which operates DeltaNet, a long-haul
broadband microwave network ringing the Yukon-Kuskokwim Delta – a region of approximately 30,000 square miles in
western Alaska. By the summer of 2008, DeltaNet, which is still under construction but has already commenced
operations where completed microwave towers have been placed into service, will link more than 40 villages to Bethel,
the region’s hub. We expect to utilize DeltaNet in 2008 to support growth in rural health, SchoolAccess® and other
broadband services.
You should refer to “Consumer Segment — Facilities” above for additional information.
Customers
Our Managed Broadband segment revenue, including our SchoolAccess® and rural health initiatives, totaled $28.8 million,
$26.1 million and $26.1 million, or 5.6%, 5.5% and 5.9% of total revenues in 2007, 2006 and 2005, respectively. Our
SchoolAccess® Internet service was delivered to 51 customers at December 31, 2007 representing over 162 schools in
rural Alaska and 9 schools in Montana, New Mexico and Arizona. Our SchoolAccess® Internet service was delivered to
48 customers at December 31, 2006 representing over 203 schools in rural Alaska and 9 schools in Montana, New
Mexico and Arizona. We had 45 SchoolAccess® customers at December 31, 2005. Our rural health service was delivered
to 21 customers in Alaska, Washington and Montana at December 31, 2007, 2006 and 2005.
Competition
Presently, there are several competing companies in Alaska that actively sell broadband services. Our ability to provide
end-to-end broadband services solutions has allowed us to maintain our market position based on “value added” services
and products rather than solely based on price competition. These services are blended with other transport and software
products into unique customer solutions, including SchoolAccess® and rural health applications such as video
conferencing and unique web content services.
See “Item 1A. — Risk Factors — We face intense competition that may reduce our market share and harm our financial
performance.”
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Seasonality
Our Managed Broadband segment does not exhibit seasonality.
Sales and Marketing – Company-wide
Our sales and marketing strategy hinges on our ability to leverage (i) our unique position as an integrated provider of
multiple communications, Internet and cable services, (ii) our well-recognized and respected brand 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 consumer and
commercial customer market penetration and retention rates, increase our share of our customers’ aggregate voice, video
and data services expenditures and achieve continued growth in revenues and operating cash flow.
Environmental Regulations
We may undertake activities that, under certain circumstances may affect the environment. Accordingly, they are subject
to federal, state, and local regulations designed to preserve or protect the environment. The FCC, the Bureau of Land
Management, the United States Forest Service, and the National Park Service are required by the National Environmental
Policy Act of 1969 to consider the environmental impact before the commencement of facility construction.
We believe that compliance with such regulations has had no material effect on our consolidated operations. The principal
effect of our facilities on the environment would be in the form of construction of facilities and networks at various
locations in Alaska and between Alaska, Seattle, Washington, and Warrenton, Oregon. Our facilities have been
constructed in accordance with federal, state and local building codes and zoning regulations whenever and wherever
applicable. Some facilities may be on lands that may be subject to state and federal wetland regulation.
Uncertainty as to the applicability of environmental regulations is caused in major part by the federal government’s
decision to consider a change in the definition of wetlands. Most of our facilities are on leased property, and, with respect
to all of these facilities, we are unaware of any violations of lease terms or federal, state or local regulations pertaining to
preservation or protection of the environment.
Our Alaska United projects consist, in part, of deploying land-based and undersea fiber optic cable facilities between
Anchorage, Juneau, Seward, Valdez, and Whittier, Alaska, Seattle, Washington, and Warrenton, Oregon. The engineered
routes pass over wetlands and other environmentally sensitive areas. We believe our construction methods used for
buried cable have a minimal impact on the environment. The agencies, among others, that are involved in permitting and
oversight of our cable deployment efforts are the United States Army Corps of Engineers, National Marine Fisheries
Service, United States Fish and Wildlife Service, United States Coast Guard, National Oceanic and Atmospheric
Administration, Alaska Department of Natural Resources, and the Alaska Office of the Governor-Governmental
Coordination. We are unaware of any violations of federal, state or local regulations or permits pertaining to preservation
or protection of the environment.
In the course of operating our cable television and communications systems, we have used various materials defined as
hazardous by applicable governmental regulations. These materials have been used for insect repellent, paint used to
mark the location of our facilities, and pole treatment, and as heating fuel, transformer oil, cable cleaner, batteries, diesel
fuel, and in various other ways in the operation of those systems. We do not believe that these materials, when used in
accordance with manufacturer instructions, pose an unreasonable hazard to those who use them or to the environment.
Patents, Trademarks and Licenses
We do not hold patents, franchises or concessions for communications services or local access services. We do hold
registered service marks for the letters GCI®, and for the terms SchoolAccess®, Alaska United Fiber Optic Cable System®,
GCI ConnectMD®, ConnectMD®, GCI Hypernet®, My GCI®, MyGCI®, Info Anchorage GCI Internet Hot Spot®, Info
Fairbanks GCI Internet Hot Spot®, and Info Juneau GCI Internet Hot Spot®. The Communications Act of 1934 gives the
FCC the authority to license and regulate the use of the electromagnetic spectrum for radio communications. We hold
licenses through our subsidiary GCI Communication Corp. for our satellite and microwave transmission facilities for
provision of long-distance services provided by our Consumer, Commercial and Network Access segments.
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Our majority-owned subsidiary, Alaska DigiTel, holds registered service marks for the terms Keep Talking Alaska® and
Digiminutes®.
We acquired a license for use of a 30-MHz block of spectrum for providing PCS services in Alaska. 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 had an initial duration of 10 years. At the end of the license period, a renewal
application was filed. Licenses may be revoked and license renewal applications may be denied for cause. The PCS
license was renewed in 2005 for an additional 10-year term.
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 at which time licensees will be required to provide
“substantial service” in their service regions. Our LMDS license will expire in 2008 if not renewed by the FCC. We are a
member of a coalition that has petitioned the FCC for an extension of the expiration date due to the lack of suitable
equipment for this bandwidth. We are unable to predict at this time whether the FCC will grant an extension of our LMDS
license expiration. Our operations may require additional licenses in the future.
In 1998 our majority-owned subsidiary, Alaska DigiTel, 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 will be filed. Licenses may be revoked and license
renewal applications may be denied for cause. We expect the PCS license will be renewed in 2008 for an additional 10-
year term.
Earth stations are licensed generally for fifteen years. The FCC also issues a single blanket license for a large number of
technically identical earth stations (e.g., VSATs).
Regulation
Our businesses are subject to substantial government regulation and oversight. The following summary of regulatory
issues does not purport to describe all existing and proposed federal, state, and local laws and regulations, or judicial and
regulatory proceedings that affect our businesses. Existing laws and regulations are reviewed frequently by legislative
bodies, regulatory agencies, and the courts and are subject to change. For example, critics continue to ask Congress to
modify, if not altogether rework, the 1996 Telecom Act. Any change in the Act that loosened regulatory oversight of ILECs’
control of bottleneck facilities could have an adverse impact on our businesses. We cannot predict at this time the
outcome of the debate over the 1996 Telecom Act or any other existing or proposed laws and regulations.
Wireline Voice Services and Products
General. As an Interexchange carrier, we are subject to regulation by the FCC and RCA as a non-dominant provider of
interstate, international, and intrastate long-distance services. As a state-certificated CLEC, we are subject to regulation
by the RCA and the FCC as a non-dominant provider of local communications services. Military franchise requirements
also affect our ability to provide communications services to military bases.
Rural Exemption. A Rural Telephone Company is exempt from compliance with certain material interconnection
requirements under Section 251(c) of the 1996 Telecom Act, including the obligation to negotiate Section 251(c)
interconnection requirements in good faith, unless and until a state regulatory commission lifts such “rural exemption” or
otherwise finds it not to apply.
On April 2, 1997, we made a bona fide request to ACS for 251(c) interconnection in Fairbanks and Juneau and requested
the RCA to lift the rural exemption for those two cities. After extensive regulatory and judicial action, we and ACS entered
into a comprehensive settlement on April 18, 2004, that, in part, included a relinquishment by ACS of its rural exemption
for its Fairbanks and Juneau operating companies.
On January 12, 2004, we made a bona fide request to MTA for 251(c) interconnection under Section 251(f)(1)(C) of the
1996 Telecom Act, which provides that the rural exemption does not apply to such a request from a cable operator
seeking to provide telecommunications service in an area where a rural telephone company is providing video
programming in competition with the cable operator. On February 2, 2005, the RCA ruled that MTA’s provision of video
service through a wholly owned subsidiary meant that MTA’s rural exemption did not apply to our request. MTA
subsequently petitioned the RCA to suspend and modify certain of its Section 251(c) obligations. On December 20, 2005,
33
the RCA granted MTA’s petition for a three-year period. We have appealed the RCA’s decision. Following negotiation and
arbitration of MTA’s remaining interconnection obligations, the RCA approved an Interconnection Agreement between
MTA and us on February 17, 2006. We entered the Mat-Su Valley market with local access services in 2006 and 2007.
On May 2, 2005, we made a bona fide request to the City of Ketchikan d/b/a “KPU” for 251(c) interconnection under
Section 251(f)(1)(C) of the 1996 Telecom Act. On June 3, 2005, we entered into a stipulation with KPU providing that KPU
would forfeit its rural exemption and that negotiations for interconnection would commence when KPU executed its then
existing plan to offer video programming. On November 14, 2006, the RCA approved the resulting Interconnection
Agreement. We entered the Ketchikan market with local access services in 2007.
On May 17, 2006, we made a bona fide request to CVTC for 251(c) interconnection. This request resulted in a settlement
under which CVTC agreed to negotiate section 251(a) and (b) interconnection with us subject to private arbitration if
necessary. Following negotiation and arbitration of CVTC’s interconnection obligations, the RCA approved an
Interconnection Agreement between CVTC and us on October 11, 2007. We entered the Valdez CVTC market with local
access services in 2007.
On October 19, 2006, we made bona fide requests to TelAlaska Inc. d/b/a MukLuk Telephone Company, Inc. (“Mukluk”)
and TelAlaska Inc. d/b/a Interior Telephone Company, Inc. (“Interior”) for 251(c) interconnection. This request resulted in
a settlement under which Mukluk and Interior agreed to negotiate section 251(a) and (b) interconnection with us subject to
private arbitration if necessary. Following negotiation and arbitration of Mukluk’s and Interior’s interconnection obligations,
the RCA approved interconnection agreements between Mukluk and Interior and us on February 22, 2008.
On September 26, 2007, we requested that Alaska Telephone Company (“ATC”) enter into an agreement under which
ATC would agree to negotiate section 251(a) and (b) interconnection with us subject to private arbitration if necessary.
Such agreement was reached and negotiations for an Interconnection Agreement with ATC are ongoing.
On October 17, 2007, we requested that Cordova Telephone Cooperative (“CTC”) enter into an agreement under which
ATC would agree to negotiate section 251(a) and (b) interconnection with us subject to private arbitration if necessary.
Such agreement was reached and negotiations and arbitration for an Interconnection Agreement with ATC are ongoing.
On December 14, 2007, we requested that ASTAC enter into an agreement under which ASTAC would agree to negotiate
section 251(a) and (b) interconnection with us subject to private arbitration if necessary. Such agreement was reached
and negotiations and arbitration for an Interconnection Agreement with ASTAC are ongoing.
See “Description of Our Business by Reportable Segment — Consumer — Competition — Voice Services and Products
Competition” for more information.
Access Charges and Other Regulated Fees. The FCC regulates the fees that local telephone companies charge long-
distance companies for access to their local networks. The FCC is considering proposals to restructure and possibly
reduce interstate access charges. Changes to the interstate access charge regime or introduction of new technologies not
subject to access charges could fundamentally change the economics of some aspects of our business.
Carriers also pay fees for switched wholesale transport services in and out of Alaska. The rates for such services offered
by and to any provider are currently governed by a federal law that is effective through December 31, 2009.
Access to Unbundled Network Elements. The ability to obtain unbundled network elements is an important element of our
local access services business. In 2005, the FCC, in response to a court decision, 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 generally self-
provision.
We cannot predict the extent to which existing FCC rules will be sustained in the face of additional legal action and the
impact of any further rules that are yet to be determined by the FCC. For example, the FCC has pending a notice of
proposed rulemaking for review of the 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. Moreover, the future regulatory classification of services that are transmitted over facilities may
impact the extent to which we will be permitted access to such facilities.
34
Recurring and non-recurring charges for UNE-loops and other unbundled network elements may increase based on the
rates adopted in RCA proceedings to establish new Interconnection Agreements or renew existing agreements. These
increases could have an adverse effect on our financial position, results of operations or liquidity.
On September 30, 2005, the ACS subsidiary serving Anchorage filed a petition with the FCC, seeking forbearance from
the requirement that it provide access to UNEs, and that to the extent it voluntarily did so, that the pricing provisions of the
Act would not apply. We filed our opposition on January 9, 2006 and our reply on February 23, 2006. On December 28,
2006, the FCC granted ACS the requested relief from the provision of unbundled loops and transport in five of its eleven
tariffed wire centers. The relief is conditioned on the requirement that ACS make loops and certain subloops available in
those wire centers where relief was granted, by no later than a one-year transition period, at the same rates, terms and
conditions as those negotiated between GCI and ACS for Fairbanks, until commercially negotiated rates were reached.
On March 15, 2007, GCI and ACS entered into an agreement (the "Settlement Agreement") to settle issues related to the
FCC’s December 28, 2006 decision and other matters. Under the Settlement Agreement, ACS and GCI entered into a
Global Interconnection Agreement that covers all ACS study areas, including ACS’s Sitka-Bush and Glacier State study
areas. The Settlement Agreement also provides that ACS will continue to provide GCI with access to UNE loops in the
Anchorage, Fairbanks, and Juneau study areas at a rate of $23.00 per UNE loop per month. The per-loop price is subject
to an upward or downward adjustment depending on the aggregate number of UNE and wholesale lines GCI is
purchasing from ACS in all of ACS’s study areas. The initial term of the Settlement Agreement is five years.
On March 21, 2007, GCI and ACS filed motions to withdraw their appeals of the FCC decision, before United States Court
of Appeals for the District of Columbia Circuit and the United States Court of Appeals for the Ninth Circuit, respectively,
which motions have been granted. Additional appeals that were filed by others have been dismissed and on June 28,
2007, the RCA approved the Global Interconnection Agreement that incorporated the terms of the settlement.
On May 22, 2006, the ACS subsidiary serving Anchorage filed a petition with the FCC, seeking forbearance from
regulation of interstate broadband and access services. On August 20, 2007, the FCC granted in part and denied in part
the requested relief, requiring that ACS comply with certain safeguards to ensure the relief granted would not result in
harm to consumers or competition. On September 19, 2007, GCI and ACS both filed petitions for reconsideration on
discrete findings in the order. The petitions are pending and we cannot predict the final outcome of the proceeding at this
time.
Universal Service. The USF pays subsidies to ETCs to support the provision of facilities-based wireline and wireless
telephone service in high-cost areas. Under FCC regulations, we have qualified as a competitive ETC in the Anchorage,
Fairbanks, Juneau, Mat-Su Valley, Ketchikan, and Glacier State service areas. Without ETC status, we would not qualify
for USF subsidies in these areas or other rural areas where we propose to offer facilities-based wireline and wireless
telephone services, and our net cost of providing local telephone services in these areas would be materially adversely
affected.
The Federal State Joint Board on Universal Service (“Joint Board”) has recommended the imposition of a state-by-state
interim cap on high cost funds to be distributed to ETCs. If the Joint Board recommendation is adopted by the FCC, this
cap will reduce the high cost fund amounts available to competitive ETCs, such as us, as new competitive ETCs are
designated and as existing competitive ETCs acquire new customers. In addition, the Joint Board has recommended for
FCC consideration long-term options for reforming USF support, including establishing separate funds for mobility and
broadband support. Separately, the FCC has issued two reform proposals for changing the basis for support amounts.
We cannot predict at this time the outcome of the FCC proceedings to consider USF reform proposals or their respective
impact on us. Both these and any future regulatory, legislative, or judicial actions could affect the operation of the USF
and result in a change in our revenue for providing local access services in new and existing markets and facilities-based
wireless services in new markets.
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.
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Video Services and Products
General. Because cable communications systems use local streets and rights-of-way, they generally are operated
pursuant to franchises (which can take the form of certificates, permits or licenses) granted by a municipality or other state
or local government entity. The RCA is the franchising authority for all of Alaska. We believe that we have generally met
the terms of our franchises, which do not require periodic renewal, and have provided quality levels of service. On
December 20, 2006, the FCC adopted rules to ensure a reasonable franchising process for new video market entrants;
these rules have not had a material effect on our operations. Military franchise requirements also affect our ability to
provide video services to military bases.
The RCA is also certified under federal law to regulate rates for the Basic Service tier on our cable systems. Under state
law, however, cable television service is exempt from regulation unless subscribers petition the RCA. At present,
regulation of basic cable rates takes place only in Juneau. The RCA does not regulate rates for cable modem service.
Must Carry/Retransmission Consent. The 1992 Cable Act contains broadcast signal carriage requirements that allow local
commercial television broadcast stations to elect once every three years to require a cable system to carry the station,
subject to certain exceptions, or to negotiate for “retransmission consent” to carry the station.
The FCC has adopted rules to require cable operators to carry the digital programming streams of broadcast television
stations. The FCC has also decided, however, that cable operators should be required to carry both the analog and digital
programming streams of broadcast television stations while broadcasters are transitioning from analog to digital
transmission and that cable operators should not be required to carry multiple digital programming streams from a single
broadcast television station. Should the FCC change this policy, we would be required to devote additional cable capacity
to carrying broadcast television programming streams, a step that could require the removal of other programming
services.
Cable System Delivery of Internet Service. The FCC has defined high-speed Internet over cable as an “information
service” not subject to local cable-franchise fees, as cable service may be, or any explicit requirements for “open access,”
as telecommunications service is. The Supreme Court affirmed the FCC’s position in a decision issued on June 27, 2005.
Although there is at present no significant federal regulation of cable system delivery of Internet services, this situation
may change as cable systems expand their broadband delivery of Internet services. Proposals have been advanced at
the FCC and Congress to require cable operators to provide access to unaffiliated Internet service providers and online
service providers and to govern the terms under which content providers and applications are delivered by all broadband
network operators. If such requirements were imposed on cable operators, it could burden the capacity of cable systems
and frustrate our plans for providing expanded Internet access services. These access obligations could adversely affect
our financial position, results of operations or liquidity.
Segregated Security for Set-top Devices. The FCC mandated, effective July 1, 2007, that all new set-top video navigation
devices must segregate the security function from the navigation function. The new devices are more expensive than
existing equipment, and compliance would increase our cost of providing cable services. A waiver has been granted to
one small cable system conditioned upon, among other things, its commitment to fully digitize analog signals throughout
its cable network. The FCC has also indicated that enforcement of the separate security requirement may be deferred
with respect to small cable operators that meet certain criteria and are unable to receive compliant set-top devices in a
timely manner from manufacturers. Subject to a waiver granted by the FCC on May 4, 2007, we may continue providing
low-cost integrated set-top boxes to consumers to facilitate our transition to all-digital cable networks through February 17,
2009.
Pole Attachments. The Communications Act requires the FCC to regulate the rates, terms and conditions imposed by
public utilities for cable systems’ use of utility pole and conduit space unless state authorities can demonstrate that they
adequately regulate pole attachment rates. In the absence of state regulation, the FCC administers pole attachment rates
on a formula basis. This formula governs the maximum rate certain utilities may charge for attachments to their poles and
conduit by companies providing communications services, including cable operators. The RCA has largely retained the
existing pole attachment formula that has been in state regulation since 1987. This formula could be subject to further
revisions upon petition to the RCA and the FCC has initiated a rulemaking to consider application of the federal formula.
We cannot predict at this time the outcome of any such proceedings.
Copyright. Cable television systems are subject to federal copyright licensing covering carriage of television and radio
broadcast signals. In exchange for filing certain reports and contributing a percentage of their revenues to a federal
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copyright royalty pool that varies depending on the size of the system, the number of distant broadcast television signals
carried, and the location of the cable system, cable operators can obtain blanket permission to retransmit copyrighted
material included in broadcast signals. The possible modification or elimination of this compulsory copyright license is the
subject of continuing legislative review. We cannot predict the outcome of this legislative review, which could adversely
affect our ability to obtain desired broadcast programming. Copyright clearances for non-broadcast programming services
are arranged through private negotiations.
Internet-Based Services and Products
General. There is no one entity or organization that governs the Internet. Each facilities-based network provider that is
interconnected with the global Internet controls operational aspects of their own network. Certain functions, such as IP
addressing, domain name routing, and the definition of the TCP/IP protocol, are coordinated by an array of quasi-
governmental, intergovernmental, and non-governmental bodies. The legal authority of these bodies is not precisely
defined.
The 1996 Telecom Act provides little direct guidance as to whether the FCC has authority to regulate Internet-based
services. Given the absence of clear statutory guidance, the FCC must determine on a case-by-case basis whether it has
the authority or the obligation to exercise regulatory jurisdiction over specific Internet-based activities.
Although the FCC does not regulate the prices charged by ISPs or Internet backbone providers, the vast majority of users
connect to the Internet over facilities of existing communications carriers. Those communications carriers are subject to
varying levels of regulation at both the federal and the state level. Thus, non-Internet-specific regulatory decisions
exercise a significant influence over the economics of the Internet market.
Many aspects of the coordination and regulation of Internet activities and the underlying networks over which those
activities are conducted are evolving. Internet-specific and non-Internet-specific changes in the regulatory environment,
including changes that affect communications costs or increase competition from ILECs or other communications services
providers, could adversely affect the prices at which we sell Internet-based services.
Wireless Services and Products
General. The FCC regulates the licensing, construction, interconnection, operation, acquisition, and transfer of wireless
network systems in the United States pursuant to the Communications Act. As a licensee of PCS, LMDS, and other
wireless services, we are subject to regulation by the FCC, and must comply with certain build-out and other license
conditions, as well as with the FCC’s specific regulations governing the PCS and LMDS services (described above). The
FCC does not currently regulate rates for services offered by commercial mobile radio service providers.
Commercial mobile radio service wireless systems are subject to Federal Aviation Administration and FCC regulations
governing the location, lighting and construction of antenna structures on which our antennas and associated equipment
are located and are also subject to regulation under federal environmental laws and the FCC’s environmental regulations,
including limits on radio frequency radiation from wireless handsets and antennas on towers.
Assignments or Transfers of Control. The FCC (and in some instances, the Department of Justice) must grant prior
approval to any assignment or transfer of control of an FCC spectrum license. On December 22, 2006, the FCC released
an order approving our acquisition of 82% percent of the equity of Alaska DigiTel, a statewide commercial mobile radio
service provider in Alaska, in a non-control transaction. In January 2008, we requested the FCC approve our acquisition
of the remaining 18% of the equity of Alaska DigiTel. This transaction is subject to customary closing conditions, including
regulatory approval, but is expected to occur in the third quarter of 2008.
Universal Service. A wireless carrier may seek ETC status so that it can receive subsidies from the USF to support the
provision of wireless voice service to consumers residing in certain high cost areas. Several wireless carriers have
successfully applied to the RCA for ETC status in Alaska.
Emergency 911. The FCC has imposed rules requiring carriers to provide emergency 911 services, including enhanced
911 services that provide to local public safety dispatch agencies the caller’s communications number and approximate
location. Providers are required to transmit the geographic coordinates of the customer’s location within accuracy
parameters set forth by the FCC, either by means of network-based or handset-based technologies. Providers may not
demand cost recovery as a condition of doing so, although they are permitted to negotiate cost recovery if it is not
mandated by the state or local governments.
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State and Local Regulation. While the Communications Act generally preempts state and local governments from
regulating the entry of, or the rates charged by, wireless carriers, it also permits a state to petition the FCC to allow it to
impose commercial mobile radio service rate regulation when market conditions fail adequately to protect customers and
such service is a replacement for a substantial portion of the telephone wireline exchange service within a state. No state
currently has such a petition on file, and all prior efforts have been rejected. In addition, the Communications Act does not
expressly preempt the states from regulating the “terms and conditions” of wireless service.
Several states have invoked this “terms and conditions” authority to impose or propose various consumer protection
regulations on the wireless industry. State attorneys general have also become more active in enforcing state consumer
protection laws against sales practices and services of wireless carriers. States also may impose their own universal
service support requirements on wireless and other communications carriers, similar to the contribution requirements that
have been established by the FCC.
States have become more active in imposing new taxes on wireless carriers, such as gross receipts taxes, and fees for
items such as the use of public rights of way. These taxes and fees are generally passed through to our customers and
result in higher costs to our customers.
At the local level, wireless facilities typically are subject to zoning and land use regulation. Neither local nor state
governments may categorically prohibit the construction of wireless facilities in any community or take actions, such as
indefinite moratoria, which have the effect of prohibiting construction. Nonetheless, securing state and local government
approvals for new tower sites has been and is likely to continue to be difficult, lengthy and costly.
Financial Information about our Foreign and Domestic Operations and Export Sales
Although we have several agreements to help originate and terminate international toll traffic, we do not have foreign
operations or export sales. We conduct our operations throughout the western contiguous United States and Alaska and
believe that any subdivision of our operations into distinct geographic areas would not be meaningful. Revenues
associated with international toll traffic were $2.6 million, $2.5 million and $2.6 million for the years ended December 31,
2007, 2006 and 2005, respectively.
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, 2007 and 2006, our Network Access segment had a backlog of Private Line orders of $40,000 and
$157,000, respectively, which represents recurring monthly charges for Private Line services. As of December 31, 2007
and 2006, our Commercial segment had a backlog of Private Line orders of $19,000 and $12,000, respectively, which
represents recurring monthly charges for Private Line. We expect that all of the Private Line orders in backlog at the end
of 2007 will be delivered during 2008.
Geographic Concentration and Alaska Economy
We offer voice and data communications and video services to customers primarily in the State of Alaska. Because of this
geographic concentration, growth of our business and operations depends upon economic conditions in Alaska. The
economy of the State of Alaska is dependent upon natural resource industries, in particular oil production, as well as
investment earnings (including earnings from the State of Alaska Permanent Fund), tourism, government, and United
States military spending. Any deterioration in these markets could have an adverse impact on us. Oil revenues are the
second largest source of state revenues, following funds from investment sources. To the extent that our large common
carrier customers experience reduced demand for traffic destined for and originating in Alaska, it could adversely affect
our common carrier traffic and associated revenues. See “Part I — Item 1A — Risk Factors — Our business is currently
geographically concentrated in Alaska,” and “Part II — Item 7 — Management’s Discussion and Analysis of Financial
Condition and Results of Operations” for more information about the effect of geographic concentration and the Alaska
economy on us.
Employees
We employed 1,295 persons as of January 4, 2008, 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.
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Other
No material portion of our businesses is subject to renegotiation of profits or termination of contracts at the election of the
federal government.
Item 1A. Risk Factors.
Factors That May Affect Our Business and Future Results
Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially
and adversely affect our business operations. Any of the following risks could materially and adversely affect our
business, financial position, results of operations or liquidity.
We depend on a small number of customers for a substantial portion of our revenue and business. The loss of
any of such customers would have a material adverse effect on our financial position, results of operations or
liquidity.
For the year ended December 31, 2007, we provided services to Verizon and Sprint Nextel which generated combined
revenues of 21.3% of our total 2007 revenues. These customers are free to seek out long-distance communications
services from our competitors upon expiration of their contracts (in December 2009 in the case of Verizon and in March
2009 in the case of Sprint Nextel) 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 Verizon and
Sprint Nextel for their services remain competitive.
Mergers and acquisitions in the communications industry are relatively common. If a change in control of Verizon or Sprint
Nextel were to occur it would not permit them to terminate their existing contracts with us without a negotiated settlement,
but it could in the future result in the termination of or a material adverse change in our relationships with these
customers.
In addition, Verizon’s and Sprint Nextel’s need for our long-distance services depends directly upon their ability to obtain
and retain their own long-distance and wireless customers and upon the needs of those customers for long-distance
services.
The loss of one or more of Verizon or Sprint Nextel 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.
We face competition that may reduce our market share and harm our financial performance.
There is substantial competition in the communications industry. The traditional dividing lines between long-distance
telephone service, local access telephone service, wireless telephone service, Internet services and video services are
increasingly becoming blurred. Through mergers and various service integration strategies, major providers are striving to
provide integrated communications services offerings within and across geographic markets. We face increasing video
services competition from DBS providers.
We expect competition to increase as a result of the rapid development of new technologies, services and products. We
cannot predict which of many possible future technologies, products or services will be important to maintain our
competitive position or what expenditures will be required to develop and provide these technologies, products or
services. Our ability to compete successfully will depend on marketing and on our ability to anticipate and respond to
various competitive factors affecting the industry, including new services that may be introduced, changes in consumer
preferences, economic conditions and pricing strategies by competitors. To the extent we do not keep pace with
technological advances or fail to timely respond to changes in competitive factors in our industry and in our markets, we
could lose market share or experience a decline in our revenue and net income. Competitive conditions create a risk of
market share loss and the risk that customers shift to less profitable lower margin services. Competitive pressures also
create challenges for our ability to grow new businesses or introduce new services successfully and execute our business
plan. Each of our business segments also faces the risk of potential price cuts by our competitors that could materially
adversely affect our market share and gross margins.
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For more information about competition by segment, see the sections titled “Competition” included in “Item 1 — Business
— Narrative Description of our Business — Description of our Business by Reportable Segment.”
Our business is subject to extensive governmental legislation and regulation. Applicable legislation and
regulations and changes to them could adversely affect our business, financial position, results of operations or
liquidity.
Local Access Services. Our success in the local telephone market depends on our continued ability to obtain
interconnection, access and related services from Local Exchange carriers on terms that are 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
establish dialing parity, to obtain access to rights-of-way, to resell services offered by the Local Exchange carrier, and in
some cases, to allow the purchase, at cost-based rates, of access to unbundled network elements. In some Alaska
markets, it also depends on our ability to gain interconnection at economic costs. Future arbitration proceedings with
respect to new or existing markets could result in a change in our cost of serving these markets via the facilities of the
ILEC or via wholesale offerings.
Video Services. The cable television industry is subject to extensive regulation at various levels, and many aspects of
such regulation are currently the subject of judicial proceedings and administrative or legislative proposals. The law
permits certified local franchising authorities to order refunds of rates paid in the previous 12-month period determined to
be in excess of the reasonable rates. It is possible that rate reductions or refunds of previously collected fees may be
required of us in the future. Currently, pursuant to Alaska law, the basic cable rates in Juneau are the only rates in Alaska
subject to regulation by the local franchising authority, and the rates in Juneau were reviewed and approved by the RCA
in January 2007.
Other existing federal regulations, currently the subject of judicial, legislative, and administrative review, could change, in
varying degrees, the manner in which cable television systems operate. Neither the outcome of these proceedings nor
their impact upon the cable television industry in general, or on our activities and prospects in the cable television
business in particular, can be predicted at this time. There can be no assurance that future regulatory actions taken by
Congress, the FCC or other federal, state or local government authorities will not have a material adverse effect on our
business, financial position, results of operations or liquidity.
Proposals may be made before Congress and the FCC to mandate cable operators provide “open access” over their
cable systems to Internet service providers. As of the date of this report, the FCC has declined to impose such
requirements. If the FCC or other authorities mandate additional access to our cable systems, we cannot predict the effect
that this would have on our Internet service offerings.
Internet Services. Changes in the regulatory environment relating to the Internet access market, including changes in
legislation, FCC regulation, judicial action or local regulation that affect communications costs or increase competition
from the ILEC or other communications services providers, could adversely affect the prices at which we sell Internet
services. Legislative or regulatory proposals under the banner of “net neutrality”, if adopted, could interfere with our ability
to reasonably manage and invest in our broadband network, and could adversely affect the manner and price of providing
service.
Wireless Services. The licensing, construction, operation, sale and interconnection arrangements of wireless
communications systems are regulated by the FCC and, depending on the jurisdiction, state and local regulatory
agencies. In particular, the FCC imposes significant regulation on licensees of wireless spectrum with respect to:
• How radio spectrum is used by licensees;
• The nature of the services that licensees may offer and how such services may be offered; and
• Resolution of issues of interference between spectrum bands.
The Communications Act of 1934 preempts state and local regulation of market entry by, and the rates charged by,
commercial mobile radio service providers, except that states may exercise authority over such things as certain billing
practices and consumer-related issues. These regulations could increase the costs of our wireless operations. The FCC
grants wireless licenses for terms of generally ten years that are subject to renewal and revocation. FCC rules require all
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wireless licensees to meet certain build-out requirements and substantially comply with applicable FCC rules and policies
and the Communications Act of 1934 in order to retain their licenses. Failure to comply with FCC requirements in a given
license area could result in revocation of the license for that license area. There is no guarantee that our licenses will be
renewed. You should also see the risk factor below titled “We may not fully develop our wireless services, in which case
we could not meet the needs of our customers who desire packaged services.”
The FCC has initiated a number of proceedings to evaluate its rules and policies regarding spectrum licensing and usage.
New uses could adversely impact our utilization of our licensed spectrum and our operational costs.
Commercial mobile radio service providers must implement E911 capabilities in accordance with FCC rules. Failure to
deploy E911 service consistent with FCC requirements could subject us to significant fines.
The FCC, together with the FAA, also regulates tower marking and lighting. In addition, tower construction is affected by
federal, state and local statutes addressing zoning, environmental protection and historic preservation. The FCC adopted
significant changes to its rules governing historic preservation review of projects, which makes it more difficult and
expensive to deploy antenna facilities. The FCC is also considering changes to its rules regarding environmental
protection as related to tower construction, which, if adopted, could make it more difficult to deploy facilities.
For more information about Regulations affecting our operations, see “Competition” contained in “Item 1 — Business —
Regulation.”
Loss of our ETC status would disqualify us for USF subsidies.
The USF pays subsidies to ETCs to support the provision of facilities-based wireline and wireless telephone service in
high-cost areas. Under FCC regulations, we have qualified as a competitive ETC in the Anchorage, Fairbanks, Juneau,
Matanuska-Susitna Valley, Ketchikan, and Glacier State service areas. Without ETC status, we would not qualify for USF
subsidies in these areas or other rural areas where we propose to offer facilities-based wireline and wireless telephone
services. Loss of our ETC status could have an adverse effect on our business, financial position, results of operations or
liquidity.
Failure to complete development, testing and deployment of new technology that supports new services could
affect our ability to compete in the industry. In addition, the technology we use may place us at a competitive
disadvantage.
We develop, test and deploy various new technologies and support systems intended to enhance our competitiveness by
both supporting new services and features and reducing the costs associated with providing those services or features.
Successful development and implementation of technology upgrades depend, in part, on the willingness of third parties to
develop new applications in a timely manner. We may not successfully complete the development and rollout of new
technology and related features or services in a timely manner, and they may not be widely accepted by our customers or
may not be profitable, in which case we could not recover our investment in the technology. Deployment of technology
supporting new service offerings may also adversely affect the performance or reliability of our networks with respect to
both the new and existing services. Any resulting customer dissatisfaction could affect our ability to retain customers and
may have an adverse effect on our financial position, results of operations, or liquidity.
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, data and wireless communication and video services to customers primarily in Alaska. Because of this
geographic concentration, our growth and operations depend upon economic conditions in Alaska. The economy of
Alaska is dependent upon natural resource industries, in particular oil production, as well as tourism, and government
spending including substantial amounts for the United States military. Any deterioration in these markets could have an
adverse impact on the demand for communication and cable television services and on our results of operations and
financial condition. In addition, the customer base in Alaska is limited. Alaska has a population of approximately 670,000
people, 54% of whom are located in the Anchorage and Matanuska-Susitna Borough region. We have already achieved
significant market penetration with respect to our service offerings in Anchorage and in other locations in Alaska.
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We may not be able to continue to increase our market share of the existing markets for our services, and no assurance
can be given that the Alaskan economy will continue to grow and increase the size of the markets we serve or increase
the demand for the services we offer. As a result, the best opportunities for expanding our business may arise in other
geographic areas such as the Lower 49 States. There can be no assurance that we will find attractive opportunities to
grow our businesses outside of Alaska or that we will have the necessary expertise to take advantage of such
opportunities. The markets in Alaska for voice and data communications and video services are unique and distinct within
the United States due to Alaska’s large geographical size, its sparse population located in a limited number of clusters,
and its distance from the rest of the United States. The expertise we have developed in operating our businesses in
Alaska may not provide us with the necessary expertise to successfully enter other geographic markets.
We may not fully develop our wireless services, in which case we could not meet the needs of our customers
who desire such services.
We offer wireless mobile services under the GCI brand by distributing other providers’ wireless mobile services and over
our own facilities under the Alaska DigiTel brand. We offer wireless local telephone services over our own facilities, and
have purchased personal communications system, or PCS, and local multipoint distribution system, or LMDS, wireless
broadband licenses in FCC auctions covering markets in Alaska. In 2007 we acquired a substantial ownership interest in
Alaska DigiTel (see “Part I — Item 1 — Business — Development of our Business during the Past Fiscal Year — Alaska
DigiTel Acquisition and Loan” for more information.) We have entered into an agreement to acquire the remaining
ownership interest in Alaska DigiTel (see “Part I — Item 1 — Business — Recent Developments — Acquisition of
Remaining Alaska DigiTel Interest” for more information.) We have fewer subscribers to our wireless services than to our
other service offerings. Currently the geographic coverage of our wireless services is smaller than the geographic
coverage of our other services. Some of our competitors offer or propose to offer an integrated bundle of communications,
entertainment and information services, including wireless services. If we are unable to expand our wireless facilities (see
“Part I — Item 1 — Business — Recent Developments — Wireless Business Strategy” for more information) and further
develop our wireless services, we may not be able to meet the needs of customers who desire such services, and our
competitors who offer these services would have an advantage. This could result in the loss of market share for our other
service offerings.
As a PCS and LMDS licensee, we are subject to regulation by the FCC, and must comply with certain build-out and other
conditions of the licenses, as well as with the FCC’s regulations governing the PCS and LMDS services. The FCC
renewed our PCS Block B license in 2005 for an additional 10-year term. We expect the FCC to renew the PCS Block A
license held by our majority-owned subsidiary, Alaska DigiTel, in 2008. Our LMDS license will expire in 2008 if not
renewed by the FCC. We are a member of a coalition that has petitioned the FCC for an extension of the expiration date
due to the lack of suitable equipment for this bandwidth. We are unable to predict at this time whether the FCC will grant
an extension of our LMDS license expiration.
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.
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If failures occur in our undersea fiber optic cable systems, our ability to immediately restore the entirety of our
service may be limited and we could incur significant costs, which could lead to a material adverse effect on our
business, financial position, results of operations or liquidity.
Our communications facilities include two undersea fiber optic cable systems that carry a large portion of our voice, data
and Internet traffic to and from the contiguous Lower 48 States one of which provides an alternative geographically
diverse backup communication facility to the other. If a failure of both sides of the ring of our undersea fiber optic facilities
occurs and we are not able to secure alternative facilities, some of the communications services we offer to our customers
could be interrupted which could have a material adverse effect on our business, financial position, results of operations
or liquidity. Damage to an undersea fiber optic cable system can result in significant unplanned Cost of Goods Sold which
could have a material adverse effect on our business, financial position, results of operations or liquidity.
If a failure occurs in our satellite communications systems, our ability to immediately restore the entirety of our
service may be limited.
We serve many rural and remote Alaska locations solely via satellite communications. Each of our C-band and Ku-band
satellite transponders is backed up on the same spacecraft with multiple backup transponders. The primary spacecrafts
we use to provide voice, data and Internet services to our rural Alaska customers is Intelsat’s Galaxy XR for C-band and
Intelsat's Horizons 1 for Ku-band, but we also lease capacity on two other spacecraft for services we provide, SES
Americom’s AMC-7 and AMC-8.
On Galaxy XR, we use 9 C-band transponders. Galaxy XR experienced a failure of its primary and secondary xenon ion
propulsion system (“XIPS”) that maintains the satellite’s proper orbital position in 2004. The satellite is using its backup bi-
propellant 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. Intelsat, the owner and operator of
Galaxy XR, believes the satellite has sufficient fuel to continue normal operations until May 18, 2008. The terms of our
Galaxy XR transponder purchase agreement extends through March 2012. Intelsat intends to replace the satellite before
its estimated end-of-life. The launch of the replacement satellite, Galaxy 18, is expected to occur on May 3, 2008. 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 Intelsat’s Galaxy XII and Galaxy XIII satellites in the event of a catastrophic
failure of Galaxy XR. Additionally, our agreement includes backup of our Horizons 1 Ku-band transponders on the Ku-
band payload of Galaxy 18.
If such a failure occurs with Galaxy XR, we plan to divide our C-band network between Galaxy XII and Galaxy XIII.
Galaxy XII will be moved from its current orbital slot to where Galaxy XR is currently positioned. Service may not be fully
restored for up to a week or longer due to the time necessary for Intelsat to move Galaxy XII and for us to redirect earth
station antennae. We have installed additional facilities at our Barrow, Nome, Kotzebue, and Bethel, Alaska earth stations
to allow dual use of Galaxy XII and Galaxy XIII from those locations to help mitigate the impact of this transition. We are
also reactivating our Fairbanks, Alaska gateway earth station to help share the load of our primary gateway earth stations
in Eagle River, Alaska and Issaquah, Washington.
We also lease one 36 MHz transponder on SES Americom's AMC-7 spacecraft. We use this transponder to distribute
multi-channel, digitally encoded video programming and services to remote locations within Alaska. We may use this
transponder along with two others that we reserve on AMC-7 to restore service during any fiber outage that may occur in
our network.
There is uncertainty whether the Galaxy 18 spacecraft will launch on schedule. The contracted provider of launch services
for Galaxy 18 experienced a launch failure on January 20, 2007 that damaged the launch platform and delayed future
launches scheduled prior to the Galaxy 18 launch. One more satellite is scheduled to launch March 9, 2008 and the next
scheduled launch is of Galaxy 18. There is additional uncertainty that Galaxy 18 will be launched successfully and will
become fully operational once in orbit. Additionally, Galaxy XR station-keeping fuel may not last the estimated or expected
amount of time before the replacement spacecraft is operational. Such a loss of station-keeping fuel would cause the
spacecraft to drift out of its normal orbital position and our fixed ground antennas would no longer point directly at the
spacecraft causing loss of signal and thus loss of communications with the spacecraft. While we have developed
contingency plans that provide for continued satellite service in the event the launch date extends beyond the Galaxy XR
satellite’s end-of-life we may experience extended service outages which could have a material adverse effect on our
business, financial position, results of operations or liquidity.
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We may not be able to successfully integrate the businesses we plan to acquire in 2008.
The process of integrating the operations of Alaska DigiTel, UUI and Unicom and Alaska Wireless with ours in 2008 may
cause interruptions of or loss of momentum in our business and financial performance. The diversion of management’s
attention and any delays or difficulties encountered in connection with the integration of the companies’ operations may
have an adverse effect on our business, financial condition, or results of operations. We may also incur additional and
unforeseen expenses in connection with the integration efforts. There can be no assurance that the expense savings and
synergies that we anticipate from the acquisitions will be realized fully or will be realized within the expected timeframe.
We depend on a limited number of third-party vendors to supply communications equipment. If we do not obtain
the necessary communications equipment, we will not be able to meet the needs of our customers.
We depend on a limited number of third-party vendors to supply cable, Internet, DLPS, wireless and telephony-related
equipment. If our providers of this equipment are unable to timely supply the equipment necessary to meet our needs or
provide them at an acceptable cost, we may not be able to satisfy demand for our services and competitors may fulfill this
demand. Due to the unique characteristics of the Alaska communications markets (i.e., remote locations, rural, satellite-
served, low density populations, and our leading edge services and products), in many situations we deploy and utilize
specialized, advanced technology and equipment that may not have a large market or demand. Our vendors may not
succeed in developing sufficient market penetration to sustain continuing production and may fail. Vendor bankruptcy (or
acquisition without continuing product support by the acquiring company) may require us to replace technology before its
otherwise useful end of life due to lack of on-going vendor support and product development.
We do not have insurance to cover certain risks to which we are subject, which could lead to the incurrence of
uninsured liabilities that adversely affect our financial position, results of operations or liquidity.
We are self-insured for damage or loss to certain of our transmission facilities, including our buried, undersea and above-
ground transmission lines. If we become subject to substantial uninsured liabilities due to damage or loss to such facilities,
our financial position, results of operations or liquidity may be adversely affected.
We must perform impairment tests of our goodwill, cable certificate and wireless license assets on an annual
basis. Impairment testing may result in a material, non-cash write-down of our cable certificate, wireless license,
or goodwill assets and could have a material adverse impact on our results of operations.
Under Statement of Financial Accounting Standard (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” we must
test our goodwill and other intangible assets with indefinite lives for impairment at least annually. The SEC Staff
Announcement Topic “Use of the Residual Method to Value Acquired Assets Other than Goodwill,” requires us to apply 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 and wireless license assets are our only
indefinite-lived assets other than goodwill as of December 31, 2007. Our cable certificate assets were originally valued
and recorded using the residual method. Our wireless license assets were originally valued using the direct value
method. Impairment testing of these assets in future periods may result in a material, non-cash write-down of these assets
and could have a material adverse impact on our results of operations.
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, 2007, we had total debt of $541.4
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;
•
• 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;
Increase our vulnerability to general adverse economic and industry conditions;
44
• Place us at a competitive disadvantage compared to our competitors that have less debt; and
• Limit, along with the financial and other restrictive covenants in our debt, among other things, our ability to borrow
additional funds, dispose of assets or pay cash dividends.
In addition, a substantial amount of our debt bears interest at variable rates. If market interest rates increase, variable-rate
debt will create higher debt service requirements, which would adversely affect our financial position, results of operations
or liquidity.
We will require a significant amount of cash to service our debt, complete our planned network expansion,
complete our planned acquisitions and to meet other obligations. Our ability to generate cash depends on many
factors beyond our control. If we are unable to meet our future capital needs it may be necessary for us to curtail,
delay or abandon our business growth plans. If we incur significant additional indebtedness to fund our plans, it
could cause a decline in our credit rating and could increase our borrowing costs or limit our ability to raise
additional capital.
We will require a significant amount of cash for our planned wireless network expansion, acquisitions, to satisfy our debt
service requirements and to meet other obligations. To meet our capital needs we may incur additional debt in the future.
Our ability to make payments on and to refinance our debt and to fund planned capital expenditures and acquisitions will
depend on our ability to generate cash and to arrange additional financing in the future. These abilities are subject to,
among other factors, our credit rating, our financial performance, general economic conditions, prevailing market
conditions, the state of competition in our market, the outcome of certain legislative and regulatory issues and other
factors that may be beyond our control. Our ability to obtain suitable financing when needed has become more difficult
due to the downturn in economic conditions in 2008 and our failure to obtain suitable financing could, among other things,
result in our inability to continue to expand our business and meet competitive challenges. If we incur significant
additional indebtedness, or if we do not continue to generate sufficient cash from our operations, our credit rating could be
adversely affected, which would likely increase our future borrowing costs and could affect our ability to access capital.
The terms of our debt impose restrictions on us that may affect our ability to successfully operate our business
and our ability to make payments on the senior notes.
The indenture governing our senior notes contains and/or the credit agreement governing our senior secured credit facility
contains covenants that, among other things, limit our ability to:
Incur additional debt and issue preferred stock;
•
• Pay dividends or make other restricted payments;
• Make certain investments;
• Create liens;
• Allow restrictions on the ability of certain of our subsidiaries to pay dividends or make other payments to us;
• Sell assets;
• Merge or consolidate with other entities; and
• Enter into transactions with affiliates.
The senior secured credit facility also requires us to comply with specified financial ratios and tests, including, but not
limited to, minimum interest coverage ratio, maximum leverage ratio and maximum annual capital expenditures.
These covenants could materially and adversely affect our ability to finance our future operations or capital needs and to
engage in other business activities that may be in our best interest.
All of these covenants may restrict our ability to expand or to pursue our business strategies. Our ability to comply with
these covenants may be affected by events beyond our control, such as prevailing economic conditions and changes in
regulations, and if such events occur, we cannot be sure that we will be able to comply. A breach of these covenants
could result in a default under the indenture governing our senior notes and/or the senior secured credit facility. If there
were an event of default under the indenture for the senior notes and/or the senior secured credit facility, holders of such
defaulted debt could cause all amounts borrowed under these instruments to be due and payable immediately.
Additionally, if we fail to repay the debt under the senior secured credit facility when it becomes due, the lenders under the
senior secured credit facility could proceed against certain of our assets and capital stock of our subsidiaries that we have
pledged to them as security. Our assets or cash flow may not be sufficient to repay borrowings under our outstanding debt
instruments in the event of a default thereunder.
45
Concerns about health risks associated with wireless equipment may reduce the demand for our wireless
services.
Portable communications devices have been alleged to pose health risks, including cancer, due to radio frequency
emissions from these devices. Purported class actions and other lawsuits have been filed against numerous other
wireless carriers seeking not only damages but also remedies that could increase the cost of doing business. We cannot
be sure of the outcome of those cases or that the industry will not be adversely affected by litigation of this nature or
public perception about health risks. The actual or perceived risk of mobile communications devices could adversely
affect us through a reduction in subscribers and reduced network usage per subscriber. Further research and studies are
ongoing, and we cannot be sure that additional studies will not demonstrate a link between radio frequency emissions and
health concerns.
Additionally, new government regulations on the use of a wireless device while driving may affect us through a reduction
in subscribers and reduced network usage per subscriber. Studies have indicated that using wireless devices while
driving may impair a driver’s attention. Many state and local legislative bodies have passed or proposed legislation to
restrict the use of wireless telephones while driving vehicles. Concerns over safety and the effect of future legislation, if
adopted and enforced in the areas we serve, could limit our ability to market and sell our wireless services and decrease
our revenue from customers who now use their wireless telephones while driving. Litigation relating to accidents, deaths
or serious bodily injuries allegedly incurred as a result of wireless telephone use while driving could result in damage
awards against telecommunications providers, adverse publicity and further governmental regulation. Any of these results
could have a material adverse effect on our financial position, results of operations or liquidity.
A significant percentage of our voting securities are owned by a small number of shareholders and these
shareholders can control shareholder decisions on very important matters.
As of December 31, 2007, our executive officers and directors and their affiliates owned 4.4% of our combined
outstanding Class A and class B common stock, representing 16.9% of the combined voting power of that stock. These
shareholders can significantly influence, if not control, our management policy and all fundamental corporate actions,
including mergers, substantial acquisitions and dispositions, and election of directors to the Board.
Corporate governance rules may impose increased costs and internal control assessment requirements on us.
The Sarbanes-Oxley Act of 2002 and rules subsequently implemented by the SEC, the Public Company Accounting
Oversight Board, and the Nasdaq National Market have required changes in corporate governance practices of public
companies. For example, Section 404 of the Sarbanes-Oxley Act of 2002 requires that we and our auditor evaluate and
report on our system of internal controls over financial reporting. We expect to incur ongoing costs to comply with these
rules and regulations and may incur increased legal and financial compliance costs that may negatively affect our results
of operations.
If we fail to maintain an effective system of internal control over financial reporting, we may not be able to
accurately report our financial results. As a result, current and potential shareholders could lose confidence in
our financial reporting, which would harm our business and the trading price of our stock.
Our management has determined that as of December 31, 2007, we did not maintain effective internal controls over
financial reporting based on criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”) in Internal Control-Integrated Framework as a result of one identified material weakness in our internal control
over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over
financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or
interim financial statements will not be prevented or detected on a timely basis. For a detailed description of this material
weakness and our remediation efforts and plans, see “Part II — Item 9A — Controls and Procedures.” If the result of our
remediation of the identified material weakness is not successful, or if additional material weaknesses are identified in our
internal control over financial reporting, our management will be unable to report favorably as to the effectiveness of our
internal control over financial reporting and/or our disclosure controls and procedures, and we could be required to further
implement expensive and time-consuming remedial measures and potentially lose investor confidence in the accuracy
and completeness of our financial reports which could have an adverse effect on our stock price and potentially subject us
to litigation.
46
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties
General
Our properties do not lend themselves to description by location of principal units. Our investment in property and
equipment in our consolidated operations consisted of the following at December 31:
Telephone distribution systems
Cable television distribution systems
Support equipment
Construction in progress
Land and buildings
Transportation equipment
Property and equipment under capital leases
Total
2007
63.6%
16.2%
10.8%
6.9%
1.4%
0.8%
0.3%
100.0%
2006
65.1%
18.2%
11.0%
3.5%
1.0%
0.8%
0.4%
100.0%
It is not practicable to allocate our properties to our operating segments since many of our properties are employed by
more than one segment to provide common services and products. Additionally our Chief Operating Decision Maker
manages our properties at the consolidated company level rather than at the segment level.
These properties consist primarily of undersea and land-based fiber-optic networks, switching equipment, satellite
transponders and earth stations, microwave radio and cable and wire facilities, cable head-end equipment, coaxial
distribution networks, routers, servers, transportation equipment, computer equipment and general office equipment. Land
and buildings consist of land, land improvements and landing stations and other buildings. Substantially all of our
properties secure our Senior Credit Facility. See note 7 included in “Part II — Item 8 — Consolidated Financial
Statements and Supplementary Data” for more information.
Our cable television plant and related equipment are generally attached to utility poles under pole rental agreements with
local public utilities and telephone companies and in certain locations are buried in underground ducts or trenches. We
own or lease real property for signal reception sites.
Our local access services outside plant consists of connecting lines (aerial, underground and buried cable), the majority of
which is on or under public roads, highways or streets, while the remainder is on or under private property.
Our construction in progress totaled $69.4 million at December 31, 2007, consisting of long-distance, video, local, wireless
and Internet services, and support systems projects that were incomplete at December 31, 2007. Our construction in
progress totaled $30.0 million at December 31, 2006, consisting of long-distance, video, local and Internet services, and
support systems projects that were incomplete at December 31, 2006. The property, plant and equipment included in
construction in progress at December 31, 2007 are expected to be placed in service in 2008.
We lease our executive, corporate and administrative facilities and business offices. Our operating, executive, corporate
and administrative properties are in good condition. We consider our properties suitable and adequate for our present
needs and they are being fully utilized.
Capital Expenditures
Capital expenditures consist primarily of (a) gross additions to property, plant and equipment having an estimated service
life of one year or more, plus the incidental costs of preparing the asset for its intended use, and (b) gross additions to
capitalized software.
The total investment in property, plant and equipment has increased from $611.2 million at January 1, 2003 to $932.3
million at December 31, 2007, including Alaska DigiTel in 2007 and construction in progress and excluding deductions of
accumulated depreciation. Significant additions to property, plant and equipment will be required in the future to meet the
47
growing demand for communications, Internet and entertainment services and to continually modernize and improve such
services to meet competitive demands.
Additions to property and equipment and construction in progress for 2003 through 2007 were as follows (in millions):
2003
2004
2005
2006
2007
$
62.5
$ 112.6
$
81.2
$ 105.1
$ 154.5
We expect our 2008 expenditures for property and equipment for our core operations, including construction in progress
and excluding the Galaxy 18 satellite transponder capacity lease discussed in “Part I – Item 1 – Development of our
Business During the Past Year,” to total $220.0 million to $230.0 million, depending on available opportunities, available
credit, and the amount of cash flow we generate during 2008. We have made capital and operating purchase
commitments totaling $74.8 million at December 31, 2007. A majority of the expenditures are expected to expand,
enhance and modernize our current networks, facilities and operating systems, and to develop other businesses.
We funded our normal business capital requirements substantially through internal sources during 2007 and, to the extent
necessary, from external financing sources. We expect expenditures for 2008 to be financed through internal sources
and, for the Galaxy 18 satellite transponder capacity lease and wireless facility expansion discussed above, through
external financing sources.
Insurance
We have insurance to cover risks incurred in the ordinary course of business, including general liability, property
coverage, director and officers and employment practices liability, auto, crime, fiduciary, aviation, and business
interruption insurance in amounts typical of similar operators in our industry and with reputable insurance providers.
Central office equipment, buildings, furniture and fixtures and certain operating and other equipment are insured under a
blanket property insurance program. This program provides substantial limits of coverage against “all risks” of loss
including fire, windstorm, flood, earthquake and other perils not specifically excluded by the terms of the policies. As is
typical in the communications industry, we are self-insured for damage or loss to certain of our transmission facilities,
including our buried, undersea, and above-ground transmission lines. We self-insure with respect to employee health
insurance and workers’ compensation, subject to stop-loss insurance with other parties that caps our liability at specified
limits. We believe our insurance coverage is adequate; however, if we become subject to substantial uninsured liabilities
due to damage or loss to such facilities, our financial position, results of operations or liquidity may be adversely affected.
Item 3. Legal Proceedings
Except as set forth in this item, neither the Company, its property nor any of its subsidiaries or their property is a party to
or subject to any material pending legal proceedings. We are parties to various claims and pending litigation as part of the
normal course of business. We are also involved in several administrative proceedings and filings with the FCC and state
regulatory authorities. In the opinion of management, the nature and disposition of these matters are considered routine
and arising in the ordinary course of business. 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 2007 to a vote of security holders, through the solicitation of
proxies or otherwise.
Part II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Market Information for Common Stock
Shares of GCI’s Class A common stock are traded on the Nasdaq Global Select MarketSM under the symbol GNCMA.
48
Shares of GCI’s Class B common stock are traded through the Over-The-Counter Bulletin Board service offered by the
National Association of Securities Dealers. Each share of Class B common stock is convertible, at the option of the
holder, into one share of Class A common stock.
The following table sets forth the high and low sales price for the above-mentioned common stock for the periods
indicated. Market price data for Class A shares were obtained from the Nasdaq Stock Market System quotation system.
Market price data for Class B shares were obtained from reported Over-the-Counter Bulletin Board service market
transactions. The prices represent prices between dealers, do not include retail markups, markdowns, or commissions,
and do not necessarily represent actual transactions.
2006:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2007:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Class A
Class B
High
Low
High
Low
$
$
$
$
$
$
$
$
12.20
13.24
13.01
16.09
16.10
15.20
14.00
12.47
10.12
11.13
11.00
11.78
13.64
12.42
11.03
7.51
12.25
12.60
12.30
15.35
15.10
14.80
14.05
11.85
9.87
11.00
11.00
12.00
14.20
12.00
12.10
8.00
Holders
As of December 31, 2007 there were 2,173 holders of record of our Class A common stock and 390 holders of record of
our Class B common stock (amounts do not include the number of shareholders whose shares are held of record by
brokers, but do include the brokerage house as one shareholder).
Dividends
We have never paid cash dividends on our common stock, and we have no present intention of doing so. Payment of
cash dividends in the future, if any, will be determined by our Board of Directors in light of our earnings, financial condition
and other relevant considerations. Our existing bank loan agreements contain provisions that limit payment of dividends
on common stock, other than stock dividends (see note 7 included in “Part II — Item 8 — Consolidated Financial
Statements and Supplementary Data” for more information).
Stock Transfer Agent and Registrar
BNY Mellon Shareowner Services is our stock transfer agent and registrar.
Performance Graph
The following graph includes a line graph comparing the yearly percentage change in our cumulative total shareholder
return on our Class A common stock during the five-year period 2003 through 2007. This return is measured by dividing
(1) the sum of (a) the cumulative amount of dividends for the measurement period (assuming dividend reinvestment, if
any) and (b) the difference between our share price at the end and the beginning of the measurement period, by (2) the
share price at the beginning of that measurement period. This line graph is compared in the following graph with two other
line graphs during that five-year period, i.e., a market index and a peer index.
The market index is the Center for Research in Securities Price Index for the Nasdaq Stock Market for United States
companies. It presents cumulative total returns for a broad based equity market assuming reinvestment of dividends and
is based upon companies whose equity securities are traded on the Nasdaq Stock Market. The peer index is the Center
for Research in Securities Price Index for Nasdaq Telecommunications Stock. It presents cumulative total returns for the
equity market in the telecommunications industry segment assuming reinvestment of dividends and is based upon
companies whose equity securities are traded on the Nasdaq Stock Market. The line graphs represent monthly index
levels derived from compounding daily returns.
49
In constructing each of the line graphs in the following graph, the closing price at the beginning point of the five-year
measurement period has been converted into a fixed investment, stated in dollars, in our Class A common stock (or in the
stock represented by a given index, in the cases of the two comparison indexes), with cumulative returns for each
subsequent fiscal year measured as a change from that investment. Data for each succeeding fiscal year during the five-
year measurement period are plotted with points showing the cumulative total return as of that point. The value of a
shareholder’s investment as of each point plotted on a given line graph is the number of shares held at that point
multiplied by the then prevailing share price.
Our Class B common stock is traded through the Over-The-Counter Bulletin Board service on a more limited basis.
Therefore, comparisons similar to those previously described for the Class A common stock are not directly available.
However, the performance of Class B common stock may be analogized to that of the Class A common stock in that the
Class B common stock is readily convertible into Class A common stock by request to us.
Comparison of Five-Year Cumulative Return
Performance Graph for General Communication, Inc.
$260
$240
$220
$200
$180
$160
$140
$120
$100
$80
198.0
197.1
130.4
2
0
-
c
e
D
3
0
-
r
a
M
3
0
-
n
u
J
3
0
-
p
e
S
3
0
-
c
e
D
4
0
-
r
a
M
4
0
-
n
u
J
4
0
-
p
e
S
4
0
-
c
e
D
5
0
-
r
a
M
5
0
-
n
u
J
5
0
-
p
e
S
5
0
-
c
e
D
6
0
-
r
a
M
6
0
-
n
u
J
6
0
-
p
e
S
6
0
-
c
e
D
7
0
-
r
a
M
7
0
-
n
u
J
7
0
-
p
e
S
7
0
-
c
e
D
Company
Market
Peer
50
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURNS PERFORMANCE
GRAPH FOR GENERAL
COMMUNICATION, INC., NASDAQ STOCK MARKET INDEX FOR
UNITED STATES COMPANIES, AND NASDAQ TELECOMMUNICATIONS STOCK1,2,3,4
Measurement Period
(Fiscal Year
Covered)
Company ($)
Nasdaq Stock
Market
Index for U.S.
Companies ($)
Nasdaq
Telecommunications
Stock ($)
FYE 12/31/02
FYE 12/31/03
FYE 12/31/04
FYE 12/31/05
FYE 12/31/06
FYE 12/31/07
100.0
129.7
164.5
153.9
234.4
130.4
100.0
149.5
162.7
166.2
182.6
198.0
100.0
166.3
177.3
168.5
221.6
197.1
1 The lines represent monthly index levels derived from compounded daily returns that include all
dividends.
2 The indexes are reweighted daily, using the market capitalization on the previous trading day.
3
used.
4 The index level for all series was set to $100.00 on December 31, 2002.
If the monthly interval, based on the fiscal year-end, is not a trading day, the preceding trading day is
Issuers Purchases of Equity Securities
(a) Not applicable.
(b) Not applicable.
(c) The following table provides information about repurchases of shares of our Class A common stock during the quarter
ended December 31, 2007:
Issuer Purchases of Equity Securities
(c) Total
Number of
Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs 1
(d) Maximum
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
218,312 3
$ 12.08
5,787,732
$13,841,876
230,000 3
$ 8.78
6,017,732
$11,821,653
80,000 3
528,312
$ 8.75
6,097,732
$11,121,453
Period
October 1, 2007 to
October 31, 2007
November 1, 2007 to
November 30, 2007
December 1, 2007 to
December 31, 2007
Total
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.
We do not expect further share repurchases in the near term. We will likely curtail our stock repurchases
51
as a condition for increasing availability under our credit facilities. When we begin generating free cash
flow we may continue the repurchases subject to the availability under our credit facilities and the price of
our Class A and Class B common stock.
2 The total amount approved for repurchase was $80.0 million through December 31, 2007 consisting of
$60.0 million through December 31, 2006 and an additional $20.0 million during the year ended
December 31, 2007. If stock repurchases are less than the total approved quarterly amount the difference
may be carried forward and used to repurchase additional shares in future quarters, subject to board
approval.
3 Open-market purchases made under our publicly announced repurchase plan.
Item 6. Selected Financial Data
The following table presents selected historical information relating to financial condition and results of operations over the
past five years.
Years ended December 31,
2004
2005
2006
2007
(Amounts in thousands except per share amounts)
2003
Revenues
Income before income tax expense and
cumulative effect of a change in
accounting principle
Cumulative effect of a change in
accounting principal, net of income
tax expense of $44 in 2006 and net of
income tax benefit of $367 in 2003
Net income
Net income available to common
shareholders
Basic net income available to common
shareholders per common share
Diluted net income available to
common shareholders per common
share
Total assets
Long-term debt, including current
portion and net of unamortized
discount
Obligations under capital leases,
including current portion
Redeemable preferred stock:
Series B
Series C
Total stockholders’ equity
$
$
$
$
$
$
$
$
$
$
$
$
$
520,311
477,482
443,026
424,826
390,797
25,465
34,253
36,835
38,715
26,160
---
64
---
---
(544)
13,504
18,520
20,831
21,252
15,542
13,504
18,520
18,325
19,749
13,524
0.26
0.34
0.34
0.35
0.24
0.22
0.33
0.33
0.34
0.24
982,386
914,659
873,775
849,191
763,020
538,398
489,462
475,840
437,137
345,000
2,851
2,857
672
39,661
44,775
---
---
---
---
4,249
4,249
15,664
---
---
10,000
251,921
245,473
243,620
234,270
226,642
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.”
52
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
In the following discussion, General Communication, Inc. and its direct and indirect subsidiaries are referred to as “we,”
“us” and “our.”
Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated
financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. 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 accruals, allowance for
doubtful accounts, share-based compensation expense, 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.”
The following discussion and analysis of financial condition and results of operations should be read in conjunction with
our consolidated financial statements and supplementary data as presented in Item 8 of this Form 10-K.
General Overview
Through our focus on long-term results, acquisitions, and strategic capital investments, we strive to consistently grow our
revenues and expand our margins. We have historically met our cash needs for operations, regular capital expenditures
and maintenance capital expenditures through our cash flows from operating activities. Historically, cash requirements for
significant acquisitions and major capital expenditures have been provided largely through our financing activities.
Our four reportable segments are Consumer, Network Access, Commercial and Managed Broadband. Our reportable
segments are business units that offer different products, are each managed separately, and serve distinct types of
customers.
The Network Access segment provides services to other common carrier customers and the Managed Broadband
segment provides services to rural school districts and hospitals and health clinics. Following are our segments and the
services and products each offers to its customers:
Services and Products
Consumer
Reportable Segments
Network
Access Commercial
Managed
Broadband
Voice:
Long-distance
Local Access
Directories
Video
Data:
Internet
Private Line and Private Networks
Managed Services
Managed Broadband Services
Wireless
X
X
X
X
X
An overview of our services and products follows.
X
X
X
X
X
53
X
X
X
X
X
X
X
X
X
X
X
X
Voice Services and Products
Long-distance
We generate long-distance services revenues from monthly plan fees and usage charges.
Factors that have the greatest impact on year-to-year changes in long-distance services revenues include the rate per
minute charged to customers and usage volumes expressed as minutes of use.
Common carrier traffic routed to us for termination in Alaska is largely dependent on traffic routed to our common carrier
customers by their customers. Pricing pressures, new program offerings, and market and business consolidations
continue to evolve in the markets served by our other common carrier customers. If, as a result, their traffic is reduced, or
if their competitors’ costs to terminate or originate traffic in Alaska are reduced, our traffic will also likely be reduced, and
our pricing may be reduced to respond to competitive pressures, consistent with federal law. Additionally, disruption in the
economy resulting from terrorist attacks and other attacks or acts of war could affect our carrier customers. We are unable
to predict the effect on us of such changes. However, given the materiality of other common carrier revenues to us, a
significant reduction in traffic or pricing could have a material adverse effect on our financial position, results of operations
and liquidity.
AT&T acquired Dobson, including its Alaska properties, on November 15, 2007. In December 2007 we signed an
agreement with AT&T that provides for an orderly four-year transition of our wireless customers from the Dobson/AT&T
network in Alaska to our wireless facilities to be built in 2008 and 2009. The agreement allows our current and future
customers to use the AT&T wireless network for local access and roaming during the transition period. The four-year
transition period, which expires June 30, 2012, provides us adequate time to replace the Dobson/AT&T network in Alaska
with our own wireless facilities. Under the agreement, AT&T’s obligation to purchase network services from us will
terminate as of July 1, 2008. AT&T will provide us with a large block of wireless network usage at no charge to facilitate
the transition of our customers to our facilities. We will pay for usage in excess of that base transitional amount. Under
the previous agreement with Dobson, our margin was fixed. Under the new agreement with AT&T we will pay for usage
on a per minute basis. The block of wireless network usage at no charge will reduce Cost of Goods Sold during the four
year period ended June 30, 2012, that we would have otherwise recognized in accordance with the new agreement,
however, we are unable to estimate the impact this change will have on our Cost of Goods Sold.
Due in large part to the favorable synergistic effects of our bundling strategy focused on consumer and commercial
customers, long-distance services continue to be a significant contributor to our overall performance, although the
migration of traffic from our voice products to our data and wireless products continues.
Our long-distance service faces significant competition from AT&T Alascom, ACS, MTA, long-distance resellers, and
certain smaller rural local telephone companies that have entered the long-distance market. We believe our approach to
developing, pricing, and providing long-distance services and bundling different services will continue to allow us to be
competitive in providing those services.
Local Access
We generate local access services revenues from four primary sources: (1) basic dial tone services; (2) private line and
special access services; (3) origination and termination of long-distance calls for other common carriers; and (4) features
and other charges, including voice mail, caller ID, distinctive ring, inside wiring and subscriber line charges.
The primary factors that contribute to year-to-year changes in local access services revenues include the average number
of subscribers to our services during a given reporting period, the average monthly rates charged for non-traffic sensitive
services, the number and type of additional premium features selected, the traffic sensitive access rates charged to
carriers and amounts received from the Universal Service Program.
We estimate that our December 31, 2007, 2006 and 2005 total lines in service represent a statewide market share of
approximately 28%, 26% and 26%, respectively. At December 31, 2007, 2006 and 2005 approximately 89%, 87% and
86%, respectively, of our lines are provided on our own facilities and leased local loops. At December 31, 2007, 2006 and
2005 approximately 8%, 6% and 6%, respectively, of our lines are provided using the UNE platform delivery method.
Our local access service faces significant competition in Anchorage, Fairbanks, and Juneau from ACS, which is the
largest ILEC in Alaska, and from AT&T Alascom in Anchorage for consumer services. AT&T Alascom has received
certification from the RCA to provide local access services in Fairbanks and Juneau. In February 2007, we began offering
local access service in certain MTA exchanges and face significant competition from MTA. In October 2007, we began
54
offering local access service in the Kenai-Soldotna area and face significant competition from the ILEC, ACS. We
compete against other smaller ILECs in certain smaller communities. We believe our approach to developing, pricing,
and providing local access services and bundling different services will allow us to be competitive in providing those
services.
In 2005 and 2006 the RCA issued orders granting us certification to serve the service areas of Ketchikan Public Utility,
Cordova Telephone Cooperative, Copper Valley Telephone Cooperative, MTA, the Glacier State area served by ACS of
the Northland, Alaska Telephone Company, Interior Telephone Company, United-KUC, ASTAC and Mukluk Telephone
Company. The affected rural Local Exchange carriers had appealed various aspects of the certification rulings. We cross-
appealed questioning whether the RCA had issued an untimely order beyond the statutory deadline when it approved the
portion of the application granting us authority to serve Wrangell, Petersburg, Seward, Sitka and Nome. In rulings on
October 5, 2007 and November 23, 2007, the Superior Court held that the RCA’s approval had been untimely and that our
authority to serve those areas was effective immediately by operation of law.
In 2007 we expanded our local access service areas within Alaska by offering facilities-based services in Eagle River,
Chugiak, Wasilla, Palmer, Kenai-Soldotna, Ketchikan, Kodiak, Sitka and Valdez. In 2007 we also began offering resale
services in all of the Glacier State study area and those areas in the MTA study area in which we do not offer facilities-
based services.
We plan to continue to expand our local access service areas in 2008 and will offer service in these new areas using a
combination of methods. To a large extent, we plan to use our existing coaxial cable network to deliver local access
services. Where we do not have cable facilities, we may resell other carriers’ services, lease portions of an existing
carrier’s network or seek wholesale discounts.
We plan to have deployed more than 79,900 DLPS lines which utilize our coaxial cable facilities by December 31, 2008.
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.
The USF pays subsidies to ETCs to support the provision of local access service in high-cost areas. Under FCC
regulations, we have qualified as a competitive ETC in the Anchorage, Fairbanks, Juneau, Matanuska-Susitna Valley,
Ketchikan and Glacier State service areas. Without ETC status, we would not qualify for USF subsidies in these areas or
other rural areas where we propose to offer local access services, and our revenue for providing local access services in
these areas would be materially adversely affected.
The Federal-State Joint Board on Universal Service has issued recommendations to the FCC for curbing growth in the
fund, and the FCC has initiated rulemaking proceedings to consider these and its own proposals. We cannot predict at
this time the outcome of these proceedings or their impact on us. These and any future regulatory, legislative, or judicial
actions could affect the operation of the USF and result in a change in our revenue for providing local access services in
new and existing markets and facilities-based wireless services in new markets.
We have signed an agreement to purchase the UUI and Unicom telecommunications subsidiaries of UCI for $40.0 million.
Additionally we may assume approximately $37.0 million in net debt as part of the acquisition. This transaction is subject
to customary closing conditions, including regulatory approval. We have filed applications with the RCA and FCC seeking
the requisite regulatory consent for the transaction. The FCC comment cycle is completed, and the parties are awaiting
FCC action. GCI is currently filing replies to comments and the statutory date for a final RCA decision is May 16, 2008.
The results of operations generated by the acquired companies will impact our voice and data services in all of our
segments. This transaction will close upon regulatory approval which is expected in the second or third quarter of 2008.
Directories
We sell advertising in our yellow pages directories to commercial customers, distribute white and yellow pages directories
to customers in certain markets we serve, and offer an on-line directory.
Video Services and Products
We generate cable services revenues from three primary sources: (1) digital and analog programming services, including
monthly basic and premium subscriptions, pay-per-view movies and one-time events, such as sporting events; (2)
equipment rentals; and (3) advertising sales.
55
Our cable systems serve 40 communities and areas in Alaska, including the state’s five largest population centers,
Anchorage, Fairbanks, the Matanuska-Susitna Valley, the Kenai Peninsula, and Juneau.
The primary factors that contribute to period-to-period changes in cable services revenues include average monthly
subscription rates and pay-per-view buys, the mix among basic, premium and digital tier services, the average number of
cable television subscribers during a given reporting period, set-top box utilization and related rates, revenues generated
from new product offerings, and sales of cable advertising services.
We increased rates charged for certain cable services in eleven communities, including four of the state’s five largest
population centers, Anchorage, Fairbanks, the Matanuska-Susitna Valley, and the Kenai Peninsula. The rate increases
were primarily effective in January 2006 and increased approximately 5% for those customers who experienced an
adjustment.
In the fourth quarter of 2006 we increased rates charged for certain cable services in seven communities, including the
state’s five largest population centers. The rates increased approximately 5% for those customers who experienced an
adjustment.
Our cable service offerings are bundled with various combinations of our long-distance, local access, and Internet
services and beginning in the second quarter of 2007 include an offering of free cable service. Value-added premium
services are available for additional charges. We expect to transmit an entirely digital signal for all cable television
channels in all markets by December 31, 2008.
Our cable television systems face competition primarily from alternative methods of receiving and distributing television
signals, including DBS and digital video over telephone lines, and other sources of news, information and entertainment,
including Internet services.
Data Services and Products
Internet
We generate Internet services revenues from three primary sources: (1) access product services, including cable modem,
dial-up, and dedicated access; (2) network management services; and (3) wholesale access for other common carriers.
The primary factors that contribute to year-to-year changes in Internet services revenues include the average number of
subscribers to our services during a given reporting period, the average monthly subscription rates, the amount of
bandwidth purchased by large commercial customers, and the number and type of additional premium features selected.
Marketing campaigns continue to be deployed featuring bundled products. Our Internet offerings are bundled with various
combinations of our long-distance, cable, and local access services and provide free or discounted basic or premium
Internet services. Value-added premium Internet features are available for additional charges.
We compete with a number of Internet service providers in our markets. We believe our approach to developing, pricing,
and providing Internet services allows us to be competitive in providing those services.
Private Line and Private Networks
We generate private line and private network services revenue from two primary sources: (1) leasing capacity on our
facilities that utilize voice and data transmission circuits, dedicated to particular subscribers, which link a device in one
location to another in a different location and (2) through the sale of IP based data services on a secured shared network
to businesses linking multiple enterprise locations. The factor that has the greatest impact on year-to-year changes in
private line and private network services revenues is the number of private lines and private networks in use. We compete
against AT&T Alascom, ACS and other local telecommunication service providers.
Managed Services
We design, sell, install, service and operate, on behalf of certain customers, communications and computer networking
equipment and provide field/depot, third party, technical support, communications consulting and outsourcing services.
We also supply integrated voice and data communications systems incorporating interstate and intrastate digital private
lines, point-to-point and multipoint private network and small earth station services. There are a number of competing
companies in Alaska that actively sell and maintain data and voice communications systems.
56
Our ability to integrate communications networks and data communications equipment has allowed us to maintain our
market position based on “value added” support services rather than price competition. These services are blended with
other transport products into unique customer solutions, including managed services and outsourcing.
Managed Broadband Services
We generate managed broadband services revenue through our SchoolAccess®, ConnectMD® and managed video
conferencing products. Our customers may purchase end-to-end broadband services solutions blended with other
transport and software products. There are several competing companies in Alaska that actively sell broadband services.
Our ability to provide end-to-end broadband services solutions has allowed us to maintain our market position based on
“value added” products and services rather than solely based on price competition.
SchoolAccess® is a suite of services designed to advance the educational opportunities of students in underserved
regions of the country. Our SchoolAccess® division provides Internet and distance learning services designed exclusively
for the school environment. The Schools and Libraries Program of the USF makes discounts available to eligible rural
school districts for telecommunication services and monthly Internet service charges. The program is intended to ensure
that rural school districts have access to affordable services.
Our network, Internet and software application services provided through our Managed Broadband segment’s Medical
Services Division are branded as ConnectMD®. Our ConnectMD® services are currently provided under contract to
medical businesses in Alaska, Washington and Montana. The Rural Health Care Program of the USF makes discounts
available to eligible rural health care providers for telecommunication services and monthly Internet service charges. The
program is intended to ensure that rural health care providers pay no more for telecommunications in the provision of
health care services than their urban counterparts. Customers utilize ConnectMD® services to securely move data,
images, or voice traffic, to include real time multipoint interactive video.
We offer a managed video conferencing product for use in distance learning, telemedicine and group communication and
collaboration environments. The product is designed to offer customers enhanced communication services that support
video, audio and data presentation. Our product benefits customers by reducing travel costs, improving course equity in
education and increasing the quality of health services available to patients. The product bundles our data products, video
conferencing services and optional rental of video conferencing endpoint equipment. Our video conferencing services
include multipoint conferencing, ISDN gateway and transcoding services, online scheduling and conference control, and
videoconference recording, archiving and streaming. We provide 24-hour technical support via telephone or online.
Wireless Services and Products
We generate wireless services and equipment revenues from four primary sources: (1) monthly plan fees; (2) usage and
roaming charges; (3) wireless Internet access; and (4) handset and accessory sales.
We offer wireless services by reselling Dobson services under our brand name and Alaska DigiTel’s services under its
brand name. We provide limited wireless local access and Internet services using our own facilities. We compete against
AT&T Wireless, ACS, MTA, and resellers of those services in Anchorage and other markets. The GCI and Alaska DigiTel
brands compete against each other. We competed against Dobson until its acquisition by AT&T discussed below.
On January 2, 2007 we invested $29.5 million in Alaska DigiTel in exchange for an 81.9% equity interest. We do not have
voting control of Alaska DigiTel. In December 2007, we signed a definitive agreement to acquire the remaining minority
interest in Alaska DigiTel for a total consideration of approximately $10.0 million. On January 22, 2008, the FCC initiated
its proceedings to review the application seeking requisite regulatory approval of the proposed change in control.
Following FCC approval, we will own 100% of Alaska DigiTel.
Commencing in 2008 we plan to construct a GSM network throughout the terrestrially served portions of Alaska including
the cities of Anchorage, Fairbanks, and Juneau. Alaska DigiTel will construct and operate the CDMA portion of our
statewide wireless platform.
We had a distribution agreement with Dobson allowing us to resell Dobson wireless services. In November 2007 AT&T
acquired Dobson, including its Alaska properties. In December 2007 we signed an agreement with AT&T that provides for
an orderly four-year transition of our wireless customers from the Dobson/AT&T network in Alaska to our wireless facilities
to be built in 2008 and 2009. The agreement allows our current and future customers to use the AT&T wireless network
for local access and roaming during the transition period. The four-year transition period, which expires June 30, 2012,
provides us adequate time to replace the Dobson/AT&T network in Alaska with our own wireless facilities. Under the
57
agreement, AT&T’s obligation to purchase network services from us will terminate as of July 1, 2008. AT&T will provide us
with a large block of wireless network usage at no charge to facilitate the transition of our customers to our facilities. We
will pay for usage in excess of that base transitional amount. Under the previous agreement with Dobson, our margin was
fixed. Under the new agreement with AT&T we will pay for usage on a per minute basis. The block of wireless network
usage at no charge will reduce Cost of Goods Sold during the four year period ended June 30, 2012, that we would have
otherwise recognized in accordance with the new agreement, however, we are unable to estimate the impact this change
will have on our Cost of Goods Sold.
We have signed a purchase agreement to acquire all of the interests in Alaska Wireless for $13.0 million to $14.0 million,
expected to be paid upon closing. In addition to the initial acquisition payment we have agreed to a contingent payment of
approximately $3.0 million in 2010 if certain financial conditions are met. Alaska Wireless is a GSM cellular provider
serving approximately 4,000 subscribers in the Dutch Harbor, Alaska area. In addition to the acquisition, we will enter into
a management agreement with the existing owners of Alaska Wireless. The business will continue to operate under the
Alaska Wireless name and the current management will continue to manage the day-to-day operations. The results of
operations generated by the acquired company will impact our wireless services in our Consumer and Commercial
segments. We filed the application with the FCC seeking the requisite regulatory consent to the transaction on January
18, 2008. This transaction will close upon regulatory approval which is expected in the second or third quarter of 2008.
Results of Operations
The following table sets forth selected Statements of Operations data as a percentage of total revenues for the periods
indicated (underlying data rounded to the nearest thousands):
Year Ended December 31,
2007
2005
2006
Percent-
age
Change 1
2007
vs.
2006
Percent-
age
Change 1
2006
vs.
2005
43.0%
31.4%
20.1%
5.5%
100.0%
37.5%
34.9%
22.2%
5.4%
100.0%
36.8%
33.5%
23.8%
5.9%
100.0%
24.9%
(1.9%)
(1.2%)
10.2%
9.0%
9.8%
12.2%
0.3%
0.1%
7.8%
37.0%
0.0%
36.0%
0.0%
35.1%
0.4%
12.1%
---
10.4%
NM
16.6%
12.0%
7.1%
17.2%
14.1%
6.9%
16.7%
17.3%
9.0%
5.2%
(7.3%)
11.8%
10.8%
(12.3%)
(16.7%)
4.9%
7.2%
8.3%
(25.7%)
(7.0%)
2.6%
2.6%
3.9%
3.9%
4.7%
4.7%
(26.5%)
(26.7%)
(11.5%)
(11.2%)
(Unaudited)
Statements of Operations Data:
Revenues:
Consumer segment
Network Access segment
Commercial segment
Managed Broadband segment
Total revenues
Selling, general and
administrative expenses
Restructuring charge
Depreciation and amortization
expense
Operating income
Other expense, net
Income before income taxes and
cumulative effect of a change in
accounting principle in 2006
Income before cumulative effect
of a change in accounting
principle in 2006
Net income
________________________________
1 Percentage change in underlying data.
NM – Not meaningful.
________________________________
58
Year Ended December 31, 2007 (“2007”) Compared to Year Ended December 31, 2006 (“2006”)
Overview of Revenues and Cost of Goods Sold
Total revenues increased 9.0% from $477.5 million in 2006 to $520.3 million in 2007. Revenue increases in our
Consumer and Managed Broadband segments were partially off-set by decreases in our Network Access and
Commercial segments. See the discussion below for more information by segment.
Total Cost of Goods Sold increased 14.5% from $156.4 million in 2006 to $179.1 million in 2007. Cost of Goods Sold
increased in all of our segments. See the discussion below for more information by segment.
Consumer Segment Overview
Consumer segment revenue represented 43.0% of 2007 consolidated revenues. The components of Consumer segment
revenue are as follow (amounts in thousands):
Voice
Video
Data
Wireless
Total Consumer segment revenue
$
2007
46,212
96,327
34,230
46,733
$ 223,502
2006
45,625
90,226
29,406
13,694
178,951
Percentage
Change
1.3%
6.8%
16.4%
241.3%
24.9%
Consumer segment Cost of Goods Sold represented 45.7% of 2007 consolidated Cost of Goods Sold. The components of
Consumer segment Cost of Goods Sold are as follows (amounts in thousands):
Voice
Video
Data
Wireless
Total Consumer segment Cost of Goods Sold
2007
17,835
33,550
2,872
27,620
81,877
$
$
2006
20,264
30,573
2,167
13,885
66,889
Percentage
Change
(12.0%)
9.7%
32.5%
98.9%
22.4%
Selected key performance indicators for our Consumer segment follow:
Voice:
Long-distance subscribers1
Long-distance minutes carried (in millions)
Total local access lines in service2
Local access lines in service on GCI facilities2
Video:
Basic subscribers3
Digital programming tier subscribers4
HD/DVR converter boxes5
Homes passed
Average monthly gross revenue per subscriber6
Data:
Cable modem subscribers7
Wireless:
Wireless lines in service8
Average monthly gross revenue per subscriber9
December 31,
2007
2006
Percentage
Change
89,900
135.8
74,400
50,700
128,000
65,800
50,200
224,700
$64.01
89,800
141.9
66,200
31,400
124,000
58,700
29,200
219,900
$61.57
0.1%
(4.3%)
12.4%
61.5%
3.2%
12.1%
71.9%
2.2%
4.0%
88,000
78,500
12.1%
70,000
$58.29
24,400
$52.21
186.9%
11.6%
59
1 A long-distance customer is defined as a customer account that is invoiced a monthly long-distance
plan fee or has made a long-distance call during the month.
2 A local access line in service is defined as a revenue generating circuit or channel connecting a
customer to the public switched telephone network.
3 A basic cable subscriber is defined as one basic tier of service delivered to an address or separate
subunits thereof regardless of the number of outlets purchased.
4 A digital programming tier subscriber is defined as one digital programming tier of service delivered to
an address or separate subunits thereof regardless of the number of outlets or digital programming
tiers purchased. Digital programming tier subscribers are a subset of basic subscribers.
5 A high definition/digital video recorder (“HD/DVR”) converter box is defined as one box rented by a
digital programming or basic tier subscriber. A digital programming or basic tier subscriber is not
required to rent an HD/DVR converter box to receive service.
6 Year-to-date average monthly consumer video revenues divided by the average of consumer video
basic subscribers at the beginning and ending of the period.
7 A cable modem subscriber is defined by the purchase of cable modem service regardless of the level
of service purchased. If one entity purchases multiple cable modem service access points, each
access point is counted as a subscriber. Cable modem subscribers may also be video basic
subscribers though basic cable service is not required to receive cable modem service.
8 A wireless line in service is defined as a revenue generating wireless device and includes Alaska
DigiTel lines in service in 2007.
9 Year-to-date average monthly consumer wireless revenues divided by the average of consumer
wireless subscribers at the beginning and ending of the period. The 2007 average monthly gross
revenue per subscriber includes Alaska DigiTel consumer revenue and subscribers.
Consumer Segment Revenues
The increase in voice revenue is primarily due to a $991,000 or 15.8% increase in the monthly local service network
access fee in April 2007 and a $508,000 or 4.6% increase due to increased local access lines partially offset by a
$474,000 or 44.7% decrease in support from the Universal Service Program.
The increase in video revenue is primarily due to the following:
• A 22.7% increase in equipment rental revenue to $16.3 million in 2007 primarily resulting from our customers’
increased use of digital distribution technology.
• A 4.1% increase in programming services revenue to $78.6 million in 2007 primarily resulting from an increase in
digital programming tier subscribers in 2007 and increased rates charged for certain cable services primarily
effective in the fourth quarter of 2006.
The increase in data revenue is primarily due to a 17.0% increase in cable modem revenue to $28.8 million primarily due
to increased subscribers.
The increase in wireless revenue is due to our January 1, 2007 acquisition of Alaska DigiTel and a $9.9 million or 72.3%
increase in the wireless revenue from our resale agreement primarily due to increased subscribers. Consumer segment
wireless revenues from our Alaska DigiTel investment totaled $23.1 million in 2007.
Consumer Segment Cost of Goods Sold
The decrease in voice Cost of Goods Sold is primarily due to the following:
• Cost savings resulting from the increased deployment of DLPS lines during the year ended December 31, 2007,
• Decreased voice minutes carried, and
• Reduced access costs resulting from the 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 $0.012 and up to $0.054 per minute for originating and terminating interstate and
intrastate traffic, respectively.
The voice Cost of Goods Sold decrease is partially off-set by an increased UNE loop cost charged by ACS due to the
Settlement Agreement, as further described and defined above in “Part I – Item 1 – Regulation.”
60
The video Cost of Goods Sold increase is primarily due to increased channels offered to our subscribers in three of
Alaska’s five largest population centers and increased rates paid to programmers, increased costs associated with
delivery of digital services offered over our HD/DVR converter boxes due to the increased number of boxes in service,
and increased subscribers.
The data Cost of Goods Sold increase is primarily due to increased satellite costs due to increased cable modem
subscribers.
The wireless Cost of Goods Sold increase is primarily due to our January 1, 2007 acquisition of Alaska DigiTel and a $7.3
million or 52.8% increase in our wireless service Cost of Goods Sold related to increased wireless service revenue from
our resale agreement. Consumer segment wireless Cost of Goods Sold from our Alaska DigiTel investment totaled $6.4
million in 2007.
Network Access Segment Overview
Network access segment revenue represented 31.4% of 2007 consolidated Revenues. The components of Network
Access segment revenue are as follows (amounts in thousands):
Voice
Data
Wireless
Total Network Access segment revenue
NM – Not meaningful.
$
2007
96,896
61,199
5,282
$ 163,377
2006
110,834
55,637
---
166,471
Percentage
Change
(12.6%)
10.0%
NM
(1.9%)
Network Access segment Cost of Goods Sold represented 22.7% of 2007 consolidated Cost of Goods Sold. The
components of Network Access segment Cost of Goods Sold are as follows (amounts in thousands):
Voice
Data
Wireless
Total Network Access segment Cost of Goods
Sold
NM – Not meaningful.
$
2007
29,431
10,792
370
2006
28,888
8,392
---
Percentage
Change
1.9%
28.6%
NM
$
40,593
37,280
8.9%
Selected key performance indicators for our Network Access segment follow:
December 31,
2007
2006
Percentage
Change
Voice:
Long-distance minutes carried (in millions)
1,251
1,317
(5.0%)
Data:
Total Internet service provider access lines in
service1
2,600
3,100
(16.1%)
1 An Internet service provider access line in service is defined as a revenue generating circuit or
channel connecting a customer to the public switched telephone network.
Network Access Segment Revenues
The decrease in voice revenue is primarily due to decreased billable minutes and a 6.4% decrease in our rate per minute
on billable minutes carried for our common carrier customers. The average rate per minute decrease is primarily due to a
change in the composition of traffic and a 3.0% rate decrease mandated by federal law which will result in annual rate
decreases of 3.0%.
61
The increase in data revenue is primarily due to an increase in circuits sold.
The Network Access segment wireless revenue results from our January 1, 2007 acquisition of Alaska DigiTel.
Network Access Segment Cost of Goods Sold
The increase in voice Cost of Goods Sold is primarily due to an average cost per minute increase due to a change in the
composition of traffic and is partially off-set by decreased long-distance minutes carried.
The increase in data Cost of Goods Sold is primarily due to costs associated with the increased circuits sold discussed
above and $878,000 in costs to repair breaks in our undersea and terrestrial fiber-optic cable systems.
The Network Access segment wireless Cost of Goods Sold results from our January 1, 2007 acquisition of Alaska DigiTel.
Commercial Segment Overview
Commercial segment revenue represented 20.1% of 2007 consolidated revenues. The components of Commercial
segment revenue are as follows (amounts in thousands):
Voice
Video
Data
Wireless
Total Commercial segment revenue
$
2007
30,761
8,018
61,052
4,809
$ 104,640
2006
32,162
7,993
63,276
2,498
105,929
Percentage
Change
(4.4%)
0.3%
(3.5%)
92.5%
(1.2%)
Commercial segment Cost of Goods Sold represented 28.2% of 2007 consolidated Cost of Goods Sold. The components
of Commercial segment Cost of Goods Sold are as follows (amounts in thousands):
Voice
Video
Data
Wireless
Total Commercial segment Cost of Goods Sold
2007
18,622
1,576
26,201
4,160
50,559
$
$
Selected key performance indicators for our Commercial segment follow:
Voice:
Long-distance subscribers1
Total local access lines in service2
Local access lines in service on GCI facilities 2
Long-distance minutes carried (in millions)
Data:
Cable modem subscribers3
Wireless:
Wireless lines in service4
2006
20,426
1,413
23,422
2,608
47,869
2006
11,100
41,900
8,400
131.8
Percentage
Change
(8.8%)
11.5%
11.9%
59.5%
5.6%
Percentage
Change
(5.4%)
2.9%
48.8%
(0.4%)
December 31,
2007
10,500
43,100
12,500
131.3
8,500
7,800
9.0%
7,300
4,600
58.7%
1 A long-distance customer is defined as a customer account that is invoiced a monthly long-distance
plan fee or has made a long-distance call during the month.
2 A local access line in service is defined as a revenue generating circuit or channel connecting a
customer to the public switched telephone network.
62
3 A cable modem subscriber is defined by the purchase of cable modem service regardless of the level
of service purchased. If one entity purchases multiple cable modem service access points, each
access point is counted as a subscriber.
4 A wireless line in service is defined as a revenue generating wireless device and includes Alaska
DigiTel lines in service in 2007.
We leased a portion of our 800-mile fiber optic system capacity that extends from Prudhoe Bay to Valdez via Fairbanks,
and provided management and maintenance services for this capacity to a significant customer. The lessee signed a
contract with a competitor in March 2005, started the transition of their circuits from our fiber optic cable system to our
competitor’s microwave system in June 2006, and completed the transition in April 2007. In November 2006, we signed
an agreement with our competitor to lease capacity on our fiber optic cable system and provide certain other services to
them in association with their contract.
Commercial Segment Revenues
The decrease in voice revenue is due to decreased long distance subscribers and decreased minutes carried. Revenues
associated with increased local access lines in service partially off-set this decrease.
The decrease in data revenue is primarily due to a $7.9 million or 58.2% decrease in revenue earned from the lease and
provision of management and maintenance services on a portion of our 800-mile fiber optic system capacity that extends
from Prudhoe Bay to Valdez via Fairbanks as described above and a decrease in revenue earned from a large customer
who reduced their services with us. The decrease is partially off-set by a $4.6 million increase in managed services
project revenue and growth in our private IP product resulting from new customers and increased coverage for existing
customers.
The increase in wireless revenue is primarily due to increased subscribers to our wireless offerings from our resale
agreement.
Commercial Segment Cost of Goods Sold
The decrease in voice Cost of Goods Sold is due to savings resulting from increased provision of services through our
own facilities in 2007, decreased voice minutes carried, and decreased costs associated with decreased long-distance
subscribers. The voice Cost of Goods Sold decrease is partially off-set by an increased UNE loop cost charged by ACS
due to the Settlement Agreement, as further described and defined above in “Part I – Item 1 – Regulation.”
The increase in data Cost of Goods Sold resulted primarily from an increase in contract labor and internal labor classified
as Cost of Good Sold due to the increase in managed service project revenue discussed above.
The wireless Cost of Goods Sold increase is primarily due to increased wireless service revenue from our resale
agreement.
Managed Broadband Segment Overview
Managed Broadband segment revenue and Cost of Goods sold represented 5.5% and 3.4% of 2007 consolidated
revenues and Cost of Goods Sold, respectively.
Selected key performance indicators for our Managed Broadband segment follow:
Managed Broadband segment:
SchoolAccess® customers
Rural health customers
December 31,
2007
2006
Percentage
Change
51
21
48
21
6.3%
0.0%
Managed Broadband Segment Revenues
Managed Broadband segment revenue, which includes data products only, increased 10.2% to $28.8 million in 2007 as
compared to 2006. The increase is primarily due to increased circuits purchased by our rural health and SchoolAccess®
customers and several 2007 product sales that did not occur in 2006.
63
Managed Broadband Segment Cost of Goods Sold
Managed Broadband segment Cost of Goods Sold increased $1.7 million to $6.0 million from 2006 to 2007 primarily due
to costs associated with the product sales and increased circuits purchased as discussed above.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 12.1% to $192.5 million in 2007 primarily due to the following:
• Recognition of $15.5 million in additional expense resulting from our January 1, 2007 acquisition of Alaska
DigiTel,
• A $3.8 million increase in labor and benefits costs, and
• A $1.4 million increase in bad debt expense primarily due to the realization of recoveries for certain Managed
Broadband services customers and MCI, Inc. (merged with Verizon Communications, Inc.) in 2006 through a
reduction to bad debt expense which did not recur in 2007.
The selling, general and administrative expenses increase is partially off-set by the following:
• A $2.2 million decrease in certain promotion expenses, and
• A $658,000 decrease in our company-wide success sharing bonus accrual in 2007.
As a percentage of total revenues, selling, general and administrative expenses increased to 37.0% in 2007 from 36.0%
in 2006, primarily due to the net increases described above without a proportional increase in revenues.
Depreciation and Amortization Expense
Depreciation and amortization expense increased 5.2% to $86.3 million in 2007. The increase is primarily due to our
$83.4 million investment in equipment and facilities placed into service during 2006 for which a full year of depreciation
was recorded in 2007, the $111.6 million investment in equipment and facilities placed into service during the year ended
December 31, 2007 for which a partial year of depreciation was recorded in 2007, and the increased depreciation and
amortization expense recognized in 2007 on the depreciable and amortizable assets recorded upon the acquisition and
consolidation of Alaska DigiTel. The depreciation and amortization expense increase is partially off-set by the $790,000
software impairment recognized in 2006 upon the closure of an operating segment.
Other Expense, Net
Other expense, net of other income, increased 11.8% to $37.0 million in 2007 primarily due to the following:
• A $2.5 million or 7.2% increase in interest costs due to an increase in our average outstanding debt balance in
2007 as compared to 2006,
• A $1.3 million or 70.5% decrease in interest income in 2007 resulting from a decrease in our average cash and
•
cash equivalents balance in 2007 as compared to 2006, and
In the third quarter of 2007, we substantially modified our Senior Credit Facility resulting in loan fee expense of
$611,000.
The increases described above are partially offset by an increase in capitalized interest from $820,000 in 2006 to $1.6
million in 2007.
Income Tax Expense
Income tax expense totaled $12.0 million and $15.8 million in 2007 and 2006, respectively. Our effective income tax rate
increased from 46.1% in 2006 to 47.0% in 2007 primarily due to increases in permanent differences in 2007.
At December 31, 2007, we have (1) tax net operating loss carryforwards of approximately $116.4 million that will begin
expiring in 2011 if not utilized, and (2) alternative minimum tax credit carryforwards of approximately $3.1 million available
to offset regular income taxes payable in future years. We estimate that we will utilize net operating loss carryforwards of
$1.0 million to $3.0 million during the year ended December 31, 2008. Our utilization of certain net operating loss
carryforwards is subject to limitations pursuant to Internal Revenue Code section 382.
We have recorded deferred tax assets of approximately $47.6 million associated with income tax net operating losses that
were generated from 1995 to 2005, and that expire from 2011 to 2025, and with charitable contributions that were
converted to net operating losses in 2006 and 2007, and that expire in 2026 and 2027, respectively.
64
Tax benefits associated with recorded deferred tax assets are considered to be more likely than not realizable through
future reversals of existing taxable temporary differences and future taxable income exclusive of reversing temporary
differences and carryforwards. The amount of deferred tax asset considered realizable, however, could be reduced if
estimates of future taxable income during the carryforward period are reduced which would result in additional income tax
expense. We estimate that our effective annual income tax rate for financial statement purposes will be 47% to 49% in the
year ended December 31, 2008.
Cumulative Effect of a Change in Accounting Principle
On January 1, 2006 we adopted SFAS No. 123(R), “Share-Based Payment.” SFAS 123(R) requires us to estimate pre-
vesting option forfeitures at the time of grant and periodically revise those estimates in subsequent periods if actual
forfeitures differ from those estimates. We record share-based compensation expense only for those awards expected to
vest using an estimated forfeiture rate based on our historical pre-vesting forfeiture data. Previously, we accounted for
forfeitures as they occurred under the pro forma disclosure provisions of SFAS 123 for periods prior to 2006. The
transition impact (benefit) of adopting SFAS No. 123(R) attributed to accruing for expected forfeitures on outstanding
share-based awards totaled $108,000, which was reduced by income tax expense of $44,000, and is reported as a
cumulative effect of a change in accounting principle during the year ended December 31, 2006 in the accompanying
Consolidated Income Statements.
Year Ended December 31, 2006 (“2006”) Compared to Year Ended December 31, 2005 (“2005”)
Overview of Revenues and Cost of Goods Sold
Total revenues increased 7.8% from $443.0 million in 2005 to $477.5 million in 2006. Revenue increased in all of our
segments. See the discussion below for more information by segment.
Total Cost of Goods Sold increased 16.0% from $134.9 million in 2005 to $156.4 million in 2006. Cost of Goods Sold
increases in our Consumer, Network Access and Commercial segments were partially off-set by decreased Cost of Goods
Sold in our Managed Broadband segment. See the discussion below for more information by segment.
Consumer Segment Overview
Consumer segment revenue represented 37.5% of 2006 consolidated revenues. The components of Consumer segment
revenue are as follow (amounts in thousands):
Voice
Video
Data
Wireless
Total Consumer segment revenue
$
2006
45,625
90,226
29,406
13,694
$ 178,951
2005
46,821
84,731
25,313
6,063
162,928
Percentage
Change
(2.6%)
6.5%
16.2%
125.9%
9.8%
Consumer segment Cost of Goods Sold represented 42.8% of 2006 consolidated Cost of Goods Sold. The components of
Consumer segment Cost of Goods Sold are as follows (amounts in thousands):
Voice
Video
Data
Wireless
Total Consumer segment Cost of Goods Sold
2006
20,264
30,573
2,167
13,885
66,889
$
$
2005
21,022
28,557
5,365
5,818
60,762
Percentage
Change
(3.6%)
7.1%
(59.6%)
138.7%
10.1%
65
Selected key performance indicators for our Consumer segment follow:
Voice:
Long-distance subscribers1
Long-distance minutes carried (in millions)
Total local access lines in service2
Local access lines in service on GCI facilities2
Video:
Basic subscribers3
Digital programming tier subscribers4
HD/DVR converter boxes5
Homes passed
Average monthly gross revenue per subscriber6
Data:
Cable modem subscribers7
Wireless:
Wireless lines in service8
December 31,
2006
2005
Percentage
Change
89,800
141.9
66,200
31,400
124,000
58,700
29,200
219,900
$61.57
95,000
163.0
68,400
21,700
122,600
53,700
12,500
215,000
$59.45
(5.5%)
(12.9%)
(3.2%)
44.7%
1.1%
9.3%
133.6%
2.3%
3.6%
78,500
70,800
10.9%
24,400
15,900
53.5%
1 A long-distance customer is defined as a customer account that is invoiced a monthly long-distance
plan fee or has made a long-distance call during the month.
2 A local access line in service is defined as a revenue generating circuit or channel connecting a
customer to the public switched telephone network.
3 A basic cable subscriber is defined as one basic tier of service delivered to an address or separate
subunits thereof regardless of the number of outlets purchased.
4 A digital programming tier subscriber is defined as one digital programming tier of service delivered to
an address or separate subunits thereof regardless of the number of outlets or digital programming
tiers purchased. Digital programming tier subscribers are a subset of basic subscribers.
5 An HD/DVR converter box is defined as one box rented by a digital programming or basic tier
subscriber. A digital programming or basic tier subscriber is not required to rent an HD/DVR converter
box to receive service.
6 Year-to-date average monthly consumer video revenues divided by the average of consumer video
basic subscribers at the beginning and ending of the period.
7 A cable modem subscriber is defined by the purchase of cable modem service regardless of the level
of service purchased. If one entity purchases multiple cable modem service access points, each
access point is counted as a subscriber. Cable modem subscribers may also be video basic
subscribers though basic cable service is not required to receive cable modem service.
8 A wireless line in service is defined as a revenue generating wireless device.
Consumer Segment Revenues
The decrease in voice revenue is primarily due to decreased long-distance minutes carried for these customers. The
decrease is partially off-set by a $446,000 or 9.1% increase in support from the Universal Service Program in 2006 and a
$300,000 increase in local service revenue in 2006 due to the implementation of the monthly network access fee in April
2005.
The increase in video revenue is primarily due to the following:
• A 23.9% increase in equipment rental revenue to $13.3 million in 2006 primarily resulting from our customers’
increased use of digital distribution technology and an equipment rental rate increase effective primarily in
January 2006, and
• A 4.2% increase in programming services revenue to $75.6 million in 2006 primarily resulting from an increase in
digital programming tier subscribers in 2006, and increased rates charged for certain cable services primarily
effective in the first and fourth quarters of 2006.
66
The increase in data revenue is primarily due to a 9.7% increase in cable modem revenue to $24.6 million and a 68.8%
increase to $1.6 million in revenue earned from our customers’ use of our Internet facilities in excess of that allowed by
their plan in 2006. The increase in cable modem revenue is primarily due to increased subscribers.
The increase in wireless revenue is primarily due to increased wireless subscribers.
Consumer Segment Cost of Goods Sold
The Consumer segment Cost of Goods Sold increase is primarily due to increased wireless Cost of Goods Sold resulting
from increased revenue and increased video Cost of Goods Sold. The increased video Cost of Goods Sold is primarily
due to the 2006 expiration of arrangements with suppliers from which we earned rebates and refunds upon us meeting
specified goals, increased channels offered to our subscribers, and increased subscribers. The increase in Cost of Goods
Sold is partially off-set by decreased voice Cost of Goods Sold primarily due to the following:
• Cost savings resulting from the increased deployment of DLPS lines during the year ended December 31, 2006,
• Decreased voice minutes carried, and
• Reduced access costs resulting from the 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 $0.011 and $0.057 per minute for originating and terminating interstate and
intrastate traffic, respectively.
The decrease in voice Costs of Goods Sold is partially off-set by the receipt in 2005 of $9.1 million upon the settlement of
four separate claims with AT&T and Alascom pursuant to a master agreement of which $1.8 million reduced the
Consumer segment voice Cost of Goods Sold in 2005.
Network Access Segment Overview
Network access segment revenue represented 34.9% of 2006 consolidated revenues. The components of Network
Access segment revenue are as follows (amounts in thousands):
Voice
Data
Total Network Access segment revenue
2006
$ 110,834
55,637
$ 166,471
2005
95,555
52,778
148,333
Percentage
Change
16.0%
5.4%
12.2%
Network Access segment Cost of Goods Sold represented 23.8% of 2006 consolidated Cost of Goods Sold. The
components of Network Access segment Cost of Goods Sold are as follows (amounts in thousands):
Voice
Data
Total Network Access segment Cost of Goods
Sold
2006
28,888
8,392
2005
18,223
7,318
Percentage
Change
58.5%
14.7%
37,280
25,541
46.0%
$
$
Selected key performance indicators for our Network Access segment follow:
December 31,
2006
2005
Percentage
Change
Voice:
Long-distance minutes carried (in millions)
1,317
1,073
22.7%
Data:
Total Internet service provider access lines in
service1
3,100
3,700
(16.2%)
67
1 An Internet service provider access line in service is defined as a revenue generating circuit or
channel connecting a customer to the public switched telephone network.
Network Access Segment Revenues
The increase in voice revenue is primarily due to increased minutes carried for our other common carrier customers
partially off-set by a 4.7% decrease in our rate per minute on minutes carried for other common carriers. The average rate
per minute decrease is primarily due to a change in the composition of traffic and a 3.0% rate decrease mandated by
federal law which will result in annual rate decreases of 3.0%.
Network Access Segment Cost of Goods Sold
The Network Access segment Cost of Goods Sold increase is primarily due to the following:
Increased voice minutes carried, and
•
• Receipt in 2005 of $9.1 million upon the settlement of four separate claims with AT&T and Alascom pursuant to a
master agreement of which $5.3 million reduced the Network Access segment voice Cost of Goods Sold in 2005.
Commercial Segment Overview
Commercial segment revenue represented 22.2% of 2006 consolidated revenues. The components of Commercial
segment revenue are as follows (amounts in thousands):
Voice
Video
Data
Wireless
Total Commercial segment revenue
$
2006
32,162
7,993
63,276
2,498
$ 105,929
2005
33,718
7,163
63,592
1,190
105,663
Percentage
Change
(4.6%)
11.6%
(0.5%)
109.9%
0.3%
Commercial segment Cost of Goods Sold represented 30.6% of 2006 consolidated Cost of Goods Sold. The components
of Commercial segment Cost of Goods Sold are as follows (amounts in thousands):
Voice
Video
Data
Wireless
Total Commercial segment Cost of Goods Sold
2006
20,426
1,413
23,422
2,608
47,869
$
$
2005
19,481
1,369
21,926
1,140
43,916
Percentage
Change
4.9%
3.2%
6.8%
128.8%
9.0%
Selected key performance indicators for our Commercial segment follow:
Voice:
Long-distance subscribers1
Total local access lines in service2
Local access lines in service on GCI facilities 2
Long-distance minutes carried (in millions)
Data:
Cable modem subscribers3
Wireless:
Wireless lines in service4
December 31,
2006
2005
Percentage
Change
11,100
41,900
8,400
131.8
11,700
40,700
6,900
138.9
(5.1%)
2.9%
21.7%
(5.1%)
7,800
6,500
20.0%
4,600
3,000
53.3%
1 A long-distance customer is defined as a customer account that is invoiced a monthly long-distance
plan fee or has made a long-distance call during the month.
68
2 A local access line in service is defined as a revenue generating circuit or channel connecting a
customer to the public switched telephone network.
3 A cable modem subscriber is defined by the purchase of cable modem service regardless of the level
of service purchased. If one entity purchases multiple cable modem service access points, each
access point is counted as a subscriber.
4 A wireless line in service is defined as a revenue generating wireless device.
Commercial Segment Revenues
The decrease in voice revenue is primarily due to decreased minutes carried for our Commercial segment customers.
The increase in video revenue is primarily due to a 27.4% or $1.2 million increase in political advertising sales for the
2006 Alaska state-wide and local elections.
The decrease in data revenue is primarily due to a $4.6 million or 31.7% decrease in revenue earned from the lease and
provision of management and maintenance services on a portion of our 800-mile fiber optic system capacity that extends
from Prudhoe Bay to Valdez via Fairbanks as described above. The decrease is partially off-set by following:
• A $2.6 million increase to $14.7 million in private line and private network services due to increased circuits sold,
• $2.1 million in revenue recognized for a special project completed in 2006, and
• A $738,000 or 4.5% increase in other special project revenues.
The increase in wireless revenue is primarily due to increased wireless subscribers.
Commercial Segment Cost of Goods Sold
The Commercial segment Cost of Goods Sold increase is primarily due to the following:
• $2.3 million in managed services Cost of Goods Sold recognized for a special project completed in 2006,
• A $1.5 million or 128.4% increase in wireless Cost of Goods Sold resulting from increased revenue,
• Receipt in 2005 of $9.1 million upon the settlement of four separate claims with AT&T and Alascom pursuant to a
master agreement of which $2.0 million reduced the Commercial segment long-distance Cost of Goods Sold in
2005, and
• A 7.9% increase in managed services Cost of Goods Sold to $14.4 million primarily due to increased managed
services revenue in 2006 as compared to 2005.
The increase in Cost of Goods Sold is partially off-set by cost savings resulting from increased deployment of DLPS lines
during the year ended December 31, 2006 and decreased voice minutes carried.
Managed Broadband Segment Overview
Managed Broadband segment revenue and Cost of Goods Sold represented 5.4% and 2.8% of 2006 consolidated
revenues and Cost of Goods Sold, respectively.
Selected key performance indicators for our Managed Broadband segment follow:
Managed Broadband segment:
SchoolAccess® customers
Rural health customers
December 31,
2006
2005
Percentage
Change
48
21
45
21
6.7%
0.0%
Managed Broadband Segment Revenues
Managed Broadband segment revenue, which includes data products only, increased 0.1% to $26.1 million in 2006. The
increase is primarily due to increased multi-site and single-site SchoolAccess® customers, increased circuits purchased by
our rural health customers, and increased single-site rural health customers in the last six months of 2006 and a $358,000
contribution from the RCA to fund the construction of rural wireless sites. The increase is partially off-set by decreased
multi-site SchoolAccess® customers in the first six months of 2006 and a rate decrease for certain circuits purchased by
our rural health customers in 2006.
69
Managed Broadband Segment Cost of Goods Sold
Managed Broadband segment Cost of Goods Sold decreased $275,000 to $4.4 million from 2005 to 2006 primarily due to
reduced satellite capacity costs in 2006.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 10.4% to $171.7 million in 2006 primarily due to the following:
• A $5.9 million increase in our share-based compensation expense due to the recognition of $3.5 million in share-
based compensation expense following our adoption of SFAS No. 123(R) on January 1, 2006 and a $2.9 million
increase in expense relating to the fair value of our share-based liability during 2006. The $6.6 million in share-
based compensation expense was allocated to our reportable segments as follows (amounts in thousands):
Share-based compensation expense
Reportable Segments
Consumer
$ 2,154
Network
Access
2,565
Commercial
Managed
Broadband
1,380
484
Total
6,583
• A $2.9 million increase in bad debt expense due to a decrease in the realization of a recovery from Verizon in
2006 as compared to 2005,
• A $2.1 million increase in health insurance costs primarily resulting from a decreased reserve for incurred but not
reported health insurance claims in 2005 to reflect historical experience that was not repeated in 2006 and
increased medical claims in 2006,
• A $1.7 million increase in bad debt expense due to a temporary slowdown in our collection process on our long-
distance, local service and Internet invoices. The slowdown was due to the September 1, 2005 conversion to our
unified order management and fulfillment, billing, customer service, cash application, and credit and collection
system. Our ability to perform our collections process timely was significantly restored by December 31, 2006,
and
• A $1.4 million increase in certain promotion expenses in 2006.
The selling, general and administrative expenses increase is partially off-set by the following:
• A $3.1 million decrease in Managed Broadband segment’s bad debt expense primarily due to increased
allowances for certain Managed Broadband segment customers in 2005 for which payments were received in
2006,
• A $2.5 million decrease in labor costs in 2006,
• A $2.2 million decrease in our company-wide success sharing bonus accrual in 2006, and
• A $1.4 million decrease in contract labor in 2006 primarily due to a reduced number of contractors supporting our
information technology systems.
As a percentage of total revenues, selling, general and administrative expenses increased to 36.0% in 2006 from 35.1%
in 2005, primarily due to the net increases described above without a proportional increase in revenues.
Restructuring Charge
In August 2005 we committed to a reorganization plan to more efficiently meet the demands of technological and product
convergence by realigning along customer lines rather than product lines. The reorganization plan included integration of
several functions resulting in the layoff of 76 employees by November 30, 2005. During the year ended December 31,
2005 we recognized a restructuring charge of $2.0 million for workforce reduction costs across all functions. Total costs
incurred under this plan were $2.1 million. The following table sets forth the restructuring charges by segment during 2005
(amounts in thousands):
Consumer
Network
Access
Commer-
cial
Managed
Broadband
Total
Reportable
Segments
Restructuring charge
incurred through the year
ending December 31,
2005
$
660
737
417
153
1,967
70
Depreciation and Amortization Expense
Depreciation and amortization expense increased 10.8% to $82.1 million in 2006. The increase is primarily due to our
$95.3 million investment in equipment and facilities placed into service during 2005 for which a full year of depreciation
was recorded in 2006, the $83.4 million investment in equipment and facilities placed into service during the year ended
December 31, 2006 for which a partial year of depreciation was recorded in 2006, and a $790,000 software impairment
recognized in 2006 upon the closure of an operating segment.
Other Expense, Net
Other expense, net of other income, decreased 16.7% to $33.1 million in 2006 primarily due to the following:
•
In August 2005, we finalized a $215.0 million Amended Senior Credit Facility to replace our May 21, 2004 Senior
Credit Facility resulting in the following 2005 expenses:
o We recognized a $2.8 million Loss on Early Extinguishment of Debt in 2005 resulting from termination of our
satellite transponder capital lease, and
o We recognized $1.8 million in Amortization and Write-off of Loan and Senior Notes Fees in 2005 because a
portion of the Amended Senior Credit Facility was a substantial modification of the May 21, 2004 Senior
Credit Facility.
• Senior Credit Facility deferred loan fee amortization expense decreased $502,000 or 73% in 2006 after the
August 2005 amendment,
Interest income increased $1.2 million to $1.8 million in 2006 resulting from the increased average cash and cash
equivalents and restricted cash balances in 2006, and
Interest expense decreased $820,000 due to construction period interest capitalization in 2006.
•
•
Income Tax Expense
Income tax expense was $15.8 million in 2006 and $16.0 million in 2005. Our effective income tax rate increased from
43.4% in 2005 to 46.1% in 2006 due to adjustments to deferred tax assets and liabilities balances in 2005. Partially
offsetting this decrease were increases in nondeductible entertainment expenses in 2005.
Cumulative Effect of a Change in Accounting Principle
On January 1, 2006 we adopted SFAS No. 123(R), “Share-Based Payment.” SFAS 123(R) requires us to estimate pre-
vesting option forfeitures at the time of grant and periodically revise those estimates in subsequent periods if actual
forfeitures differ from those estimates. We record share-based compensation expense only for those awards expected to
vest using an estimated forfeiture rate based on our historical pre-vesting forfeiture data. Previously, we accounted for
forfeitures as they occurred under the pro forma disclosure provisions of SFAS 123 for periods prior to 2006. The
transition impact (benefit) of adopting SFAS No. 123(R) attributed to accruing for expected forfeitures on outstanding
share-based awards totaled $108,000, which was reduced by income tax expense of $44,000, and is reported as a
cumulative effect of a change in accounting principle during the year ended December 31, 2006 in the accompanying
Consolidated Income Statements.
Multiple System Operator (“MSO”) Operating Statistics
Our operating statistics include capital expenditures and customer information from our Consumer and Commercial
segments which offer services utilizing our cable services’ facilities.
Our capital expenditures by standard reporting category for the years ended December 31, 2007, 2006 and 2005 follows
(amounts in thousands):
Line extensions
Customer premise equipment
Scalable infrastructure
Upgrade/rebuild
Support capital
Commercial
Sub-total
Remaining reportable segments capital
expenditures
$
2007
62,984
23,554
4,749
1,451
1,317
392
94,447
2006
24,126
14,771
1,062
4,145
1,146
138
45,388
62,850
$ 157,297
59,672
105,060
2005
3,877
18,600
2,702
11,761
935
331
38,206
42,945
81,151
71
The standardized definition of a customer relationship is the number of customers that receive at least one level of service
utilizing our cable service facilities, encompassing voice, video, and data services, without regard to which services
customers purchase. At December 31, 2007, 2006 and 2005 we had 129,000, 125,300 and 123,500 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, 2007, 2006 and 2005 we had 295,200,
249,300 and 236,300 revenue generating units, respectively.
Liquidity and Capital Resources
Our principal sources of current liquidity are cash and cash equivalents and other financing as needed to support our
facilities expansion. We believe, but can provide no assurances, that we will be able to meet our current and long-term
liquidity and capital requirements and fixed charges through our cash flows from operating activities, existing cash, cash
equivalents, credit facilities, and other external financing and equity sources. Should operating cash flows be insufficient
to support additional borrowings and principal payments scheduled under our existing credit facilities, capital expenditures
will likely be reduced.
Cash flows from operating activities totaled $108.6 million for the year ended December 31, 2007 as compared to $122.8
million for the year ended December 31, 2006.
Other sources of cash during the year ended December 31, 2007 included a $60.0 million borrowing on our Senior Credit
Facility, $4.6 million of collateral released and returned to us, and $3.3 million from the issuance of our Class A common
stock. Other uses of cash during the year ended December 31, 2007 included expenditures of $151.3 million for property
and equipment, including construction in progress, $19.5 million to acquire Alaska DigiTel, $15.2 million to repay a note
payable and convertible debenture previously owed by Alaska DigiTel, repayment of $12.0 million of our Senior Credit
Facility, purchase of $15.3 million of common stock to be retired and held for corporate purposes, and the purchase of
$7.2 million of other assets and intangible assets.
Working capital totaled $35.3 million at December 31, 2007, a $59.1 million decrease as compared to $94.4 million at
December 31, 2006. The decrease is primarily due to cash paid for capital expenditures, the Alaska DigiTel acquisition
and debt repayment.
Net receivables increased $20.4 million from December 31, 2006 to December 31, 2007 primarily due to payment timing
on trade receivables from several large customers, an increase in amounts due from the Universal Service Administrative
Company (“USAC”), the addition of $6.3 million net receivables due to the acquisition of Alaska DigiTel, and an increase
in trade receivables for Managed Broadband services provided to hospitals and health clinics due to the timing of
payments received.
Senior Notes
We have outstanding Senior Notes of $317.0 million at December 31, 2007. We pay interest of 7.25% on the Senior
Notes and they are due in 2014. The Senior Notes are carried on our Consolidated Balance Sheet net of the unamortized
portion of the discount, which is being amortized to Interest Expense over the term of the Senior Notes.
The Senior Notes are not redeemable prior to February 15, 2009. At any time on or after February 15, 2009, the Senior
Notes are redeemable at our option, in whole or in part, on not less than thirty days nor more than sixty days notice, at the
following redemption prices, plus accrued and unpaid interest (if any) to the date of redemption:
If redeemed during the twelve month period
commencing February 1 of the year
indicated:
2009
2010
2011
2012 and thereafter
Redemption Price
103.625%
102.417%
101.208%
100.000%
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The Senior Notes restrict GCI, Inc. and certain of its subsidiaries from incurring debt, but permits debt under the Senior
Credit Facility and vendor financing as long as our leverage ratio does not exceed 6.0 to one. In addition, certain other
debt is permitted regardless of our leverage ratio, including debt under the Senior Credit Facility not exceeding (and
reduced by certain stated items):
• $250.0 million, reduced by the amount of any prepayments, or
• 3.0 times earnings before interest, taxes, depreciation and amortization for the last four full fiscal quarters of GCI,
Inc. and certain of its subsidiaries.
The Senior Notes limit our ability to make cash dividend payments.
Semi-annual interest payments of $11.6 million are payable in February and August of each year.
We were in compliance with all Senior Notes loan covenants at December 31, 2007.
Senior Credit Facility
In September 2007 we exercised our right to add an Incremental Facility of up to $100.0 million to our existing Senior
Credit Facility. The Incremental Facility was structured in the form of a $55.0 million increase to the existing term loan
component of our Senior Credit Facility and a $45.0 million increase to the existing revolving loan component of our
Senior Credit Facility. The $100.0 million Incremental Facility will become due under the same terms and conditions as
set forth in the existing Senior Credit Facility.
The Senior Credit Facility which includes the incremental facility as discussed above includes a $215.0 million term loan
and a $100.0 million revolving credit facility with a $25.0 million sublimit for letters of credit. Our term loan is fully drawn.
We borrowed $10.0 million under our revolving credit facility in December 2007, and we have letters of credit outstanding
totaling $4.2 million at December 31, 2007 which leaves $85.8 million available at December 31, 2007 to draw under the
revolving credit facility if needed. The term and revolving loan portions of our Senior Credit Facility are due in 2012 and
2011, respectively. In 2008 we have borrowed an additional $20.0 million under our revolving credit facility.
The Incremental Facility increased the interest rate on the term loan component of our Senior Credit Facility from LIBOR
plus 1.50% to LIBOR plus 2.00%. The interest rate on the revolving loan component of the previous Senior Credit Facility
was LIBOR plus a margin dependent upon our Total Leverage Ratio ranging from 1.00% to 1.75%. The Incremental
Facility increased the revolving credit facility interest rate for our Senior Credit Facility to LIBOR plus the following
applicable margin dependent upon our Total Leverage ratio:
Total Leverage
Ratio (as defined)
>3.75
>3.25 but <3.75
>2.75 but <3.25
<2.75
Applicable
Margin
2.25%
2.00%
1.75%
1.50%
The annual commitment fee we are required to pay on the unused portion of the commitment is 0.375%.
The Senior Credit Facility Total Leverage Ratio (as defined) limit is 4.50:1.0, the Senior Leverage Ratio (as defined) limit
is 2.25:1.0, and the Fixed Charge Coverage Ratio (as defined) must be less than 1.0:1.0 subject to certain exceptions.
On May 7, 2007 our Senior Credit Facility was amended to allow the exclusion of up to $100.0 million of capital
expenditures in aggregate from Fixed Charges (as defined) during the Excluded Capital Expenditures Period (as defined)
beginning on May 7, 2007 and ending September 30, 2009.
The Incremental Facility was a substantial modification of a portion of our existing Senior Credit Facility resulting in a
$348,000 write-off of previously deferred loan fees during the year ended December 31, 2007 in our Consolidated Income
Statement. Deferred loan fees of $312,000 associated with the portion of our existing Senior Credit Facility determined
not to have been substantially modified continue to be amortized over the remaining life of the Senior Credit Facility.
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In connection with the Incremental Facility, we paid bank fees and other expenses of $519,000 during the year ended
December 31, 2007 of which $263,000 were written off in the year ended December 31, 2007 and $256,000 were
deferred and will be amortized over the remaining life of the Senior Credit Facility.
Borrowings under the Senior Credit Facility are subject to certain financial covenants and restrictions on indebtedness,
dividend payments, financial guarantees, business combinations, and other related items. At December 31, 2007 we
were in compliance with all loan covenants relating to our Senior Credit Facility.
We expect to increase the amount available to borrow under our Senior Credit Facility early in the second quarter of 2008
to ensure we have access to the capital required for our acquisitions and planned capital expenditures.
Total Long-term Debt
As of December 31, 2007 maturities of long-term debt were as follows (amounts in thousands):
Years ending December 31,
2008
2009
2010
2011
2012
2013 and thereafter
Total
$
2,283
2,181
2,179
112,751
101,690
320,305
$ 541,389
Capital Lease Obligation
On March 31, 2006, through our subsidiary GCC we entered into an agreement to lease transponder capacity on Intelsat’s
Galaxy 18 spacecraft that is expected to be launched May 3, 2008. We will also lease capacity on the Horizons 1 satellite,
which is owned jointly by Intelsat and JSAT International, Inc. The leased capacity is expected to replace our existing
transponder capacity on Intelsat’s Galaxy XR satellite when it reaches its end of life.
We will lease C-band and Ku-Band transponders over an expected term of 14 years once the satellite is placed into
commercial operation in its assigned orbital location, and the transponders meet specific performance specifications and
are made available for our use. We will record the capital lease obligation of $98.6 million and the addition to our Property
and Equipment when the satellite is made available for our use which is expected to occur May 18, 2008.
A summary of estimated future minimum lease payments for this lease follows (amounts in thousands):
Years ending December 31:
2008
2009
2010
2011
2012
2013 and thereafter
$
Total minimum lease payments $
6,510
11,160
11,160
11,160
11,160
105,090
156,240
Capital Expenditures
Our cash expenditures for property and equipment, including construction in progress, totaled $151.3 million and $96.0
million during the years ended December 31, 2007 and 2006, respectively. Our capital expenditures requirements in
excess of approximately $25.0 million per year are largely success driven and are a result of the progress we are making
in the marketplace. We expect our 2008 expenditures for property and equipment for our core operations, including
construction in progress and excluding the Galaxy 18 satellite transponder capacity lease discussed above and potential
acquisitions discussed earlier, to total $220.0 million to $230.0 million, depending on available opportunities and the
amount of cash flow we generate during 2008.
Planned capital expenditures over the next five years include those necessary for the expansion of Alaska DigiTel’s
CDMA network, construction of our GSM network, maintenance of existing facilities, growth of our long-distance, local
74
access, cable and Internet facilities, improving network integrity, continuing deployment of DLPS, adding new products,
and introducing other new facilities and automation to reduce costs.
During 2007 Alaska DigiTel and GCI signed an agreement with Sprint Nextel to build-out Alaska DigiTel's CDMA network
to provide expanded roaming area coverage. If we fail to meet the schedule, Sprint Nextel has the right to terminate the
agreement and we may be required to pay up to $16.0 million as liquidated damages. We expect to meet the deadlines
imposed by the build-out schedule and therefore expect our expenditures to result in an expansion of our wireless
facilities rather than payment of the liquidated damages. To complete the CDMA network build-out, we signed an
agreement to purchase CDMA network equipment for $12.5 million which is expected to be paid in 2008.
On July 31, 2006, through our subsidiary GCC we entered into an agreement to purchase an IRU in the Kodiak-Kenai
Cable Company, LLC’s marine-based fiber optic cable system linking Anchorage to Kenai, Homer, Kodiak and Seward,
Alaska. The new system was placed into service in December 2006. We accepted the first installment of our IRU capacity
in December 2006. We have committed to purchase a minimum of $5.0 million to $5.5 million in additional IRU capacity in
two installments through 2011.
We have entered into an agreement to purchase hardware and software capable of providing wireless service to small
markets in rural Alaska as a reliable substitute for standard wire line service. The agreement has a total commitment of
$20.6 million. We paid a $3.5 million down payment in 2007 and expect to pay $4.3 million, $9.0 million, and $3.8 million
during the years ended December 31, 2008, 2009, and 2010, respectively.
In 2007 we entered into several agreements to purchase submarine cable, amplifiers and line terminal equipment for our
Southeast Alaska submarine fiber optic system project. In addition to providing the equipment for the new submarine line,
the contracts include additional equipment to upgrade the Alaska United West submarine cable system and also include
an option to increase capacity on the Alaska United East submarine cable system. The agreements have a total
commitment of $25.3 million. We paid a $2.5 million down payment in 2007 and expect to pay the remaining $22.8 million
in 2008.
Operating Leases
A summary of estimated future minimum lease payments for operating leases follows (amounts in thousands):
Years ending December 31:
2008
2009
2010
2011
2012
2013 and thereafter
Total minimum lease payments
$
$
10,979
8,412
7,123
6,156
4,444
18,315
55,429
Share Repurchases
GCI’s Board of Directors has authorized a common stock buyback program for the repurchase of our Class A and Class B
common stock in order to reduce our outstanding shares of Class A and Class B common stock. Our Board of Directors
authorized us and we obtained permission from our lenders for up to $80.0 million of repurchases through December 31,
2007. We are authorized to continue our stock repurchases of up to $5.0 million per quarter indefinitely and to use stock
option exercise proceeds, in our discretion, to repurchase additional shares. If stock repurchases are less than the total
approved quarterly amount the difference may be carried forward and used to repurchase additional shares in future
quarters. During the year ended December 31, 2007 we repurchased 1,252,000 shares of our common stock at a cost of
$15.1 million. We do not expect further share repurchases in the near term. We will likely curtail our stock repurchases as
a condition for increasing availability under our credit facilities. When we begin generating free cash flow we may
continue the repurchases subject to the availability under our credit facilities and the price of our Class A and Class B
common stock. The repurchases have and will continue to comply with the restrictions of SEC Rule 10b-18.
Other Expenditures and Commitments
Effective January 1, 2007 we invested $29.5 million in Alaska DigiTel in exchange for an 81.9% equity interest. We do not
have voting control of Alaska DigiTel. We funded the transaction from existing cash balances and by drawing down $15.0
million under the revolving portion of our Senior Credit Facility. Additionally, we entered into a revolving credit loan
75
agreement with Alaska DigiTel effective January 1, 2007. The loan agreement provides that Alaska DigiTel can draw,
subject to certain restrictions and financial covenants, up to $15.0 million of which all was drawn during the year ended
December 31, 2007. In January 2008 the revolving credit facility available to Alaska DigiTel was increased to $25.0
million. In December 2007, we signed a definitive agreement to acquire the remaining minority interest in Alaska DigiTel
for a total consideration of approximately $10.0 million. This transaction is subject to customary closing conditions,
including regulatory approval, but is expected to occur in the third quarter of 2008.
At December 31, 2006 we had provided a $4.6 million bank depository account as collateral for a term loan from a bank to
Alaska DigiTel. The $4.6 million collateral was released and returned to us in January 2007.
We have an agreement with Alaska Airlines, Inc. (“Alaska Airlines”) to offer our consumer and commercial customers who
make qualifying purchases from us the opportunity to accrue mileage awards in the Alaska Airlines Mileage Plan. The
agreement as amended has a remaining commitment at December 31, 2007 totaling $3.8 million.
As previously described, in October 2007 we signed an agreement to purchase the stock of the UUI and Unicom
telecommunications subsidiaries of UCI for $40.0 million expected to be paid upon closing. Additionally we may assume
approximately $37.0 million in net debt as part of the acquisition. We will fund the transaction from cash on hand, by
drawing down additional debt, or a combination of the two. This transaction will close upon regulatory approval which is
expected in the second or third quarter of 2008.
As previously described, in December 2007 we signed a purchase agreement to acquire all of the interests in Alaska
Wireless for $13.0 million to $14.0 million, expected to be paid upon closing. In addition to the initial acquisition payment
we have agreed to a contingent payment of approximately $3.0 million in 2010 if certain financial conditions are met. We
will fund the transaction from cash on hand, by drawing down additional debt, or a combination of the two. This
transaction will close upon regulatory approval which is expected in the second or third quarter of 2008.
The long-distance, local access, cable, Internet and wireless services industries continue to experience substantial
competition, regulatory uncertainty, and continuing technological changes. Our future results of operations will be affected
by our ability to react to changes in the competitive and regulatory environment and by our ability to fund and implement
new or enhanced technologies. We are unable to determine how competition, economic conditions, and regulatory and
technological changes will affect our ability to obtain financing under acceptable terms and conditions.
New Accounting Standards
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations" which requires the acquiring entity in a
business combination to record all assets acquired and liabilities assumed at their respective acquisition-date fair values,
changes the recognition of assets acquired and liabilities assumed arising from contingencies, changes the recognition
and measurement of contingent consideration, and requires the expensing of acquisition-related costs as incurred. SFAS
141(R) also requires additional disclosure of information surrounding a business combination, such that users of the
entity's financial statements can fully understand the nature and financial impact of the business combination. We will
implement SFAS No. 141(R) on January 1, 2009 and we will apply it to any business combinations with an acquisition
date after January 1, 2009.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements"
which establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the
parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a
parent's ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is
deconsolidated. SFAS 160 also established reporting requirements that provide sufficient disclosures that clearly identify
and distinguish between the interests of the parent and the interests of the noncontrolling owner. We will implement
SFAS No. 160 on January 1, 2009. We do not expect the adoption of this standard to have a material impact on our
income statement, financial position or cash flows.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" which provides a definition of fair value,
establishes a framework for measuring fair value, and expands disclosures about fair value measurements for future
transactions. SFAS 157 is effective for us beginning January 1, 2008. We do not expect the adoption of this standard to
have a material impact on our income statement, financial position or cash flows.
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Critical Accounting Policies
Our accounting and reporting policies comply with U.S. generally accepted accounting principles (“GAAP”). The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions.
The financial position and results of operations can be affected by these estimates and assumptions, which are integral to
understanding reported results. Critical accounting policies are those policies that management believes are the most
important to the portrayal of our financial condition and results, and require management to make estimates that are
difficult, subjective or complex. Most accounting policies are not considered by management to be critical accounting
policies. Several factors are considered in determining whether or not a policy is critical in the preparation of financial
statements. These factors include, among other things, whether the estimates are significant to the financial statements,
the nature of the estimates, the ability to readily validate the estimates with other information including third parties or
available prices, and sensitivity of the estimates to changes in economic conditions and whether alternative accounting
methods may be utilized under GAAP. For all of these policies, management cautions that future events rarely develop
exactly as forecast, and the best estimates routinely require adjustment. Management has discussed the development
and the selection of critical accounting policies with our Audit Committee.
Those policies considered to be critical accounting policies for the year ended December 31, 2007 are described below.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to
make required payments. We also maintain an allowance for doubtful accounts based on our assessment of the
likelihood that our customers will satisfactorily comply with rules necessary to obtain supplemental funding from the
USAC for services provided by us under our packaged communications offerings to hospitals, health clinics and rural
school districts. We base our estimates on the aging of our accounts receivable balances, financial health of specific
customers, regional economic data, changes in our collections process, regulatory requirements, and our customers’
compliance with USAC rules. If the financial condition of our customers were to deteriorate or if they are unable to
emerge from reorganization proceedings, resulting in an impairment of their ability to make payments, additional
allowances may be required. If their financial condition improves or they emerge successfully from reorganization
proceedings, allowances may be reduced. Such allowance changes could have a material effect on our consolidated
financial condition and results of operations.
Impairment and Useful Lives of Intangible Assets
We record all assets and liabilities acquired in purchase acquisitions, including goodwill and other intangibles, at fair
value as required by SFAS No. 141, “Business Combinations.” Goodwill and indefinite-lived assets such as our cable
certificates and wireless licenses are not amortized but are subject, at a minimum, to annual tests for impairment and
quarterly evaluations of whether events and circumstances continue to support an indefinite useful life as required by
SFAS No. 142, “Goodwill and Other Intangible Assets.” Other intangible assets are amortized over their estimated
useful lives primarily using the straight-line method, and are subject to impairment if events or circumstances indicate
a possible inability to realize the carrying amount as required by SFAS No. 142 and SFAS No. 144. The initial goodwill
and other intangibles recorded and subsequent impairment analysis requires management to make subjective
judgments concerning estimates of the applicability of quoted market prices in active markets and, if quoted market
prices are not available and/or are not applicable, how the acquired asset will perform in the future using a discounted
cash flow analysis. Estimated cash flows may extend beyond ten years and, by their nature, are difficult to determine
over an extended timeframe. Events and factors that may significantly affect the estimates include, among others,
competitive forces, customer behaviors and attrition, changes in revenue growth trends, cost structures and
technology, and changes in discount rates, performance compared to peers, material and ongoing negative economic
trends, and specific industry or market sector conditions. In determining the reasonableness of cash flow estimates,
we review historical performance of the underlying asset or similar assets in an effort to improve assumptions utilized
in our estimates. In assessing the fair value of goodwill and other intangibles, we may consider other information to
validate the reasonableness of our valuations including third-party assessments. These evaluations could result in a
change in useful lives in future periods and could result in write-down of the value of intangible assets. Our cable
certificates, wireless licenses and goodwill assets are our only indefinite-lived intangible assets and because of the
significance of our cable certificate and goodwill assets to our consolidated balance sheet, our annual and quarterly
impairment analyses and quarterly evaluations of remaining useful lives are critical. Any changes in key assumptions
about the business and its prospects, changes in market conditions or other externalities, or recognition of previously
unrecognized intangible assets for impairment testing purposes could result in an impairment charge and such a
charge could have a material adverse effect on our consolidated results of operations.
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Accruals for Unbilled Costs
We estimate unbilled long-distance services Cost of Goods Sold based upon minutes of use carried through our
network and established rates. We estimate unbilled costs for new circuits and services, and network changes that
result in traffic routing changes or a change in carriers. Carriers that provide service to us regularly make network
changes that can lead to new, revised or corrected billings. Such estimates are revised or removed when subsequent
billings are received, payments are made, billing matters are researched and resolved, tariffed billing periods lapse, or
when disputed charges are resolved. Revisions to previous estimates could either increase or decrease costs in the
year in which the estimate is revised which could have a material effect on our consolidated financial condition and
results of operations.
Valuation Allowance for Net Operating Loss Deferred Tax Assets
Our income tax policy provides for deferred income taxes to show the effect of temporary differences between the
recognition of revenue and expenses for financial and income tax reporting purposes and between the tax basis of
assets and liabilities and their reported amounts in the financial statements in accordance with SFAS No. 109,
“Accounting for Income Taxes.” We have recorded deferred tax assets of approximately $47.6 million associated with
income tax net operating losses that were generated from 1995 to 2005, and that expire from 2011 to 2025, and with
charitable contributions that were converted to net operating losses in 2006 and 2007, and that expire in 2026 and
2027, respectively. Pre-acquisition income tax net operating losses associated with acquired companies are subject
to additional deductibility limits. We have recorded deferred tax assets of approximately $3.1 million associated with
alternative minimum tax credits that do not expire. Significant management judgment is required in developing our
provision for income taxes, including the determination of deferred tax assets and liabilities and any valuation
allowances that may be required against the deferred tax assets. We have not recorded a valuation allowance on the
deferred tax assets as of December 31, 2007 based on management’s belief that future reversals of existing taxable
temporary differences and estimated future taxable income exclusive of reversing temporary differences and
carryforwards, will, more likely than not, be sufficient to realize the benefit of these assets over time. In the event that
actual results differ from these estimates or if our historical trends change, we may be required to record a valuation
allowance on deferred tax assets, which could have a material adverse effect on our consolidated financial position or
results of operations.
Other significant accounting policies, not involving the same level of measurement uncertainties as those discussed
above, are nevertheless important to an understanding of the financial statements. Policies related to revenue recognition,
share-based payments, and financial instruments require difficult judgments on complex matters that are often subject to
multiple sources of authoritative guidance. Certain of these and other matters are among topics currently under
reexamination by accounting standards setters and regulators. No specific conclusions reached by these standard setters
appear likely to cause a material change in our accounting policies, although outcomes cannot be predicted with
confidence. A complete discussion of our significant accounting policies can be found in note 1 in the accompanying
“Notes to Consolidated Financial Statements.”
Geographic Concentration and the Alaska Economy
We offer voice, data and wireless telecommunication services and video services to customers primarily throughout
Alaska. Because of this geographic concentration, growth of our business and of our operations depends upon economic
conditions in Alaska. The economy of Alaska is dependent upon the natural resource industries, and in particular oil
production, as well as investment earnings, tourism, government, and United States military spending. Any deterioration in
these markets could have an adverse impact on us. 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 2007
the State of Alaska reported that oil revenues, federal funding and investment revenues supplied 43%, 16% and 31%,
respectively, of the state’s total revenues. In fiscal 2008 state economists forecast that Alaska’s oil revenues, federal
funding and investment revenues will supply 50%, 19% and 23%, respectively, of the state’s total projected revenues.
These forecasts incorporate Alaska’s Clear and Equitable Share (ACES) production tax, passed by the Alaska legislature
in November 2007 and signed into law in December 2007. With the new production tax, the revenue estimates are
significantly higher than they would have been under the prior law.
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 0.715
million barrels produced per day in fiscal 2007. The state forecasts the production rate to decline from 0.731 million
barrels produced per day in fiscal 2008 to 0.680 million barrels produced per day in fiscal 2018.
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Market prices for North Slope oil averaged $61.63 in fiscal 2007 and are forecasted to average $72.64 in fiscal 2008. The
closing price per barrel was $87.31 on February 1, 2008. To the extent that actual oil prices vary materially from the
state’s projected prices, the state’s projected revenues and deficits will change. Every $5 change in the price per barrel of
oil is forecasted to result in an increase of at least $552.0 million in the state’s fiscal 2008 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 (“CBRF”) that is intended to fund budgetary
shortfalls. If the state’s current projections are realized and no surpluses are deposited into the CBRF it will be depleted in
2016. The date the CBRF is depleted is highly influenced by the price of oil. If the fund is depleted, aggressive state action
will be necessary to increase revenues and reduce spending in order to balance the budget. The governor of the State of
Alaska and the Alaska legislature continue to evaluate cost cutting and revenue enhancing measures.
Should new oil discoveries or developments not materialize or the price of oil become depressed, the long term trend of
continued decline in oil production from the Prudhoe Bay area is inevitable with a corresponding adverse impact on the
economy of the state, in general, and on demand for telecommunications and cable television services, and, therefore, on
us, in particular. Periodically there are renewed efforts to allow exploration and development in the Arctic National Wildlife
Refuge (“ANWR”). The United States Energy Information Agency has estimated that it could take nine years to begin oil
field drilling after approval of ANWR exploration.
No assurance can be given that the driving forces in the Alaska economy, and in particular, oil production, will continue at
appropriate levels to provide an environment for expanded economic activity.
No assurance can be given that oil companies doing business in Alaska will be successful in discovering new fields or
further developing existing fields which are economic to develop and produce oil with access to the pipeline or other
means of transport to market. We are not able to predict the effect of changes in the price and production volumes of
North Slope oil on Alaska’s economy or on us.
Deployment of a natural gas pipeline from the State of Alaska’s North Slope to the Lower 48 States has been proposed to
supplement natural gas supplies. The economic viability of a natural gas pipeline depends upon the price of and demand
for natural gas. The Governor of the State of Alaska introduced natural gas pipeline legislation on March 2, 2007, which
outlined project criteria that energy companies must meet in exchange for inducement incentives from the State of Alaska
to build a natural gas pipeline. The state is currently in the process of evaluating proposals from various commercial
entities. Such a project could have a positive impact on the State of Alaska’s revenues and could provide a substantial
stimulus to the Alaska economy.
Development of the ballistic missile defense system project has had a significant impact on Alaskan telecommunication
requirements. The system is a fixed, land-based, non-nuclear missile defense system with a land and space based
detection system capable of responding to limited strategic ballistic missile threats to the United States. The system
includes deployment of up to 100 ground-based interceptor silos and battle management command and control facilities
at Fort Greely, Alaska.
The United States Army Corps of Engineers awarded a construction contract and construction of test bed facilities began
in 2002. As of January 2008 a total of twenty-one ground-based missile interceptors have been placed in underground
silos. The Missile Defense Agency is reported to expect to emplace up to thirty interceptors in Alaska by 2009.
Tourism, air cargo, and service sectors have helped offset the prevailing pattern of oil industry downsizing that has
occurred during much of the last several years.
We have, since our entry into the telecommunication marketplace, aggressively marketed our services to seek a larger
share of the available market. The customer base in Alaska is limited, however, with a population of approximately
670,000 people. The State of Alaska’s population is distributed as follows:
• 42% are located in the Municipality of Anchorage,
• 13% are located in the Fairbanks North Star Borough,
• 12% are located in the Matanuska-Susitna Borough,
• 8% are located in the Kenai Peninsula Borough,
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• 5% are located in the City and Borough of Juneau, and
• The remaining 20% are located in other communities across the State of Alaska.
Seasonality
Revenue derived from our long-distance services product in our Network Access segment have historically been highest
in the summer months because of temporary population increases attributable to tourism and increased seasonal
economic activity such as construction, commercial fishing, and oil and gas activities. Our long-distance services product
in our Consumer and Commercial segments and our other products in all our segments do not exhibit significant
seasonality. Our ability to implement construction projects is hampered during the winter months because of cold
temperatures, snow and short daylight hours.
Off-Balance Sheet Arrangements
We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purpose of raising
capital, incurring debt or operating parts of our business that are not consolidated into our financial statements. We do not
have any arrangements or relationships with entities that are not consolidated into our financial statements that are
reasonably likely to materially affect our liquidity or the availability of our capital resources.
Schedule of Certain Known Contractual Obligations
The following table details future projected payments associated with certain known contractual obligations as of
December 31, 2007:
Payments Due by Period
Long-term debt
Interest on long-term debt
Capital lease obligations,
including interest
Operating lease commitments
Purchase obligations
Other
Total contractual obligations
Total
$ 541,389
215,754
163,199
55,429
74,828
66,500
$ 1,117,099
Less than 1
Year
1 to 3
Years
(Amounts in thousands)
2,283
38,580
4,360
76,628
4 to 5
Years
214,441
65,746
6,981
10,979
60,028
63,500
182,351
23,389
15,535
14,800
3,000
137,712
23,152
10,600
---
---
313,939
More
Than 5
Years
320,305
34,800
109,677
18,315
---
---
483,097
For long-term debt included in the above table, we have included principal payments on our Senior Credit Facility and
Senior Notes. Interest on amounts outstanding under our Senior Credit Facility is based on variable rates. We used the
current rate paid on the Senior Credit Facility to estimate our future interest payments. Our Senior Notes require semi-
annual interest payments of $11.6 million through February 2014. For a discussion of our Senior Notes and Senior Credit
Facility see note 7 in the accompanying “Notes to Consolidated Financial Statements.”
Capital lease obligations include our obligation to lease transponder capacity on Galaxy 18, which is expected to be
launched on May 3, 2008 and placed into service on May 18, 2008. For a discussion of our capital and operating leases,
see note 15 in the accompanying “Notes to Consolidated Financial Statements.”
Purchase obligations include a commitment to purchase hardware and software capable of providing wireless service to
small markets in rural Alaska of $17.1 million, a commitment to purchase submarine cable, amplifiers and line terminal
equipment of $22.8 million, a commitment to purchase additional capacity through an IRU purchase of fiber of $5.0
million, a commitment to purchase CDMA network equipment of $12.5 million for the build-out of Alaska DigiTel's CDMA
network, and a remaining $3.8 million commitment for our Alaska Airlines agreement as further described in note 15 in the
accompanying “Notes to Consolidated Financial Statements.” The contracts associated with these commitments are non-
cancelable. Purchase obligations also include open purchase orders for goods and services for capital projects and
normal operations totaling $12.9 million which are not included in our Consolidated Balance Sheets at December 31,
80
2007, because the goods had not been received or the services had not been performed at December 31, 2007. The
open purchase orders are cancelable.
Other consists of our commitments to acquire the remaining minority interest in Alaska DigiTel for approximately $10.0
million, UUI and Unicom for approximately $40.0 million, and Alaska Wireless for approximately $16.0 million to $17.0
million.
Regulatory Developments
See “Part I — Item 1 — Business — Regulation” for more information about regulatory developments affecting us.
Inflation
We do not believe that inflation has a significant effect on our operations.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to various types of market risk in the normal course of business, including the impact of interest rate
changes. We do not hold derivatives for trading purposes.
Our Senior Credit Facility carries interest rate risk. Amounts borrowed under this Agreement bear interest at LIBOR plus
2.0% 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, 2007, we have borrowed $220.8 million subject to interest rate
risk. On this amount, each 1% increase in the LIBOR interest rate would result in $2,208,000 of additional gross interest
cost on an annualized basis.
Item 8. Consolidated Financial Statements and Supplementary Data
Our consolidated financial statements are filed under this Item, beginning on page 87 Our supplementary data is filed
under Item 7, beginning on page 53.
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial
Disclosure
None.
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by
us in reports that we file or submit under the Securities Exchange Act of 1934 (“Exchange Act”) is recorded, processed,
summarized and reported as specified in the SEC’s rules and forms. As of the end of the period covered by this Annual
Report on Form 10-K, we carried out an evaluation of the effectiveness of the design and operation of our “disclosure
controls and procedures” (as defined in Exchange Act Rule 13a - 15(e)) under the supervision and with the participation of
our management, including our Chief Executive Officer and our Chief Financial Officer.
Based on that evaluation and as described below under “Management’s Report on Internal Control Over Financial
Reporting" (Item 9A.(b)), we have identified material weaknesses in our internal control over financial reporting (as defined
in Exchange Act Rule 13a-15(f)). Because of these material weaknesses, our management, including our Chief Executive
Officer and our Chief Financial Officer, concluded that our disclosure controls and procedures were not effective as of
December 31, 2007.
The certifications attached as Exhibits 31 and 32 to this report should be read in conjunction with the disclosures set forth
herein.
81
(b) Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as
such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management,
including our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of the effectiveness of
our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We acquired Alaska DigiTel during 2007, and have excluded from our assessment of the effectiveness of our internal
control over financial reporting as of December 31, 2007, Alaska DigiTel’s internal control over financial reporting
associated with total assets of $57.3 million and total revenues of $28.5 million included in our consolidated financial
statements as of and for the year ended December 31, 2007.
Based on our evaluation of the effectiveness of our internal control over financial reporting, our management concluded
that as of December 31, 2007, we did not maintain effective internal control over financial reporting due of the existence of
material weaknesses. A material weakness is a control deficiency, or a combination of deficiencies, in internal control over
financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or
interim financial statements will not be prevented or detected on a timely basis. The material weaknesses in internal
control over financial reporting that existed as of December 31, 2007 were as follows:
Information Technology Program Development and Change Controls over the Unified Billing System and Related
Monitoring Controls - Information technology program development and change controls over the unified billing
system and the interface with the general ledger were not designed effectively. As a result, our automated
interface between the unified billing system and the general ledger was not appropriately configured. In addition,
our management review control over unreconciled transactions recorded in accounts receivable general ledger
accounts was not designed at the level of precision to detect and correct errors that could be material to annual or
interim financial statements. As a result of these deficiencies, errors existed in the Company's accounts
receivable and revenues that were corrected prior to the issuance of the 2007 consolidated financial statements.
Share-Based Payment Arrangements– Our policies and procedures to ensure that our accounting personnel are
sufficiently trained on technical accounting matters did not operate effectively. More specifically, our accounting
personnel did not have the necessary knowledge and training to adequately account for and disclose certain
share-based compensation awards in accordance with Statement of Financial Accounting Standard No.123(R),
Share-Based Payment. In addition, our accounting personnel lacked adequate training on the operation of certain
aspects of the software used to calculate the Company’s share-based compensation expense. As a result of
these deficiencies, errors existed in the Company's share-based compensation expense that were corrected prior
to the issuance of the 2007 consolidated financial statements.
KPMG LLP, the Company’s independent registered public accounting firm, has issued an audit report on the Company’s
internal control over financial reporting as of December 31, 2007, which is included in Item 8 of this Form 10-K.
(c) Managements Plan for Remediation of Material Weaknesses
Subsequent to December 31, 2007, we plan to remediate the material weakness associated with the unified billing system
by taking the following actions:
• We will enhance the design of our detective monitoring control over of the recording of receivables and revenues
by:
1) Performing the monitoring at a level of precision to detect all transactions that could aggregate to a material
component of the account balances, and
2) Ensuring differences identified during the monitoring process are resolved in a timely manner, and
• With regards to our system development and change controls we will incorporate more thorough end-user testing
of developments and changes to ensure the outputs of transactions processed are recorded correctly in the
general ledger before the system changes are implemented
Subsequent to December 31, 2007, we plan to finalize remediation of the share-based payments material weakness by
taking the following actions:
82
•
Independently recalculate shared-based compensation expense on a sample of options and restricted stock
awards on a quarterly basis and compare the expense to the amounts reported by our stock option plan
administration software to validate correct settings were entered into the software. This independent verification
will be reviewed and approved on a quarterly basis, and
• Require our staff to continue to attend training related to the application of SFAS No. 123(R), Share-Based
Payment, and related interpretations and obtain further training in using our stock option plan administration
software as appropriate.
We cannot assure you that these remediation efforts will be successful or that our internal control over financial reporting
will be effective in accomplishing all control objectives all of the time. See “Part I — Item 1A — Risk Factors.”
(d) Changes in Internal Control Over Financial Reporting
As a result of the material weakness related to Share-Based Payment Arrangements reported in Form 10-Q for the period
ending June 30, 2007, we began taking steps toward remediation of this control deficiency. During the fourth quarter of
2007 we made the following changes in internal control:
• We reorganized and reassigned the accounting duties related to share-based compensation expense, and
• Our accounting personnel attended training sessions related to SFAS No. 123(R), Share-Based Payment, and
our stock option plan administration software.
Although we began remediation of the material weakness during the fourth quarter, we have not had sufficient time to fully
implement the control changes necessary to completely remediate the Share-Based Payment Arrangements material
weakness described above.
There were no other changes in our internal control over financial reporting (as defined in Rules 13a-13(f) and 15d-15(f) of
the Exchange Act) identified in connection with the evaluation of our controls performed during the quarter ended
December 31, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Internal control over financial reporting has inherent limitations. Internal control over financial reporting is a process that
involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human
failures. Internal control over financial reporting also can be circumvented by collusion or improper management override.
Because of such limitations, there is a risk that material misstatements will not be prevented or detected on a timely basis
by internal control over financial reporting. However, these inherent limitations are known features of the financial
reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this
risk.
We may enhance, modify, and supplement internal controls and disclosure controls and procedures based on experience.
Item 9B. Other Information
None.
83
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Information regarding our directors and executive officers and compliance with Section 16(a) of the Exchange Act
appearing under the heading “Management of the Company” will be included in GCI’s definitive proxy statement relating
to our 2008 Annual Meeting of Shareholders and is hereby incorporated by reference. Alternatively, the Registrant may
file an amendment to this Form 10-K to provide such information within 120 days following the end of the Registrant’s
fiscal year ended December 31, 2007.
Information regarding our code of ethics appearing under the heading “Code of Business Conduct and Ethics” will be
included in GCI’s definitive proxy statement relating to our 2008 Annual Meeting of Shareholders and is hereby
incorporated by reference. Alternatively, GCI may file an amendment to this Form 10-K to provide such information within
120 days following the end of its fiscal year ended December 31, 2007.
The Audit Committee, composed entirely of independent directors (as such term is prescribed by Nasdaq Stock Market
Rule 4200(a)(15)), meets periodically with our independent auditors and management to review our financial statements
and the results of audit activities. The Audit Committee, in turn, reports to the Board of Directors on the results of its
review and recommends the selection of independent auditors.
The Audit Committee has approved the independent auditor to provide the following services:
• Audit (audit of financial statements filed with the SEC, quarterly reviews, comfort letters, consents, review of
registration statements, accounting consultations);
• Audit-related (employee benefit plan audits and accounting consultation on proposed transactions); and
•
Income tax services (review of corporate and partnership income tax returns, and consultations regarding income
tax matters).
There have been no material changes to the procedures by which security holders may recommend nominee’s to our
board of directors from those procedures described in GCI’s definitive proxy statement relating to our 2007 Annual
Meeting of Shareholders.
The report of our Audit Committee, information regarding the independence of our Audit Committee and our Audit
Committee financial expert appearing under the heading “Management of Company” will be included in GCI’s definitive
proxy statement relating to our 2008 Annual Meeting of Shareholders and is hereby incorporated by reference.
Alternatively, GCI may file an amendment to this Form 10-K to provide such information within 120 days following the end
of its fiscal year ended December 31, 2007.
Item 11. Executive Compensation
Information regarding the compensation of our directors and executive officers appearing under the heading
“Management of the Company” will be included in GCI’s definitive proxy statement relating to our 2008 Annual Meeting of
Shareholders and is hereby incorporated by reference. Alternatively, GCI may file an amendment to this Form 10-K to
provide such information within 120 days following the end of its fiscal year ended December 31, 2007.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Information regarding the security ownership of our directors, executive officers and certain beneficial owners appearing
under the heading “Ownership of the Company” will be included in GCI’s definitive proxy statement relating to our 2008
Annual Meeting of Shareholders and is hereby incorporated by reference. Alternatively, the Registrant may file an
amendment to this Form 10-K to provide such information within 120 days following the end of Registrant’s fiscal year
ended December 31, 2007.
Information regarding securities authorized for issuance under our equity compensation plans appearing under the
heading “Management of the Company” will be included in GCI’s definitive proxy statement to our 2008 Annual Meeting of
84
Shareholders and is hereby incorporated by reference. Alternatively, GCI may file an amendment to this Form 10-K to
provide such information within 120 days following the end of its fiscal year ended December 31, 2007.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information regarding transactions with our directors, executive officers, certain beneficial owners and related persons
appearing under the heading “Certain Transactions” will be included in GCI’s definitive proxy statement relating to our
2008 Annual Meeting of Shareholders and is hereby incorporated by reference. Alternatively, GCI may file an amendment
to this Form 10-K to provide such information within 120 days following the end of its fiscal year ended December 31,
2007.
Information regarding the independence of our board of directors appearing under the heading “Company Annual
Meeting: Director Elections” will be included in GCI’s definitive proxy statement relating to our 2008 Annual Meeting of
Shareholders and is hereby incorporated by reference. Alternatively, GCI may file an amendment to this Form 10-K to
provide such information within 120 days following the end of its fiscal year ended December 31, 2007.
Item 14. Principal Accountant Fees and Services
Information regarding the fees paid to our principal accountant and the pre-approval policies and procedures of our audit
committee appearing under the heading “Relationship with Independent Public Accountants” will be included in GCI’s
definitive proxy statement relating to our 2008 Annual Meeting of Shareholders and is hereby incorporated by reference.
Alternatively, the Registrant may file an amendment to this Form 10-K to provide such information within 120 days
following the end of Registrant’s fiscal year ended December 31, 2007.
85
Item 15. Exhibits, Consolidated Financial Statement Schedules
Part IV
(l) Consolidated Financial Statements
Included in Part II of this Report:
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets, December 31, 2007 and 2006
Consolidated Income Statements, years ended December 31, 2007, 2006 and 2005
Consolidated Statements of Stockholders’ Equity, years ended December 31, 2007,
2006 and 2005
Consolidated Statements of Cash Flows, years ended December 31, 2007, 2006 and
2005
Notes to Consolidated Financial Statements
(2) Consolidated Financial Statement Schedules
Schedules are omitted, as they are not required or are not applicable, or the required
information is shown in the applicable financial statements or notes thereto.
(3) Exhibits
Page No.
87 — 89
90 — 91
92
93 — 94
95
96 — 137
138
86
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, 2007 and 2006, and the related consolidated statements of income, stockholders’ equity, and cash flows
for each of the years in the three-year period ended December 31, 2007. 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, 2007 and 2006, and the results of their
operations and their cash flows for each of the years in the three-year period ended December 31, 2007, in conformity
with U.S. generally accepted accounting principles.
As discussed in Notes 1(z) and 10 to the consolidated financial statements, effective January 1, 2006, the Company
adopted the fair value method of accounting for stock-based compensation as required by Statement of Financial
Accounting Standards No. 123(R), Share-Based Payment. As discussed in Note 1(ai) to the consolidated financial
statements, the Company changed its method of quantifying errors in 2006 to conform to Staff Accounting Bulletin No.
108, Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial
Statements.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), General Communication, Inc.’s internal control over financial reporting as of December 31, 2007, 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 6, 2008 expressed an adverse opinion on the
effectiveness of the Company’s internal control over financial reporting.
(signed) KPMG LLP
Anchorage, Alaska
March 6, 2008
87
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
General Communication, Inc.:
We have audited General Communication, Inc.’s internal control over financial reporting as of December 31, 2007, based
on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). General Communication, Inc.'s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting (Item 9A.(b)).
Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also
included performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that
there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will
not be prevented or detected on a timely basis. Material weaknesses related to the following have been identified and
included in management's assessment:
•
Information Technology Program Development and Change Controls over the Unified Billing System and Related
Monitoring Controls
• Share-Based Payment Arrangements
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, 2007 and
2006, and the related consolidated income statements, stockholders’ equity, and cash flows for each of the years in the
three-year period ended December 31, 2007. These material weaknesses were considered in determining the nature,
timing, and extent of audit tests applied in our audit of the 2007 consolidated financial statements, and this report does not
affect our report dated March 6, 2008, which expressed an unqualified opinion on those consolidated financial statements.
In our opinion, because of the effect of the aforementioned material weaknesses on the achievement of the objectives of
the control criteria, General Communication, Inc. has not maintained effective internal control over financial reporting as of
December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
88
General Communication, Inc. acquired Alaska DigiTel, LLC during 2007, and management excluded from its assessment
of the effectiveness of General Communication, Inc.’s internal control over financial reporting as of December 31, 2007,
Alaska DigiTel, LLC’s internal control over financial reporting associated with total assets of $57.3 million and total
revenues of $28.5 million included in the consolidated financial statements of General Communication, Inc. and
subsidiaries as of and for the year ended December 31, 2007. Our audit of internal control over financial reporting of
General Communication, Inc. also excluded an evaluation of the internal control over financial reporting of Alaska DigiTel,
LLC.
(signed) KPMG LLP
Anchorage, Alaska
March 6, 2008
89
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
ASSETS
December 31,
2007
2006
Current assets:
Cash and cash equivalents
Restricted cash
Receivables
Less allowance for doubtful receivables
Net receivables
Deferred income taxes
Prepaid expenses
Inventories
Notes receivable from related parties
Property held for sale
Other current assets
Total current assets
Property and equipment in service, net of depreciation
Construction in progress
Net property and equipment
Cable certificates
Goodwill
Wireless licenses
Other intangible assets, net of amortization
Deferred loan and senior notes costs, net of amortization of $2,787 and $1,976
at December 31, 2007 and 2006, respectively
Other assets
Total other assets
Total assets
See accompanying notes to consolidated financial statements.
$
$
13,074
---
97,913
1,657
96,256
5,734
5,356
2,541
31
---
686
123,678
502,426
69,409
571,835
191,565
42,181
25,757
11,769
6,202
9,399
286,873
982,386
57,647
4,612
78,811
2,922
75,889
20,685
5,729
3,362
1,080
2,316
1,988
173,308
454,879
29,994
484,873
191,565
42,181
1,497
7,011
7,091
7,133
256,478
914,659
90
(Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
(Amounts in thousands)
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS’ EQUITY
December 31,
2007
2006
Current liabilities:
Current maturities of obligations under long-term debt and capital
leases
Accounts payable
Deferred revenue
Accrued payroll and payroll related obligations
Accrued interest
Accrued liabilities
Subscriber deposits
Total current liabilities
$
Long-term debt
Obligations under capital leases, excluding current maturities
Obligation under capital lease due to related party, excluding current
maturity
Deferred income taxes
Other liabilities
Total liabilities
Minority interest
Commitments and contingencies
Stockholders’ equity:
Common stock (no par):
Class A. Authorized 100,000 shares; issued 50,437 and 50,191
shares at December 31, 2007 and 2006, respectively; outstanding
49,425 and 49,804 at December 31, 2007 and 2006, respectively
Class B. Authorized 10,000 shares; issued 3,257 and 3,370 shares
at December 31, 2007 and 2006, respectively; outstanding 3,255
and 3,368 at December 31, 2007 and 2006, respectively;
convertible on a share-per-share basis into Class A common
stock
Less cost of 473 and 258 Class A and Class B common shares
held in treasury at December 31, 2007 and 2006, respectively
Paid-in capital
Notes receivable with related parties issued upon stock option
exercise
Retained earnings
Total stockholders’ equity
Total liabilities, minority interest and stockholders’ equity
$
See accompanying notes to consolidated financial statements.
91
2,375
35,747
16,600
16,329
8,927
7,536
877
88,391
536,115
2,290
469
83,481
13,241
723,987
1,792
28,404
16,566
14,598
8,710
8,377
489
78,936
487,737
2,229
561
86,998
12,725
669,186
6,478
---
155,980
157,502
2,751
2,846
(3,448 )
20,132
---
76,506
251,921
982,386
(1,436 )
20,641
(738 )
66,658
245,473
914,659
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(Amounts in thousands, except per share amounts)
Revenues
2007
2006
$ 520,311 477,482
2005
443,026
Cost of goods sold (exclusive of depreciation and
amortization shown separately below)
Selling, general and administrative expenses
Restructuring charge
Depreciation and amortization expense
Operating income
Other income (expense):
179,057 156,405
192,494 171,652
---
---
82,099
86,327
67,326
62,433
134,861
155,542
1,967
74,126
76,530
Interest expense
Interest income
Amortization and write-off of loan and senior note fees
Loss on termination of capital lease
Other
Other expense, net
Income before income tax expense and cumulative
effect of a change in accounting principle
Income tax expense
Income before cumulative effect of a change in
accounting principle
Cumulative effect of a change in accounting principle,
net of income tax expense of $44
Net income
(36,125)
544
(1,423)
---
36
(36,968)
(34,413 )
1,841
(964 )
---
463
(33,073 )
(34,116)
624
(3,406)
(2,797)
---
(39,695)
25,465
11,961
34,253
15,797
36,835
16,004
13,504
18,456
20,831
---
13,504
64
18,520
---
20,831
Excess of the price paid to redeem Series B redeemable
preferred stock over the carrying amount of the preferred
stock
Preferred stock dividends
---
---
Net income available to common shareholders
$ 13,504
Basic net income available to common shareholders per
common share:
Income available to common shareholders before
cumulative effect of a change in accounting principle
$
Cumulative effect of a change in accounting principle
Net income available to common shareholders
$
0.26
---
0.26
Diluted net income available to common shareholders per
common share:
Income available to common shareholders before
cumulative effect of a change in accounting principle
$
Cumulative effect of a change in accounting principle
Net income available to common shareholders
$
0.22
---
0.22
See accompanying notes to consolidated financial statements.
---
---
18,520
2,358
148
18,325
0.34
---
0.34
0.33
---
0.33
0.34
---
0.34
0.33
---
0.33
92
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(Amounts in thousands)
Class A
Common
Stock
Class B
Common
Stock
Class A
and B
Shares
Held in
Treasury
Notes
Receivable
with Related
Parties
Paid-in
Capital
Retained
Earnings
Total
Stockholders’
Equity
Balances at January 1, 2005
$ 186,883
3,248
(1,702)
14,957
---
---
---
(3,016 )
---
33,900
20,831
234,270
20,831
Net income
Tax effect of excess stock
compensation expense for tax
purposes over amounts recognized
for financial reporting purposes
Common stock repurchases
Common stock retirements
Shares issued under stock
compensation plans
Class B shares converted to Class A
Issuance of service awards
Share-based compensation expense
Payments received on notes
receivable with related parties
issued upon stock option exercise
Excess of the price paid to redeem
Series B redeemable preferred
stock over the carrying amount of
the preferred stock
---
---
---
(12,910 )
4,377
1
---
---
---
---
Preferred stock Series B dividends
Balances at December 31, 2005
---
$ 178,351
---
---
---
---
(1)
---
---
---
---
(60)
---
---
---
32
---
922
---
---
---
---
---
546
---
---
---
---
---
---
---
---
---
1,294
---
(16,086)
12,910
922
(16,146)
---
---
---
---
---
---
4,377
---
32
546
1,294
---
---
3,247
---
---
(1,730)
---
---
16,425
---
---
(1,722 )
(2,358)
(148)
49,049
(2,358)
(148)
243,620
See accompanying notes to consolidated financial statements.
93
(Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(Continued)
Class A
Common
Stock
Class B
Common
Stock
Class A
and B
Shares
Held in
Treasury
Notes
Receivable
with
Related
Parties
Paid-in
Capital
Retained
Earnings
Total
Stockholders’
Equity
$ 178,351
3,247
(1,730)
16,425
(1,722 )
49,049
243,620
---
---
---
---
1,104
18,520
1,104
18,520
---
---
---
---
---
---
(32,571 )
11,690
32
---
---
---
---
(369)
---
(32)
---
---
---
---
---
(3)
---
---
---
14
---
(108)
---
---
---
---
---
4,407
---
---
---
---
---
---
---
---
(34,672)
32,940
---
---
---
---
---
---
---
---
---
1,001
---
---
$ 157,502
---
---
(11,420 )
3,311
6,492
95
---
---
---
---
2,846
---
---
---
---
---
(95)
---
---
283
---
(1,436)
---
(2,000)
---
---
---
---
28
---
---
(83)
20,641
---
---
---
---
(6,492)
---
---
5,983
---
(17 )
(738 )
---
---
---
(283)
---
66,658
13,504
(15,076)
11,420
---
---
---
---
---
---
---
---
---
---
(108 )
(34,675 )
---
11,690
---
14
4,407
1,001
---
(100 )
245,473
13,504
(17,076 )
---
3,311
---
---
28
5,983
(Amounts in thousands)
Balances at December 31, 2005
SAB 108 cumulative adjustment, net
of income tax expense
Net income
Cumulative effect adjustments upon
implementation of Statement of
Financial Accounting Standard No.
123(R)
Common stock repurchases
Common stock retirements
Shares issued under stock
compensation plans
Class B shares converted to Class A
Issuance of service awards
Share-based compensation expense
Payments received on notes
receivable with related parties
issued upon stock option exercise
Reclassification from treasury stock to
be held for general corporate
purposes to common stock to be
retired
Other
Balances at December 31, 2006
Net income
Common stock repurchases
Common stock retirements
Shares issued under stock option
plan
Issuance of restricted stock awards
Class B shares converted to Class A
Issuance of service awards
Share-based compensation expense
Payments received on notes
receivable with related parties
issued upon stock option exercise
Other
Balances at December 31, 2007
---
---
$ 155,980
---
---
2,751
---
(40)
(3,448)
---
---
20,132
738
---
---
---
---
76,506
738
(40 )
251,921
See accompanying notes to consolidated financial statements.
94
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(Amounts in thousands)
Cash flows from operating activities:
2007
2006
2005
Net income
Adjustments to reconcile net income to net cash provided by
$
13,504
18,520
20,831
operating activities, net of acquisition:
Depreciation and amortization expense
Deferred income tax expense
Share-based compensation expense
Loss on termination of capital lease
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
Purchase of business
Purchases of other assets and intangible assets
Restricted cash
Other
Net cash used in investing activities
Cash flows from financing activities:
Borrowing on Senior Credit Facility
Payment of debt
Purchase of treasury stock to be retired
Proceeds from common stock issuance
Purchase of treasury stock to be held for general corporate
purposes
Payment of debt issuance costs
Repayments of capital lease obligations
Payments received on notes receivable with related parties
issued upon stock option exercise
Redemption of Series B redeemable preferred stock
Payment upon early termination of capital lease
Payment of preferred stock dividends
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
86,327
11,448
4,944
---
7,602
(15,255)
108,570
82,099
15,384
6,365
---
4,924
(4,510 )
122,782
74,126
14,936
546
2,797
8,027
(6,398 )
114,865
(151,312)
(19,530)
(7,183)
4,612
44
(173,369)
(95,998 )
---
(4,751 )
(4,612 )
3,326
(102,035 )
60,000
(27,152)
(13,337)
3,311
(2,000)
(527)
(69)
---
---
---
---
20,226
(44,573)
57,647
15,000
(1,725 )
(32,561 )
11,472
(3 )
(44 )
(43 )
442
---
---
---
(7,462 )
13,285
44,362
(79,789 )
---
(1,881 )
---
2,087
(79,583 )
38,831
(800 )
(15,882 )
3,989
(60 )
(1,076 )
(38,989 )
1,256
(6,607 )
(2,797 )
(237 )
(22,372 )
12,910
31,452
Cash and cash equivalents at end of period
$
13,074
57,647
44,362
See accompanying notes to consolidated financial statements.
95
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(l)
Business and Summary of Significant Accounting Principles
In the following discussion, General Communication, Inc. (“GCI”) and its direct and indirect subsidiaries
are referred to as “we,” “us” and “our.”
(a) Business
GCI, an Alaska corporation, was incorporated in 1979. We offer the following services:
• Origination and termination of traffic in Alaska for certain common carriers,
• Cable television services throughout Alaska,
• Competitive local access services in Anchorage, Fairbanks, Juneau, Wasilla, Eagle River,
Kodiak, Palmer, Kenai, Soldotna, Chugiak, Sitka, Valdez, and Ketchikan, Alaska as of
December 31, 2007 with on-going expansion into additional Alaska communities,
• Long-distance telephone service between Alaska and the remaining United States and
foreign countries,
• Resale and sale of postpaid and sale of prepaid wireless telephone services and sale of
wireless telephone handsets and accessories,
Internet access services,
• Private line and private network services,
•
• Broadband services, including our SchoolAccess® offering to rural school districts, our
ConnectMD® offering to hospitals and health clinics, and managed video conferencing,
• Managed services to certain commercial customers,
• Sales and service of dedicated communications systems and related equipment,
• Lease and sales of capacity on our fiber optic cable systems used in the transmission of
interstate and intrastate private line, switched message long-distance and Internet
services within Alaska and between Alaska and the remaining United States and foreign
countries, and
• Distribution of white and yellow pages directories to residential and business customers in
certain markets we serve and on-line directory products.
(b) Principles of Consolidation
The consolidated financial statements include the consolidated accounts of GCI and its wholly owned
subsidiaries as well as a variable interest entity in which we are the primary beneficiary as defined by
Financial Accounting Standards Board ("FASB") Interpretation ("FIN") No. 46(R), “Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51.” FIN 46(R) addresses the consolidation of
business enterprises to which the usual condition (majority voting interest) does not apply. This
interpretation focuses on controlling financial interests that may be achieved through arrangements that
do not involve voting interests. It concludes that, in the absence of clear control through voting
interests, a company's exposure (variable interest) to the economic risks and potential rewards from the
variable interest entity's assets and activities are the best evidence of control. If an enterprise holds a
majority of the variable interests of an entity, it would be considered the primary beneficiary. The
primary beneficiary is required to consolidate the assets, liabilities and results of operations of the
variable interest entity in its financial statements. All significant intercompany transactions are
eliminated in consolidation.
Alaska DigiTel, LLC ("Alaska DigiTel") Acquisition
On January 2, 2007, we acquired 82% of the equity interest and 20.0% of the voting interest of Alaska
DigiTel, an Alaska wireless provider, for $29.5 million. We have a variable interest in Alaska DigiTel in
which we are the primary beneficiary as defined by FIN 46(R). We view our investment as an
incremental way to participate in future growth of the Alaska wireless industry. We consolidated Alaska
DigiTel in accordance with FIN 46(R) and their results of operations are included in the Consolidated
Income Statement for the entire year ended December 31, 2007. The Alaska DigiTel purchase price
has been allocated as follows: cash $10.0 million, receivables, net $4.4 million, other current assets
$850,000, property and equipment $12.3 million, wireless licenses $24.3 million, other intangible assets
$4.5 million, current liabilities $4.1 million, debt $15.7 million and minority interest $6.5 million. The total
96
(Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
assets of Alaska DigiTel were $57.3 million at December 31, 2007. Alaska DigiTel’s revenues for the
year ended December 31, 2007 were $28.5 million with $23.1 million, $4.9 million and $538,000
allocated to our Consumer, Network Access, and Commercial segments, respectively. Alaska DigiTel
had outstanding debt of $529,000 at December 31, 2007 that is collateralized by $801,000 of its
property in service. Alaska DigiTel’s creditors do not have recourse to GCI’s assets.
Assuming we had consolidated Alaska DigiTel on January 1, 2006, our revenues, income before
cumulative effect of a change in accounting principle and basic and diluted earnings per common share
("EPS") for the year ended December 31, 2006 would have been as follows (amounts in thousands,
except per share amounts):
(Unaudited)
Pro forma consolidated revenue
Pro forma income before cumulative
effect of a change in accounting
principle
EPS:
Basic – pro forma
Diluted – pro forma
2006
497,822
18,414
0.34
0.33
$
$
$
$
(c) Earnings per Common Share
EPS and common shares used to calculate basic and diluted EPS consist of the following (amounts in
thousands, except per share amounts):
Year Ended December 31, 2007
Shares
(Denom-
inator)
Income
(Num-
erator)
Per-share
Amounts
Basic EPS:
Net income available to common shareholders
Effect of Dilutive Securities:
Unexercised stock options
Unvested stock awards
Diluted EPS:
Effect of share based compensation that may be
settled in cash or shares
Net income adjusted for effect of share based
$ 13,504
52,951
$ 0.26
---
---
1,288
24
(1,329)
318
---
---
---
compensation that may be settled in cash or shares
$ 12,175
54,581
$ 0.22
97
(Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31,
Income
(Num-
erator)
2006
Shares
(Denom-
inator)
Per-share
Amounts
Income
(Num-
erator)
2005
Shares
(Denom-
inator)
Per-share
Amounts
$ 18,456
53,777
$ 0.34
$ 20,831
54,684
$ 0.38
64
18,520
53,777
53,777
0.00
$ 0.34
---
20,831
54,684
54,684
---
$ 0.38
---
---
2,358
148
$ 18,520
53,777
$ 0.34
$ 18,325
54,684
$ 0.34
---
1,548
---
---
1,190
---
$ 18,456
55,325
$ 0.33
$ 20,831
55,874
$ 0.37
64
18,520
55,325
55,325
0.00
$ 0.33
---
20,831
55,874
55,874
---
$ 0.37
---
---
2,358
148
$ 18,520
55,325
$ 0.33
$ 18,325
55,874
$ 0.33
Basic EPS:
Income before cumulative
effect of a change in
accounting principle
Cumulative effect of a
change in accounting
principle
Net income
Less excess of the price
paid to redeem Series B
redeemable preferred
stock over the carrying
amount of the preferred
stock
Less Series B preferred
stock dividends
Net income available to
common shareholders
Effect of Dilutive
Securities:
Unexercised stock options
Diluted EPS:
Income before cumulative
effect of a change in
accounting principle
Cumulative effect of a
change in accounting
principle
Net income
Less excess of the price
paid to redeem Series B
redeemable preferred
stock over the carrying
amount of the preferred
stock
Less Series B preferred
stock dividends
Net income available to
common shareholders
98
(Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Weighted average shares associated with outstanding share awards for the years ended
December 31, 2007, 2006 and 2005 which have been excluded from the computations of diluted
EPS because the effect of including these share awards would have been anti-dilutive, consist of
the following (shares, in thousands):
Weighted average shares associated with
outstanding stock options
Effect of share-based compensation that may be
settled in cash or shares
2007
2006
2005
1,909
1,394
---
1,909
99
1,493
310
141
451
Series B redeemable preferred stock common equivalent shares outstanding which are anti-
dilutive for purposes of calculating EPS and are not included in the diluted EPS calculations was
309,000 for the year ended December 31, 2005. In May 2005 we redeemed the remaining 4,314
shares of Series B redeemable preferred stock. No Series B redeemable preferred stock was
outstanding for the years ended December 31, 2007 and 2006.
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
and, therefore, we do not apply the two-class method of calculating earnings per share.
(d) Common Stock
Following are the changes in issued common stock for the years ended December 31, 2007, 2006
and 2005 (shares, in thousands):
Balances at December 31, 2004
Class B shares converted to Class A
Shares issued under stock option plan
Share awards issued
Shares retired
Balances at December 31, 2005
Class B shares converted to Class A
Shares issued under stock option plan
Share awards issued
Shares retired
Balances at December 31, 2006
Class B shares converted to Class A
Shares issued under stock option plan
Share awards issued
Shares retired
Balances at December 31, 2007
Class A
51,825
19
660
40
(1,344 )
51,200
38
1,706
17
(2,770 )
50,191
113
477
499
(843 )
50,437
Class B
3,862
(19 )
---
---
---
3,843
(38 )
---
---
(435 )
3,370
(113 )
---
---
---
3,257
Our Board of Directors has authorized a common stock buyback program for the repurchase of
our Class A and Class B common stock in order to reduce our outstanding shares of Class A and
Class B common stock. Our Board of Directors authorized us and we obtained permission from
our lenders for up to $80.0 million of repurchases through December 31, 2007. We are authorized
to continue our stock repurchases of up to $5.0 million per quarter indefinitely and to use stock
option exercise proceeds to repurchase additional shares. During the years ended December 31,
2007, 2006 and 2005 we repurchased 1,252,000, 2,858,000 and 1,716,000 shares of our Class A
and B common stock at a cost of $15.1 million, $34.7 million and $16.1 million, respectively. The
99
(Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
cost of the repurchased common stock is included in Retained Earnings on our Consolidated
Balance Sheets.
If stock repurchases are less than the total approved quarterly amount the difference may be
carried forward and used to repurchase additional shares in future quarters. We do not expect
further share repurchases in the near term. We will likely curtail our stock repurchases as a
condition for increasing the availability under our credit facilities. When we begin generating free
cash flow we may continue the repurchases subject to the availability under our credit facilities
and the price of our Class A and Class B common stock. The repurchases have and will continue
to comply with the restrictions of SEC Rule 10b-18.
(e) Redeemable Preferred Stock
We have 1,000,000 shares of preferred stock authorized with no shares issued and outstanding at
December 31 2007, 2006 and 2005. We issued 20,000 shares of convertible redeemable
accreting Series B preferred stock on April 30, 1999. In May 2005 we redeemed the remaining
4,314 shares of our Series B preferred stock.
(f) Treasury Stock
We account for treasury stock purchased for general corporate purposes under the cost method
and include treasury stock as a component of Stockholders’ Equity.
Treasury stock purchased that we intend to retire (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 have
an original maturity of three months or less and are readily convertible into cash.
(h) Restricted Cash
We had provided a $4.6 million bank depository account as collateral for a term loan from a bank
to Alaska DigiTel as of December 31, 2006. The cash was released from the restriction in
January 2007 subsequent to our investment in Alaska DigiTel.
(i) Accounts Receivable and Allowance for Doubtful Receivables
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The
allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our
existing accounts receivable. We base our estimates on the aging of our accounts receivable
balances, financial health of specific customers, regional economic data, changes in our
collections process, regulatory requirements, and our customers’ compliance with Universal
Service Administrative Company rules. 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 old 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.
(j)
Inventories
Wireless handset inventories are stated at the lower of cost or market. Cost is determined using
the average cost method. Handset costs in excess of the revenues generated from handset sales,
or handset subsidies, are expensed at the time of sale. We do not recognize the expected handset
100
(Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
subsidies prior to the time of sale because the promotional discount decision is made at the point
of sale and/or because we expect to recover the handset subsidies through service revenue.
Inventories of merchandise for resale and parts are stated at the lower of cost or market. Cost is
determined using the average cost method.
(k) 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
equipment and systems and support equipment and systems not placed in service on December
31, 2007 that management intends to place in service during 2008.
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 equipment and systems and
fiber optic cable systems
Cable television distribution equipment and systems
Support equipment and systems
Transportation equipment
Property and equipment under capital leases
Buildings
Asset Lives
10-20 years
3-10 years
3-10 years
5-10 years
12-20 years
30-40 years
Amortization of property and equipment under capital leases is included in Depreciation and
Amortization Expense on the Consolidated Income Statement.
Repairs and maintenance are charged to expense as incurred. Expenditures for major renewals
and betterments are capitalized. Accumulated depreciation is removed and gains or losses are
recognized at the time of retirements, sales or other dispositions of property and equipment.
(l) Long-lived Assets to be Disposed of
Long-lived assets to be disposed of, including those of discontinued operations, if any, are
measured at the lower of carrying amount or fair value less cost to sell, if applicable. We classify a
long-lived asset to be disposed of other than by sale as held and used until it is disposed of. We
classify a long-lived asset to be sold as held for sale in the period in which all of certain criteria
established by Statement of Financial Accounting Standard (“SFAS”) No. 144, “Accounting for the
Impairment or Disposal of Long-lived Assets” are met. We do not depreciate or amortize long-lived
assets to be sold.
A loss is recognized for any initial or subsequent write-down to fair value less cost to sell. A gain is
recognized for any subsequent increase in fair value less cost to sell, but not in excess of the
cumulative loss previously recognized (for a write-down to fair value less cost to sell). The loss or
gain adjusts only the carrying amount of a long-lived asset, whether classified as held for sale
individually or as part of a disposal group. A gain or loss not previously recognized that results
from the sale of a long-lived asset (disposal group) is recognized at the date of sale.
(m) Intangible Assets
Goodwill, cable certificates (certificates of convenience and public necessity) and wireless
licenses are not amortized. Cable certificates represent certain perpetual operating rights to
provide cable services. Wireless licenses represent the right to utilize certain radio frequency
spectrum to provide wireless communications services. Goodwill represents the excess of cost
over fair value of net assets acquired in connection with a business acquisition. Goodwill is not
allocated to our segments as our Chief Operating Decision Maker does not review a balance
101
(Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
sheet by segment to make decisions about resource allocation or evaluate segment performance.
Goodwill is allocated to our Consumer and Commercial reporting segments for the sole purpose of
the annual impairment test.
All other amortizable intangible assets are being amortized over 2 to 20 year periods using the
straight-line method. Customer relationships obtained through the purchase of a majority non-
controlling interest in Alaska DigiTel are amortized over the four-year expected life of the
customers.
(n)
Impairment of Intangibles, Goodwill, and Long-lived Assets
Cable certificate assets and wireless licenses are tested annually for impairment, and are tested
for impairment more frequently if events and circumstances indicate that the asset might be
impaired. The impairment test consists of a comparison of the fair value of the asset with its
carrying amount. If the carrying amount of the assets exceeds its fair value, an impairment loss is
recognized in an amount equal to that excess. After an impairment loss is recognized, the
adjusted carrying amount of the asset becomes its new accounting basis. Impairment testing of
our cable certificate assets and wireless licenses as of December 31, 2007 and 2006 used a direct
value method.
Our goodwill assets are tested annually for impairment, and are tested for impairment more
frequently if events and circumstances indicate that the assets might be impaired. An impairment
loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. This
determination is made at the reporting unit level and consists of two steps. First, we determine the
fair value of a reporting unit and compare it to its carrying amount. Second, if the carrying amount
of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the
carrying amount of the reporting unit’s goodwill asset over the implied fair value of that asset. The
implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a
manner similar to a purchase price allocation, in accordance with SFAS No. 141, “Business
Combinations.”
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.
(o) Amortization and Write-off of Loan and Senior Notes Fees
Debt issuance costs are deferred and amortized using the effective interest method. If a
refinancing or amendment of a debt instrument is a substantial modification, all or a portion of the
applicable debt issuance costs are written off.
(p) Other Assets
Other Assets primarily include long-term deposits, prepayments, and non-trade accounts
receivable.
(q) Asset Retirement Obligations
We record the fair value of a liability for an asset retirement obligation in the period in which it is
incurred in Other Liabilities on the Consolidated Balance Sheets. Additionally, a conditional asset
retirement obligation is recognized as a liability if the fair value of the liability can be reasonably
estimated. When the liability is initially recorded, we capitalize a cost by increasing the carrying
amount of the related long-lived asset. Over time, the liability is accreted to its present value each
period, and the capitalized cost is depreciated over the useful life of the related asset. Upon
102
(Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
settlement of the liability, we either settle the obligation for its recorded amount or incur a gain or
loss upon settlement.
The majority of our asset retirement obligation is the estimated cost to remove telephony
distribution equipment and support equipment from leased property.
Following is a reconciliation of the beginning and ending aggregate carrying amount of our liability
for asset retirement obligation (amounts in thousands):
Balance at December 31, 2005
Liability incurred
Accretion expense
Liability settled
Balance at December 31, 2006
Liability incurred
Additions upon consolidation of Alaska DigiTel
Accretion expense
Liability settled
Balance at December 31, 2007
$ 3,210
30
172
(4 )
3,408
260
365
144
(4 )
$ 4,173
During the years ended December 31, 2007 and 2006 we recorded additional capitalized costs of
$260,000 and $30,000, respectively, in Property and Equipment in Service, Net of Depreciation.
(r) 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 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,
2007 and 2006. We estimated the amount of the obligation based on the amount of mileage
awards purchased through December 31, 2007 and 2006 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.
(s) Revenue Recognition
All revenues are recognized when the earnings process is complete in accordance with SEC Staff
Accounting Bulletins (“SAB”) No. 101 and No. 104, “Revenue Recognition” as follows:
• Revenues generated from long-distance service usage and plan fees, Internet service
excess usage, and managed services are recognized when the services are provided,
• Cable television service package fees, local access and Internet service plan fees, and
private line telecommunication revenues are billed in advance, recorded as Deferred
Revenue on the balance sheet, and are recognized as the associated service is
provided,
• Certain of our wireless services offerings have been determined to be revenue
arrangements with multiple deliverables. Revenues are recognized as each element is
earned based on objective evidence regarding the relative fair value of each element and
when there are no undelivered elements that are essential to the functionality of the
delivered elements. Revenues generated from wireless service usage and plan fees are
103
(Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
recognized when the services are provided. Revenues generated from the sale of
wireless handsets and accessories are recognized when title to the handset and
accessories passes to the customer. As the non-refundable, up-front activation fee
charged to the customer does not meet the criteria as a separate unit of accounting, we
allocate the additional arrangement consideration received from the activation fee to the
handset (the delivered item) to the extent that the aggregate handset and activation fee
proceeds do not exceed the fair value of the handset. Any activation fees not allocated to
the handset would be deferred upon activation and recognized as service revenue on a
straight-line basis over the expected customer relationship period,
The majority of our equipment sale transactions involve the sale of communications
equipment with no other services involved. Such equipment is subject to standard
manufacturer warranties and we do not manufacture any of the equipment we sell. In
such instances the customer takes title to the equipment generally upon delivery. We
recognize revenue for such transactions when title passes to the customer and the
revenue is earned and realizable pursuant to the provisions of SAB 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 white and yellow page directories are recognized ratably during the
period following publication, which typically begins with distribution and is complete in the
month prior to publication of the next directory,
• Other revenues are recognized when the service is provided,
• We recognize unbilled revenues when the service is provided based upon minutes of
use processed, and/or established rates, net of credits and adjustments, and
• We account for the sale of fiber capacity indefeasible rights to use (“IRU”) as sales-type
leases if substantially all of the benefits and risks of ownership have been transferred to
the purchaser. If substantially all of the benefits and risks of ownership have not been
transferred to the purchaser, we defer the revenue and recognize it ratably over the life
of the IRU.
(t) Payments Received from Suppliers
Our Consumer and Commercial segments occasionally receive reimbursements for video services
costs to promote suppliers’ services, called cooperative advertising arrangements. The supplier
payment is classified as a reduction of selling, general and administrative expenses if it
reimburses specific, incremental and identifiable costs incurred to resell the suppliers’ services.
Excess consideration, if any, is classified as a reduction of cost of goods sold (exclusive of
depreciation and amortization expense) ("Cost of Goods Sold").
Occasionally our Consumer and Commercial segments enter into a binding arrangement with a
supplier in which we receive a rebate dependent upon us meeting a specified goal. We recognize
the rebate as a reduction of Cost of Goods Sold systematically as we make progress toward the
specified goal, provided the amounts are probable and reasonably estimable. If earning the rebate
is not probable and reasonably estimable, it is recognized only when the goal is met.
(u) Advertising Expense
We expense advertising costs in the year during which the first advertisement appears.
Advertising expenses were $5.6 million, $3.5 million and $3.2 million for the years ended
December 31, 2007, 2006 and 2005, respectively.
104
(Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(v) Leases
We account for capital and operating leases as lessee as required by SFAS No. 13, “Accounting
for Leases” and in subsequently issued amendments and interpretations of SFAS No. 13.
Scheduled operating lease rent increases are amortized over the lease term on a straight-line
basis. Contingent rent expense results from increases in the Consumer Price Index. Rent holidays
are recognized on a straight-line basis over the operating lease term (including any rent holiday
period).
Leasehold improvements are amortized over the shorter of their economic lives or the lease term.
We may amortize a leasehold improvement over a term that includes assumption of a lease
renewal if the renewal is reasonably assured. Leasehold improvements acquired in a business
combination are amortized over the shorter of the useful life of the assets or a term that includes
required lease periods and renewals that are deemed to be reasonably assured at the date of
acquisition. Leasehold improvements that are placed in service significantly after and are not
contemplated at or near the beginning of the lease term are amortized over the shorter of the
useful life of the assets or a term that includes required lease periods and renewals that are
deemed to be reasonably assured at the date the leasehold improvements are purchased.
Leasehold improvements made by us and funded by landlord incentives or allowances under an
operating lease are recorded as deferred rent and amortized as reductions to lease expense over
the lease term.
(w)
(x)
Interest Expense
Material interest costs incurred during the construction period of non-software capital projects are
capitalized. Interest costs incurred during the development period of a software capital project are
capitalized. Interest is capitalized in the period commencing with the first expenditure for a
qualifying capital project and ending when the capital project is substantially complete and ready
for its intended use. We capitalized interest cost of $1.6 million, $820,000 and $0 during the years
ended December 31, 2007, 2006 and 2005, respectively.
Income Taxes
Income taxes are accounted for using the asset and liability method. Deferred tax assets and
liabilities are recognized for their future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply
to taxable earnings in the years in which those temporary differences are expected to be
recovered or settled. Deferred tax assets recognized are reduced by a valuation allowance to the
extent that the benefits are more likely to be realized than not.
On January 1, 2007, we adopted FIN 48, “Accounting for Uncertainty in Income Taxes” which
clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial
statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 prescribes
a recognition threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides
guidance on derecognition, classification, interest and penalties, accounting in interim periods,
disclosure, and transition. Adoption of FIN 48 on January 1, 2007 did not have a material effect on
our results of operations, financial position, and cash flows.
We file federal income tax returns in the U.S. and in various state jurisdictions. We are no longer
subject to U.S. or state tax examinations by tax authorities for years before 2004. Certain U.S.
federal income tax returns for years after 1994 are not closed by relevant statutes of limitations
due to unused net operating losses reported on those income tax returns.
We recognize accrued interest on unrecognized tax benefits in interest expense and penalties in
selling, general and administrative expenses. We did not have any unrecognized tax benefits as
105
(Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
of December 31, 2007, 2006 and 2005, and, accordingly, we did not recognize any interest
expense. Additionally, we did not record any penalties during the years ended December 31,
2007, 2006 and 2005.
(y)
Incumbent Local Exchange Carrier (“ILEC”) Over-earnings Refunds
We receive refunds from time to time from ILECs with which we do business in respect of their
earnings that exceed regulatory requirements. Telephone companies that are rate regulated by
the Federal Communications Commission (“FCC”) using the rate of return method are required by
the FCC to refund earnings from interstate access charges assessed to long-distance carriers
when their earnings exceed their authorized rate of return. Such refunds are computed based on
the regulated carrier’s earnings in several access categories. Uncertainties exist with respect to
the amount of their earnings, the refunds (if any), their timing, and their realization. We account for
such refundable amounts as gain contingencies, and, accordingly, do not recognize them until
realization is a certainty upon receipt.
(z) Share-based Payment Arrangements
Effective January 1, 2006, we adopted the provisions of SFAS No. 123(R), “Share-Based
Payment,” and related interpretations, to account for share-based compensation using the
modified prospective transition method and therefore will not restate our prior period results. SFAS
123(R) supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock
Issued to Employees” and revises guidance in SFAS 123, “Accounting for Stock-Based
Compensation.” Among other things, SFAS 123(R) requires that compensation expense be
recognized in the financial statements for share-based awards based on the grant date fair value
of those awards. The modified prospective transition method applies to (a) unvested stock options
under our 1986 Stock Option Plan (“Stock Option Plan”) and unvested stock options not issued
pursuant to a plan that were outstanding as of December 31, 2005 based on the grant date fair
value estimated in accordance with the pro forma provisions of SFAS 123, and (b) any new share-
based awards granted subsequent to December 31, 2005, based on the grant-date fair value
estimated in accordance with the provisions of SFAS 123(R). Additionally, share-based
compensation expense includes an estimate for pre-vesting forfeitures and is recognized over the
requisite service periods of the awards on a straight-line basis, which is generally commensurate
with the vesting term. See note 10 for information on the assumptions we used to calculate the fair
value of share-based compensation.
Prior to January 1, 2006, we accounted for all of our stock option awards in accordance with APB
No. 25 and related interpretations. Accordingly, compensation expense for a stock option grant
was recognized only if the exercise price was less than the market value of our common stock on
the grant date.
SFAS 123(R) requires the benefits associated with tax deductions in excess of recognized
compensation cost to be reported as a financing cash flow rather than as an operating cash flow
as previously required.
106
(Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following illustrates the effect on net income and EPS for the year ended December 31, 2005
as if we had applied the fair value method to measure share-based compensation, as required
under the disclosure provisions of SFAS No. 123 (amounts in thousands, except per share
amounts):
Net income available to common stockholders, as
reported
Total share-based employee compensation expense
included in reported net income, net of related tax
effects
Less share-based employee compensation expense
determined under the SFAS 123 fair value method,
net of related tax effects
Pro forma net income available to common
stockholders
EPS:
Basic – as reported
Diluted – as reported
Basic – pro forma
Diluted – pro forma
2005
$
18,325
287
(1,876 )
16,736
0.34
0.33
0.31
0.30
$
$
$
$
$
(aa) Stock Options and Stock Warrants Issued for Non-employee Services
Stock options and warrants issued in exchange for non-employee services pursuant to the
provisions of SFAS 123(R), Emerging Issues Task Force (“EITF”) 96-3 and EITF 96-18 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-Merton 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.
(ab) 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 the allowance for doubtful
receivables, reserve for future customer credits, valuation allowances for deferred income tax
assets, depreciable and amortizable lives of assets, the carrying value of long-lived assets
including goodwill, cable certificates, wireless licenses and the accrual of Cost of Goods Sold.
Actual results could differ from those estimates.
(ac) 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
107
(Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
liquid money instruments issued by highly rated financial institutions. At December 31, 2007 and
2006, 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, Verizon Communications, Inc. (“Verizon”) (see note 11). We also
provide services to Sprint Nextel Corporation ("Sprint Nextel") and Dobson Communications
Corporation ("Dobson"). Although these customers do not meet the threshold for classification as
a major customer, we do derive significant revenues and operating income from them. In
November 2007, AT&T Mobility LLC ("AT&T") acquired Dobson, including its Alaska properties. In
December 2007, we signed an agreement with AT&T that terminates AT&T’s obligation to
purchase network services from us as of July 1, 2008. As compensation AT&T will provide us with
a large block of wireless network usage at no charge. The block of wireless network usage at no
charge will reduce Cost of Goods Sold during the four year period ended June 30, 2012, that we
would have otherwise recognized in accordance with the new agreement, however, we are unable
to estimate the impact this agreement will have on our Cost of Goods Sold. We expect our
message telephone and Private Line revenues earned from Dobson to decrease in 2008 and
forward. Dobson revenues were $23.2 million in 2007. We do not believe the termination of the
agreement with Dobson will have a material adverse effect on our financial position, results of
operations or liquidity. 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 Verizon, Sprint Nextel and AT&T, 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.
We entered into a loan agreement with Alaska DigiTel dated as of January 2, 2007. Under the
loan agreement, we made available to Alaska DigiTel a $15.0 million revolving credit facility. In
January 2008 the revolving credit facility available to Alaska DigiTel was increased to $25.0
million. The advances under the loan agreement are secured by all personal property of Alaska
DigiTel and its subsidiaries, and by the membership interests in Alaska DigiTel held by AKD
Holdings, LLC. The agreement provides that the outstanding loans under the revolving credit
facility will convert to a term loan on December 31, 2008. Principal on the term loan will be due in
quarterly installments beginning March 31, 2009 equal to 1.25% of the term loan, increasing to
2.50% beginning March 31, 2010. The remaining balance of the term loan is due on June 30,
2011. The loan is eliminated upon consolidation, however, there is increased credit risk since,
although we are a majority owner, we do not have voting control of Alaska DigiTel.
(ad) Software Capitalization Policy
Internally used software, whether purchased or developed, is capitalized and amortized using the
straight-line method over an estimated useful life of five years. We capitalize certain costs
associated with internally developed software such as payroll costs of employees devoting time to
the projects and external direct costs for materials and services. Costs associated with internally
developed software to be used internally are expensed until the point the project has reached the
development stage. Subsequent additions, modifications or upgrades to internal-use software are
capitalized only to the extent that they allow the software to perform a task it previously did not
perform. Software maintenance and training costs are expensed in the period in which they are
incurred. The capitalization of software requires judgment in determining when a project has
reached the development stage.
(ae) Guarantees
Certain of our customers have guaranteed levels of service. We accrue for guarantees as they
become probable and estimable.
108
(Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
At December 31, 2006, we had a $4.6 million outstanding contingent liability for the debt
guarantee. We guaranteed a loan secured by Alaska DigiTel from a bank. We accounted for
Alaska DigiTel's debt guarantee according to FIN No. 45, “Guarantor’s Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” If
Alaska DigiTel had defaulted on their loan we would have been liable for up to $4.6 million. We
were released from the guarantee following our investment in Alaska DigiTel in January 2007.
(af) Exchanges of Nonmonetary Assets
The cost of a nonmonetary asset or service acquired in exchange for another nonmonetary asset
or service is based upon the fair value of the asset surrendered to obtain it unless the fair value is
not determinable, the transaction is an exchange of a product or property held for sale in the
ordinary course of business for a product or property to be sold in the same line of business to
facilitate sales to customers other than the parties to the exchange, or the exchange lacks
commercial substance. If the exceptions apply we value the transaction using the recorded
amount (after reduction, if appropriate, for an indicated impairment of value) of the nonmonetary
asset or service relinquished. A gain or loss may be recognized on the exchange.
(ag) Classification of Taxes Collected from Customers
We report sales, use, excise, and value added taxes assessed by a governmental authority that is
directly imposed on a revenue-producing transaction between us and a customer on a net basis in
our income statement. We report a certain surcharge on a gross basis in our income statement of
$4.2 million, $4.6 million and $4.0 million for the years ended December 31, 2007, 2006 and 2005,
respectively.
(ah) New Accounting Standards
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations" which requires
the acquiring entity in a business combination to record all assets acquired and liabilities assumed
at their respective acquisition-date fair values, changes the recognition of assets acquired and
liabilities assumed arising from contingencies, changes the recognition and measurement of
contingent consideration, and requires the expensing of acquisition-related costs as incurred.
SFAS 141(R) also requires additional disclosure of information surrounding a business
combination, such that users of the entity's financial statements can fully understand the nature
and financial impact of the business combination. We will implement SFAS No. 141(R) on
January 1, 2009 and we will apply it to any business combinations with an acquisition date after
January 1, 2009.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated
Financial Statements" which establishes accounting and reporting standards for ownership
interests in subsidiaries held by parties other than the parent, the amount of consolidated net
income attributable to the parent and to the noncontrolling interest, changes in a parent's
ownership interest and the valuation of retained noncontrolling equity investments when a
subsidiary is deconsolidated. SFAS 160 also established reporting requirements that provide
sufficient disclosures that clearly identify and distinguish between the interests of the parent and
the interests of the noncontrolling owner. We will implement SFAS No. 160 on January 1, 2009.
We do not expect the adoption of this standard to have a material impact on our income
statement, financial position or cash flows.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" which provides
a definition of fair value, establishes a framework for measuring fair value, and expands
disclosures about fair value measurements for future transactions. SFAS 157 is effective for us
beginning January 1, 2008. We do not expect the adoption of this standard to have a material
impact on our income statement, financial position or cash flows.
(ai) SAB No. 108
Effective January 1, 2006, we adopted SAB No. 108, “Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial Statements.” SAB No.
109
(Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
108 requires a dual approach for quantifying misstatements using both a method that quantifies a
misstatement based on the amount of misstatement originating in the current year income
statement, as well as a method that quantifies a misstatement based on the effects of correcting
the misstatement existing in the balance sheet. Prior to the adoption of SAB No. 108, we
quantified any misstatements in our consolidated financial statements using the income statement
method in addition to evaluating qualitative characteristics. As this method focuses solely on the
income statement, this can lead to the accumulation of misstatements in the balance sheet that
may become material if recorded in a particular period.
Prior to January 1, 2006, only the interest costs incurred during the construction period of
significant capital projects, such as construction of an undersea fiber optic cable system, were
capitalized. Beginning January 1, 2006, we modified our interest capitalization policy resulting in
the capitalization of material interest costs incurred during the construction period of non-software
capital projects and the capitalization of interest costs incurred during the development period of a
software capital project.
These misstatements accumulated over several years and were immaterial when quantifying the
misstatements using the income statement method. Upon adoption of SAB No. 108 on January 1,
2006, we recorded a $3.5 million increase to property and equipment in service and $1.6 million
increase to accumulated depreciation for the cumulative misstatement as of December 31, 2005.
Accordingly, we increased retained earnings by $1.1 million and recorded $772,000 as a long-
term deferred tax liability.
(aj) Reclassifications
Reclassifications have been made to the 2006 and 2005 financial statements to make them
comparable with the 2007 presentation.
(2) Consolidated Statements of Cash Flows Supplemental Disclosures
Changes in operating assets and liabilities, net of acquisition, consist of (amounts in thousands):
Year ended December 31,
Increase in accounts receivable
(Increase) decrease in prepaid expenses
(Increase) decrease in inventories
Decrease in other current assets
Increase (decrease) in accounts payable
Increase (decrease) in accrued payroll and
payroll related obligations
Increase (decrease) in deferred revenue
Increase (decrease) in accrued interest
Increase (decrease) in accrued liabilities
Increase (decrease) in subscriber deposits
Increase (decrease) in components of other
long-term liabilities
$
2007
(19,713 )
949
1,455
1,089
2,738
620
(2,000 )
217
(1,330 )
194
2006
2005
(5,649 )
863
(1,732 )
1,965
3,790
(3,397 )
(998 )
(878 )
804
128
(4,729)
(609)
27
179
(5,525)
2,963
460
841
245
(76)
526
(15,255 )
$
594
(4,510 )
(174)
(6,398)
We paid interest totaling $35.8 million, $35.1 million and $33.1 million during the years ended
December 31, 2007, 2006 and 2005, respectively.
We paid income taxes totaling $293,000, $689,000 and $133,000 during the years ended December
31, 2007, 2006 and 2005, respectively. We received $213,000, $5,000 and $0 in income tax refunds
during the years ended December 31, 2007, 2006 and 2005, respectively.
110
(Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
We recorded a net cumulative effect adjustment (benefit) of $64,000 during the year ended December
31, 2006 for share-based compensation instruments outstanding at December 31, 2005 for which the
requisite service was not expected to be rendered. We recorded $922,000 and $1,730,000 during the
years ended December 31, 2005 and 2004, 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, 2005 our Senior Vice-President and CFO tendered 20,701
shares of his GCI Class A common stock to us at the then existing market value of $9.87 per share for
a total value of $204,000. The stock tender was in lieu of a cash payment on a note receivable with
related party and a note receivable with related party issued upon stock option exercise.
During the year ended December 31, 2006 our Senior Vice President, Strategic Initiatives, tendered
40,000 shares of his GCI Class A common stock to us at the then existing market value of $12.50 per
share for a total value of $500,000. The stock tender was in lieu of a cash payment on a note
receivable with related party.
During the year ended December 31, 2006 a company owned by our President and CEO tendered
100,000 shares of its GCI Class A common stock to us at the then existing market value of $15.34 per
share for a total value of $1,534,000. Additionally, during the year ended December 31, 2006 our
President and CEO tendered 50,000 shares of his GCI Class A common stock to us at the then
existing market value of $15.34 per share for a total value of $767,000. The stock tenders were in lieu
of cash payments on behalf of our President and CEO on a note receivable with related party and a
note receivable with related party issued upon stock option exercise.
During the year ended December 31, 2006 we financed $2.2 million for the acquisition of two buildings
through capital lease obligations.
We retired common stock shares in the amount of $11.4 million, $32.9 million and $12.9 million during
the years ended December 31, 2007, 2006 and 2005, respectively.
As described in note 1(ai) we adopted SAB No. 108 effective January 1, 2006, resulting in a
modification of our interest capitalization policy. Upon adoption of SAB No. 108 we recorded a $3.5
million increase to Property and Equipment in Service and a $722,000 increase to Deferred Tax Liability
during the year ended December 31, 2006.
In February 2007, our President and Chief Executive Officer tendered 112,000 shares of his GCI Class
A common stock to us at $15.50 per share for a total value of $1.7 million. The stock tender was in lieu
of a cash payment on his note receivable with related party and a note receivable with related party
issued upon stock option exercise, both of which originated in 2002.
Upon our acquisition of Alaska DigiTel, we consolidated $12.7 million in property and equipment, $24.3
million in wireless licenses, $4.5 million in other intangible assets, $365,000 in other liabilities and $15.7
million in debt.
During the year ended December 31, 2007, $9.0 million in non-cash additions to property and
equipment were recorded consisting of $6.7 million in unpaid purchases as of December 31, 2007 and
$2.3 million in land and buildings that were transferred from property held for sale.
During the years ended December 31, 2006 and 2005, we had $3.7 million and $2.4 million,
respectively, in non-cash additions for unpaid purchases of property and equipment as of December 31,
2006 and 2005, respectively.
During the years ended December 31, 2007, 2006 and 2005, we had $260,000, $30,000 and $41,000,
respectively, in non-cash additions to property and equipment for assets added when recording asset
retirement obligations.
111
(Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3) Receivables and Allowance for Doubtful Receivables
Receivables consist of the following at December 31, 2007 and 2006 (amounts in thousands):
Trade
Employee
Other
Total Receivables
2007
2006
$
$
95,941
198
1,774
97,913
77,508
203
1,100
78,811
Changes in the allowance for doubtful receivables during the years ended December 31, 2007, 2006
and 2005 are summarized below (amounts in thousands).
Additions
Deductions
Balance at
beginning
of year
2,922
Charged
to costs
and
expenses
4,822
Charged
to Other
Accounts
---
Write-offs
net of
recoveries
6,087
Balance at
end of year
1,657
5,317
3,057
2,317
4,366
---
---
5,452
2,922
1,366
5,317
Description
December 31, 2007
December 31, 2006
December 31, 2005
$
$
$
During the years ended December 31, 2007, 2006 and 2005 we utilized $0, $372,000 and $3.3 million,
respectively, of the MCI credit (as further described and defined in note 11) against amounts otherwise
payable for services received from MCI.
(4) Net Property and Equipment in Service
Net property and equipment in service consists of the following at December 31, 2007 and 2006
(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
$
2007
14,424
636,832
161,934
107,920
8,102
3,086
932,298
428,808
1,064
502,426
2006
8,685
556,494
155,693
95,206
6,645
3,086
825,809
369,976
954
454,879
(5)
Intangible Assets
As of December 31, 2007 cable certificates, wireless licenses and goodwill were tested for impairment
and the fair values were greater than the carrying amounts, therefore these intangible assets were
determined not to be impaired at December 31, 2007. The remaining useful lives of our cable
certificates, wireless licenses and goodwill were evaluated as of December 31, 2007 and events and
circumstances continue to support an indefinite useful life.
112
(Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
No intangible assets subject to amortization have been impaired based upon impairment testing
performed as of December 31, 2007. No indicators of impairment have occurred since the impairment
testing was performed.
Other Intangible Assets subject to amortization include the following at December 31, 2007 and 2006
(amounts in thousands):
Software license fees
Customer relationships
Right-of-way
Other
Less accumulated amortization
Net other intangible assets
2007
2006
$
$
12,094
4,528
783
261
17,666
5,897
11,769
9,755
240
783
365
11,143
4,132
7,011
Changes in Other Intangible Assets are as follows (amounts in thousands):
Balance at December 31, 2005
Asset additions
Less amortization expense
Less asset write-off
Balance at December 31, 2006
Asset additions upon consolidation of Alaska DigiTel
Asset additions
Less amortization expense
Less asset write-off
Balance at December 31, 2007
$
4,704
4,901
1,804
790
7,011
4,469
3,738
3,332
117
$ 11,769
During the year ended December 31, 2006, we decided to close an operating subsidiary and in
connection with the closure we determined the software for a Managed Broadband segment product
offering with a net book value of $790,000 was impaired and had no net realizable value. During the
year ended December 31, 2006, we recognized the impairment in depreciation and amortization
expense in the accompanying Consolidated Income Statement.
Additions to other intangible assets mainly consist of software license fees purchased for our statewide
local service expansion and in 2007 the addition of customer relationships obtained through the
purchase of a majority non-controlling interest in Alaska DigiTel.
Amortization expense for amortizable intangible assets for the years ended December 31, 2007, 2006
and 2005 follow (amounts in thousands):
Amortization expense for amortizable intangible assets
$
3,332
1,804
1,244
Years Ended December 31,
2005
2006
2007
113
(Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Amortization expense for amortizable intangible assets for each of the five succeeding fiscal years is
estimated to be (amounts in thousands):
Years Ending
December 31,
2008
2009
2010
2011
2012
$ 3,297
2,979
2,458
1,051
486
(6) Notes Receivable from Related Parties
Notes receivable from related parties consist of the following (amounts in thousands):
Note receivable from officers bearing interest at the prime rate
or at the rate paid by us on our senior indebtedness which is
considered market rate, unsecured, unconditionally
guaranteed by the borrower, due through February 8, 2007
Notes receivable from other related parties bearing interest up
to 7.6% or at the rate paid by us on our senior indebtedness,
unsecured, due through January 1, 2010
Interest receivable
Total notes receivable from related parties
Less notes receivable with 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 receivable
$
(7) Debt
Long-term debt consists of the following (amounts in thousands):
December 31,
2007
2006
$
---
1,741
48
8
56
---
31
25
92
29
1,862
738
1,080
44
Senior Notes (a)
Senior Credit Facility (b)
Mortgage
Note Payable
Debt
$
Less unamortized bond discount paid on the Senior Notes
Less current portion of long-term debt
Long-term debt, net of unamortized bond discount
$
December 31,
2007
320,000
220,760
529
100
541,389
2,991
2,283
536,115
2006
320,000
172,600
---
225
492,825
3,363
1,725
487,737
(a) We pay interest of 7.25% on Senior Notes that are due in 2014. The Senior Notes are an
unsecured senior obligation. The Senior Notes are carried on our Consolidated Balance Sheet net
of the unamortized portion of the discount based on an effective interest rate of 7.50%, which is
being amortized to Interest Expense over the term of the Senior Notes using the effective interest
method.
114
(Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Senior Notes are not redeemable prior to February 15, 2009. At any time on or after February
15, 2009, the Senior Notes are redeemable at our option, in whole or in part, on not less than thirty
days nor more than sixty days notice, at the following redemption prices, plus accrued and unpaid
interest (if any) to the date of redemption:
If redeemed during the twelve month
period commencing February 1 of the
year indicated:
2009
2010
2011
2012 and thereafter
Redemption Price
103.625%
102.417%
101.208%
100.000%
The Senior Notes restrict GCI, Inc. and certain of its subsidiaries from incurring debt, but permits
debt under the Senior Credit Facility and vendor financing as long as our leverage ratio does not
exceed 6.0 to one. In addition, certain other debt is permitted regardless of our leverage ratio,
including debt under the Senior Credit Facility not exceeding (and reduced by certain stated
items):
• $250.0 million, reduced by the amount of any prepayments, or
• 3.0 times earnings before interest, taxes, depreciation and amortization for the last four full
fiscal quarters of GCI, Inc. and certain of its subsidiaries.
The Senior Notes limit our ability to make cash dividend payments.
Semi-annual interest payments of $11.6 million are payable in February and August of each year.
The Senior Notes are structurally subordinate to our Senior Credit Facility.
Our Senior Notes’ key debt covenants require our Total Leverage Ratio (as defined) be 6.0:1.0 or
less and our Senior Leverage Ratio (as defined) be 3.0:1.0 or less if our Senior Notes are greater
than $250.0 million.
(b)
In September 2007 we exercised our right to add an Incremental Facility of up to $100.0 million to
our existing Senior Credit Facility. The Incremental Facility was structured in the form of a $55.0
million increase to the existing term loan component of our Senior Credit Facility and a $45.0
million increase to the existing revolving loan component of our Senior Credit Facility. The $100.0
million Incremental Facility will become due under the same terms and conditions as set forth in
the existing Senior Credit Facility.
The Senior Credit Facility which includes the incremental facility as discussed above includes a
$215.0 million term loan and a $100.0 million revolving credit facility with a $25.0 million sublimit
for letters of credit. Our term loan is fully drawn. We borrowed $10.0 million under our revolving
credit facility in December 2007, and we have letters of credit outstanding totaling $4.2 million at
December 31, 2007 which leaves $85.8 million available at December 31, 2007 to draw under the
revolving credit facility if needed. The term and revolving loan portions of our Senior Credit Facility
are due in 2012 and 2011, respectively. In 2008 we have borrowed an additional $20.0 million
under our revolving credit facility.
115
(Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Incremental Facility increased the interest rate on the term loan component of our Senior
Credit Facility from LIBOR plus 1.50% to LIBOR plus 2.00%. The interest rate on the revolving
loan component of the Senior Credit Facility was LIBOR plus a margin dependent upon our Total
Leverage Ratio ranging from 1.00% to 1.75%. The Incremental Facility increased the revolving
credit facility interest rate for our Senior Credit Facility to LIBOR plus the following applicable
margin dependent upon our Total Leverage ratio (as defined):
Total Leverage
Ratio (as defined)
>3.75
>3.25 but <3.75
>2.75 but <3.25
<2.75
Applicable
Margin
2.25%
2.00%
1.75%
1.50%
The annual commitment fee we are required to pay on the unused portion of the commitment is
0.375%.
Substantially all of the Company’s assets collateralize the Senior Credit Facility.
The Incremental Facility was a substantial modification of a portion of our existing Senior Credit
Facility resulting in a $348,000 write-off of previously deferred loan fees during the year ended
December 31, 2007 in our Consolidated Income Statement. Deferred loan fees of $312,000
associated with the portion of our existing Senior Credit Facility determined not to have been
substantially modified continue to be amortized over the remaining life of the Senior Credit Facility.
In connection with the Incremental Facility, we paid bank fees and other expenses of $519,000
during the year ended December 31, 2007 of which $263,000 were written-off in the year ended
December 31, 2007 and $256,000 were deferred and will be amortized over the remaining life of
the Senior Credit Facility.
Borrowings under the Senior Credit Facility are subject to certain financial covenants and
restrictions on indebtedness, dividend payments, financial guarantees, business combinations,
and other related items. Our Senior Credit Facility key debt covenants require our Senior Credit
Facility Total Leverage Ratio (as defined) be 4.50:1.0 or less, the Senior Leverage Ratio (as
defined) must be less than 2.25:1.0, and the Fixed Charge Coverage Ratio (as defined) must be
less than 1.0:1.0 subject to certain exceptions. On May 7, 2007 our Senior Credit Facility was
amended to allow the exclusion of up to $100.0 million of capital expenditures in aggregate from
Fixed Charges (as defined) during the Excluded Capital Expenditures Period (as defined)
beginning on May 7, 2007 and ending September 30, 2009.
On August 31, 2005 our April 2004 Senior Credit Facility was amended and restated. Proceeds
from the amendment were used to pay down our previous Senior Credit Facility and to pay off our
Satellite Transponder Capacity Capital Lease with the remainder used to pay financing fees.
Outstanding principal of $35.8 million on the Satellite Transponder Capacity Capital Lease was
repaid, and we incurred a $2.8 million charge due to the early termination of the capital lease
which is classified as a component of Other Income (Expense) during the year ended December
31, 2005 in our Consolidated Income Statement. A portion of the 2005 amendment was a
substantial modification of our April 2004 Senior Credit Facility and we therefore recognized $1.8
million in Amortization and Write-off of Loan and Senior Notes Fees during the year ended
December 31, 2005 in our Consolidated Income Statement.
116
(Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Maturities of long-term debt as of December 31, 2007 were as follows (amounts in thousands):
Years ending December 31,
2008
2009
2010
2011
2012
2013 and thereafter
$
2,283
2,181
2,179
112,751
101,690
320,305
$ 541,389
(8) Comprehensive Income
During the years ended December 31, 2007, 2006 and 2005 we had no other comprehensive income.
Total comprehensive income which was equal to net income during the years ended December 31,
2007, 2006 and 2005 was $13,504,000, $18,520,000 and $20,831,000, respectively.
(9)
Income Taxes
Total income tax expense (benefit) was allocated as follows (amounts in thousands):
Years ended December 31,
2006
2007
2005
Income before cumulative effect of a change
in accounting principle
SAB 108 cumulative adjustment
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
$
$
11,961
---
---
11,961
15,797
772
44
16,613
16,004
---
---
16,004
---
11,961
---
16,613
(922)
15,082
We did not record any excess tax benefit generated from stock options exercised during the years
ended December 31, 2007 and 2006 since we are in a net operating loss carryforward position and the
income tax deduction will not yet reduce income taxes payable.
Income tax expense (benefit) consists of the following (amounts in thousands):
Years ended December 31,
2006
2007
2005
Current tax expense:
Federal taxes
State taxes
$
436
77
513
(278 )
(81 )
(359 )
827
238
1,065
117
(Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31,
2006
2007
2005
Deferred tax expense:
Federal taxes
State taxes
9,616
1,832
11,448
11,961
$
12,514
3,642
16,156
15,797
11,587
3,352
14,939
16,004
Total income tax expense differed from the “expected” income tax expense determined by applying the
statutory federal income tax rate of 35% as follows (amounts in thousands):
Years ended December 31,
2006
2007
2005
“Expected” statutory tax expense
State income taxes, net of federal benefit
Income tax effect on nondeductible
entertainment expenses
Income tax effect of nondeductible lobbying
expenses
Income tax effect of nondeductible
expenditures and other
items, net
Other, net
$
$
8,913
1,558
11,988
2,529
12,892
2,343
569
468
423
409
310
368
500
(47 )
11,961
60
388
15,797
102
(11)
16,004
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and
liabilities at December 31, 2007 and 2006 are summarized below (amounts in thousands):
Current deferred tax assets, net of current deferred tax
liability:
Compensated absences, accrued for financial
reporting purposes
Net operating loss carryforwards
Workers compensation and self insurance health
reserves, principally due to accrual for financial
reporting purposes
Accounts receivable, principally due to allowance for
doubtful accounts
Deferred compensation expense for tax purposes in
excess of amounts recognized for financial reporting
purposes
Other
Total current deferred tax assets
$
2007
2006
$
2,196
2,033
2,029
16,811
694
629
652
1,193
(401 )
583
5,734
---
---
20,685
118
(Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Long-term deferred tax assets:
Net operating loss carryforwards
Alternative minimum tax credits
Deferred compensation expense for financial reporting
purposes in excess of amounts recognized for tax
purposes
$
Asset retirement obligations 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
Other
Total long-term deferred tax liabilities
Net combined long-term deferred tax liabilities
$
2007
2006
45,518
3,160
41,002
2,574
2,690
2,082
1,444
222
53,034
1,398
51
47,107
106,376
29,677
462
136,515
83,481
107,696
25,788
621
134,105
86,998
At December 31, 2007, we have (1) tax net operating loss carryforwards of $116.4 million that will
begin expiring in 2011 if not utilized, and (2) alternative minimum tax credit carryforwards of $3.1 million
available to offset regular income taxes payable in future years. We utilized federal tax net operating
loss carryforwards of $21.7 million in 2007. 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.
Our tax net operating loss carryforwards are summarized below by year of expiration (amounts in
thousands).
Years ending December 31,
Federal
State
$
2011
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
Total tax net operating loss carryforwards
$
759
644
20,210
44,744
29,614
14,081
3,968
544
1,342
337
116
116,359
759
637
19,675
43,797
28,987
13,788
3,903
---
---
---
---
111,546
Tax benefits associated with recorded deferred tax assets are considered to be more likely than not
realizable through taxable income earned in carryback years, future reversals of existing taxable
temporary differences, and future taxable income exclusive of reversing temporary differences and
carryforwards. The amount of deferred tax asset considered realizable, however, could be reduced if
estimates of future taxable income during the carryforward period are reduced.
119
(Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(10) Stockholders’ Equity
Common Stock
GCI’s Class A and Class B common stock are identical in all respects, except that each share of Class
A common stock has one vote per share and each share of Class B common stock has ten votes per
share. Each share of Class B common stock outstanding is convertible, at the option of the holder, into
one share of Class A common stock.
During the years ended December 31, 2007, 2006 and 2005 we repurchased 1.3 million, 2.9 million,
and 1.7 million, respectively, shares of our Class A and Class B common stock at a cost of $15.1
million, $34.7 million and $16.1 million, respectively, pursuant to the Class A and Class B common
stock repurchase program authorized by our Board of Directors. During the years ended December 31,
2007, 2006 and 2005 we retired 843,000, 3.2 million, and 1.3 million shares, respectively, of our Class
A and Class B common stock that we purchased pursuant to the Class A and Class B common stock
repurchase program.
Verizon (formerly MCI) owned 1,276,000 shares of our Class B common stock that represented 38
percent of the issued and outstanding Class B shares at December 31, 2006 and 2005, and 15 percent
and 14 percent of voting interest at December 31, 2006 and 2005, respectively. In March 2007,
Verizon sold all of their GCI Class B common stock to two individuals in a private transaction.
In May 2005 we repurchased the remaining 4,300 shares of our Series B preferred stock for a total
purchase price of $6.6 million. The 4,300 preferred shares were convertible into 777,300 shares of our
Class A common stock and the transaction price represented an equivalent Class A common stock
purchase price of $8.50 per share. The repurchase of our Series B preferred stock was not part of our
buyback program discussed in note 1(d).
Share-Based Compensation
Our Stock Option Plan, as amended, provides for the grant of options and restricted stock awards
(collectively "award") for a maximum of 15.7 million shares of GCI Class A common stock, subject to
adjustment upon the occurrence of stock dividends, stock splits, mergers, consolidations or certain
other changes in corporate structure or capitalization. If an award expires or terminates, the shares
subject to the award will be available for further grants of awards under the Stock Option Plan. The
Compensation Committee of GCI’s Board of Directors administers the Stock Option Plan. Substantially
all restricted stock awards granted vest over periods of up to five years. Substantially all options vest in
equal installments over a period of five years, and expire ten years from the date of grant. Options
granted pursuant to the Stock Option Plan are only exercisable if at the time of exercise the option
holder is our employee, non-employee director, or a consultant or advisor working on our behalf. New
shares are issued when stock option agreements are exercised and restricted stock awards are made.
Our share repurchase program as described above may include the purchase of shares issued
pursuant to stock option agreement exercise transactions.
The fair value of restricted stock awards is determined based on the number of shares granted and the
quoted price of our common stock. We use a Black-Scholes-Merton option pricing model to estimate
the fair value of stock options issued under SFAS 123(R). The Black-Scholes-Merton option pricing
model incorporates various and highly subjective assumptions, including expected term and expected
volatility. We have reviewed our historical pattern of option exercises and have determined that
meaningful differences in option exercise activity existed among employee job categories. Therefore,
we have categorized these awards into two groups of employees for valuation purposes.
We estimated the expected term of options granted by evaluating the vesting period of stock option
awards, employee’s past exercise and post-vesting employment departure behavior, and expected
volatility of the price of the underlying shares.
We estimated the expected volatility of our common stock at the grant date using the historical volatility
of our common stock over the most recent period equal to the expected stock option term and
120
(Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
evaluated the extent to which available information indicated that future volatility may differ from
historical volatility.
The risk-free interest rate assumption was determined using the Federal Reserve nominal rates for
U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the award
being valued. We have never paid any cash dividends on our common stock and we do not anticipate
paying any cash dividends in the foreseeable future. Therefore, we assumed an expected dividend
yield of zero.
The following table shows our assumptions used to compute the share-based compensation expense
and pro forma information in note 1(z) for stock options granted during the years ended December 31,
2007, 2006 and 2005:
Expected term (years)
Volatility
Risk-free interest rate
2007
5.2 – 6.8
41.5% – 54.3%
3.5% – 4.7%
2006
5.4 – 8.0
43.3% – 61.4%
4.7% – 5.0%
2005
4.3 – 5.2
41.9% – 45.5%
3.7% – 4.4%
SFAS 123(R) requires us to estimate pre-vesting option forfeitures at the time of grant and periodically
revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We record
share-based compensation expense only for those awards expected to vest using an estimated
forfeiture rate based on our historical pre-vesting forfeiture data. Previously, we accounted for
forfeitures as they occurred under the pro forma disclosure provisions of SFAS 123 for periods prior to
2006. The transition impact of adopting SFAS No. 123(R), attributed to accruing for expected forfeitures
on outstanding share-based awards, totaled $108,000, which was reduced by income tax expense of
$44,000 and is reported as cumulative effect of a change in accounting principle in the accompanying
Consolidated Income Statement for the year ended December 31, 2006.
The weighted average grant date fair value of options granted during the years ended December 31,
2007, 2006 and 2005 was $7.03 per share, $6.92 per share and $4.81 per share, respectively. The
total fair value of options vesting during the years ended December 31, 2007, 2006 and 2005 was $3.3
million, $3.6 million and $3.8 million, respectively.
We have recorded share-based compensation expense of $4.9 million for the year ended December
31, 2007, which consists of $6.2 million for employee share-based compensation expense and a $1.3
million decrease in the fair value of liability-classified share-based compensation. We recorded share-
based compensation expense of $6.4 million for the year ended December 31, 2006, which consists of
$4.8 million for employee share-based compensation expense and $1.6 million for liability-classified
share-based compensation. Share-based compensation expense is classified as selling, general and
administrative expense in our consolidated income statement. Unrecognized share-based
compensation expense was $4.2 million relating to 475,000 restricted stock awards and $14.0 million
relating to 2.6 million unvested stock options as of December 31, 2007. We expect to recognize share-
based compensation expense over a weighted average period of 3.1 years for stock options and 2.7
years for restricted stock awards.
121
(Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following is a summary of our Stock Option Plan activity for the years ended December 31, 2007,
2006 and 2005 (in thousands):
Outstanding at December 31, 2004
Granted
Exercised
Forfeited
Outstanding at December 31, 2005
Granted
Exercised
Forfeited
Outstanding at December 31, 2006
Options granted
Restricted stock awards granted
Exercised
Restricted stock awards vested
Forfeited
Outstanding at December 31, 2007
Available for grant at December 31, 2007
Weighted
Average
Exercise Price
$6.81
$9.47
$6.06
$7.22
$7.27
$12.11
$6.74
$8.83
$8.22
$12.85
$13.04
$6.93
$13.34
$9.69
$9.37
Shares
6,437
983
(659)
(218)
6,543
1,003
(1,606)
(73)
5,867
983
499
(477)
(23)
(98)
6,751
1,584
The following is a summary of activity for stock options granted not pursuant to the Stock Option Plan
for the years ended December 31, 2007, 2006 and 2005 (in thousands):
Outstanding at January 1, 2005 and
December 31, 2005
Exercised during 2006
Outstanding at December 31, 2006 and
2007
Available for grant at December 31, 2007
Weighted
Average
Exercise Price
Shares
250
(100)
150
---
$6.50
$6.50
$6.50
122
(Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following is a summary of all outstanding stock options at December 31, 2007:
Options Outstanding
Weighted Average
Remaining
Aggregate
Range of
Exercise Prices
Shares
(thousands)
$3.11-$6.00
$6.01-$6.35
$6.36-$6.50
$6.51-$7.12
$7.13-$7.25
$7.26-$9.00
$9.01-$10.14
$10.15-$11.50
$11.51-$12.92
$12.93-$15.54
$3.11-$15.54
726
42
780
118
1,050
679
813
651
194
1,222
6,275
Range of
Exercise Prices
Shares
(thousands)
$3.11-$6.00
$6.01-$6.35
$6.36-$6.50
$6.51-$7.12
$7.13-$7.25
$7.26-$9.00
$9.01-$10.14
$10.15-$11.50
$11.51-$12.92
$12.93-$15.54
$3.11-$15.54
698
42
731
118
967
563
351
130
12
94
3,706
Contractual Life Weighted Average Intrinsic Value
(thousands)
Exercise Price
(years)
3.57
3.05
2.78
2.83
4.10
5.19
7.37
7.95
9.39
9.15
5.93
Options Vested
Weighted Average
Remaining
$5.50
$6.13
$6.50
$7.08
$7.25
$8.37
$9.83
$11.28
$11.74
$13.07
$9.09
$2,359
$108
$1,754
$197
$1,575
$294
$---
$---
$---
$---
$6,287
Aggregate
Contractual Life Weighted Average Intrinsic Value
(thousands)
Exercise Price
(years)
3.50
3.04
2.61
2.83
4.10
4.93
7.11
6.98
8.57
8.49
4.28
$5.48
$6.13
$6.50
$7.08
$7.25
$8.33
$9.79
$10.99
$11.96
$13.26
$7.46
$2,281
$107
$1,644
$197
$1,450
$262
$---
$---
$---
$---
$5,941
The total intrinsic value, determined as of the date of exercise, of options exercised in the years ended
December 31, 2007, 2006 and 2005 were $3.5 million, $9.8 million and $2.7 million, respectively. We
received $3.3 million, $11.5 million and $4.0 million in cash from stock option exercises in the years
ended December 31, 2007, 2006 and 2005, respectively. We used cash of $0, $5.8 million, and $0 to
settle stock option agreements in the years ended December 31, 2007, 2006 and 2005, respectively.
We discontinued offering a cash-settlement exercise option to employees on October 23, 2006 and do
not intend to cash-settle option exercises in the future.
Employee Stock Purchase Plan
In December 1986, we adopted an Employee Stock Purchase Plan (the “401(k) Plan”) qualified under
Section 401 of the Internal Revenue Code of 1986. The 401(k) Plan provides for acquisition of GCI’s
Class A and Class B common stock at market value. The 401(k) Plan permits each employee who has
completed one year of service to elect to participate in the 401(k) Plan. Through December 31, 2007,
123
(Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
eligible employees could elect to reduce their compensation by up to 50 percent of such compensation
(subject to certain limitations) up to a maximum of $15,000. Beginning January 1, 2008, eligible
employees can elect to reduce their compensation by up to 50 percent of such compensation (subject
to certain limitations) up to a maximum of $15,500. Eligible employees may contribute up to 10 percent
of their compensation with after-tax dollars, or they may elect a combination of salary reductions and
after-tax contributions.
Eligible employees were allowed to make catch-up contributions of no more than $5,000 during the
year ended December 31, 2007 and will be able to make such contributions limited to $5,000 during the
year ended December 31, 2008. We do not match employee catch-up contributions.
We may match up to 100% of employee salary reductions and after tax contributions in any amount,
decided by our Board of Directors each year, but not more than 10 percent of any one employee’s
compensation will be matched in any year. Matching contributions vest over the initial six years of
employment. For the year ended December 31, 2007, the combination of salary reductions, after tax
contributions and matching contributions could not exceed the lesser of 100 percent of an employee’s
compensation or $45,000 (determined after salary reduction). For the year ended December 31, 2006,
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 $44,000 (determined after salary
reduction). For the year ended December 31, 2005 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 $42,000 (determined after salary reduction) for any year.
Employee contributions may be invested in GCI Class A and Class B common stock, AT&T common
stock, Comcast Corporation common stock, or various mutual funds.
In 2005 and 2006 employee contributions received up to 100% matching, as determined by our Board
of Directors each year, in GCI common stock. As of January 1, 2007, employee contributions receive
up to 100% matching and employees self-direct their matching investment. Our matching contributions
allocated to participant accounts totaled $5.5 million, $4.6 million, and $5.2 million for the years ended
December 31, 2007, 2006, and 2005, respectively. The 401(k) Plan may, at its discretion, purchase
shares of GCI common stock from GCI at market value or may purchase GCI’s common stock on the
open market. We funded all of our employer-matching contributions through market purchases during
the years ended December 31, 2007, 2006 and 2005.
(11)
Industry Segments Data
Our reportable segments are business units that offer different products. The reportable segments are
each managed separately and serve distinct types of customers.
A description of our four reportable segments follows:
Consumer - We offer a full range of voice, video, data and wireless services to residential
customers.
Network Access - We offer a full range of voice, data and wireless services to common carrier
customers.
Commercial - We offer a full range of voice, video, data and wireless services to business and
governmental customers.
Managed Broadband - We offer data services to rural school districts and hospitals and health clinics
through our SchoolAccess® and ConnectMD® initiatives.
Corporate related expenses including engineering, operations and maintenance of our core network,
information technology, accounting, legal and regulatory, human resources, and other selling, general
124
(Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
and administrative (“SG&A”) expenses are allocated to our segments using the segment margin for the
previous year. Bad debt expense is allocated to our segments using a combination of specific
identification and allocations based upon segment revenue in the same year. Restructuring charge and
loss on termination of capital lease for the year ended December 31, 2005 was allocated using the
percentage of each segment's margin for the year ended December 31, 2004 to total margin for the
same period.
We evaluate performance and allocate resources based on earnings from operations before
depreciation and amortization expense, net interest expense, income tax expense and share-based
compensation expense. The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies in note 1. Intersegment sales are recorded
at cost plus an agreed upon intercompany profit.
We earn all revenues through sales of services and products within the United States. All of our long-
lived assets are located within the United States of America, except 82% of our undersea fiber optic
cable systems which transit international waters and all of our satellite transponders.
Summarized financial information for our reportable segments for the years ended December 31, 2007,
2006 and 2005 follows (amounts in thousands):
2007
Revenues:
Intersegment
External
Total revenues
Cost of Goods Sold:
Intersegment
External
Total Cost of Goods
Sold
Contribution:
Intersegment
External
Total contribution
Less SG&A
Plus share-based
compensation
Plus other income
Earnings from external
operations before
depreciation, amortization,
net interest expense,
income taxes and share-
based compensation
expense
2006
Revenues:
Intersegment
External
Consumer
Network
Access
Commer-
cial
Managed
Broadband
Total
Reportable
Segments
$
---
223,502
223,502
2,978
163,377
166,355
5,471
104,640
110,111
---
28,792
28,792
8,449
520,311
528,760
2,067
81,877
1,303
40,593
2,487
50,559
---
6,028
5,857
179,057
83,944
41,896
53,046
6,028
184,914
(2,067 )
141,625
139,558
95,808
1,675
122,784
124,459
44,182
1,720
14
1,744
15
2,984
54,081
57,065
38,655
1,071
7
---
22,764
22,764
13,849
409
---
2,592
341,254
343,846
192,494
4,944
36
$
47,551
80,361
16,504
9,324
153,740
$
---
178,951
---
166,471
5,335
105,929
---
26,131
5,335
477,482
125
(Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Total revenues
Cost of Goods Sold:
Intersegment
External
Total Cost of Goods
Sold
Contribution:
Intersegment
External
Total contribution
Less SG&A
Plus other income
Plus share-based
compensation
Earnings from external
operations before
depreciation, amortization,
net interest expense,
income taxes and share-
based compensation
expense
2005
Revenues:
Intersegment
External
Total revenues
Cost of Goods Sold:
Intersegment
External
Total Cost of Goods
Sold
Contribution:
Intersegment
External
Total contribution
Less SG&A
Less Restructuring charge
Less loss on termination of
capital lease
Plus share-based
compensation
Earnings from external
operations before
depreciation, amortization,
net interest expense,
income taxes and share-
based compensation
expense
Consumer
178,951
Network
Access
166,471
Commer-
cial
111,264
Managed
Broadband
26,131
Total
Reportable
Segments
482,817
---
66,889
636
37,280
2,353
47,869
---
4,367
2,989
156,405
66,889
37,916
50,222
4,367
159,394
---
112,062
112,062
80,750
---
(636 )
129,191
128,555
40,268
---
2,982
58,060
61,042
38,169
---
---
21,764
21,764
12,465
463
2,346
321,077
323,423
171,652
463
2,081
2,478
1,337
469
6,365
$
33,393
91,401
21,228
10,231
156,253
$
59
162,928
162,987
6,764
148,333
155,097
24,655
105,663
130,318
568
26,102
26,670
32,046
443,026
475,072
5,988
60,762
7,643
25,541
10,901
43,916
3,360
4,642
27,892
134,861
66,750
33,184
54,817
8,002
162,753
(5,929 )
102,166
96,237
73,286
660
(879)
122,792
121,913
33,943
737
921
1,089
180
212
13,754
61,747
75,501
32,376
417
562
110
(2,792 )
21,460
18,668
15,937
153
225
44
4,154
308,165
312,319
155,542
1,967
2,797
546
$
27,479
87,235
28,502
5,189
148,405
126
(Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
A reconciliation of reportable segment revenues to consolidated revenues follows (amounts in
thousands):
Years ended December 31,
Reportable segment revenues
Less intersegment revenues eliminated
in consolidation
Consolidated revenues
2007
528,760
8,449
520,311
$
$
2006
482,817
5,335
477,482
2005
475,072
32,046
443,026
A reconciliation of reportable segment earnings from external operations before depreciation and
amortization expense, net interest expense, income taxes and share-based compensation expense to
consolidated net income before income taxes and cumulative effect of a change in accounting principle
follows (amounts in thousands):
Years ended December 31,
Reportable segment earnings from
operations before depreciation and
amortization expense, net interest
expense, income taxes and share-
based compensation expense
Less depreciation and amortization
expense
Less share-based compensation
expense
Plus loss on termination of capital
lease
Less other income
Consolidated operating income
Less other expense, net
Consolidated income before
income taxes and cumulative
effect of a change in accounting
principle
2007
2006
2005
$
153,740
156,253
148,405
86,327
82,099
74,126
4,944
6,365
546
---
36
62,433
36,968
---
463
67,326
33,073
2,797
---
76,530
39,695
$
25,465
34,253
36,835
Assets at December 31, 2007, 2006 and 2005 and capital expenditures for the years ended December
31, 2007, 2006 and 2005 are not allocated to reportable segments as our Chief Operating Decision
Maker does not review a balance sheet or capital expenditures by segment to make decisions about
resource allocations or to evaluate segment performance.
We earn revenues included in the Network Access segment from Verizon (formerly MCI), a major
customer. We earned revenues from Verizon, net of discounts, of $71.6 million, $93.4 million and $85.4
million for the years ended December 31, 2007, 2006 and 2005, respectively. As a percentage of total
revenues, Verizon revenues totaled 13.8%, 19.6% and 19.3% for the years ended December 31, 2007,
2006 and 2005, respectively.
In July 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. In July 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 in April 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
as a credit against amounts payable for services purchased from MCI.
127
(Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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,
recognized a reduction of bad debt expense as services were provided by MCI and the credit was
realized. During the years ended December 31, 2007, 2006 and 2005 we realized $0, $370,000, $3.3
million, respectively, of the MCI credit against amounts payable for services received from MCI.
The MCI credit was completely used at December 31, 2006. The credit balance was not recorded on
the Consolidated Balance Sheet as we recognized recovery of bad debt expense as the credit was
realized.
In the fourth quarter of 2005 we recognized a decrease in Cost of Goods Sold upon the receipt of $9.1
million from the settlement of four separate claims with AT&T Corp. and AT&T Alascom, Inc. pursuant
to a master agreement.
(12) Restructuring Charge
In August 2005, we committed to a reorganization plan to more efficiently meet the demands of
technological and product convergence by realigning along customer lines rather than product lines.
The reorganization plan included integration of several functions resulting in the layoff of 76 employees
by November 30, 2005. The reorganization was completed and became effective on January 1, 2006.
Beginning January 1, 2006 we are reorganized under Consumer, Commercial, Network Access and
Managed Broadband segments, replacing the Long-distance, Cable, Local Access and Internet
services segments.
Charges incurred in relation to the reorganization plan were accounted for under SFAS No. 146,
“Accounting for Costs Associated with Exit or Disposal Activities.” The total costs incurred under the
plan were $2.2 million which were recognized primarily during the year ended December 31, 2005 in
accordance with SFAS No. 146.
The following table sets forth the restructuring charges by segment during the years ended December
31, 2006 and 2005 (amounts in thousands):
Consumer
Network
Access
Commer-
cial
Managed
Broadband
Total
Reportable
Segments
$
660
737
417
153
1,967
Restructuring charge
incurred through the year
ending December 31,
2005
Restructuring charge
incurred through the year
ending December 31,
2006
$
39
118
84
8
249
128
(Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Following is a reconciliation of our beginning and ending liability related to the reorganization plan at
December 31, 2007, 2006 and 2005 (amounts in thousands):
Balance at December 31, 2004
Restructuring charge incurred
Cash paid
Non-cash charges
Balance at December 31, 2005
Restructuring charge incurred
Cash paid
Non-cash charges
Balance at December 31, 2006
Cash paid
Adjustment to accrual
Balance at December 31, 2007
$
$
---
1,967
(1,554 )
(282 )
131
249
(345 )
(19 )
16
(2 )
(14 )
---
(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, 2007 and 2006 the fair values of cash and
cash equivalents, restricted cash, net receivables, current portion of notes receivable from related
parties, accounts payable, accrued payroll and payroll related obligations, accrued interest, accrued
liabilities, and subscriber deposits approximate their carrying value due to the short-term nature of
these financial instruments. The carrying amounts and estimated fair values of our financial instruments
at December 31, 2007 and 2006 follow (amounts in thousands):
2007
2006
Carrying
Amount
Fair Value
Carrying
Amount
Fair Value
Current and long-term debt and
capital lease obligations
Other liabilities
$ 541,249
11,596
512,853
11,380
492,319
11,915
492,527
11,808
The following methods and assumptions were used to estimate fair values:
Current and long-term debt and capital lease obligations: The fair value of our Senior Notes is
estimated based on the quoted market price for the same issue. The fair value of our Senior Credit
Facility is estimated to approximate the carrying value because these instruments are subject to
variable interest rates. The fair value of our capital leases and capital leases due to related party
are estimated based upon the discounted amount of future cash flows using our current
incremental rate of borrowing on our Senior Credit Facility.
Other Liabilities: Deferred compensation liabilities have no defined maturity dates therefore the
fair value is the amount payable on demand as of the balance sheet date. Asset retirement
obligations are recorded at their fair value and, over time, the liability is accreted to its present
value each period. Lease escalation liabilities are valued at the discounted amount of future cash
flows using the Senior Credit Facility interest rate at December 31, 2007. Our non-employee
share-based compensation awards are reported at their fair value at each reporting period.
129
(Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(14) Related Party Transactions
We entered into a long-term capital lease agreement in 1991 with the wife of our President and CEO
for property occupied by us. The leased asset was capitalized in 1991 at the owner’s cost of $900,000
and the related obligation was recorded in the accompanying financial statements. The lease
agreement was amended in September 2002. The amended lease terminates on September 30, 2011.
Through September 30, 2006 our monthly payment was $20,860 and increased to $21,532 per month
on October 1, 2006, and will continue at that rate through September 30, 2011.
In January 2001 we entered into an aircraft operating lease agreement with a company owned by our
President and CEO. The lease was amended effective January 1, 2002 and February 25, 2005. The
lease term is month-to-month and may be terminated at any time upon one hundred and twenty days
written notice. The monthly lease rate is $75,000. Upon signing the lease, the lessor was granted an
option to purchase 250,000 shares of GCI Class A common stock at $6.50 per share, of which 150,000
shares remain and are exercisable at December 31, 2007. We paid a deposit of $1.5 million in
connection with the lease. The deposit will be repaid to us upon the earlier of six months after the
agreement terminates, or nine months after the date of a termination notice. The lessor may sell to us
the stock arising from the exercise of the stock option or surrender the intrinsic value of the right to
purchase all or a portion of the stock option to repay the deposit, if allowed by our debt instruments in
effect at such time.
(15) Commitments and Contingencies
Leases
Operating Leases as Lessee. We lease business offices, have entered into site lease agreements and
use satellite transponder and fiber capacity and certain equipment pursuant to operating lease
arrangements. Rental costs, including immaterial amounts of contingent rent expense, under such
arrangements amounted to $34.6 million, $32.8 million and $32.0 million for the years ended December
31, 2007, 2006 and 2005, respectively.
Capital Leases
In August 2005 we used proceeds from our Senior Credit Facility to pay off our satellite transponder
capacity capital lease. Outstanding principal of $35.8 million was repaid and we incurred a $2.8 million
charge due to the early termination of the capital lease which is classified as Loss on Early
Extinguishment of Capital Lease during the year ended December 31, 2005 on our Consolidated
Income Statement.
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.
On March 31, 2006, through our subsidiary GCI Communication Corp. we entered into an agreement to
lease transponder capacity on Intelsat, Ltd.’s (“Intelsat”) Galaxy 18 spacecraft that is expected to be
launched May 3, 2008. We will also lease capacity on the Horizons 1 satellite, which is owned jointly by
Intelsat and JSAT International, Inc. The leased capacity is expected to replace our existing
transponder capacity on Intelsat’s Galaxy XR satellite when it reaches its end of life which is estimated
to be May 18, 2008.
We will lease C-band and Ku-Band transponders over an expected term of 14 years once the satellite is
placed into commercial operation in its assigned orbital location, and the transponders meet specific
performance specifications and are made available for our use. The present value of the lease
payments, excluding telemetry, tracking and command services and back-up protection, is expected to
total $98.6 million. We will record the capital lease obligation and the addition to our Property and
Equipment when the satellite is made available for our use which is expected to occur on May 18, 2008.
130
(Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
A summary of estimated future minimum lease payments for this lease assuming a May 3, 2008 launch
date follows (amounts in thousands):
Years ending December 31:
$
2008
2009
2010
2011
2012
2013 and thereafter
6,510
11,160
11,160
11,160
11,160
105,090
Total minimum lease payments $ 156,240
A summary of future minimum lease payments for all leases except the Galaxy 18 capital lease
described above follows (amounts in thousands):
Years ending December 31:
2008
2009
2010
2011
2012
2013 and thereafter
Total minimum lease payments
Less amount representing interest
Less current maturity of obligations
under capital leases
Long-term obligations under
capital leases, excluding current
maturity
Operating
10,979
8,412
7,123
6,156
4,444
18,315
55,429
$
$
Capital
471
530
540
485
347
4,586
6,959
4,108
92
$
2,759
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 Agreement and Capacity Leases
A summary of minimum future service revenues primarily including the lease of capacity on one of our
fiber optic cable systems and the provision of certain other services follows (amounts in thousands):
Years ending December 31,
2008
2009
2010
2011
2012
2013 and thereafter
$
Total minimum future service revenues
$
14,573
9,114
5,574
3,720
3,720
45,260
81,961
The cost of assets that are leased to customers is $22.9 million as of December 31, 2007 and 2006.
The carrying value of assets leased to customers is $13.1 million and $12.1 million as of December 31,
2007 and 2006, respectively.
131
(Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Letters of Credit
We have letters of credit totaling $4.2 million outstanding under our Senior Credit Facility as follows:
• $3.4 million to secure payment of certain access charges associated with our provision of
telecommunications services within the State of Alaska,
• $653,000 to meet obligations associated with our insurance arrangements, and
• $100,000 to secure right of way access.
Alaska Airlines Miles Agreement
We have an agreement with Alaska Airlines to offer our consumer and commercial customers who
make qualifying purchases from us the opportunity to accrue mileage awards in the Alaska Airlines
Mileage Plan. The agreement as amended requires the purchase of Alaska Airlines miles during the
year ended December 31, 2007 and in future years. The agreement has a remaining commitment at
December 31, 2007 totaling $3.8 million.
Wireless Service Equipment Obligation
We have entered into an agreement to purchase hardware and software capable of providing wireless
service to small markets in rural Alaska as a reliable substitute for standard wire line service. The
agreement has a total commitment of $20.6 million. We paid a $3.5 million down payment in 2007 and
expect to pay $4.3 million, $9 million, and $3.8 million during the years ended December 31, 2008,
2009, and 2010, respectively.
Submarine Cable Obligation
In September 2007 we entered into several agreements to purchase the submarine cable, amplifiers
and line terminal equipment for our Southeast Alaska submarine fiber optics project. In addition to
providing the equipment for the new submarine line, the contracts include additional equipment to
upgrade the Alaska United West submarine cable system and also include an option to increase
capacity on the Alaska United East submarine cable system. The agreements have a total
commitment of $25.3 million. We paid a $2.5 million down payment in 2007 and expect to pay the
remaining $22.8 million in 2008.
IRU Purchase Commitment
On July 31, 2006, through our subsidiary GCC we entered into an agreement to purchase an IRU in the
Kodiak-Kenai Cable Company, LLC’s marine-based fiber optic cable system linking Anchorage to
Kenai, Homer, Kodiak and Seward, Alaska. The new system was placed into service in December
2006. We accepted the first installment of our IRU capacity in December 2006. We have committed to
purchase a minimum of $5.0 million to $5.5 million in additional IRU capacity in two installments
through 2011.
Deferred Compensation Plan
During 1995, we adopted a non-qualified, unfunded deferred compensation plan to provide a means by
which certain employees may elect to defer receipt of designated percentages or amounts of their
compensation and to provide a means for certain other deferrals of compensation. We may contribute
matching deferrals at a rate selected by us. Participants immediately vest in all elective deferrals and all
income and gain attributable thereto. Matching contributions and all income and gain attributable
thereto vest over a six-year period. Participants may elect to be paid in either a single lump sum
payment or annual installments over a period not to exceed 10 years. Vested balances are payable
upon termination of employment, unforeseen emergencies, death and total disability. Participants are
general creditors of us with respect to deferred compensation plan benefits. Compensation deferred
pursuant to the plan totaled $0, $3,000 and $37,000 for the years ended December 31, 2007, 2006 and
2005, respectively.
Performance Based Incentive Compensation Plan
During 2003 we adopted and in 2005 we amended a non-qualified, performance based incentive
compensation plan. The amended incentive compensation plan provides additional compensation to
132
(Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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. The amended incentive compensation plan goals were met as of December 31, 2005. All
awards were paid during the year ended December 31, 2006, except 12,500 shares of GCI Class A
common stock valued and issued in 2007. Under this plan we recognized no expenses during the years
ended December 31, 2007 and 2006 and $1.2 million during the year ended December 31, 2005.
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 $2.0 million per lifetime per beneficiary above which third party insurance
applies. A reserve of $1.4 million and $1.1 million was recorded at December 31, 2007 and 2006,
respectively, to cover estimated reported losses, estimated unreported losses based on past
experience modified for current trends, and estimated expenses for settling claims. We are self-insured
for losses and liabilities related to workers’ compensation claims up to $500,000 above which third
party insurance applies. A reserve of $330,000 and $487,000 was recorded at December 31, 2007 and
2006, 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.
CDMA Network Build-out Agreement
During 2007 Alaska DigiTel and GCI signed an agreement with Sprint Nextel to build-out Alaska
DigiTel's CDMA network to provide expanded roaming area coverage. If we fail to meet the schedule
of this build-out, Sprint Nextel has the right to terminate the agreement and we may be required to pay
up to $16.0 million as liquidated damages. We expect to meet the deadlines imposed by the build-out
schedule. To complete the CDMA network build-out, we signed an agreement to purchase CDMA
network equipment for $12.5 million which is expected to be paid in 2008.
Access to ACS Unbundled Network Elements
On May 22, 2006, the ACS subsidiary serving Anchorage filed a petition with the FCC, seeking
forbearance from regulation of interstate broadband and access services. On August 20, 2007, the
FCC granted in part and denied in part the requested relief, requiring that ACS comply with certain
safeguards to ensure the relief granted would not result in harm to consumers or competition. On
September 19, 2007, GCI and ACS both filed petitions for reconsideration on discrete findings in the
order. The petitions are pending and we cannot predict the final outcome of the proceeding at this
time.
Universal Service
The Universal Service Fund ("USF") pays subsidies to Eligible Telecommunications Carriers ("ETC") to
support the provision of local access service in high-cost areas. Under FCC regulations, we have
qualified as a competitive ETC in the Anchorage, Fairbanks, Juneau, Matanuska-Susitna Valley,
Ketchikan, and Glacier State service areas. Without ETC status, we would not qualify for USF
subsidies in these areas or other rural areas where we propose to offer local access services, and our
revenue for providing local access services in these areas would be materially adversely affected.
133
(Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Federal State Joint Board on Universal Service (“Joint Board”) has recommended the imposition of
a state-by-state interim cap on high cost funds to be distributed to ETCs. If the Joint Board
recommendation is adopted by the FCC, this cap will reduce the high cost fund amounts available to
competitive ETCs, such as us, as new competitive ETCs are designated and as existing competitive
ETCs acquire new customers. In addition, the Joint Board has recommended for FCC consideration
long-term options for reforming USF support, including establishing separate funds for mobility and
broadband support. Separately, the FCC has issued two reform proposals for changing the basis for
support amounts. We cannot predict at this time the outcome of the FCC proceedings to consider USF
reform proposals or their respective impacts on us. Both these and any future regulatory, legislative, or
judicial actions could affect the operation of the USF and result in a change in our revenue for providing
local access services in new and existing markets and facilities-based wireless services in new
markets.
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, 2007, only the
Juneau system is subject to RCA regulation of its basic service rates. No petition requesting regulation
has been filed for any other system. The Juneau system serves 7% of our total basic service
subscribers at December 31, 2007.
UUI and Unicom Acquisition
In October 2007 we signed an agreement to purchase the stock of the United Utilities, Inc. (“UUI”) and
Unicom Telecommunications (“Unicom”) subsidiaries of United Companies, Inc. (“UCI”) for $40.0
million expected to be paid upon closing. Additionally we may assume approximately $37.0 million in
net debt as part of the acquisition. We will fund the transaction from cash on hand, by drawing down
additional debt, or a combination of the two. UUI together with its subsidiary, United-KUC, provides
local telephone service to 60 rural Alaska communities across Alaska. Unicom operates DeltaNet, a
long-haul broadband microwave network ringing the Yukon-Kuskokwim Delta – a region of
approximately 30,000 square miles in western Alaska. By the summer of 2008, DeltaNet, which is still
under construction but has already commenced operations where completed microwave towers have
been placed into service, will link more than 40 villages to Bethel, the region’s hub. This transaction is
subject to customary closing conditions, including regulatory approval. We have filed applications with
the RCA and FCC seeking the requisite regulatory consent for the transaction. The FCC comment
cycle is completed, and the parties are awaiting FCC action. GCI is currently filing replies to comments
and the statutory date for a final RCA decision is May 16, 2008. The transaction will close upon
regulatory approval which is expected in the second or third quarter of 2008.
Alaska Wireless Acquisition
In August 2007 we signed a memorandum of understanding to acquire all of the interests in Alaska
Wireless, LLC (“Alaska Wireless”) for $13.0 million to $14.0 million, expected to be paid upon closing.
In addition to the initial acquisition payment we have agreed to a contingent payment of approximately
$3.0 million in 2010 if certain financial conditions are met. We will fund the transaction from cash on
hand, by drawing down additional debt, or a combination of the two. Alaska Wireless is a GSM cellular
provider serving approximately 4,000 subscribers in the Dutch Harbor, Alaska area. In addition to the
acquisition, we will enter into a management agreement with the existing owners of Alaska Wireless.
The business will continue to operate under the Alaska Wireless name and the current management
team will continue to manage the day-to-day operations. This transaction is subject to customary
closing conditions, including regulatory approval. We filed the application with the FCC seeking the
requisite regulatory consent to the transaction on January 18, 2008. This transaction will close upon
regulatory approval which is expected in the second or third quarter of 2008.
Dobson Resale Agreement
AT&T acquired Dobson, including its Alaska properties, on November 15, 2007. In December 2007 we
signed an agreement with AT&T that provides for an orderly four-year transition of our wireless
134
(Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
customers from the Dobson/AT&T network in Alaska to our wireless facilities to be built in 2008 and
2009. The agreement allows our current and future customers to use the AT&T wireless network for
local access and roaming during the transition period. The four-year transition period, which expires
June 30, 2012, provides us adequate time to replace the Dobson/AT&T network in Alaska with our own
wireless facilities. Under the agreement AT&T’s obligation to purchase network services from us will
terminate as of July 1, 2008. AT&T will provide us with a large block of wireless network usage at no
charge to facilitate the transition of our customers. We will pay for usage in excess of that base
transitional amount. This grant of service will reduce the Cost of Goods Sold during the four-year
period ended June 30, 2012, that we would have otherwise recognized in accordance with the new
agreement, however we are unable to estimate the impact this agreement will have on our Cost of
Goods Sold.
Acquisition of Remaining Alaska DigiTel Interest
In December 2007, we signed a definitive agreement to acquire the remaining minority interest in
Alaska DigiTel for a total consideration of approximately $10.0 million. On January 22, 2008, the FCC
initiated its proceedings to review the application seeking requisite regulatory approval of the proposed
change in control. Following FCC approval of the change in control expected by the third quarter of
2008, we will own 100% of Alaska DigiTel.
IRU Purchase Commitment
On July 31, 2006, we entered into an agreement to purchase an IRU in the Kodiak-Kenai Cable
Company, LLC’s marine-based fiber optic cable system linking Anchorage to Kenai, Homer, Kodiak
and Seward, Alaska. The new system was placed into service in December 2006. We accepted the first
installment of our IRU capacity in December 2006. We have committed to purchase a minimum of $5.0
million to $5.5 million in additional IRU capacity in two installments through 2011.
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 and are not expected to have a material affect on our
statement of financial position or income statement.
(16) Fluctuations in Fourth Quarter Results of Operations (Unaudited)
The following is a summary of unaudited quarterly results of operations for the years ended December
31, 2007 and 2006 (amounts in thousands, except per share amounts):
2007
Revenues, as originally reported
Immaterial error corrections
Revenues, as adjusted
Operating income, as originally
reported
Immaterial error corrections
Operating income, as adjusted
Net income, as originally reported
Immaterial error corrections
Net income, as adjusted
First
Quarter1
Second
Quarter1
Third
Quarter1
Fourth
Quarter1
Total
Year
$ 124,579 129,592
298
$ 125,031 129,890
452
133,864 132,276
(976)
134,090 131,300
226
520,311
---
520,311
$
$
$
$
11,488
532
12,020
18,126
1,050
19,176
14,193
150
14,343
18,626
(1,732)
16,894
62,433
---
62,433
1,530
282
1,812
5,015
556
5,571
2,213
80
2,293
4,746
(918)
3,828
13,504
---
13,504
135
(Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Net income available to common
shareholders, as originally reported
$
Immaterial error corrections
Net income available to common
shareholders, as adjusted
Basic net income available to
common shareholders per common
share, as originally reported2
Immaterial error corrections
Basic net income available to
common shareholders per common
share, as adjusted2
Diluted net income available to
common shareholders per common
share, as originally reported2
Immaterial error corrections
Diluted net income available to
common shareholders per common
share, as adjusted2
First
Quarter1
Second
Quarter1
Third
Quarter1
Fourth
Quarter1
Total
Year
1,530
282
5,015
556
2,213
80
4,746
(918)
13,504
---
$
1,812
5,571
2,293
3,828
13,504
$
$
$
$
0.03
---
0.09
0.01
0.04
---
0.09
(0.02)
0.26
(0.01)
0.03
0.10
0.04
0.07
0.26
0.02
0.01
0.09
0.01
0.04
---
0.08
(0.02)
0.22
---
0.03
0.10
0.04
0.06
0.22
1 Includes the correction of immaterial errors caused by (1) the fourth quarter correction of our
unified billing system interface to our general ledger that resulted in incorrect amounts being
recorded in revenue and accounts receivable, (2) the fourth quarter correction of incorrectly
calculated share-based compensation expense related to options and awards, (3) the fourth
quarter correction of revenue that had not been correctly recorded throughout the year, and (4)
the fourth quarter correction of depreciation expense due to an adjustment of the Alaska DigiTel
purchase price allocation.
2 Due to rounding, the sum of quarterly net income available to common shareholders per common
share amounts does not agree to total year net income available to common shareholders per
common share.
136
(Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
2006
Total revenues
Operating income
Income before cumulative effect of a
change in accounting principle
Net income
Net income available to common
shareholders
Basic net income available to
common shareholders per common
share:
Income available to common
shareholders before cumulative
effect of a change in accounting
principle per common share
Net income available to common
shareholders per common share
Diluted net income available to
common shareholders per common
share:
Income available to common
shareholders before cumulative
effect of a change in accounting
principle per common share
Net income available to common
shareholders per common share
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Total
Year
$ 112,822 118,220
18,698
$
15,221
125,081
19,777
121,359 477,482
67,326
13,630
$
$
$
$
$
$
$
3,250
3,314
5,656
5,656
6,482
6,482
3,068
3,068
18,456
18,520
3,314
5,656
6,482
3,068
18,520
0.06
0.10
0.12
0.06
0.34
0.06
0.10
0.12
0.06
0.34
0.06
0.09
0.12
0.06
0.33
0.06
0.09
0.12
0.06
0.33
No significant, unusual or infrequently occurring items were recognized in the fourth quarter of 2007 or
2006.
137
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
3.1.1
3.2
4.1
10.3
10.4
10.5
10.6
10.13
10.14
10.15
10.16
10.17
10.20
10.21
10.25
10.25.1
10.25.2
10.25.3
10.25.11
10.26
10.29
10.30
10.31
10.32
10.33
10.34
10.36
10.37
10.38
Restated Articles of Incorporation of the Company dated August 20, 2007 *
Articles of Amendment to the Restated Articles of Incorporation of the Company dated
July 24, 2007 *
Amended and Restated Bylaws of the Company dated August 20, 2007 (35)
Certified copy of the General Communication, Inc. Amendment No. 1, dated as of June
25, 2007, to the Amended and Restated 1986 Stock Option Plan (33)
Westin Building Lease (3)
Duncan and Hughes Deferred Bonus Agreements (4)
Compensation Agreement between General Communication, Inc. and William C.
Behnke dated January 1, 1997 (13)
Order approving Application for a Certificate of Public Convenience and Necessity to
operate as a Telecommunications (Intrastate Interexchange Carrier) Public Utility
within Alaska (2)
MCI Carrier Agreement between MCI Telecommunications Corporation and General
Communication, Inc. dated January 1, 1993 (5)
Contract for Alaska Access Services Agreement between MCI Telecommunications
Corporation and General Communication, Inc. dated January 1, 1993 (5)
Promissory Note Agreement between General Communication, Inc. and Ronald A.
Duncan, dated August 13, 1993 (6)
Deferred Compensation Agreement between General Communication, Inc. and
Ronald A. Duncan, dated August 13, 1993 (6)
Pledge Agreement between General Communication, Inc. and Ronald A. Duncan,
dated August 13, 1993 (6)
The GCI Special Non-Qualified Deferred Compensation Plan (7)
Transponder Purchase Agreement for Galaxy X between Hughes Communications
Galaxy, Inc. and GCI Communication Corp. (7)
Licenses: (3)
214 Authorization
International Resale Authorization
Digital Electronic Message Service Authorization
Certificate of Convenience and Public Necessity – Telecommunications Service
(Local Exchange) dated July 7, 2000 (29)
ATU Interconnection Agreement between GCI Communication Corp. and Municipality
of Anchorage, executed January 15, 1997 (12)
Asset Purchase Agreement, dated April 15, 1996, among General Communication,
Inc., ACNFI, ACNJI and ACNKSI (8)
Asset Purchase Agreement, dated May 10, 1996, among General Communication,
Inc., and Alaska Cablevision, Inc. (8)
Asset Purchase Agreement, dated May 10, 1996, among General Communication,
Inc., and McCaw/Rock Homer Cable System, J.V. (8)
Asset Purchase Agreement, dated May 10, 1996, between General Communication,
Inc., and McCaw/Rock Seward Cable System, J.V. (8)
Amendment No. 1 to Securities Purchase and Sale Agreement, dated October 31,
1996, among General Communication, Inc., and the Prime Sellers Agent (9)
First Amendment to Asset Purchase Agreement, dated October 30, 1996, among
General Communication, Inc., ACNFI, ACNJI and ACNKSI (9)
Order Approving Arbitrated Interconnection Agreement as Resolved and Modified by
Order U-96-89(5) dated January 14, 1997 (12)
Amendment to the MCI Carrier Agreement executed April 20, 1994 (12)
Amendment No. 1 to MCI Carrier Agreement executed July 26, 1994 (11)
138
Exhibit No.
Description
10.39
10.40
10.41
10.42
10.43
10.44
10.45
10.46
10.47
10.50
10.51
10.52
10.54
10.55
10.58
10.59
10.60
10.61
10.62
10.66
10.67
10.71
MCI Carrier Addendum—MCI 800 DAL Service effective February 1, 1994 (11)
Third Amendment to MCI Carrier Agreement dated as of October 1, 1994 (11)
Fourth Amendment to MCI Carrier Agreement dated as of September 25, 1995 (11)
Fifth Amendment to the MCI Carrier Agreement executed April 19, 1996 (12)
Sixth Amendment to MCI Carrier Agreement dated as of March 1, 1996 (11)
Seventh Amendment to MCI Carrier Agreement dated November 27, 1996 (14)
First Amendment to Contract for Alaska Access Services between General
Communication, Inc. and MCI Telecommunications Corporation dated April 1, 1996
(14)
Service Mark License Agreement between MCI Communications Corporation and
General Communication, Inc. dated April 13, 1994 (13)
Radio Station Authorization (Personal Communications Service License), Issue Date
June 23, 1995 (13)
Contract No. 92MR067A Telecommunications Services between BP Exploration
(Alaska), Inc. and GCI Network Systems dated April 1, 1992 (14)
Amendment No. 03 to BP Exploration (Alaska) Inc. Contract No. 92MRO67A effective
August 1, 1996 (14)
Lease Agreement dated September 30, 1991 between RDB Company and General
Communication, Inc. (2)
Order Approving Transfer Upon Closing, Subject to Conditions, and Requiring Filings
dated September 23, 1996 (13)
Order Granting Extension of Time and Clarifying Order dated October 21, 1996 (13)
Employment and Deferred Compensation Agreement between General
Communication, Inc. and John M. Lowber dated July 1992 (13)
Deferred Compensation Agreement between GCI Communication Corp. and Dana L.
Tindall dated August 15, 1994 (13)
Transponder Lease Agreement between General Communication Incorporated and
Hughes Communications Satellite Services, Inc., executed August 8, 1989 (6)
Addendum to Galaxy X Transponder Purchase Agreement between GCI
Communication Corp. and Hughes Communications Galaxy, Inc. dated August 24,
1995 (13)
Order Approving Application, Subject to Conditions; Requiring Filing; and Approving
Proposed Tariff on an Inception Basis, dated February 4, 1997 (13)
Supply Contract Between Submarine Systems International Ltd. And GCI
Communication Corp. dated as of July 11, 1997. (15)
Supply Contract Between Tyco Submarine Systems Ltd. And Alaska United Fiber
System Partnership Contract Variation No. 1 dated as of December 1, 1997. (15)
Third Amendment to Contract for Alaska Access Services between General
Communication, Inc. and MCI Telecommunications Corporation dated February 27,
1998 (16)
10.80
Fourth Amendment to Contract for Alaska Access Services between General
Communication, Inc. and its wholly owned subsidiary GCI Communication Corp.,
and MCI WorldCom. (17)
10.89
Fifth Amendment to Contract for Alaska Access Services between General
Communication, Inc. and its wholly owned subsidiary GCI Communication Corp.,
and MCI WorldCom Network Services, Inc., formerly known as MCI
Telecommunications Corporation dated August 7, 2000 # (18)
10.90
Sixth Amendment to Contract for Alaska Access Services between General
Communication, Inc. and its wholly owned subsidiary GCI Communication Corp.,
and MCI WorldCom Network Services, Inc., formerly known as MCI
Telecommunications Corporation dated February 14, 2001 # (18)
10.91
Seventh Amendment to Contract for Alaska Access Services between General
Communication, Inc. and its wholly owned subsidiary GCI Communication Corp.,
and MCI WorldCom Network Services, Inc., formerly known as MCI
Telecommunications Corporation dated March 8, 2001 # (18)
139
Exhibit No.
10.100
Description
Contract for Alaska Access Services between Sprint Communications Company L.P.
10.102
and General Communication, Inc. and its wholly owned subsidiary GCI
Communication Corp. dated March 12, 2002 # (21)
First Amendment to Lease Agreement dated as of September 2002 between RDB
Company and GCI Communication Corp. as successor in interest to General
Communication, Inc. (22)
10.103
Agreement and plan of merger of GCI American Cablesystems, Inc. a Delaware
10.104
10.105
10.106
10.108
10.109
10.110
10.112
10.113
10.114
corporation and GCI Cablesystems of Alaska, Inc. an Alaska corporation each with
and into GCI Cable, Inc. an Alaska corporation, adopted as of December 10, 2002
(22)
Articles of merger between GCI Cablesystems of Alaska, Inc. and GCI Cable, Inc.,
adopted as of December 10, 2002 (22)
Aircraft lease agreement between GCI Communication Corp., and Alaska corporation
and 560 Company, Inc., an Alaska corporation, dated as of January 22, 2001 (22)
First amendment to aircraft lease agreement between GCI Communication Corp., and
Alaska corporation and 560 Company, Inc., an Alaska corporation, dated as of
February 8, 2002 (22)
Bonus Agreement between General Communication, Inc. and Wilson Hughes (23)
Eighth Amendment to Contract for Alaska Access Services between General
Communication, Inc. and its wholly owned subsidiary GCI Communication Corp.,
and MCI WorldCom Network Services, Inc. # (23)
Settlement and Release Agreement between General Communication, Inc. and
WorldCom, Inc. (23)
Waiver letter agreement dated as of February 13, 2004 for Credit, Guaranty, Security
and Pledge Agreement (24)
Indenture dated as of February 17, 2004 between GCI, Inc. and The Bank of New
York, as trustee (24)
Registration Rights Agreement dated as of February 17, 2004, among GCI, Inc., and
Deutsche Bank Securities Inc., Jefferies & Company, Inc., Credit Lyonnais
Securities (USA), Inc., Blaylock & Partners, L.P., Ferris, Baker Watts, Incorporated,
and TD Securities (USA), Inc., as Initial Purchasers (24)
10.121
First amendment to contract for Alaska Access Services between Sprint
10.122
Communications Company L.P. and General Communication, Inc. and its wholly
owned subsidiary GCI Communication Corp. dated July 24, 2002 # (26)
Second amendment to contract for Alaska Access Services between Sprint
Communications Company L.P. and General Communication, Inc. and its wholly
owned subsidiary GCI Communication Corp. dated December 31, 2003 (26)
10.123
Third amendment to contract for Alaska Access Services between Sprint
Communications Company L.P. and General Communication, Inc. and its wholly
owned subsidiary GCI Communication Corp. dated February 19, 2004 # (26)
10.124
Fourth amendment to contract for Alaska Access Services between Sprint
10.126
10.127
10.128
Communications Company L.P. and General Communication, Inc. and its wholly
owned subsidiary GCI Communication Corp. dated June 30, 2004 # (26)
Audit Committee Charter (as revised by the board of directors of General
Communication, Inc. effective as of February 3, 2005) (27)
Nominating and Corporate Governance Committee Charter (as revised by the board
of directors of General Communication, Inc. effective as of February 3, 2005) (27)
Fifth amendment to contract for Alaska Access Services between Sprint
Communications Company L.P. and General Communication, Inc. and its wholly
owned subsidiary GCI Communication Corp. dated January 22, 2005 # (27)
10.129
Ninth Amendment to Contract for Alaska Access Services between General
Communication, Inc. and its wholly owned subsidiary GCI Communication Corp.,
and MCI WorldCom Network Services, Inc. # (28)
140
Exhibit No.
10.130
10.131
10.132
10.134
10.135
Description
Amended and Restated Credit Agreement among GCI Holdings, Inc. and Calyon New
York Branch as Administrative Agent, Sole Lead Arranger, and Co-Bookrunner, The
Initial Lenders and Initial Issuing Bank Named Herein as Initial Lenders and Initial
Issuing Bank, General Electric Capital Corporation as Syndication Agent, and Union
Bank of California, N.A., CoBank, ACB, CIT Lending Services Corporation and
Wells Fargo Bank, N.A. as Co-Documentation Agents, dated as of August 31, 2005
(28)
Amended and Restated 1986 Stock Option Plan of General Communication, Inc. as of
June 7, 2005 (28)
Amendment No. 1 to $150 Million EBITDA Incentive Program dated December 30,
2005 (29)
Full-time Transponder Capacity Agreement with PanAmSat Corporation dated March
31, 2006 # (30)
Tenth Amendment to Contract for Alaska Access Services between General
Communication, Inc. and its wholly owned subsidiary GCI Communication Corp.,
and MCI Communications Services, Inc. d/b/a Verizon Business Services
(successor-in-interest to MCI Network Services, Inc., which was formerly known as
MCI WorldCom Network Services) # (31)
10.136
Reorganization Agreement among General Communication, Inc., Alaska DigiTel, LLC,
The Members of Alaska DigiTel, LLC, AKD Holdings, LLC and The Members of
Denali PCS, LLC dated as of June 16, 2006 (Nonmaterial schedules and exhibits to
the Reorganization Agreement have been omitted pursuant to Item 601b.2 of
Regulation S-K. We agree to furnish supplementally to the Commission upon
request a copy of any omitted schedule or exhibit.) # (32)
10.137
Second Amended and Restated Operating Agreement of Alaska DigiTel, LLC dated
as of January 1, 2007 (We agree to furnish supplementally to the Commission upon
request a copy of any omitted schedule or exhibit.) # (32)
10.138
Sixth amendment to contract for Alaska Access Services between Sprint
Communications Company L.P. and General Communication, Inc. and its wholly
owned subsidiary GCI Communication Corp. dated September 20, 2006 (33)
10.139
Seventh amendment to contract for Alaska Access Services between Sprint
Communications Company L.P. and General Communication, Inc. and its wholly
owned subsidiary GCI Communication Corp. dated January 17, 2007 # (33)
10.140
10.141
General Communication, Inc. Director Compensation Plan dated June 29, 2006 (33)
Eleventh Amendment to Contract for Alaska Access Services between General
Communication, Inc. and its wholly owned subsidiary GCI Communication Corp., and
MCI Communications Services, Inc. d/b/a Verizon Business Services (successor-in-
interest to MCI Network Services, Inc., which was formerly known as MCI WorldCom
Network Services) # (35)
10.142
Third Amendment to the Amended and Restated Credit Agreement among GCI
Holdings, Inc., GCI Communication Corp., GCI Cable, Inc., GCI Fiber
Communication Co., Potter View Development Co., Inc., and Alaska United Fiber
System Partnership, GCI, Inc., the banks, financial institutions, and other lenders
party hereto and Calyon New York Branch as Administrative Agent, dated as of
September 14, 2007 (36)
Joinder Agreement dated as of September 28, 2007 among BNP Paribas, U.S. Bank
National Association, GCI Holdings, Inc., GCI Communication Corp., GCI Cable,
Inc., GCI Fiber Communication Co., Potter View Development Co., Inc., and Alaska
United Fiber System Partnership, GCI, Inc., and Calyon New York Branch as
Administrative Agent (36)
Strategic Roaming Agreement dated as of October 30, 2007 between Alaska DigitTel,
LLC. And WirelessCo L.P. # *
CDMA Build-out Agreement dated as of October 30, 2007 between Alaska DigitTel,
LLC. and WirelessCo L.P. (Nonmaterial schedules and exhibits to the
Reorganization Agreement have been omitted pursuant to Item 601b.2 of Regulation
10.143
10.144
10.145
141
Exhibit No.
Description
S-K. We agree to furnish supplementally to the Commission upon request a copy of
any omitted schedule or exhibit.) # *
Long-term de Facto Transfer Spectrum Leasing agreement between Alaska DigitTel,
LLC. and SprintCom, Inc. # *
Twelfth Amendment to Contract for Alaska Access Services between General
Communication, Inc. and its wholly owned subsidiary GCI Communication Corp.,
and MCI Communications Services, Inc. d/b/a Verizon Business Services
(successor-in-interest to MCI Network Services, Inc., which was formerly known as
MCI WorldCom Network Services) dated November 19, 2007 (Nonmaterial
schedules and exhibits to the Reorganization Agreement have been omitted
pursuant to Item 601b.2 of Regulation S-K. We agree to furnish supplementally to
the Commission upon request a copy of any omitted schedule or exhibit.) # *
Stock Purchase Agreement dated as of October 12, 2007 among GCI Communication
Corp., United Companies, Inc., Sea Lion Corporation and Togiak Natives LTD.
(Nonmaterial schedules and exhibits to the Reorganization Agreement have been
omitted pursuant to Item 601b.2 of Regulation S-K. We agree to furnish
supplementally to the Commission upon request a copy of any omitted schedule or
exhibit.) *
Code Of Business Conduct and Ethics (originally reported as exhibit 10.118) (25)
Subsidiaries of the Registrant *
Consent of KPMG LLP (Independent Public Accountant for Company) *
Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *
Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 *
Additional Exhibits:
The Articles of Incorporation of GCI Communication Corp. (1)
The Bylaws of GCI Communication Corp. (1)
The Bylaws of GCI Cable, Inc. (10)
The Articles of Incorporation of GCI Cable, Inc. (10)
The Bylaws of GCI Holdings, Inc. (13)
The Articles of Incorporation of GCI Holdings, Inc. (13)
The Articles of Incorporation of GCI, Inc. (12)
The Bylaws of GCI, Inc. (12)
The Partnership Agreement of Alaska United Fiber System (15)
The Bylaws of Potter View Development Co., Inc. (19)
The Articles of Incorporation of Potter View Development Co., Inc. (19)
The Bylaws of GCI Fiber Communication, Co., Inc. (20)
The Articles of Incorporation of GCI Fiber Communication, Co., Inc. (20)
10.146
10.147
10.148
14
21.1
23.1
31
32
99
99.1
99.2
99.7
99.8
99.15
99.16
99.17
99.18
99.27
99.28
99.29
99.34
99.35
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*
CONFIDENTIAL PORTION has been omitted pursuant to a request for confidential
treatment by us to, and the material has been separately filed with, the Securities and
Exchange Commission. Each omitted Confidential Portion is marked by three
asterisks.
Filed herewith.
________________
Exhibit
Reference
1
Description
Incorporated by reference to The Company’s Annual Report on Form 10-K for the year
ended December 31, 1990
2
Incorporated by reference to The Company’s Annual Report on Form 10-K for the year
ended December 31, 1991
142
Exhibit
Reference
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
Description
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, 1995.
Incorporated by reference to The Company’s Form S-4 Registration Statement dated
October 4, 1996.
Incorporated by reference to The Company’s Current Report on Form 8-K dated
November 13, 1996.
Incorporated by reference to The Company’s Annual Report on Form 10-K for the year
ended December 31, 1996.
Incorporated by reference to The Company’s Current Report on Form 8-K dated March
14, 1996, filed March 28, 1996.
Incorporated by reference to The Company’s Form S-3 Registration Statement (File No.
333-28001) dated May 29, 1997.
Incorporated by reference to The Company’s Amendment No. 1 to Form S-3/A
Registration Statement (File No. 333-28001) dated July 8, 1997.
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 Annual Report on Form 10-K for the year
ended December 31, 1997.
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 June 30, 1999.
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 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 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 June 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 Quarterly Report on Form 10-Q for the
period ended March 31, 2005.
Incorporated by reference to The Company’s Quarterly Report on Form 10-Q for the
period ended September 30, 2005.
Incorporated by reference to The Company’s Annual Report on Form 10-K for the year
143
Exhibit
Reference
ended December 31, 2005 filed March 16, 2006.
Description
30
31
32
33
34
35
36
Incorporated by reference to The Company’s Quarterly Report on Form 10-Q for the
period ended March 31, 2006.
Incorporated by reference to The Company’s Quarterly Report on Form 10-Q for the
period ended June 30, 2006.
Incorporated by reference to The Company’s Annual Report on Form 10-K for the year
ended December 31, 2006 filed March 19, 2007.
Incorporated by reference to The Company’s Quarterly Report on Form 10-Q for the
period ended March 31, 2007.
Incorporated by reference to The Company’s Form S-8 filed with the SEC on July 27,
2007.
Incorporated by reference to The Company’s Quarterly Report on Form 10-Q for the
period ended June 30, 2007.
Incorporated by reference to The Company’s Quarterly Report on Form 10-Q for the
period ended September 30, 2007.
144
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
GENERAL COMMUNICATION, INC.
By:
/s/ Ronald A. Duncan
Ronald A. Duncan, President
(Chief Executive Officer)
Date:
March 5, 2008
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/ Stephen M. Brett
Stephen M. Brett
/s/ Ronald A. Duncan
Ronald A. Duncan
Jerry A. Edgerton
Jerry A. Edgerton
/s/ Scott M. Fisher
Scott M. Fisher
/s/ William P. Glasgow
William P. Glasgow
Stephen R. Mooney
/s/ James M. Schneider
James M. Schneider
/s/ John M. Lowber
John M. Lowber
/s/ Lynda L. Tarbath
Lynda L. Tarbath
Chairman of Board and Director
March 3, 2008
President and Director
(Principal Executive Officer)
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)
March 5, 2008
February 26, 2008
March 5, 2008
March 5, 2008
February 26, 2008
March 5, 2008
March 5, 2008
145