Back to GetFilings.com
FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
Or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-15279
GENERAL COMMUNICATION, INC.
(Exact name of registrant as specified in its charter)
ALASKA 92-0072737
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2550 Denali Street Suite 1000
Anchorage, Alaska 99503
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (907) 265-5600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A common stock Class B common stock
(Title of class) (Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the average bid and asked prices of such
stock as of the close of trading on as of the last business day of the
registrant's most recently completed second fiscal quarter of June 30, 2002 was
approximately $266,243,000.
The number of shares outstanding of the registrant's common stock
as of February 28, 2003, was:
Class A common stock - 51,888,120 shares; and,
Class B common stock - 3,874,607 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's definitive Proxy Statement to be filed
pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended,
in connection with the Annual Meeting of Stockholders of the registrant to be
held on June 5, 2003 are incorporated by reference into Part III of this report.
1
GENERAL COMMUNICATION, INC.
2002 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
----
Glossary............................................................................................................3
Cautionary Statement Regarding Forward-Looking Statements..........................................................10
Part I.............................................................................................................12
Item 1. Business...............................................................................................12
Item 2. Properties.............................................................................................63
Item 3. Legal Proceedings......................................................................................66
Item 4. Submissions of Matters to a Vote of Security Holders....................................................66
Part II............................................................................................................66
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters..............................66
Item 6. Selected Financial Data................................................................................68
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..................69
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................................95
Item 8. Consolidated Financial Statements and Supplementary Data...............................................95
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure...................95
Part III...........................................................................................................95
Items 10, 11, 12 and 13 are incorporated herein by reference from our Proxy Statement
for our 2003 Annual Shareholders' meeting.......................................................................95
Item 14. Controls and Procedures...............................................................................96
Part IV............................................................................................................97
Item 15. Exhibits, Consolidated Financial Statement Schedules, and Reports on Form 8-K.........................97
Item 15(b). Exhibits..........................................................................................140
Independent Auditors' Report...................................................................................145
Schedule VIII..................................................................................................146
Signatures........................................................................................................147
Certifications....................................................................................................148
This Annual Report on Form 10-K is for the year ending December 31, 2002. This
Annual Report modifies and supersedes documents filed prior to this Annual
Report. The Securities and Exchange Commission ("SEC") allows us to "incorporate
by reference" information that we file with them, which means that we can
disclose important information to you by referring you directly to those
documents. Information incorporated by reference is considered to be part of
this Annual Report. In addition, information that we file with the SEC in the
future will automatically update and supersede information contained in this
Annual Report.
2
Glossary
Access Charges -- Expenses incurred by an IXC and paid to LECs for accessing the
local networks of the LECs in order to originate and terminate long-distance
calls and provide the customer connection for private line services.
ACS -- Alaska Communications Systems, Inc., previously ALEC Holdings, Inc. --
ACS, one of our competitors, includes acquired properties from Century Telephone
Enterprises, Inc. and the Anchorage Telephone Utility ("ATU"). ATU provided
local telephone and long distance services primarily in Anchorage and cellular
telephone services in Anchorage and other Alaska markets.
Alaska United -- Alaska United Fiber System Partnership -- an Alaska partnership
wholly owned by The Company. Alaska United was organized to construct and
operate a new fiber optic cable connecting various locations in Alaska and the
Lower 49 states and foreign countries through Seattle, Washington.
AT&T -- AT&T Corp. -- Acquired Tele-Communications, Inc. ("TCI") in a 1999
merger; one of our competitors.
AT&T Alascom -- Alascom, Inc. -- a wholly owned subsidiary of AT&T and one of
our competitors.
Basic Service -- The basic service tier includes, at a minimum, signals of local
television broadcast stations, any public, educational, and governmental
programming required by the franchise to be carried on the basic tier, and any
additional video programming service added to the basic tier by the cable
operator.
BOC -- Bell System Operating Company -- A LEC owned by any of the remaining
Regional Bell Operating Companies, which are holding companies established
following the AT&T Divestiture Decree to serve as parent companies for the BOCs.
Backbone -- A centralized high-speed network that interconnects smaller,
independent networks.
Bandwidth -- The number of bits of data that can move through a communications
medium in a given amount of time.
Broadband -- A high-capacity communications circuit/path, usually implying
speeds of 256 kbps or better.
CAP -- Competitive Access Provider -- A company that provides its customers with
an alternative to the LEC for local transport of private line and special access
telecommunications services.
Central Offices -- The switching centers or central switching facilities of the
LECs.
CLEC -- Competitive Local Exchange Carrier. -- A company that provides its
customers with an alternative to the ILEC for local transport of
telecommunications services, as allowed under the 1996 Telecom Act.
Co-Carrier Status -- A regulatory scheme under which the incumbent LEC is
required to integrate new, competing providers of local exchange service, into
the systems of traffic exchange, inter-carrier compensation, and other
inter-carrier relationships that already exist among LECs in most jurisdictions.
Collocation -- The ability of a CAP or CLEC to connect its network to the LEC's
central offices. Physical collocation occurs when a connecting carrier places
its network connection equipment inside the LEC's central offices. Virtual
collocation is an alternative to physical collocation pursuant to which the LEC
permits a CAP or CLEC to connect its network to the LEC's central offices on
comparable terms, even though the CAP's or CLEC's network connection equipment
is not physically located inside the central offices.
The Company -- GCI and its direct and indirect subsidiaries, also referred to as
"we," "us" and "our."
3
Compression / Decompression -- A method of encoding/decoding signals that allows
transmission (or storage) of more information than the medium would otherwise be
able to support. Both compression and decompression require processing capacity,
but with many products, the time is not noticeable.
DAMA -- Demand Assigned Multiple Access -- The Company's digital satellite earth
station technology that allows calls to be made between remote villages using
only one satellite hop thereby reducing satellite delay and capacity
requirements while improving quality.
Dark Fiber -- An inactive fiber-optic strand without electronics or optronics.
Dark fiber is not connected to transmitters, receivers and regenerators.
DBS -- Direct Broadcast Satellite -- Subscription television service obtained
from satellite transmissions using frequency bands that are internationally
allocated to the broadcast satellite services. Direct-to-home service such as
DBS has its origins in the large direct-to-home satellite antennas that were
first introduced in the 1970's for the reception of video programming
transmitted via satellite. Because these first-generation direct-to-home
satellites operated in the C-band frequencies at low power, direct-to-home
satellite antennas, or dishes, as they are also known, generally needed to be
seven to ten feet in diameter in order to receive the signals being transmitted.
More recently, licensees have been using the Ku and extended Ku-bands to provide
direct-to-home services enabling subscribers to use a receiving home satellite
parabolic dish less than one meter in diameter. The major providers of DBS are
currently DirecTV and EchoStar (marketed as the DISH Network).
DS-3 -- A data communications circuit that is equivalent to 28 multiplexed T-1
channels capable of transmitting data at 44.736 mbps (sometimes called a T-3).
Dedicated -- Telecommunications lines dedicated or reserved for use by
particular customers.
Digital -- A method of storing, processing and transmitting information through
the use of distinct electronic or optical pulses that represent the binary
digits 0 and 1. Digital transmission and switching technologies employ a
sequence of these pulses to represent information as opposed to the continuously
variable analog signal. The precise digital numbers minimize distortion (such as
graininess or snow in the case of video transmission, or static or other
background distortion in the case of audio transmission).
DLC -- Digital Loop Carrier -- A digital transmission system designed for
subscriber loop plant. Multiplexes a plurality of circuits onto very few wires
or onto a single fiber pair.
DOCSIS 1.1 -- Data-Over-Cable Service Interface Specification 1.1 -- An industry
specification that provides for high-speed Internet service tiers, using
techniques known as data fragmentation and quality of service. Under this
specification, which is compatible with the existing DOCSIS 1.0 specification,
cable operators can deliver high-speed Internet services simultaneously over the
same plant and in a path parallel to core video services.
DSL - Digital Subscriber Line -- Technology that allows Internet access at data
transmission speeds greater than those of modems over conventional telephone
lines.
Equal Access -- Connection provided by a LEC permitting a customer to be
automatically connected to the IXC of the customer's choice when the customer
dials "1". Also refers to a generic concept under which the BOCs must provide
access services to AT&T's competitors that are equivalent to those provided to
AT&T.
FCC -- Federal Communications Commission -- A federal regulatory body empowered
to establish and enforce rules and regulations governing public utility
companies and others, such as the Company.
4
Frame Relay -- A wideband (64 kilobits per second to 1.544 mbps) packet-based
data interface standard that transmits bursts of data over WANs. Frame-relay
packets vary in length from 7 to 1024 bytes. Data oriented, it is generally not
used for voice or video.
FTC -- Federal Trade Commission -- A federal regulatory body empowered to
establish and enforce rules and regulations governing companies involved in
trade and commerce.
GCC -- GCI Communication Corp., an Alaska corporation and a wholly owned
subsidiary of Holdings.
GCI -- General Communication, Inc., an Alaska corporation and the Registrant.
GCI, Inc. -- a wholly owned subsidiary of GCI, an Alaska corporation and issuer
of $180 million of publicly traded bonds.
GFCC -- GCI Fiber Communication Co., Inc., an Alaska corporation and a wholly
owned subsidiary of Holdings. Holdings acquired all minority ownership interests
in GFCC in the third and fourth quarters of 2002. GFCC owns and operates a fiber
optic cable system constructed along the trans-Alaska oil pipeline corridor
extending from Prudhoe Bay to Valdez, Alaska. See Kanas.
Holdings -- a wholly owned subsidiary of GCI, Inc., an Alaska corporation and
party to the Company's Senior Holdings Loan.
ILEC -- Incumbent Local Exchange Carrier -- with respect to an area, the LEC
that -- (A) on the date of enactment of the Telecommunications Act of 1996,
provided telephone exchange service in such area; and (B)(i) on such date of
enactment, was deemed to be a member of the exchange carrier association
pursuant to section 69.601(b) of the FCC's regulations (47 C.F.R. 69.601(b)); or
(ii) is a person or entity that, on or after such date of enactment, became a
successor or assign of a member described in clause (i).
Interexchange -- Communication between two different LATAs or, in Alaska,
between two different local exchange serving areas.
ISDN -- Integrated Services Digital Network -- A set of standards for
transmission of simultaneous voice, data and video information over fewer
channels than would otherwise be needed, through the use of out-of-band
signaling. The most common ISDN system provides one data and two voice circuits
over a traditional copper wire pair, but can represent as many as 30 channels.
Broadband ISDN extends the ISDN capabilities to services in the Gigabit range.
ISP -- Internet Service Provider -- a company providing retail and/or wholesale
Internet services.
Internet -- A global collection of interconnected computer networks which use
TCP/IP, a common communications protocol.
IXC -- Interexchange Carrier -- A long-distance carrier providing services
between local exchanges.
Kanas -- Kanas Telecom, Inc. -- an Alaska corporation that was renamed to GFCC
in 2001.
LAN -- Local Area Network -- The interconnection of computers for sharing files,
programs and various devices such as printers and high-speed modems. LANs may
include dedicated computers or file servers that provide a centralized source of
shared files and programs.
5
LATA -- Local Access and Transport Area -- The approximately 200 geographic
areas defined pursuant to the AT&T Divestiture Decree. The BOCs were
historically prohibited from providing long-distance service between the LATA in
which they provide local exchange services, and any other LATA.
LEC -- Local Exchange Carrier -- A company providing local telephone services.
Each BOC is a LEC.
LMDS -- Local Multipoint Distribution System -- LMDS uses microwave signals
(millimeterwave signals) in the 28 GHz spectrum to transmit voice, video, and
data signals within small cells 3-10 miles in diameter. LMDS allows license
holders to control up to 1.3 GHz of wireless spectrum in the 28 GHz Ka-band. The
1.3 GHz can be used to carry digital data at speeds in excess of one gigabit per
second. LMDS uses a specific band in the microwave spectrum, known as millimeter
waves or the 28 GHz "Ka-band." The extremely high frequency used and the need
for point to multipoint transmissions limits the distance that a receiver can be
from a transmitter. This means that LMDS will be a "cellular" technology, based
on multiple, contiguous, or overlapping cells. LMDS is expected to provide
customers with multichannel video programming, telephony, video communications,
and two-way data services. Incumbent LECs and cable companies may not obtain the
in-region 1150 MHz license for three years following the date of the license
grant. Within 10 years following the date of the license grant, licensees will
be required to provide 'substantial service' in their service regions.
Local Exchange -- A geographic area generally determined by a PUC, in which
calls generally are transmitted without toll charges to the calling or called
party.
Local Number Portability -- The ability of an end user to change Local Exchange
Carriers while retaining the same telephone number.
Lower 48 States or Lower 48 -- refers to the 48 contiguous states south of or
below Alaska.
Lower 49 States or Lower 49 -- refers to Hawaii and the Lower 48 States.
MAN -- Metropolitan Area Network -- LANs interconnected within roughly a 50-mile
radius. MANs typically use fiber optic cable to connect various wire LANs.
Transmission speeds may vary from 2 to 100 Mbps.
MDU -- Multiple Dwelling Unit -- MDUs include multiple-family buildings, such as
apartment and condominium complexes.
MMDS -- Multichannel Multipoint Distribution Service - also known as wireless
cable. The FCC established the Multipoint Distribution Service (MDS) in 1972.
Originally, the Commission thought MDS would be used primarily to transmit
business data. However, the service became increasingly popular in transmitting
entertainment programming. Unlike conventional broadcast stations whose
transmissions are received universally, MDS programming is designed to reach
only a subscriber based audience. In 1983, the Commission reassigned eight
channels from the Instructional Television Fixed Service (ITFS) to MDS. These
eight channels make up the MMDS. Frequently, MDS and MMDS channels are used in
combination with ITFS channels to provide video entertainment programming to
subscribers.
MVPD -- Multi-channel Video Programming Distribution -- The distribution of
video programming over multiple platforms, such as cable and satellite.
NPT -- a New Product Tier -- a cable programming service tier offered to
subscribers at prices set by the cable operator.
OCC -- Other Common Carrier -- A long-distance carrier other than the Company.
6
PCS -- Personal Communication Services -- PCS encompasses a range of advanced
wireless mobile technologies and services. It promises to permit communications
to anyone, anywhere and anytime while on the move. The Cellular
Telecommunications Industry Association (CTIA) defines PCS as a "wide range of
wireless mobile technologies, chiefly cellular, paging, cordless, voice,
personal communications networks, mobile data, wireless PBX, specialized mobile
radio, and satellite-based systems." The FCC defines PCS as a "family of mobile
or portable radio communications services that encompasses mobile and ancillary
fixed communications services to individuals and businesses and can be
integrated with a variety of competing networks."
PBX -- Private Branch Exchange -- A customer premise communication switch used
to connect customer telephones (and related equipment) to LEC central office
lines (trunks), and to switch internal calls within the customer's telephone
system. Modern PBXs offer numerous software-controlled features such as call
forwarding and call pickup. A PBX uses technology similar to that used by a
central office switch (on a smaller scale). (The acronym PBX originally stood
for "Plug Board Exchange.")
POP -- Point of Presence -- The physical access location interface between a LEC
and an IXC network. The point to which the telephone company terminates a
subscriber's circuit for long-distance service or leased line communications.
PRI -- Primary Rate Interface -- An ISDN circuit transmitting at T1 (DS-1) speed
(equivalent to 24 voice-grade channels). One of the channels ("D") is used for
signaling, leaving 23 ("B") channels for data and voice communication.
Private Line -- Uses dedicated circuits to connect customer's equipment at both
ends of the line. Does not provide any switching capability (unless supported by
customer premise equipment). Usually includes two local loops and an IXC
circuit.
Private Network -- A communications network with restricted (controlled) access
usually made up of private lines (with some PBX switching).
RCA -- Regulatory Commission Of Alaska -- A state regulatory body empowered to
establish and enforce rules and regulations governing public utility companies
and others, such as the Company, within the State of Alaska (sometimes referred
to as Public Service Commissions, or PSCs, or Public Utility Commissions, or
PUCs). Previously known as the Alaska Public Utilities Commission (APUC).
Reciprocal Compensation -- The same compensation of a new CLEC for termination
of a local call by the ILEC on its network, as the new competitor pays the ILEC
for termination of local calls on the ILEC network.
SchoolAccess(TM) -- The Company's Internet and related services offering to
schools in Alaska. The federal mandate through the 1996 Telecom Act to provide
universal service resulted in schools across Alaska qualifying for varying
levels of discounts to support the provision of Internet services. The Universal
Service Administrative Company through its Schools and Libraries Division
administers this federal program.
SDN -- Software Defined Network -- A switched long-distance service for very
large users with multiple locations. Instead of putting together their own
network, large users can get special usage rates for calls carried on regular
switched long-distance lines.
Securities Reform Act - The Private Securities Litigation Reform Act of 1995.
Senior Holdings Loan -- Holding's $225,000,000 credit facility. On November 1,
2002 we closed a $225.0 million bank facility to refinance the previously
outstanding Holding's loans ($120.1 million) and the Alaska United loan ($60.0
million) facility. The Senior Holdings Loan includes a term loan of $175.0
million and a revolving credit facility of $50.0 million. The Senior Facility
matures on November 1, 2004 and bears interest at
7
LIBOR plus 6.50%. You should see note 6(b) to the accompanying Notes to
Consolidated Financial Statements included in Part II of this Report for more
information.
SMATV -- Satellite Master Antenna Television -- (also known as "private cable
systems") are multichannel video programming distribution systems that serve
residential, multiple-dwelling units ("MDUs"), and various other buildings and
complexes. A SMATV system typically offers the same type of programming as a
cable system, and the operation of a SMATV system largely resembles that of a
cable system -- a satellite dish receives the programming signals, equipment
processes the signals, and wires distribute the programming to individual
dwelling units. The primary difference between the two is that a SMATV system
typically is an unfranchised, stand-alone system that serves a single building
or complex, or a small number of buildings or complexes in relatively close
proximity to each other.
SONET -- Synchronous Optical Network -- A 1984 standard for optical fiber
transmission on the public network. 52 mbps to 13.22 Gigabits per second,
effective for ISDN services including Asynchronous Transfer Mode.
Sprint -- Sprint Corporation -- one of our significant customers.
TCP/IP -- Transmission Control Protocol/Internet Protocol -- A suite of network
protocols that allows computers with different architectures and operating
system software to communicate with other computers on the Internet.
T-1 -- A data communications circuit capable of transmitting data at 1.5 Mbps.
Tariff -- The schedule of rates and regulations set by communications common
carriers and filed with the appropriate federal and state regulatory agencies;
the published official list of charges, terms and conditions governing provision
of a specific communications service or facility, which functions in lieu of a
contract between the subscriber or user and the supplier or carrier.
UNE -- Unbundled Network Element -- A discrete piece part of a telephone
network. Unbundled network elements are the basic network functions, i.e., the
piece parts needed to provide a full range of telecommunications services. They
are physical facilities as well as all the features, and capabilities provided
by those facilities.
VSAT -- Very Small Aperture Terminal -- A portable satellite terminal that
allows connection via a satellite link.
WAN -- Wide Area Network - A remote computer communications system. WANs allow
file sharing among geographically distributed workgroups (typically at higher
cost and slower speed than LANs or MANs). WANs typically use common carriers'
circuits and networks. WANs may serve as a customized communication backbone
that interconnects all of an organization's local networks with communications
trunks that are designed to be appropriate for anticipated communication rates
and volumes between nodes.
World Wide Web or Web -- A collection of computer systems supporting a
communications protocol that permits multi-media presentation of information
over the Internet.
WorldCom -- WorldCom, Inc. -- owns approximately 9% of our common stock,
presently has one representative on our Board, and is a major customer. Prior to
May 1, 2000, the Company was named MCI WorldCom, Inc. On July 21, 2002 WorldCom
and substantially all of its active U.S. subsidiaries filed voluntary petitions
for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the United
States Bankruptcy Court. You should see note 11 to the accompanying Notes to
Consolidated Financial Statements included in Part II of this Report for more
information.
1984 Cable Act -- The Cable Communications Policy Act of 1984.
8
1992 Cable Act -- The Cable Television Consumer Protection and Competition Act
of 1992.
1996 Telecom Act -- The Telecommunications Act of 1996 - The 1996 Telecom Act
was signed into law February 8, 1996. Under its provisions, BOCs were allowed to
immediately begin manufacturing, research and development; GTE Corp. could begin
providing interexchange services through its telephone companies nationwide;
laws in 27 states that foreclosed competition were knocked down; co-carrier
status for CLECs was ratified; and the physical collocation of competitors'
facilities in LECs central offices was allowed.
The legislation breaks down the old barriers that prevented three groups of
companies, the LECs, including the BOCs, the long-distance carriers, and the
cable TV operators, from competing head-to-head with each other. The Act
requires LECs to let new competitors into their business. It also requires the
LECs to open up their networks to ensure that new market entrants have a fair
chance of competing. The bulk of the legislation is devoted to establishing the
terms under which the LECs, and more specifically the BOCs, must open up their
networks.
The 1996 Telecom Act substantially changed the competitive and regulatory
environment for telecommunications providers by significantly amending the
Communications Act including certain of the rate regulation provisions
previously imposed by the Cable Television Consumer Protection and Competition
Act of 1992 (the "1992 Cable Act"). The 1996 Telecom Act eliminated rate
regulation of the cable programming service tier in 1999. Further, the
regulatory environment will continue to change pending, among other things, the
outcome of legal challenges and FCC rulemaking and enforcement activity in
respect of the 1992 Cable Act and the completion of a significant number of FCC
rulemakings under the 1996 Telecom Act.
9
Cautionary Statement Regarding Forward-Looking Statements
You should carefully review the information contained in this Annual Report, but
should particularly consider any risk factors that we set forth in this Annual
Report and in other reports or documents that we file from time to time with the
SEC. In this Annual Report, in addition to historical information, we state our
future strategies, plans, objectives or goals and our beliefs of future events
and of our future operating results, financial position and cash flows. In some
cases, you can identify those so-called "forward-looking statements" by words
such as "may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential," "project," or "continue" or the negative
of those words and other comparable words. All forward-looking statements
involve known and unknown risks, uncertainties and other important factors that
may cause our actual results, performance, achievements, plans and objectives to
differ materially from any future results, performance, achievements, plans and
objectives expressed or implied by these forward-looking statements. In
evaluating those statements, you should specifically consider various factors,
including those outlined below. Those factors may cause our actual results to
differ materially from any of our forward-looking statements. For these
statements, we claim the protection of the safe harbor for forward-looking
statements provided by the Securities Reform Act. Such risks, uncertainties and
other factors include but are not limited to those identified below and those
further described in Part I, Item 1. Factors That May Affect Our Business and
Future Results.
o Material adverse changes in the economic conditions in the markets we
serve and in general economic conditions, including the continuing impact
of the current depressed telecommunications industry due to high levels
of competition in the long-distance market resulting in pressures to
reduce prices, an oversupply of long-haul capacity, excessive debt loads;
several high-profile company failures and potentially fraudulent
accounting practices by some companies;
o The efficacy of laws enacted by Congress; rules and regulations to be
adopted by the FCC and state public regulatory agencies to implement the
provisions of the 1996 Telecom Act; the outcome of litigation relative
thereto; and the impact of regulatory changes relating to access reform;
o Our responses to competitive products, services and pricing, including
pricing pressures, technological developments, alternative routing
developments, and the ability to offer combined service packages that
include long-distance, local, cable and Internet services;
o The extent and pace at which different competitive environments develop
for each segment of our business;
o The extent and duration for which competitors from each segment of the
telecommunication industries are able to offer combined or full service
packages prior to our being able to do so;
o The degree to which we experience material competitive impacts to our
traditional service offerings prior to achieving adequate local service
entry;
o Competitor responses to our products and services and overall market
acceptance of such products and services;
o The outcome of our negotiations with ILECs and state regulatory
arbitrations and approvals with respect to interconnection agreements;
o Our ability to purchase network elements or wholesale services from ILECs
at a price sufficient to permit the profitable offering of local
telephone service at competitive rates;
o Success and market acceptance for new initiatives, many of which are
untested;
o The level and timing of the growth and profitability of new initiatives,
particularly local telephone services expansion, Internet (consumer and
business) services expansion and wireless services;
o Start-up costs associated with entering new markets, including
advertising and promotional efforts;
o Risks relating to the operations of new systems and technologies and
applications to support new initiatives;
o Local conditions and obstacles;
o The impact of oversupply of capacity resulting from excessive deployment
of network capacity;
o Uncertainties inherent in new business strategies, new product launches
and development plans, including local telephone services, Internet
services, wireless services, digital video services, cable modem
services, digital subscriber line services, transmission services, and
yellow page directories, and the offering of these services in geographic
areas with which we are unfamiliar;
10
o The risks associated with technological requirements, technology
substitution and changes and other technological developments;
o Prolonged service interruptions which could affect our business;
o Development and financing of telecommunication, local telephone,
wireless, Internet and cable networks and services;
o Future financial performance, including the availability, terms and
deployment of capital; the impact of regulatory and competitive
developments on capital outlays, and the ability to achieve cost savings
and realize productivity improvements and the consequences of increased
leverage;
o Availability of qualified personnel;
o Changes in, or failure, or inability, to comply with, government
regulations, including, without limitation, regulations of the FCC, the
RCA, and adverse outcomes from regulatory proceedings;
o Uncertainties in federal military spending levels and military base
closures in markets in which we operate;
o The ongoing global and domestic trend towards consolidation in the
telecommunications industry, which trend may be the effect of making the
competitors larger and better financed and afford these competitors with
extensive resources and greater geographic reach, allowing them to
compete more effectively;
o The financial, credit and economic impacts of the WorldCom bankruptcy
filing on the industry in general and on us in particular;
o A conversion of WorldCom's bankruptcy petition to Chapter 7, unfavorable
reaffirmation of our pre-filing contracts and agreements with WorldCom,
or a migration of WorldCom's traffic off our network without it being
replaced by other common carriers that interconnect with our network;
o The effect on us of pricing pressures, new program offerings and market
consolidation in the markets served by our major customers, WorldCom and
Sprint;
o Under Statement of Financial Accounting Standard ("SFAS") 142, we must
test our intangibles for impairment at least annually, which may result
in a material, non-cash write-down of goodwill and could have a material
adverse impact on our results of operations and shareholders' equity; and
o Other risks detailed from time to time in our periodic reports filed with
the SEC.
You should not place undue reliance on any such forward-looking statements.
Further, any forward-looking statement, and such risks, uncertainties and other
factors speak, only as of the date on which they were originally made and we
expressly disclaim any obligation or undertaking to disseminate any updates or
revisions to any forward-looking statement to reflect any change in our
expectations with regard to those statements or any other change in events,
conditions or circumstances on which any such statement is based, except as
required by law. New factors emerge from time to time, and it is not possible
for us to predict what factors will arise or when. In addition, we cannot assess
the impact of each factor on our business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements.
11
Part I
Item 1. Business
General
In this Annual Report, "we," "us" and "our" refer to General Communication, Inc.
and its direct and indirect subsidiaries.
GCI was incorporated in 1979 under the laws of the state of Alaska and has its
principal executive offices at 2550 Denali Street, Suite 1000, Anchorage, AK
99503 (telephone number 907-265-5600).
GCI is primarily a holding company and together with its direct and indirect
subsidiaries, is a diversified telecommunications provider with a leading
position in facilities-based long-distance service in the state of Alaska and is
Alaska's leading cable television and Internet services provider.
We are a significant provider in Alaska of an integrated package of
long-distance, local and wireless telecommunications services, cable television
services and Internet services and are well positioned to take advantage of
growth opportunities in the communications, data and entertainment markets.
Availability of Reports and Other Information
Internet users can access information about GCI and its services at
http://www.gci.com/, http://www.gcinetworksolutions.com/, and
http://www.alaskaunited.com/. The Company hosts Internet services at
http://www.gci.net/ and SchoolAccess(TM) services at http://www.gcisa.net/. We
make available on the http://www.gci.com/ website, free of charge, access to our
Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K, Proxy Statement on Schedule 14A and amendments to those materials
filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and
Exchange Act of 1934 as soon as reasonably practicable after we electronically
submit such material to the SEC. In addition, the SEC's website is
http://www.sec.gov/. The SEC makes available on this website, free of charge,
reports, proxy and information statements, and other information regarding
issuers, such as us, that file electronically with the SEC. Information on our
website or the SEC's website is not part of this document.
Financial Information About Industry Segments
We have four reportable segments: long-distance services, cable services, local
access services and Internet services. For information required by this section,
you should see Part II, Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations. Also refer to Note 9 included in
Part II, Item 8, Consolidated Financial Statements and Supplementary Data.
Historical Development of our Business During the Past Fiscal Year
20th Year Anniversary
Thanksgiving 2002 marked the 20th anniversary of the first long-distance call we
carried on our network, bringing telecommunications competition to the State of
Alaska.
Properties Expansion
We completed the first phase of a project in February 2002 to connect Palmer and
Wasilla, Alaska to our fiber optic network in Anchorage. This phase connected
our network in Anchorage to our Eagle River earth station and our Wasilla Call
Center with fiber optic cable facilities. The second phase will connect and
expand our facilities to provide cable and entertainment services to the
Palmer-Wasilla area. We expect that work to be complete in early 2003. Upon
completion, we will provide cable television programming content from our
Anchorage head end facility to Palmer and Wasilla.
12
We purchased a second 5ESS digital host switch manufactured by Lucent
Technologies to accommodate Anchorage area customer and traffic growth. We
expect to place the new switch into service in 2003. We have similar Lucent 5E
switches in Anchorage and Seattle, and smaller remote Lucent 5E switches in
Fairbanks and Juneau. We shut down our Seattle, Fairbanks and Juneau Alcatel DSC
DEX switches upon installation of the Lucent 5E switches. DEX is a trade name
for an Alcatel (previously Digital Switch Corporation) electronic digital
switching system.
Cable Services Expansion
We continued to upgrade and expand our cable infrastructure in 2002. These
efforts increased the capacity and reliability of our systems, making possible
further deployment of two-way applications such as cable modems and digital
cable television programming, and provided capacity for additional program and
service offerings.
We continued to extend our digital cable service in the Anchorage, Juneau, Kenai
and Soldotna, Alaska markets in 2002. Digital cable service allows us to use
digital compression to substantially increase the capacity of our cable
communications systems, improve picture quality and provide CD quality audio.
Digital cable subscriber counts in all locations totaled approximately 30,500 in
2002, an increase of 24.3% as compared to 2001.
To meet future bandwidth requirements in the Anchorage and Matanuska-Susitna
valley markets, efforts began in 2002 to move all programming services above the
basic service level to a digital platform. A plant upgrade for the
Matanuska-Susitna valley system began in 2002 and is expected to be completed in
2004.
Approximately 96.1% of our cable customers are able to receive cable modem
service. Cable modems are deployed in approximately 19.1% of the homes passed by
our cable systems in markets offering such service, which we believe is well
above the national average. Cable modem services provide high-speed, dedicated
access to the Internet through our coaxial cable network.
We launched video-on-demand service to certain of our Anchorage commercial
customers and added additional customers in 2002. This service passed 1,389
hotel rooms at December 31, 2002, an increase of 54.5% as compared to 2001.
We initiated digital cable entertainment services in 2002 to 1,050 rooms at the
Kuparuk Oil Field living quarters facilities in Prudhoe Bay, Alaska. This
service includes 100 channels of video, music and pay-per-view choices,
including one Anchorage broadcast television station.
Our Anchorage cable channel lineup was realigned in 2002, allowing us to begin
swapping all of our existing analog boxes for digital boxes. Moving to digital
allows us offer better service, more channels and better quality. We are also
able to reclaim bandwidth for other services, including cable telephony, cable
modems, and additional cable video services.
We signed new seven-year retransmission agreements with five local Anchorage
broadcasters and began up linking and distributing that programming to all of
our cable systems. These agreements allow other locations in Alaska to receive
local Anchorage broadcasting service in addition to programming received from
non-Alaska markets, providing additional value to our cable subscribers and
allowing us to differentiate our programming from that of our DBS competitors.
We continue to evaluate technology and the feasibility of using our cable plant
for telephone services that will enable us to deliver local telephone access
services on our own network. Testing and design is underway with regard to
chosen equipment, cable plant, power delivery, and operational support systems.
Upgrades have been made to a node in our Anchorage plant to create a test
deployment platform for cable telephony. Our upgraded cable plant node was
certified compliant with DOCSIS 1.1 standards in 2002.
13
You should see Part I, Item 1. Business, Narrative Description of our Business -
Cable Services, and Part I, Item 1. Regulation, Franchise Authorizations and
Tariffs - Cable Services Operations for more information.
Local Access Services Expansion
We had approximately 96,100 local access services lines in service in Anchorage,
Fairbanks and Juneau, Alaska at December 31, 2002, a 21.3% increase from
December 31, 2001. In late 2001 we began selling GCI local services in Juneau
with conversions beginning in the first quarter of 2002. We continue to evaluate
expanded implementation of wireless local loop and cable telephony technologies.
We filed a bona fide request with the ILEC, ACS of the Northland, Inc, in 2001
to negotiate rates and services in order to provide competitive local access
services in Nenana, Ft. Greely, North Pole, Delta Junction, Kenai, Soldotna,
Ninilchik, Homer, Seldovia and Kodiak, Alaska. The RCA has approved an
interconnection agreement and GCI can now apply for approval to enter these
markets, which must be granted by the RCA before we begin to provide local
access services.
You should see Part I, Item 1. Business, Narrative Description of our Business -
Local Access Services, and Part I, Item 1. Regulation, Franchise Authorizations
and Tariffs - Telecommunication Operations for more information.
Internet and Broadband Services Expansion
We provided Internet service to approximately 70,700 dial-up subscribers at
December 31, 2002, a 2.5% increase from December 31, 2001. We provided service
to approximately 36,200 cable modem subscribers at December 31, 2002, a 36.7%
increase from December 31, 2001.
Approximately 96.1% of our cable customers are able to receive cable modem
service. Cable modems are deployed in approximately 19.1% of the homes passed by
our cable systems in markets offering such service, which we believe is well
above the national average. Cable modem services provide high-speed, dedicated
access to the Internet through our coaxial cable network. After significant
plant upgrades to handle reverse feed and higher bandwidth requirements, we
initiated cable modem services in 2002 in Petersburg, Wrangell, Cordova, Homer,
Bethel, Nome, and Kodiak, Alaska.
We initiated cable modem service in the Kenai and Soldotna, Alaska communities
in 2002. All locations that implemented cable modems in 2002 use the new DOCSIS
1.1 platform. We also upgraded cable modem customers in the Wasilla, Alaska
service area in 2002 to the DOCSIS 1.1 platform. We believe that we are the
first company in North America to successfully deploy the DOCSIS 1.1 platform.
This new non-proprietary platform allows us to provide a higher level of
service, helps us eliminate network congestion and run a cleaner network that is
more efficient to manage. It also protects customers from hackers and helps us
reduce the risk of high speed internet theft.
We increased the speeds of our DoubleUp and Gold cable modem product offerings
in certain markets in 2002, at no cost to our customers. Our premium cable modem
service, The Diamond service package, offers 2.4 megabits per second which is
twice as fast as our competitor's best package DSL offering.
We began offering our PrudhoeNet dialup Internet service to Prudhoe Bay, Alaska
oilfield workers in early 2003. We believe our product offers both lower price
and high quality for oilfield workers who want to stay in touch with family,
friends and business during their off work hours.
Our SchoolAccess(TM) program was first deployed successfully in Alaska where we
provide satellite-delivered voice, video and data services to many of the
state's rural communities. More than 80,000 Alaska students are now connected to
the Internet with SchoolAccess(TM). We provide e-mail service, a custom user
interface, a help desk, onsite training, security, network optimization, network
management, content filtering services and website hosting for 195 schools in
rural Alaska using SchoolAccess(TM), and provide Internet only services to
approximately
14
100 additional schools. We signed three-year contracts in 2002 with each of the
64 Alaska schools that re-bid their SchoolAccess(TM) service.
We provide our SchoolAccess(TM) services to nine school districts comprising 25
schools in rural New Mexico and Arizona, serving more than 10,500 students. We
began providing SchoolAccess(TM) services to two school districts in Montana in
the third quarter of 2002.
During the 3rd Quarter of 2002, we launched our SchoolAccess(TM) Distance
Learning Service ("DLS") to approximately 80 rural Alaskan schools.
SchoolAccess(TM) DLS allows schools to conduct two-way videoconferences by
providing each of the six school districts with an autonomous videoconferencing
network. Schools not only have the ability to videoconference within the
district, but have the ability to conference with other schools or entities
worldwide. SchoolAccess(TM) DLS also gives teachers and students access to a
course management system that compliments the interactive service. Circuits for
the service are provided over our broadband satellite network, and all of the
hardware and software is included as part of the managed service.
We continued to deploy high-speed broadband TeleHealth services in 2002 using an
advanced satellite network to an additional 28 villages served by the Bristol
Bay Health Corporation in the Dillingham, Alaska area; eight villages for the
Yukon-Kuskokwim Health Corporation in the Bethel, Alaska area; 16 villages for
the Norton Sound Health Corporation in the Nome, Alaska area; and six villages
in the Eastern Aleutian area. At the end of 2002 we provided TeleHealth services
to approximately 70 western Alaska communities. This broadband service allows
remote communities to access health specialists and others in Alaska and
elsewhere for consultation and diagnostic services using a combination of video,
voice and data services.
We announced in 2001 our intent to provide Internet services to 152 Alaska
communities that we currently serve by 2004. The estimated $15 million project
will deliver high-speed Internet by cable modem, DSL and wireless technologies.
A considerable expansion of facilities was made in 2001 to support cable modem
Internet service launches in Valdez, Sitka, Nome and Seward, Alaska, and in
Kenai and Soldotna, Alaska in January 2002. We deployed cable modem service in
Wasilla/Palmer, Petersburg and Wrangell, Alaska by the end of the second quarter
2002; and Bethel, Cordova, Homer, and Kodiak, Alaska by the end of 2002. We
believe the Kenai and Soldotna launches were the first U.S. deployment of a
cable modem platform using the new DOCSIS 1.1 standard. This new standard
supports tiered levels of service, provides quality of service measurement, and
supports voice traffic over coaxial cable systems.
We provide 56 kbps and 256 kbps high-speed Internet access services to 15 rural
villages in the Northwest Arctic, Aleutian, and Yukon-Kuskokwim delta regions of
Alaska. We deliver high-speed Internet services locally in the villages through
the ILEC's DSL service or our unlicensed 2.4 GHz band fixed wireless service.
All long-haul transport is delivered through our satellite and associated
facilities.
You should see Part I, Item 1. Business, Narrative Description of our Business -
Internet Services, and Part I, Item 1. Regulation, Franchise Authorizations and
Tariffs - Internet Operations for more information.
PCS and LMDS Licenses
We have invested approximately $1.79 million in our PCS license at December 31,
2002. In June 2000 we began providing fixed wireless dial-tone services in
Anchorage over our PCS system, meeting the FCC requirement to provide coverage
of a commercial offering to at least one-third of our market population within
five years of being licensed. We presently offer our fixed wireless service to
customers that are not connected to the ILEC or our physical plant. We have
invested approximately $275,000 in our LMDS license. LMDS licensees are required
to provide 'substantial service' in their service regions within 10 years.
Contract Extension
Our contract to provide interstate and intrastate long-distance services to
Sprint was replaced in March 2002 extending its term to March 2007 with two
one-year automatic extensions to March 2009. Beginning in April
15
2002 the new contract reduced the rate to be charged by us for certain Sprint
traffic over the extended term of the contract.
Yellow-Pages Directory
We signed a contract in 2002 with Alltel Publishing Corporation to enter the
directory listing and Yellow Pages market. The first directory will be
distributed in the Anchorage market in December 2003. We expect to continue to
expand our product offerings to other markets in 2004.
Retail Store Expansion
We opened new retail stores in 2002 serving our Wasilla and Anchorage markets.
The new stores combine certain of our customer service and payment centers and
allow customers to pay their bills, sign up for new services and experience our
full range of products.
GCI Fiber Communication System
We reached a significant milestone in 2002 in our agreement with the company
that operates the trans Alaska oil pipeline with the signing of a complex design
document for fiber and satellite circuits to support the pipeline control
system. These circuits operate the remote gate valves that stop the flow of oil
in the event of an emergency. They require an extremely high level of
availability and reliability. The complex design included eleven new earth
stations and supporting equipment that are expected to be placed into service in
2003.
E-Bill Service
We launched an online bill presentment and payment service in 2002 at
https://ebill.gci.com/. Over 27,000 accounts have signed up for the service
through January 2003.
E-Mail Guard Service
We launched a virus and SPAM filtering service for our e-mail platform in July
2002. The service provides our e-mail users with a capability to quarantine
unsolicited e-mail and suspected virus infected e-mail in a safe location. A
highly customer-configurable service, it has been very well received and has
significantly exceeded our 2002 acquisition forecast. Since we launched E-Mail
Guard, an estimated 50 million e-mail messages have been intercepted and
quarantined. In the first week of January 2003, E-Mail Guard prevented 1.8
million messages -- roughly 84 percent of the total volume of e-mail -- from
clogging electronic in-baskets and infecting computers with viruses.
Narrative Description of our Business
General
We operate a broadband communications network that permits the delivery of a
seamless integrated bundle of communications, entertainment and information
services. We offer a wide array of consumer and business communications and
entertainment services--including local telephone, long-distance and wireless
communications, cable television, consulting services, network and desktop
computing outsourced services, and dial-up, broadband (cable modem, wireless and
DSL) and dedicated Internet access services at a wide range of speeds--all under
the GCI brand name.
We believe that the size and growth potential of the voice, video and data
market, the increasing deregulation of telecommunication services, and the
increased convergence of telephony, wireless, and cable services offer us
considerable opportunities to continue to integrate our telecommunication,
Internet and cable services and expand into communications markets both within
and, longer-term, possibly outside of Alaska.
Considerable deregulation has already taken place in the United States because
of the 1996 Telecom Act with the barriers to competition between long-distance,
local exchange and cable providers being lowered. We believe our acquisition of
cable television systems and our development of local exchange service, Internet
services, broadband services, and wireless services leave us well positioned to
take advantage of deregulated markets.
16
We are one of Alaska's leading providers of telecommunication, Internet and
cable television services and maintain a strong competitive position. There is
active competition in the sale of substantially all products and services we
offer.
Competition in the Communications Industry
There is substantial competition in the communications industry. The traditional
dividing lines between providers offering long-distance telephone service, local
telephone service, wireless telephone service, Internet services and video
services are increasingly becoming blurred. Through mergers and various service
integration strategies, major providers, including us, are striving to provide
integrated communications service offerings within and across geographic
markets.
Alaska Voice, Video and Data Markets
We estimate that the aggregate telecommunications, cable television, and
Internet markets in Alaska generated revenues in 2002 of approximately $1.1
billion. Of this amount, approximately $470 million was attributable to
interstate and intrastate long-distance service, $350 million was attributable
to local exchange services, $92 million was attributed to cable television, and
$188 million was attributable to all other services, including wireless and
Internet services.
The Alaskan voice, video and data markets are unique within the United States.
Alaska is geographically distant from the rest of the United States and is
generally characterized by large geographical size and relatively small, dense
population clusters (with the exception of population centers such as Anchorage,
Fairbanks and Juneau). It lacks a well-developed terrestrial transportation
infrastructure, and the majority of Alaska's communities are accessible only by
air or water. As a result, Alaska's telecommunication networks are different
from those found in the Lower 49 states.
Alaska continues to rely extensively on satellite-based long-distance
transmission for intrastate calling between remote communities where investment
in a terrestrial network would be uneconomic or impractical. Also, given the
geographic isolation of Alaska's communities and lack, in many cases, of major
civic institutions such as hospitals, libraries and universities, Alaskans are
dependent on telecommunications to access the resources and information of large
metropolitan areas in Alaska, the rest of the U.S. and elsewhere. In addition to
satellite-based communications, the telecommunications infrastructure in Alaska
includes fiber optic cables between Anchorage, Valdez, Fairbanks, Prudhoe Bay,
and Juneau, traditional copper wire, and digital microwave radio on the Kenai
Peninsula and other locations. For interstate and international communication,
Alaska is connected to the Lower 48 states by three fiber optic cables.
Fiber optics is the preferred method of carrying Internet, voice, video, and
data communications over long distances, eliminating the delay commonly found in
satellite connections. Widespread use of high capacity fiber optic facilities is
expected to allow continued expansion of business, government and educational
infrastructure in Alaska.
Long-Distance Services
Industry
Until the 1970s, AT&T had a virtual monopoly on long distance service in the
United States. In the 1970s, competitors such as MCI (now WorldCom) and Sprint
began to offer long distance service. With the gradual emergence of competition,
basic rates dropped, calling surged, and AT&T's dominance declined. More than
700 companies now offer long distance service. AT&T's 1984 toll revenues were
about 90% of those reported by all long distance carriers. The FCC's regulation
of AT&T as a "dominant" carrier ended in 1995. By 2000, AT&T's revenues had
declined to approximately 37% of those reported by all non-LEC long distance
carriers. The two largest market entrants, WorldCom and Sprint, have obtained a
31% combined market share through 2000.
Because of this competition, the cost of long distance calling dropped from 32
cents per minute in 1984 to 12 cents per minute in 2000. The average price of 12
cents per minute represents a mix of international calling (an
17
average of 47 cents per minute) and domestic interstate calling (an average of 9
cents per minute). The decline in prices since 1984 is more than 70% after
adjusting for the impact of inflation.
The FCC reports that more than twenty-three million households have been added
to the nation's telephone system since November 1983. An estimated 1.5 million
households were added between July 2001 and July 2002 as a result of an
increasing number of households. As of November 2001, 102.2 million households
had telephone service. The FCC reports that approximately 2% of all consumer
expenditures are devoted to telephone service. This percentage has remained
relatively constant over the past 15 years, despite major changes in the
telephone industry and in telephone usage. Average annual expenditures on
telephone service increased from $360 per household in 1981 to $877 in 2000.
The FCC reports that an estimated 95.1% of households and virtually all
businesses in the United States subscribed to telephone service in July 2002.
Line growth over time, averaging about 3% per year, has historically reflected
growth in the population and the economy. In recent years, the growth in lines
has increased as households have added additional lines. The percentage of
additional lines for households with telephone service has increased from
approximately 3% in 1988 to about 27% in 2000, but decreased from 29% in 1999.
The FCC reports that approximately $110 billion was derived from toll services
in 2000. 102.2 million households had telephone services, an increase of 23
million households since 1983. Approximately $33 billion is derived from
intrastate, $53 billion from interstate, and $24 billion from international toll
services. Interstate long distance toll revenues increased 103% from $26 billion
in 1984, and intrastate toll revenues increased 58% from $21 billion in 1984.
International telecommunications has become an increasingly important segment of
the telecommunications market. The FCC reports that international revenues
increased over 500% from $4 billion in 1984 to $24 billion in 2000. The FCC
reports that the number of calls made from the United States to other countries
increased from 200 million in 1980 to 6.6 billion in 2000. On average, carriers
billed 51 cents per minute for international calls in 2000, a decline of more
than 60% since 1980. Five markets, the United Kingdom, Canada, Mexico, Japan and
Australia, are currently the top five destinations of U. S. activated circuits
at December 31, 2001. The FCC's year-end 2001 report reflected slow growth in
the use of U.S. international-facilities for international calls and private
line services from the United States. By service type, international message
telephone service accounted for 16% of the total circuits used; international
private line services accounted for 76% of total circuits; and the remaining 8%
of total circuits were used for other data and video services. The percentage of
idle circuits as compared to the total circuit capacity increased from 48% in
2000 to 56% in 2001.
The United States Congress passed the 1996 Telecom Act that permitted the local
phone companies, the long-distance companies, and the cable service firms to
compete in each other's market. Its purpose was to move from a regulated
monopoly model of telecommunications to a deregulatory competitive markets
model. The 1996 Telecom Act has provided the telecommunications industry with
new capabilities resulting in an industry that is more competitive than ever
before.
Advancements are expected to continue to combine wireline and wireless services
directed toward voice communication with other activities such as data sharing,
on-screen collaboration, faxing, Internet access, and game playing, among many
other things.
While the 1996 Telecom Act has facilitated competition and rapid growth in the
telecommunications market, the last two years have been a tumultuous time for
that marketplace. Industry analysts believe that overly optimistic projections
of data growth spurred companies to invest large amounts of capital to boost
network capacity. While demand for telecommunications services grew, it did not
grow at a sufficient pace to justify the substantial build-out of fiber
capacity. A wide gap between the supply of network capacity and the demand for
data transmission occurred. Network owners refocused their efforts to
demonstrate profitability over a much shorter time horizon than initially
projected. A downward spiral ensued, as many telecommunications carriers went
bankrupt after
18
failing to generate sufficient revenues to service their accelerating debt
loads. The resultant slowdown in capital expenditures left equipment
manufacturers with surplus inventory and personnel. Additionally, several
companies appear to have resorted to financial deception to mask poor
performance. This compounded the downturn by reducing confidence in the
truthfulness of financial statements.
Deteriorating conditions in the economy and in the telecommunications industry
have led to reorganizations, mergers and divestitures. AT&T and Comcast
Corporation finalized their combination of AT&T Broadband with Comcast in
November 2002, in a transaction that values AT&T Broadband at an aggregate value
of $72 billion (approximately $4,500 per subscriber). The resulting AT&T Comcast
Corporation is expected to develop and deploy new broadband applications such as
video-on-demand and interactive television.
Industry analysts believe companies will be successful in the long-term if they
can minimize regulatory battles and offer a full suite of integrated services to
their customers, using a network that is largely under their control.
Growth in data is expected to continue to be a key component of industry revenue
growth. We believe that the data telecommunications business will eventually
rival and perhaps become larger than the traditional voice telephony market.
ISPs have become major customers and many long-distance companies have acquired
ISPs and web-hosting companies.
The U.S. House of Representatives in February 2002 adopted a measure that would
allow LECs to offer long-distance data services without first opening their
networks to competitors as they must under the 1996 Telecom Act. Local telephone
carriers argue that the measure would accelerate the deployment of high-speed
Internet service using DSL technology. These dominant carriers compete with
cable companies for high-speed Internet access customers. Analysts report that
cable operators have approximately 6.4 million subscribers compared to 3.1
million DSL customers. The U.S. Senate did not act on the measure before the
close of the 107th Congress. To date, the bill has not been reintroduced in the
108th Congress.
We believe that federal and state legislators, courts and regulators will
continue to influence the telecommunications industry in 2003. Consummation of
mergers between and spin-offs from long-distance companies, local access
services companies, and cable television companies have occurred which blur the
distinction between product lines and competitors. Synergies developed through
mergers and acquisitions and obtaining end-to-end connectivity with customers is
expected to continue to drive long-run profitability and success in penetrating
new markets.
General
We supply a full range of common carrier long-distance and other
telecommunication products and services. We operate a modern, competitive
telecommunications network employing the latest digital transmission technology
based upon fiber optic facilities within and between Anchorage, Fairbanks and
Juneau, Alaska. Our facilities include a self-constructed and financed digital
fiber optic cable and additional owned capacity on another undersea fiber optic
cable, both linking Alaska to the networks of other carriers in the Lower 49
states. We use satellite transponders to transmit voice and data traffic to
remote areas of Alaska. We operate digital microwave systems to link Anchorage
with the Kenai Peninsula, and our Prudhoe Bay Earth Station with Deadhorse.
Digital microwave facilities are also used to backup our fiber facilities from
Anchorage to our Eagle River earth station, and to our Fairbanks earth station
from our Fairbanks distribution center. Virtually all switched services are
computer controlled, digitally switched, and interconnected by a packet switched
SS7 signaling network.
We provide interstate and intrastate long-distance services throughout Alaska
using our own facilities or facilities leased from other carriers. We also
provide (or join in providing with other carriers) telecommunication services to
and from Alaska, Hawaii, the Lower 48 states, and many foreign nations and
territories.
19
We offer cellular services by reselling other cellular providers' services. We
offer wireless local access services over our own facilities, and have purchased
PCS and LMDS wireless broadband licenses in FCC auctions covering markets in
Alaska.
Products
Our long-distance services industry segment is engaged in the transmission of
interstate and intrastate-switched message telephone service and private line
and private network communication service between the major communities in
Alaska, and the remaining United States and foreign countries. Our message toll
services include intrastate, interstate and international direct dial, toll-free
800, 888, 877 and 866 services, GCI calling card, operator and enhanced
conference calling, frame relay, SDN, ISDN technology based services, as well as
termination of northbound toll service for WorldCom, Sprint and several large
resellers who do not have facilities of their own in Alaska. We also provide
origination of southbound calling card and toll-free 800, 888, 877 and 866 toll
services for WorldCom, Sprint, and other IXCs. We offer our message services to
commercial, residential, and government subscribers. Subscribers may generally
cancel service at any time. Toll, private line, broadband and related services
account for approximately 53.5%, 53.5% and 60.4% of our 2002, 2001 and 2000
revenues, respectively. Broadband services include our SchoolAccess(TM) and
Rural Health initiatives. Private line and private network services utilize
voice and data transmission circuits, dedicated to particular subscribers, which
link a device in one location to another in a different location.
We have positioned ourselves as a price and customer service leader in the
Alaska telecommunication market. Rates charged for our long-distance services
are generally designed to be equal to or below those for comparable services
provided by our competitors.
In addition to providing communication services, we also design, sell, install,
service and operate, on behalf of certain customers, communication and computer
networking equipment and provide field/depot, third party, technical support,
telecommunications consulting and outsourcing services through our Network
Solutions business. We also supply integrated voice and data communication
systems incorporating interstate and intrastate digital private lines,
point-to-point and multipoint private network and small earth station services.
Our Network Solutions sales and services revenue totaled $12.4 million, $16.3
million, and $9.2 million in the years ended December 31, 2002, 2001 and 2000,
respectively, or approximately 3.4%, 4.6% and 3.2% of total revenues,
respectively. Presently, there are a number of competing companies in Alaska
that actively sell and maintain data and voice communication systems.
Our ability to integrate telecommunications networks and data communication
equipment has allowed us to maintain our market position based on "value added"
support services rather than price competition. These services are blended with
other transport products into unique customer solutions, including managed
services and outsourcing.
Facilities
Our telecommunication facilities include an undersea fiber optic cable
connecting Whittier, Valdez and Juneau, Alaska and Seattle, Washington, which
was placed into service in February 1999. We also own a portion of a second
undersea fiber optic cable linking Alaska to the Lower 48 states. The fiber
optic cables allow us to carry our Anchorage, Eagle River, Wasilla, Palmer,
military base, Kenai Peninsula, Girdwood, Valdez, Whittier, Delta Junction,
Prudhoe Bay, Glenallen, Healy, Fairbanks, Juneau, Ketchikan, and Sitka, Alaska
traffic to and from the contiguous Lower 48 states over terrestrial circuits,
eliminating the one-quarter second delay associated with satellite circuits. We
own other terrestrial fiber optic cables to transport our traffic from Anchorage
to Whittier and from Whittier to Deadhorse, Alaska, including connectivity to
intermediate communities of Valdez, Glenallen, Delta Junction, and Fairbanks.
Other facilities include major earth stations at Eagle River, Kodiak, Dutch
Harbor, Barrow, Bethel, Nome, Dillingham, Kotzebue, King Salmon, and Cordova,
all in Alaska, serving the communities in their vicinity, and at Issaquah,
Washington, which provides interconnection to Seattle and the Lower 48 states
for traffic to and from
20
major Alaska earth stations. The Eagle River earth station is linked to the
Anchorage distribution center by fiber optic facilities.
We completed construction of a fiber optic cable system from the Anchorage
distribution center to the Eagle River central office and to our major hub earth
station in Eagle River in the second quarter of 2000. The Issaquah earth station
is connected with the Seattle distribution center by means of diversely routed
leased fiber optic cable transmission systems, each having the capability to
restore the other in the event of failure. The Juneau earth station and
distribution centers are collocated. We have digital microwave facilities
serving the Kenai Peninsula communities. We maintain earth stations in Fairbanks
(linked by digital microwave to the Fairbanks distribution center), Juneau
(collocated with the Juneau distribution center), Anchorage (Benson earth
station), and in Prudhoe Bay as fiber network restoration earth stations. Our
Benson earth station also uplinks our statewide video service; such service is
pre-empted when earth station capacity is needed to restore our fiber network
between Anchorage and Prudhoe Bay.
In 2002, we constructed 6-meter earth stations at Unalakleet, Mountain Village,
and Ft. Yukon. These stations were constructed to support Distance Learning and
Telemedicine networks and primarily serve surrounding villages.
We use our DAMA facilities to serve 56 additional locations throughout Alaska.
The digital DAMA system allows calls to be made between remote villages using
only one satellite hop thereby reducing satellite delay and capacity
requirements while improving quality. We obtained the necessary RCA and FCC
approvals waiving current prohibitions against construction of competitive
facilities in certain rural Alaska communities, allowing for deployment of DAMA
technology in 56 sites in rural Alaska on a demonstration basis. In addition,
over 90 Ku-band VSAT facilities, and 119 C-band facilities provide dedicated
Internet access, Telehealth and private network services to rural public
schools, hospitals, health clinics, and natural resource development industries
throughout Alaska.
Our Anchorage, Fairbanks, and Juneau distribution centers contain electronic
switches to route calls to and from local exchange companies and, in Seattle, to
obtain access to WorldCom, Sprint and other carriers to distribute our
southbound traffic to the remaining 49 states and international destinations. In
Anchorage, a Lucent 5ESS digital host switch is connected by fiber to seven
remote facilities that are co-located in the ILEC's switching centers, to
provide both local and long distance service. Our extensive metropolitan area
fiber network in Anchorage supports cable television, Internet and telephony
services. The Anchorage, Fairbanks, and Juneau facilities also include digital
access cross-connect systems, frame relay data switches, Internet platforms, and
in Anchorage and Fairbanks, co-location facilities for interconnecting and
hosting equipment for other carriers. We also maintain an operator and customer
service center in Wasilla, Alaska.
In 2001 we constructed a new switching center in Fairbanks and installed a new
Lucent Technologies switch to enable the provisioning of local telephony
services in the Fairbanks market. The existing Fairbanks long distance toll
switch was decommissioned in December 2001. Substantially all toll traffic
originating in Fairbanks is now routed to Anchorage. The first ILEC collocation
office was also constructed during 2001 to enable access to a portion of the
Fairbanks ILEC UNE loop facilities. Fairbanks UNE loop provisioning began in
early 2002. Construction of a second collocation office was completed in 2002.
We installed a new Lucent Technologies switch in our Juneau distribution center,
also enabling local services to be launched in the Juneau market in 2002. This
new switch also replaced the existing toll switch in Juneau, which we
decommissioned in 2002. One collocation office and a second adjacent collocation
facility were completed at two of the Juneau ILEC central offices. We placed
these collocation facilities in service in 2002 enabling UNE loop access to a
portion of the Juneau ILEC's loop facilities.
Our Alcatel DSC DEX switch in Seattle was also decommissioned in 2002 after its
traffic was transitioned to our Lucent 5ESS switch in Seattle, which was placed
into service in 2000.
21
Efforts continued in 2002 to decommission our digital operator platform. We
expect to complete that work in early 2003 to enable its turndown and to migrate
its operator traffic to our Anchorage Lucent 5ESS host digital switch.
We plan to install a second Lucent 5ESS in Anchorage in 2003 that will enable
the turndown and decommissioning of our Anchorage Alcatel DSC DEX toll switch as
early as the fourth quarter of 2003.
We completed construction and placed into service in February 1999 a fiber optic
cable system that interconnects Anchorage, Whittier, Valdez, Fairbanks,
Deadhorse and Juneau, Alaska and Seattle Washington. We also own a portion of a
second undersea fiber optic cable that links Alaska with the Lower 48 states.
The fiber optic cables allow us to carry our Anchorage, Eagle River, Wasilla,
Palmer, Kenai Peninsula, Valdez, Whittier, Delta Junction, Prudhoe Bay,
Glenallen, Fairbanks, Juneau, Ketchikan, and Sitka area traffic to and from the
Lower 48 states over terrestrial circuits, eliminating the one-quarter second
delay associated with satellite circuits. Our preferred routing for this traffic
is via undersea fiber optic cable, which makes available satellite capacity to
carry our rural interstate and intrastate traffic.
We employ satellite transmission for rural intrastate and interstate traffic and
certain other major routes. We acquired satellite transponders on PanAmSat
Corporation ("PanAmSat") Galaxy XR satellite in March 2000 to meet our long-term
satellite capacity requirements. We further augmented capacity on Galaxy XR with
the lease of a seventh C-band transponder in October, 2002.
As demand for redundant capacity on our network increases, we expect that we
will need to further augment our facilities between Alaska and the Lower 48
states. We may lease or acquire capacity from others, or we may build another
undersea fiber optic cable system. We completed design and sub sea survey
efforts in 2002 for an additional undersea system as part of our planning
process. Expenditures through the 2002 totaled $1.6 million and have been
capitalized. We have not made a final decision as to whether we will construct
additional capacity. Acquisition or construction of such additional capacity
will be dependent upon our obtaining the necessary financing.
In 2000 we began deploying a new packet data satellite transmission technology
for the efficient transport of broadband data in support of our rural health and
SchoolAccess(TM) initiatives. We continued to deploy and upgrade this network
during 2002 and expect to further expand and upgrade this network during 2003.
We employ advanced digital transmission technologies to carry as many voice
circuits as possible through a satellite transponder without sacrificing voice
quality. Other technologies such as terrestrial microwave systems, metallic
cable, and fiber optics tend to be favored more for point-to-point applications
where the volume of traffic is substantial. With a sparse population spread over
a wide geographic area, neither terrestrial microwave nor fiber optic
transmission technology is considered to be economically feasible in rural
Alaska in the foreseeable future.
Customers
We had approximately 88,200, 87,900 and 88,600 active Alaska message telephone
service subscribers at December 31, 2002, 2001 and 2000, respectively.
Approximately 11,600, 12,200 and 12,200 of these were business and government
users at December 31, 2002, 2001 and 2000, respectively, and the remainder were
residential customers. Reductions in our business and government customer counts
were primarily attributed to continuing competitive pressures in Anchorage and
other markets we serve. Message telephone service revenues (excluding broadband,
operator services and private line revenues) averaged approximately $11.6
million per month during 2002.
22
Equal access conversions have been completed in all communities we serve with
owned facilities. We estimate that we carry over 45% of business and over 45% of
residential traffic as a statewide average for both originating interstate and
intrastate message telephone service traffic.
A summary of our switched message telephone service traffic (in minutes)
follows:
Interstate Minutes
---------------------------------------
Combined
Interstate
Inter- and Inter- Intra-
South- North- Calling national national State Total
For Quarter ended bound (1) bound Card Minutes Minutes Minutes Minutes
- ----------------------------------------------------------------------------------------------------------------------
(Amounts in thousands)
March 31, 2000 143,659 69,678 2,847 1,577 217,761 37,414 255,175
June 30, 2000 149,095 67,754 2,616 1,610 221,075 38,546 259,621
September 30, 2000 157,993 73,802 2,493 1,698 235,986 39,329 275,315
December 31, 2000 129,091 76,202 2,467 1,429 209,189 35,729 244,918
------- ------- ------ ----- ------- ------- ---------
Total 2000 579,838 287,436 10,423 6,314 884,011 151,018 1,035,029
======= ======= ====== ===== ======= ======= =========
March 31, 2001 126,681 74,252 2,087 1,424 204,444 38,763 243,207
June 30, 2001 141,091 76,256 1,926 1,530 220,803 40,407 261,210
September 30, 2001 160,600 87,230 1,961 1,634 251,425 39,355 290,780
December 31, 2001 130,638 90,812 1,946 1,362 224,758 39,246 264,004
------- ------- ------ ----- ------- ------- ---------
Total 2001 559,010 328,550 7,920 5,950 901,430 157,771 1,059,201
======= ======= ====== ===== ======= ======= =========
March 31, 2002 133,455 91,061 1,683 1,413 227,612 40,781 268,393
June 30, 2002 144,143 105,001 1,582 1,462 252,188 44,528 296,716
September 30, 2002 159,564 90,839 1,463 1,527 253,393 46,860 300,253
December 31, 2002 138,735 78,483 1,341 1,506 220,065 43,595 263,660
------- ------- ------ ----- ------- ------- ---------
Total 2002 575,897 365,384 6,069 5,908 953,258 175,764 1,129,022
======= ======= ====== ===== ======= ======= =========
--------------------------
1 The 2000 Interstate Southbound minutes include traffic carried from
Washington to Oregon by us on behalf of an OCC customer. The 2001
Interstate Southbound minutes include traffic that originates and
terminates in Washington by us on behalf of an OCC customer.
All minutes data were taken from our internal billing statistics reports.
---------------------------
We entered into a significant business relationship with MCI (now WorldCom) in
1993 that included the following agreements, among others.
o We agreed to terminate all Alaska-bound MCI long-distance traffic and MCI
agreed to terminate all of our long-distance traffic terminating in the
Lower 49 states excluding Washington, Oregon and Hawaii.
o The parties agreed to share some communications network resources and
various marketing, engineering and operating resources. We also carry
MCI's 800, 888, 877 and 866 traffic originating in Alaska and terminating
in the Lower 49 states and handle traffic for MCI's calling card
customers when they are in Alaska.
23
Concurrently with these agreements, MCI purchased approximately 31%
(approximately 9.1% as of December 31, 2002) of GCI's Common Stock and presently
one representative serves on the Board. In conjunction with the acquisition of
certain cable television companies in 1996, MCI purchased an additional two
million shares at a premium to the then current market price for $13 million or
$6.50 per share. WorldCom sold 4.5 million shares of GCI Class A common stock in
2002.
Revenues attributed to WorldCom's message telephone traffic from these
agreements (excluding private line and other revenues) in 2002, 2001 and 2000
totaled $54.7 million, $44.8 million, and $47.9 million, or 14.9%, 12.6%, and
16.4% of total revenues, respectively. The contract was amended in March 2001
extending its term five years to March 2006. The amendment reduces the rate to
be charged by us for certain traffic over the extended term of the contract. On
July 21, 2002 WorldCom and substantially all of its active U.S. subsidiaries
filed voluntary petitions for reorganization under Chapter 11 of the U.S.
Bankruptcy Code in the United States Bankruptcy Court. See note 11 in the
accompanying Notes to Consolidated Financial Statements for additional
information.
In 1993 we entered into a long-term agreement with Sprint, pursuant to which we
agreed to terminate all Alaska-bound Sprint long-distance traffic and Sprint
agreed to handle substantially all of our international traffic. Services
provided pursuant to the contract with Sprint resulted in message telephone
service revenues (excluding private line and other revenues) in 2002, 2001 and
2000 of approximately $23.5 million, $29.7 million, and $20.1 million, or
approximately 6.4%, 8.3%, and 6.9% of total revenues, respectively. The contract
was amended in March 2002 extending its term five years to March 2007, with two
one-year automatic extensions thereafter. The amendment reduces the rate to be
charged by us for certain traffic over the extended term of the contract.
With the contracts and amendment described above, we believe that WorldCom,
subject to reaffirmation of our contract through the bankruptcy process, and
Sprint, our two largest customers, will continue to make use of our services
during the extended term. WorldCom was a major customer of our long-distance
services industry segment through 2002. Sprint met the threshold for
classification as a major customer through 1998, and met the threshold again in
2001.
Other common carrier traffic routed to us for termination in Alaska is largely
dependent on traffic routed to our carrier customers by their customers. Pricing
pressures, new program offerings, revised business plans, and market
consolidation continue to evolve in the markets served by our carrier customers.
If, as a result, their traffic is reduced, or if their competitors' costs to
terminate or originate traffic in Alaska are reduced, our traffic will also
likely be reduced, and we may have to reduce our pricing to respond to
competitive pressures. We are unable to predict the effect of such changes on
our business; however the loss of one or both of WorldCom or Sprint as
customers, a material adverse change in our relationships with them or a
material loss of or reduction in their long-distance customers would have a
material adverse effect on our financial condition and results of operations.
We provide various services to BP Alaska, Wells Fargo Bank Alaska and Alyeska
Pipeline Service Company. Although these customers do not meet the threshold for
classification as major customers, we do derive significant revenues and gross
profit from them. There are no other individual customers, the loss of which
would have a material impact on our revenues or gross profit.
We provided private line and private network communication products and
services, including SchoolAccess(TM) private line facilities, to approximately
363 commercial and government customers in 2002. These products and services
generated approximately 9.8%, 9.7% and 9.9% of total revenues during the years
ended December 31, 2002, 2001 and 2000, respectively.
Although we have several agreements to facilitate the origination and
termination of international toll traffic, we have neither foreign operations
nor export sales (see Part I, Item 1. Business, Foreign and Domestic Operations
and Export Sales).
24
Competition
The long-distance industry is intensely competitive and subject to constant
technological change. Competition is based upon price and pricing plans, the
type of services offered, customer service, billing services, performance,
perceived quality, reliability and availability. A number of our competitors are
substantially larger than we are and have greater financial, technical and
marketing resources than we have.
In the long-distance market, we compete against AT&T Alascom, ACS, the Matanuska
Telephone Association and certain smaller rural local telephone carrier
affiliates. There is also the possibility that new competitors will enter the
Alaska market. In addition, wireless services continue to grow as an alternative
to wireline services as a means of reaching customers.
Historically, we have competed in the long-distance market by offering discounts
from rates charged by our competitors and by providing desirable packages of
services. Discounts have been eroded in recent years due to lowering of prices
by AT&T Alascom and entry of other competitors into the long-distance markets we
serve. In addition, our competitors have also begun to offer their own packages
of services. If competitors lower their rates further or develop more attractive
packages of services, we may be forced to reduce our rates or add additional
services, which would have a material adverse effect on our revenues and net
income.
Under the terms of AT&T's acquisition of Alascom, AT&T Alascom rates and
services must mirror those offered by AT&T, so changes in AT&T prices indirectly
affect our rates and services. AT&T's and AT&T Alascom's interstate prices are
regulated under a price cap plan whereby their rate of return is not regulated
or restricted. Price increases by AT&T and AT&T Alascom generally improve our
ability to raise prices while price decreases pressure us to follow. We believe
we have, so far, successfully adjusted our pricing and marketing strategies to
respond to AT&T and other competitors' pricing practices. However, if
competitors significantly lower their rates, we may be forced to reduce our
rates, which could have a material adverse effect on us.
ACS and other LECs have entered the interstate and international long-distance
market, and pursuant to RCA authorization, entered the intrastate long-distance
market. ACS and other LECs generally lease or buy long-haul capacity on
long-distance carriers' facilities to provide their interstate and intrastate
long-distance services.
Another carrier completed construction of fiber optic facilities connecting
points in Alaska to the Lower 48 states in 1999. The additional fiber system
provides direct competition to services we provide on our owned fiber optic
facilities, however the fiber system provides an alternative routing path for us
in case of a major fiber outage in our systems. This carrier filed for Chapter
11 bankruptcy in 2001 its assets were sold in 2002.
In the wireless communications services market, we expect our PCS business
license in the future may be used to compete against the cellular subsidiaries
of AT&T Wireless Services, Inc. ("AT&T Wireless") and ACS and resellers of those
services in Anchorage and other markets. The wireless communications industry
continues to experience significant consolidation. AT&T Wireless has acquired
wireless companies and negotiated roaming arrangements that give it a national
presence. Mergers and joint ventures in the industry have created large,
well-capitalized competitors with substantial financial, technical, marketing
and other resources. These competitors may be able to offer nationwide services
and plans more quickly and more economically than we can, and obtain roaming
rates that are more favorable than those that we obtain. We currently resell
AT&T Wireless analog and digital cellular services and provide limited wireless
local access services on our own facilities. AT&T Wireless has recently
announced that it plans to exchange with Dobson Communications Corporation
("Dobson") its Anchorage wireless properties for properties currently owned by
Dobson in California.
Our long-distance services sales efforts are primarily directed toward
increasing the number of subscribers we serve, selling bundled services, and
generating incremental revenues through product and feature up-sale
opportunities. We sell our long-distance communications services through
telemarketing, direct mail advertising, door-to-door selling, up-selling by our
customer contact personnel, and local media advertising.
25
We expect competition to increase as new technologies, products and services
continue to develop. We cannot predict which of many possible future
technologies, products or services will be important to maintain our competitive
position or what expenditures will be required to develop and provide these
technologies, products or services. Our ability to compete successfully will
depend on marketing and on our ability to anticipate and respond to various
competitive factors affecting the industry, including new services that may be
introduced, changes in consumer preferences, economic conditions, market and
competitor consolidation, and pricing strategies by competitors. To the extent
we do not keep pace with technological advances or fail to timely respond to
changes in competitive factors in our industry and in our markets we could lose
market share or experience a decline in our revenue and net income. Competitive
conditions create a risk of market share loss and the risk that customers shift
to less profitable lower margin services. Competitive pressures also create
challenges to our ability to grow new businesses or introduce new services
successfully and execute on our business plan. Each of our business segments
also faces the risk of potential price cuts by our competitors that could
materially adversely affect our market share and gross margins.
Cable Services
Industry
The programmed video services industry includes traditional broadcast
television, cable television, DBS systems, private cable operators, LEC entry,
broadband service providers, wireless cable, open video systems, home video
sales and rentals, Internet video, and electric and gas utilities. Cable
television providers have added non-broadcast programming, utilized improved
technology to increase channel capacity and expanded service markets to include
more densely populated areas and those communities in which off-air reception is
not problematic. Broadcast television stations including network affiliates and
independent stations generally serve the urban centers. One or more local
television stations may serve smaller communities. Rural communities may not
receive local broadcasting or have cable systems but may receive direct
broadcast programming via a satellite dish.
Advancements in technology, facility upgrades and plant expansions to enable
migration to digital programming are expected to continue to have a significant
impact on cable services in the future. We expect that changing federal, state
and local regulations, intense competition, and developing technologies and
standards will continue to challenge the industry.
The FCC has reported that although competitive alternatives continue to develop,
cable television still is the dominant technology for the delivery of video
programming to consumers in the MVPD marketplace. As of June 2002, 76.5 percent
of MVPD subscribers received their video programming from a franchised cable
operator, compared to 78 percent a year earlier. The total number of subscribers
to both cable and non-cable MVPDs continues to increase. A total of 89.9 million
households subscribe to multichannel video programming services as of June 2002,
an increase of 1.8 percent over the 88.3 million households subscribing to MVPDs
in June 2001. This subscriber growth accompanied a 1.2 percentage point decrease
in MVPDs' penetration of television households to 85.3 percent as of June 2002.
The FCC reports that the number of cable subscribers grew to almost 68.8 million
as of June 2002, up approximately 0.4 percent from 68.6 million cable
subscribers as of June 2001. The total number of non-cable MVPD subscribers grew
from 19.3 million as of June 2001 to 21.1 million as of June 2002, an increase
of more than nine percent. This subscriber growth accompanied a 1.2% decrease in
MVPDs' penetration of television households to 85.3% as of June 2002, indicating
that television households are increasing at a faster rate than MVPD subscriber
growth. Although industry data reflect continued growth through June 2002, the
FCC reports that a number of major cable system operators have experienced
significant subscriber losses during this period and calendar year 2002 may be
the first year in which the industry as a whole has had a net loss of
subscribers.
The FCC further reports that DBS subscribership has grown significantly and
represented 20.3 percent of all MVPD subscribers as of June 2002. Between June
2001 and June 2002, the number of DBS subscribers grew from approximately 16
million households to approximately 18 million households, which is
significantly higher
26
than the cable subscriber growth rate. The growth of DBS is still, in part,
attributable to the authority granted to DBS operators to distribute local
broadcast television stations in their local markets by the Satellite Home
Viewer Improvement Act of 1999 ("SHVIA"). Continued DBS subscriber growth is
expected as local programming is offered in more markets. See Part I, Item 1.
Business, Regulation, Franchise Authorizations and Tariffs - Cable Services for
more information.
According to the Bureau of Labor Statistics, cable prices rose 6.3 percent
compared to a 1.1 percent increase in the Consumer Price Index between June 2001
and June 2002. The FCC reports that concurrently with these rate increases, the
number of video and non-video services offered increased, and programming costs
increased.
As a converged platform, cable is a viable competitive alternative outside its
traditional video space, not only in the broadband space as a competitor with
technology such as DSL, but also in traditional telephony services. These
developments continue to move forward and will be enhanced as voice becomes
another application that is carried on data centric networks.
The most significant convergence of service offerings over cable plant continues
to be the pairing of Internet service with other service offerings. Cable
operators continue to build-out the broadband infrastructure that permits them
to offer high-speed Internet access. The most popular way to access the Internet
over cable is still through the use of a cable modem and personal computer,
though a small number of users continue to access the Internet through their
television and a specially designed set-top box, rather than a personal
computer. Virtually all of the major multiple system operators offer Internet
access via cable modems in portions of their service areas. Like cable, the DBS
industry is developing ways to bring advanced services to their customers. Many
MMDS and private cable operators also offer Internet access services. In
addition, broadband services providers continue to build advanced systems
specifically to offer a bundle of services, including video, voice, and
high-speed Internet access. We currently offer high-speed cable modem access in
Anchorage, Bethel, Cordova, Juneau, Eielson Air Force Base, Elmendorf Air Force
Base, Fairbanks, Fort Richardson, Fort Wainwright, Homer, Kenai, Kodiak, Nome,
North Pole, Palmer, Petersburg, Seward, Sitka, Soldotna, Wasilla, Wrangell, and
Valdez.
The cable industry has expanded its competitive offerings to include business
and residential telephone services delivered over its fiber optic
infrastructure. Cable-delivered telephone service is a natural extension of a
network already capable of delivering digital and broadband services and
products. Once upgraded to a two-way capability, a cable system can offer
telephone service over the same cable line that already carries digital video,
high speed Internet, and other advanced services to consumers. The FCC reports
that several cable multiple system operators continue to offer telephone
service. Cable operators are beginning to deploy Internet Protocol ("IP")
telephony in addition to circuit-switched telephony offerings. Cable operators
such as Cox and AT&T continue to deploy circuit-switched cable telephony.
Circuit-switched service requires large capital expenditures for switching
equipment in addition to facility upgrades. Others, like Cablevision and
Comcast, continue to offer cable telephony where it has already been deployed,
but generally are waiting for IP technology to become widely available before
accelerating their rollout of telephone service. AT&T, AOL Time Warner, Comcast,
Cox, and Charter are currently offering or continuing to test IP telephony
products. Voice over IP is more modular and does not require the large upfront
cost needed to deploy circuit-switched service. Voice over IP utilizes the data
path already built, and is expected to allow for easy software changes and
additions to service packages including innovative combinations of voice, data,
and fax services.
The National Cable and Telecommunications Association ("NCTA") reports that
cable-delivered residential telephone service subscribers totaled an estimated
2.5 million through December 2002, with analysts projecting 15.4 million
subscribers in 2005.
With digital transmissions and compression, cable operators are better able to
offer a variety and quality of channels to rival DBS, with pay-per-view choices
that can approximate video-on-demand. In 2000 we installed a commercial version
of video-on-demand for the Anchorage hotel market and continue to evaluate the
feasibility
27
of deploying this technology in the residential market. With this service,
customers can access a wide selection of movies and other programming at any
time, with digital picture quality.
The FCC reports that consolidation within the cable industry continues as cable
operators acquire and trade systems. Excluding mergers which involve the
transfer and exchange of systems, twelve system transactions occurred during the
first six months of 2002 affecting over 388,000 subscribers. The average dollar
value per subscriber totaled $2,196 as compared to $4,872 per subscriber for the
36 transactions that occurred in 2001, affecting over 17.9 million subscribers.
The ten largest operators served approximately 85 percent of all U.S. cable
subscribers. In terms of one traditional economic measure, national
concentration among the top MVPDs has decreased since last year as the largest
MSOs continue to become more equal in size, and it remains below the levels
reported in earlier years. DBS operators DirecTV and EchoStar rank among the
five largest MVPDs in terms of nationwide subscribership along with three cable
multiple system operators. As of June 2002, more than 52 million of the nation's
cable subscribers were served by systems that are included in regional clusters.
The FCC reported that estimated 2002 total cable industry revenue reached $49.4
billion, an estimated 12.3% increase over 2001, and that revenue per subscriber
per year reached approximately $716, an increase of 11.7% over 2001. Revenue
growth in 2002 occurred primarily in the high speed Internet access, cable
telephony and interactive services category (97.6% increase), the advanced
analog and digital tier category (42.9% increase), and the pay-per-view category
(15.1% increase). Revenues in the premium pay tiers category decreased 1.5%.
The escalation of programming costs continues to adversely impact the economics
of cable operators. Programming costs are reported to be the largest cost item
for major system operators, and the fastest growing operating cost item for
most. Operators face constant pressure to keep rate increases at a minimum. Over
the past several years, operators have averaged annual rate increases in the 5%
range; with escalating programming costs the most often cited principal cause.
While many public-interest groups and press reports note that cable rates have
increased at factors in excess of the general rate of inflation, cable rates are
reported to have lagged national inflation on a per channel basis.
The FCC reports that basic cable penetration as compared to homes passed was
66.9% at June 2002. Our overall penetration of homes passed was 62.2% at
December 31, 2002 with individual systems ranging from 51.2% to 92.4%.
In Alaska, cable television was introduced in the 1970s to provide television
signals to communities with few or no available off-air television signals and
to communities with poor reception or other reception difficulties caused by
terrain interference. Since that time, as on the national level, the cable
television providers in Alaska have added non-broadcast programming.
The market for programmed video services in Alaska includes traditional
broadcast television, cable television, wireless cable, and DBS systems.
Broadcast television stations including network affiliates and independent
stations serve the urban centers in Alaska. Eight, six and two broadcast
stations serve Anchorage, Fairbanks and Juneau, respectively. In addition,
several smaller communities such as Bethel are served by one local television
station that is typically a PBS affiliate. Other rural communities without cable
systems receive a single state sponsored channel of television by a satellite
dish and a low power transmitter.
See Part I, Item I, Business, Regulation, Franchise Authorizations and Tariffs -
Cable Service for more information.
General
We are the largest operator of cable systems in Alaska, serving approximately
136,100 residential, commercial and government basic subscribers. Our cable
television systems serve 33 communities and areas in Alaska, including the
state's three largest urban areas, Anchorage, Fairbanks, and Juneau. Our
statewide cable systems consist of approximately 2,230 miles of installed cable
plant having 330 to 550 MHz of channel capacity.
28
Products
Programming services offered to our cable television systems subscribers differ
by system (all information as of December 31, 2002).
Anchorage system. The Anchorage system, which is located in the urban center for
Alaska, is fully addressable and offers a basic analog service that includes 18
channels and 2 additional analog tiers offering 33 and 6 channels. This system
also carries digital service, offering enhanced picture and audio quality, over
20 digital special interest channels, 45 channels of digital music, and over 50
channels of premium and pay-per-view products. Pay TV services are available
either individually or as part of a value package. Commercial subscribers such
as hospitals, hotels and motels are charged negotiated monthly service fees.
Apartment and other multi-unit dwelling complexes receive basic service at a
negotiated bulk rate.
Fairbanks, Juneau, Kenai, and Soldotna systems. These systems offer a basic
analog service with 12 to 18 channels and an additional analog tier with 34 to
42 channels. These systems also carry digital service, offering enhanced picture
and audio quality, over 18 special interest channels, 45 channels of digital
music, and over 40 channels of premium and pay-per-view products.
Sitka System. This location offers an advanced analog service with a 15 channel
basic service, a 37 channel expanded basic service, five channels of premium
service, four channels of pay-per-view and 32 music channels.
Other systems. We own systems in the Alaska communities and areas of Bethel,
Cordova, Homer, Ketchikan, Kodiak, Kotzebue, Palmer, Wasilla, Nome, Petersburg,
Seward, Valdez, and Wrangell. These analog systems offer a basic service with
nine to 15 channels and an expanded basic service with 35 to 49 channels.
Several channels of premium service are also available in all systems. Music
service is available in Ketchikan, Kodiak, Petersburg, Valdez and Wrangell.
Pay-per-view is available in Homer, Ketchikan, Kodiak, Petersburg, Seward and
Wrangell.
Facilities
Our cable television businesses are located in Anchorage, Palmer, Wasilla,
Bethel, Chugiak, Cordova, Douglas, Eagle River, Eielson AFB, Elmendorf AFB,
Fairbanks, Fort Greely, Fort Richardson, Fort Wainwright, Homer, Juneau,
Kachemak, Kenai, Ketchikan, Kodiak, Kodiak Coast Guard Air Station, Kotzebue,
Mount Edgecombe, Nome, North Pole, Palmer, Petersburg, Peters Creek, Saxman,
Seward, Sitka, Soldotna, Ward Cove, Wasilla, and Wrangell Alaska. Our facilities
include cable plant and head-end distribution equipment. Certain of our head-end
distribution centers are co-located with customer service, sales and
administrative offices.
Customers
Our cable systems passed approximately 197,000, 192,000 and 177,000 homes at
December 31, 2002, 2001 and 2000, respectively, and served approximately
136,100, 132,000 and 120,400 basic subscribers at December 31, 2002, 2001 and
2000, respectively. Revenues derived from cable television services totaled
$88.7 million, $76.6 million and $67.9 million in 2002, 2001 and 2000,
respectively.
Competition
The 1996 Telecom Act removed barriers to telephone company or LEC entry into the
video marketplace to facilitate competition between incumbent cable operators
and telephone companies. At the time of the 1996 Telecom Act, it was expected
that LECs would compete in the video delivery market and that cable operators
would provide local telephone exchange service. The FCC reports that the four
largest ILECs have largely exited the video business. A few smaller LECs
continue to offer, or are preparing to offer, MVPD service over existing
telephone lines.
Our cable television systems face competition from alternative methods of
receiving and distributing television signals, including DBS, wireless and
private SMATV systems, and from other sources of news, information and
29
entertainment such as off-air television broadcast programming, newspapers,
movie theaters, live sporting events, interactive computer services, Internet
services and home video products, including videotape cassette and video disks.
Our cable television systems also face competition from potential overbuilds of
our existing cable systems by other cable television operators and alternative
methods of receiving and distributing television signals.
We believe our greatest source of competition comes from the DBS industry. Two
major companies, DirecTV and Echostar are currently offering nationwide
high-power DBS services. Due to the existing structure of satellite orbital
slots, satellite transmission power and lack of local signals, competition from
DBS providers has been limited.
In the past, the majority of Alaska DBS subscribers were required to install
larger satellite dishes (generally three to six feet in diameter) because of the
weaker satellite signals currently available in northern latitudes, particularly
in communities surrounding, and north of, Fairbanks. In addition, the satellites
had a relatively low altitude above the horizon when viewed from Alaska, making
their signals subject to interference from mountains, buildings and other
structures. Recent satellite placements provide Alaska and Hawaii residents with
a DBS package that requires a smaller satellite dish (typically 18 inches);
however, a second larger dish is required if the subscriber wants to receive a
channel line-up similar to that provided by our cable systems. In addition to
the dish size and cost deterrents, DBS signals are subject to degradation from
atmospheric conditions such as rain and snow.
We expect the potential launch of new satellites, the addition of local
stations, and the changing nature of technology and of the DBS business will
result in greater satellite coverage and competition in Alaska.
Several other cable operators provide cable service in Alaska. All of these
companies are relatively small, with the largest having fewer than 1,500
subscribers. The extent to which our cable television systems are competitive
depends, in part, upon our ability to provide quality programming and other
services at competitive prices.
Competitive forces will be counteracted by offering expanded programming through
digital services and by providing high-speed data services. By December 31,
2003, system upgrades will be completed to make systems reverse activated, thus
creating the necessary infrastructure to offer cable modem service to 99.5% of
our homes passed. Over the succeeding two years, we expect to establish a
digital platform in the majority of our systems. These plant upgrades combined
with local broadcast programming are expected to provide an attractive product
in comparison to competitive offerings. In 2002, seven-year retransmission
agreements were signed with Anchorage broadcasters. These agreements provide for
the uplink/downlink of their signals into all our systems, assuring local
programming is available for the foreseeable future.
High-speed data access competition takes two primary forms: cable modem access
service and DSL service. DSL service allows Internet access to subscribers at
data transmission speeds equal to cable modems over traditional telephone lines.
Numerous companies, including telephone companies, have introduced DSL service
and certain telephone companies are seeking to provide high-speed broadband
services, including interactive online services, without regard to present
service boundaries and other regulatory restrictions. Companies in the lower-49
s