Quarterlytics / Communication Services / Telecommunications Services / General Communication Inc. / FY1998 Annual Report

General Communication Inc.
Annual Report 1998

GNCMA · NASDAQ Communication Services
Claim this profile
Ticker GNCMA
Exchange NASDAQ
Sector Communication Services
Industry Telecommunications Services
Employees 1001-5000
Overview Research & Coverage Annual Reports FAQ Peers Earnings Calls Financials News
← All annual reports
FY1998 Annual Report · General Communication Inc.
Download report (PDF)
Loading PDF…
                                    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, 1998                                       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. Employerincorporation 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 requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe  preceding 12 months,  and (2) has been subject to such filing  requirementsfor the past 90 days. Yes X  No  .Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405of Regulation  S-K is not contained  herein,  and will not be contained,  to thebest of registrant's  knowledge,  in definitive proxy or information  statementsincorporated by reference in Part III of this Form 10-K or any amendment to thisForm 10-K. [X]The  aggregate  market value of the voting stock held by  non-affiliates  of theregistrant,  computed by  reference  to the average bid and asked prices of suchstock  as of the  close of  trading  on  February  26,  1999  was  approximately$159,669,544.      The number of shares outstanding of the registrant's common stock as                           of February 26, 1999, was:                 Class A common stock - 45,949,783 shares; and                    Class B common stock - 4,056,252 shares.                       DOCUMENTS INCORPORATED BY REFERENCECertain  portions of the  registrant's  definitive  Proxy  Statement to be filedpursuant to Regulation 14A of the  Securities  Exchange Act of 1934, as amended,in connection  with the Annual Meeting of  Stockholders  of the registrant to beheld on June 10,  1999  are  incorporated  by  reference  into  Part III of thisreport.                                       1                                                 GENERAL COMMUNICATION, INC.                                               1998 ANNUAL REPORT ON FORM 10-K                                                      TABLE OF CONTENTS                                                                                                                     Page                                                                                                                     ----                                                                                                                             Glossary................................................................................................................3Cautionary statement regarding forward looking statements..............................................................10Part I.................................................................................................................11   Item 1.  Business...................................................................................................11      General..........................................................................................................11      Financial information about the Company's industry segments......................................................11      Historical development of the Company's business during the past fiscal year.....................................12      Narrative description of the business done and intended to be done by the Company................................14      Alaska voice, video and data markets.............................................................................15        Long Distance Telecommunication services.......................................................................15        Cable services.................................................................................................21        Local access services..........................................................................................26        Internet services..............................................................................................28      Environmental regulations........................................................................................30      Patents, trademarks, licenses, certificates of public convenience and necessity, and military franchises.........31      Regulation, franchise authorizations and tariffs.................................................................32      Financial information about the Company's foreign and domestic operations and export sales.......................42      Seasonality......................................................................................................42      Customer sponsored research......................................................................................43      Backlog of orders and inventory..................................................................................43      Geographic concentration and Alaska economy......................................................................43      Employees........................................................................................................45      Other............................................................................................................45   Item 2.  Properties.................................................................................................45   Item 3.  Legal Proceedings..........................................................................................46   Item 4.  Submission of matters to a vote of security holders........................................................46Part II................................................................................................................47   Item 5.  Market for the registrant's common equity and related stockholder matters..................................47      Market Information for Common Stock..............................................................................47      Holders..........................................................................................................47      Dividends........................................................................................................47   Item 6.  Selected Financial Data....................................................................................48   Item 7.  Management's discussion and analysis of financial condition and results of operations......................49   Item 7A.  Quantitative and qualitative disclosures about market risk................................................65   Item 8.  Consolidated financial statements and supplementary data...................................................66   Item 9.  Changes in and disagreements with accountants on accounting and financial disclosure.......................66Part III...............................................................................................................66Part IV................................................................................................................99   Item 14.  Exhibits, consolidated financial statement schedules, and reports on Form 8-K.............................99                                       2                                    GLOSSARYACCESS CHARGES -- Expenses incurred by an IXC and paid to LECs for accessing thelocal  networks of the LECs in order to originate  and  terminate  long-distancecalls and provide the customer connection for private line services.ALASKA UNITED -- Alaska United Fiber System  Partnership -- a Alaska partnershipwholly  owned by the Company.  Alaska  United was  organized  to  construct  andoperate a new fiber optic cable connecting  various  locations in Alaska and thelower 49 states and foreign countries through Seattle, Washington.APUC -- ALASKA PUBLIC UTILITY COMMISSION -- A state regulatory body empowered toestablish and enforce rules and regulations  governing public utility  companiesand others, such as the Company,  within the state of Alaska (sometimes referredto as Public Service  Commissions,  or PSCs, or Public Utility  Commissions,  orPUCs).ATM  --  Asynchronous   Transfer  Mode  --  An  international  ISDN  high-speed,high-volume,  packet-switching  transmission protocol standard.  ATM uses short,uniform,  53-byte cells to divide data into  efficient,  manageable  packets forvery fast  switching  through a  high-performance  communications  network.  The53-byte cells contain 5-byte destination  address headers and 48 data bytes. ATMis the first  packet-switched  technology designed from the ground up to supportintegrated voice, video, and data communication applications.  It is well-suitedto high-speed WAN transmission bursts. ATM currently  accommodates  transmissionspeeds from 64 kilobytes per second to 622 megabits per second.  ATM may supportgigabit speeds in the future.BASIC SERVICE -- The basic service tier includes,  at a minimum,  all signals ofdomestic television  broadcast stations provided to any subscriber,  any public,educational,  and  governmental  programming  required  by the  franchise  to becarried on the basic tier, and any additional video programming service added tothe basic tier by the cable operator.BOC -- BELL SYSTEM OPERATING COMPANY -- A LEC owned by any of the remaining fiveRegional  Bell  Operating  Companies,  which are holding  companies  establishedfollowing 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  information  which  can  move  through  acommunications medium in a given amount of time.BRI -- Basic Rate Interface -- An ISDN offering that allows two 64 kilobytes persecond "B" channels  and one 16  kilobytes  per second "D" channel to be carriedover one typical single pair of copper wires.  The type of service that would beused to connect a small branch or home office to a remote  network.  Through theuse of Bonding  (bandwidth on Demand) the two 64 kilobytes  per second  channelscan be combined  to create  more  bandwidth  as it becomes  necessary.  For dataservices  such as Internet  access,  these  channels  can be bonded  together toprovide 2B+D transmission at a rate of 128 kilobytes per second.  New technologyincreases the bandwidth of ISDN BRI connections to 230 kilobytes per second.BROADBAND -- A high-capacity  communications  circuit/path,  usually  implying aspeed greater than 1.544 megabits per second.CAP -- Competitive Access Provider -- A company that provides its customers withan alternative to the LEC for local transport of private line and special accesstelecommunications services.CENTRAL OFFICES -- The switching centers or central switching  facilities of theLECs.                                       3CLEC --  Competitive  Local  Exchange  Carrier.  -- A company that  provides itscustomers   with  an   alternative   to  the  ILEC  for   local   transport   oftelecommunications services, as allowed under the 1996 Telecom Act.CO-CARRIER  STATUS -- A  regulatory  scheme  under  which the  incumbent  LEC isrequired to integrate new, competing  providers of local exchange service,  intothe  systems  of  traffic  exchange,   inter-carrier  compensation,   and  otherinter-carrier relationships that already exist among LECs in most jurisdictions.COLLOCATION  -- The ability of a CAP to connect its network to the LEC's centraloffices.  Physical  collocation  occurs when a CAP places its network connectionequipment  inside  the  LEC's  central  offices.   Virtual   collocation  is  analternative to physical  collocation  pursuant to which the LEC permits a CAP toconnect its  network to the LEC's  central  offices on  comparable  terms,  eventhough the CAP's network  connection  equipment is not physically located insidethe central offices.THE COMPANY -- GCI and its direct and indirect subsidiaries.COMPRESSION / DECOMPRESSION -- A method of encoding/decoding signals that allowstransmission  (or storage) of more information than the media would otherwise beable to support. Both compression and decompression require processing capacity,but with many products, the time is not noticeable.CPS -- a Cable  Programming  Service -- (also known as CPST,  Cable  ProgrammingService Tier). CPS includes any video programming  provided over a cable system,regardless of service tier,  including  installation or rental of equipment usedfor the  receipt of such  video  programming,  other than (1) video  programmingcarried  on  the  basic  service  tier,  (2)  video  programming  offered  on  apay-per-channel or  pay-per-programming  basis, or (3) a combination of multiplechannels of pay-per-channel or pay-per-programming basis so long as the combinedservice  consists of  commonly-identified  video  programming and is not bundledwith any regulated tier of service.DAMA -- Demand Assigned Multiple Access -- The Company's digital satellite earthstation  technology  that allow calls to be made between  remote  villages usingonly  one  satellite  hop  thereby   reducing   satellite   delay  and  capacityrequirements 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 obtainedfrom satellite  transmissions  using  frequency  bands that are  internationallyallocated to the broadcast  satellite services.  Direct-to-home  service such asDBS has its origins in the large  direct-to-home  satellite  antennas which werefirst  introduced  in  the  1970's  for  the  reception  of  video   programmingtransmitted  via  satellite.   Because  these  first-generation   direct-to-homesatellites  operated  in the C-band  frequencies  at low  power,  direct-to-homesatellite  antennas,  or dishes, as they are also known,  generally needed to beseven 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 providedirect-to-home  services enabling  subscribers to use a receiving home satellitedish less than one meter in diameter.DS-3 -- A data  communications  circuit that is equivalent to 28 multiplexed T-1channels capable of transmitting  data at 44.736 megabits per second  (sometimescalled a T-3).DEDICATED  --  Telecommunications   lines  dedicated  or  reserved  for  use  byparticular customers.DIGITAL -- A method of storing,  processing and transmitting information throughthe use of  distinct  electronic  or optical  pulses that  represent  the binarydigits  0 and 1.  Digital  transmission  and  switching  technologies  employ  asequence of these pulses to represent information as opposed to the continuouslyvariable analog signal. The precise digital numbers minimize distortion (such asgraininess  or snow in the  case of  video  transmission,  or  static  or  otherbackground distortion in the case of audio transmission).                                       4DLC --  Digital  Loop  Carrier -- A digital  transmission  system  designed  forsubscriber  loop plant.  Multiplexes a plurality of circuits onto very few wiresor onto a single fiber pair.EQUAL  ACCESS --  Connection  provided  by a LEC  permitting  a  customer  to beautomatically  connected to the IXC of the  customer's  choice when the customerdials "1".  Also refers to a generic  concept  under which the BOCs must provideaccess services to AT&T's  competitors  that are equivalent to those provided toAT&T.FCC -- Federal Communications  Commission -- A federal regulatory body empoweredto  establish  and  enforce  rules  and  regulations  governing  public  utilitycompanies and others, such as the Company.FDDI -- Fiber Distributed Data Interface -- Based on fiber optics, FDDI is a 100megabit  per second LAN  technology  used to connect  computers,  printers,  andworkstations  at very high speeds.  FDDI is also used as backbone  technology tointerconnect other LANs.FRAME RELAY -- A wideband (64 kilobits per second to 1.544  megabits per second)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 isgenerally not used for voice or video.GCC -- GCI  Communication  Corp.,  an  Alaska  corporation  and a  wholly  ownedsubsidiary of HoldingsGCI -- General Communication, Inc., an Alaska corporation and the Registrant.GCI, Inc. -- a wholly owned subsidiary of GCI, an Alaska  corporation and issuerof $180 million of publicly traded bonds.HOLDINGS -- a wholly owned  subsidiary of GCI, Inc., an Alaska  corporation  andparty to the Company's Senior Holdings Loan.HSD -- Home Satellite Dish - see DBS.INBOUND  "800"  or  "888"  Service  -- A  service  that  assesses  long-distancetelephone charges to the called party.ILEC -- Incumbent  Local  Exchange  Carrier -- with respect to an area,  the LECthat -- (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 ofenactment,  was  deemed  to be a  member  of the  exchange  carrier  associationpursuant 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 asuccessor or assign of a member described in clause (i).INTEREXCHANGE -- Communication between two different LATAs.ISDN  --  Integrated  Services  Digital  Network  --  A  set  of  standards  fortransmission  of  simultaneous  voice,  data and video  information  over  fewerchannels  than  would  otherwise  be  needed,  through  the  use of  out-of-bandsignalling. The most common ISDN system provides one data and two voice circuitsover 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.(See BRI and PRI)ISP -- Internet Service Provider -- a company  providing retail and/or wholesaleInternet services.INTERNET -- A global  collection of  interconnected  computer networks which useTCP/IP, a common communications protocol.IXC --  Interexchange  Carrier -- A  long-distance  carrier  providing  servicesbetween local exchanges.                                       5LAN -- Local Area Network -- The interconnection of computers for the purpose ofsharing  files,  programs and various  devices  such as printers and  high-speedmodems.  LANs may include  dedicated  computers  or file  servers that provide acentralized source of shared files and programs.LATA -- Local Access And  Transport  Area -- The  approximately  200  geographicareas defined  pursuant to the AT&T Divestiture  Decree.  The BOCs are generallyprohibited from providing  long-distance  service between the LATA in which theyprovide local exchange services, and any other LATA.LEC -- Local Exchange Carrier -- A company  providing local telephone  services.Each BOC is a LEC.LINE  COSTS --  Primarily  includes  the sum of  access  charges  and  transportcharges.LMDS -- Local  Multipoint  Distribution  System -- LMDS uses  microwave  signals(millimeterwave  signals) in the 28 gHz spectrum to transmit voice,  video,  anddata  signals  within small cells 3-10 miles in  diameter.  LMDS allows  licenseholders to control up to 1.3 gHz of wireless spectrum in the 28 gHz Ka-band. The1.3 gHz can be used to carry digital data at speeds in excess of one gigabit persecond. LMDS uses a specific band in the microwave spectrum, known as millimeterwaves  or  the  28  gHz  "Ka-band."  More  tangibly,  if  LMDS  were  used  on apoint-to-point  basis the beam would be about as wide as a pencil  lead (about amillimeter)  and would have a frequency of  approximately  28 billion cycles persecond.  The extremely  high frequency used and the need for point to multipointtransmissions  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 withmultichannel video programming,  telephony,  video  communications,  and two-waydata services.  Incumbent LECs and cable  companies may not obtain the in-region1150 MHz license for three years. Within 10 years,  licenses will be required toprovide 'substantial service' in their service regions.LOCAL  EXCHANGE -- A geographic  area  generally  determined  by a PUC, in whichcalls  generally are  transmitted  without toll charges to the calling or calledparty.LOCAL NUMBER  PORTABILITY -- The ability of an end user to change Local ExchangeCarriers while retaining the same telephone number.LOWER 48 STATES or LOWER 48 -- refers to the 48  contiguous  states  south of orbelow Alaska.LOWER 49 STATES OR LOWER 49 -- refers to the 48  contiguous  states  south of orbelow Alaska and Hawaii.MAN -- Metropolitan Area Network -- LANs interconnected within roughly a 50 mileradius.  MANs  typically  use fiber  optic cable to connect  various  wire LANs.Transmission speeds may vary from 2 to 100 Megabits per second.MDU -- Multiple Dwelling Unit -- MDUs include multiple-family buildings, such asapartment and condominium complexes.MMDS -- Multichannel  Multipoint  Distribution  Service - also known as wirelesscable. The Multipoint  Distribution  Service (MDS) was established by the FCC in1972.  Originally the Commission thought MDS would be used primarily to transmitbusiness data. However,  the service became increasingly popular in transmittingentertainment   programming.   Unlike  conventional   broadcast  stations  whosetransmissions  are received  universally,  MDS  programming is designed to reachonly a  subscriber  based  audience.  In 1983 the  Commission  reassigned  eightchannels from the  Instructional  Television  Fixed Service (ITFS) to MDS. Theseeight channels make up the MMDS.  Frequently,  MDS and MMDS channels are used incombination  with ITFS channels to provide video  entertainment  programming  tosubscribers.                                       6NARROWBAND -- A voice grade low-capacity communications circuit/path. It usuallyimplies a speed of 56 kilobits per second or less.NETWORK  SWITCHING  CENTER -- A location  where  installed  switching  equipmentroutes long-distance calls and records information with respect to calls such asthe  length of the call and the  telephone  numbers  of the  calling  and calledparties.NETWORK   SYSTEMS    INTEGRATION   --   Involves   the   creation   of   turnkeytelecommunications networks and systems including: (i) route and site selection;(ii) rights of way and legal authorizations and/or acquisition; (iii) design andengineering  of the  system,  including  technology  and vendor  assessment  andselection,   determining   fiber  optic  circuit   capacity,   and  establishingreliability/flexibility standards; and (iv) project and construction management,including contract negotiations,  purchasing and logistics, installation as wellas testing.NPT -- a New  Product  Tier -- a  cable  programming  service  tier  offered  tosubscribers at prices set by the cable operator.OCC -- Other Common Carrier -- A long-distance carrier other than the Company.PCS -- Personal  Communication  Services -- PCS  encompasses a range of advancedwireless mobile technologies and services.  It promises to permit communicationsto   anyone,   anyplace   and   anytime   while  on  the  move.   The   CellularTelecommunications  Industry  Association (CTIA) defines PCS as a "wide range ofwireless  mobile  technologies,   chiefly  cellular,  paging,  cordless,  voice,personal communications networks,  mobile data, wireless PBX, specialized mobileradio, and satellite-based  systems." The FCC defines PCS as a "family of mobileor portable radio communications  services that encompasses mobile and ancillaryfixed  communications   services  to  individuals  and  businesses  and  can  beintegrated with a variety of competing networks."PBX -- Private Branch Exchange -- A customer premise  communication  switch usedto connect  customer  telephones  (and related  equipment) to LEC central officelines  (trunks),  and to switch  internal calls within the customer's  telephonesystem.  Modern PBXs offer  numerous  software-controlled  features such as callforwarding  and call  pickup.  A PBX uses  technology  similar to that used by acentral office switch (on a smaller  scale).  (The acronym PBX originally  stoodfor "Plug Board Exchange.")POP -- Point of Presence -- The physical access location interface between a LECand a IXC  network.  The  point to which  the  telephone  company  terminates  asubscriber'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 forsignaling, leaving 23 ("B") channels for data and voice communication.PRIVATE LINE -- Uses dedicated circuits to connect customer's  equipment at bothends of the line. Does not provide any switching capability (unless supported bycustomer  premise  equipment).  Usually  includes  two  local  loops  and an IXCcircuit.PRIVATE NETWORK -- A communications network with restricted (controlled) access,usually made up of private lines (with some PBX switching).PUBLIC  SWITCHED  NETWORK -- That  portion of a LEC's  network  available to allusers  generally on a shared basis (i.e.,  not dedicated to a particular  user).Traffic  along the public  switched  network is generally  switched at the LEC'scentral offices.                                       7RBOC -- Regional Bell  Operating  Company -- Any of the remaining  five regionalBell holding companies which the AT&T Divestiture Decree established to serve asparent companies for the BOCs.RECIPROCAL  COMPENSATION -- The same  compensation of a new CLEC for terminationof a local call by the BOC on its network,  as the new  competitor  pays the BOCfor termination of local calls on the BOC network.SCHOOLACCESS(TM)  -- the  Company's  Internet and related  services  offering toschools in Alaska.  The federal  mandate through the 1996 Telecom Act to provideuniversal  service  resulted in schools  across  Alaska  qualifying  for varyinglevels of discounts to support the provision of Internet services. The UniversalService  Administrative  Company  through  its Schools  and  Libraries  Divisionadministers this federal program.SDN -- Software  Defined  Network -- A switched  long-distance  service for verylarge  users with  multiple  locations.  Instead of putting  together  their ownnetwork,  large users can get special  usage rates for calls  carried on regularswitched long-distance lines.SECURITIES REFORM ACT -- Private Securities Litigation Reform Act of 1996.SENIOR  HOLDINGS  LOAN  --  Holding's   $200,000,000   and  $50,000,000   creditfacilities.  See note 6(b) to the accompanying  Notes to Consolidated  FinancialStatements included in Part II of this Report.SETTLEMENT  RATES  -- The  rates  paid to  foreign  carriers  by  United  Statesinternational  carriers to terminate  outbound (from the United States) switchedtraffic  and by foreign  carriers  to United  States  international  carriers toterminate inbound (to the United States) switched traffic.SMATV -- Satellite  Master  Antenna  Television -- (also known as "private cablesystems") are multichannel  video  programming  distribution  systems that serveresidential,  multiple-dwelling  units ("MDUs"), and various other buildings andcomplexes.  A SMATV system  typically  offers the same type of  programming as acable system,  and the operation of a SMATV system  largely  resembles that of acable system -- a satellite  dish receives the  programming  signals,  equipmentprocesses  the signals,  and wires  distribute  the  programming  to  individualdwelling units.  The primary  difference  between the two is that a SMATV systemtypically is an unfranchised,  stand-alone  system that serves a single buildingor complex,  or a small number of buildings  or  complexes in  relatively  closeproximity to each other.SONET --  Synchronous  Optical  Network -- A 1984  standard  for  optical  fibertransmission on the public network. 52 megabits per second to 13.22 Gigabits persecond, effective for ISDN services including ATM.TCP/IP -- Transmission Control Protocol/Internet  Protocol -- A suite of networkprotocols  that allows  computers  with  different  architectures  and operatingsystem software to communicate with other computers on the Internet.T-1 -- A  data  communications  circuit  capable  of  transmitting  data  at 1.5megabits per second.TARIFF -- The schedule of rates and  regulations  set by  communications  commoncarriers and filed with the appropriate  federal and state regulatory  agencies;the published official list of charges, terms and conditions governing provisionof a specific  communications service or facility,  which functions in lieu of acontract between the subscriber or user and the supplier or carrier.TOKEN RING -- A local area  network  technology  used to  interconnect  personalcomputers, file servers,  printers, and other devices. Token Ring LANs typicallyoperate at either 4 megabits per second or 16 megabits per second.TRANSPORT CHARGES -- Expenses paid to facilities-based carriers for transmissionbetween or within LATAs.                                       8TRS  SERVICES  --   Telecommunications   Relay  Services  --  Enables  telephoneconversations  between people with and without  hearing or speech  disabilities.TRS relies on  communications  assistants  ("CA") to relay the  content of callsbetween  users of text  telephones  ("TTYs") and users of  traditional  handsets(voice users).  For example,  a TTY user may telephone a voice user by calling aTRS  provider  where a CA will  place the call to the  voice  user and relay theconversation  by  transcribing  spoken content for the TTY user and reading textaloud for the voice user.WAN -- Wide Area Network -- Remote computer  communications  system.  WANs allowfile sharing among geographically  distributed  workgroups  (typically at highercost and slower speed than LANs or MANs).  WANs  typically use common  carriers'circuits and  networks.  WANs may serve as a customized  communication  backbonethat interconnects all of an organization's  local networks with  communicationstrunks that are designed to be appropriate for anticipated  communication  ratesand volumes between nodes.WORLD  WIDE  WEB  or  WEB -- A  collection  of  computer  systems  supporting  acommunications  protocol that permits  multi-media  presentation  of informationover the Internet.1984 CABLE ACT -- The Cable Communications Policy Act of 1984.1992 CABLE ACT -- The Cable Television  Consumer  Protection and Competition Actof 1992.1996  TELECOM ACT -- The  Telecommunications  Act of 1996 - The 1996 Telecom Actwas signed into law February 8, 1996. Under its provisions, BOCs can immediatelybegin  manufacturing,  research and  development;  GTE Corp. can begin providinginterexchange  services through its telephone companies  nationwide;  laws in 27states that foreclose  competition are knocked down; co-carrier status for CLECsis ratified; and the concept of physical collocation of competitors'  facilitiesin LECs central offices, which an appeals court rejected, is resurrected.The  legislation  breaks down the old barriers  that  prevented  three groups ofcompanies,  the LECs,  including the BOCs, the long-distance  carriers,  and thecable TV  operators,  from  competing  head-to-head  with  each  other.  The Actrequires LECs to let new competitors  into their business.  It also requires theLECs to open up their  networks to ensure that new market  entrants  have a fairchance of competing.  The bulk of the legislation is devoted to establishing theterms under which the LECs, and more  specifically  the BOCs, must open up theirnetworks.The 1996  Telecom Act  substantially  changed  the  competitive  and  regulatoryenvironment  for  telecommunications  providers  by  significantly  amending theCommunications   Act  including  certain  of  the  rate  regulation   provisionspreviously imposed by the Cable Television  Consumer  Protection and CompetitionAct of 1992 (the "1992 Cable  Act").  The 1996  Telecom Act  provides  that rateregulation of the cable  programming  service tier will be phased out altogetherin 1999.  Further,  the regulatory  environment will continue to change pending,among other  things,  the outcome of legal  challenges  and FCC  rulemaking  andenforcement  activity in respect of the 1992 Cable Act and the  completion  of asignificant number of FCC rulemakings under the 1996 Telecom Act.                                       9            CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTSExcept for the historical statements and discussions  contained herein,  certainstatements  in this  annual  report  on  Form  10-K  constitute  forward-lookingstatements  within the  meaning of the  Securities  Reform  Act.  Any Form 10-K,Annual Report to Shareholders,  Form 10-Q or Form 8-K of the Company may includeforward looking statements.  In addition, other written or oral statements whichconstitute  forward  looking  statements have been made and may in the future bemade by or on behalf of the  Company,  including  statements  concerning  futureoperating  performance,  the Company's  share of new and existing  markets,  theCompany's  short- and long-term  revenue and earnings growth rates,  and generalindustry  growth rates and the Company's  performance  relative  thereto.  Theseforward  looking  statements rely on a number of assumptions  concerning  futureevents, including the outcome of litigation,  the adoption and implementation ofbalanced and  effective  rules and  regulations  by the FCC and the state publicregulatory  agencies,  and the Company's ability to achieve a significant marketpenetration in new markets.  These forward  looking  statements are subject to anumber  of  uncertainties  and other  factors,  many of which  are  outside  theCompany's  control,  that could cause actual results to differ  materially  fromsuch statements.These  statements  may be  preceded  by,  followed  by,  or  include  the  words"believes,"  "expects,  "  "anticipates,"  or  similar  expressions.  For  thosestatements, the Company claims protection of the safe-harbor for forward-lookingstatements  contained in the Securities Reform Act. The reader is cautioned thatimportant  factors,  such  as the  following  risks,  uncertainties,  and  otherfactors, in addition to those contained elsewhere in this document, could affectfuture  results  of  the  Company,  its  long-distance  services,  local  accessservices,  Internet  services,  cable services,  and wireless services and couldcause  those  results  to  differ   materially   from  those  expressed  in  theforward-looking statements:     -    Material  adverse  changes in the economic  conditions  in the markets          served by the Company;     -    The efficacy of the 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;     -    The Company's 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 local, cable and Internet  services;  the extent          and pace at which different competitive  environments develop for each          segment of the Company's  business;  the extent and duration for which          competitors from each segment of the  telecommunications  industry are          able to offer  combined or full service  packages prior to the Company          being  able to do so;  the  degree  to which the  Company  experiences          material  competitive  impacts to its  traditional  service  offerings          prior to  achieving  adequate  local  service  entry;  and  competitor          responses to the  Company's  products and services and overall  market          acceptance of such products and services;     -    The  outcome  of   negotiations   with  ILECs  and  state   regulatory          arbitrations and approvals with respect to interconnection agreements;          and the ability to purchase  unbundled  network  elements or wholesale          services  from ILECs at a price  sufficient  to permit the  profitable          offering of local exchange service at competitive rates;     -    Success and market  acceptance for new initiatives,  many of which are          untested;  the level and timing of the growth and profitability of new          initiatives,  particularly  local access services,  Internet (consumer          and  business)   services  and  wireless   services;   start-up  costs          associated  with  entering  new  markets,  including  advertising  and          promotional  efforts;   successful   deployment  of  new  systems  and          applications  to support new  initiatives;  and local  conditions  and          obstacles;     -    Uncertainties  inherent  in  new  business  strategies,   new  product          launches and  development  plans,  including  local  access  services,          Internet services,  wireless services,  digital video services,  cable          modem services, and transmission services;                                        10     -    Rapid technological changes;     -    Development   and  financing  of   telecommunication,   local  access,          wireless, Internet and cable networks and services;     -    Future financial  performance,  including the availability,  terms and          deployment  of  capital;  the  impact of  regulatory  and  competitive          developments  on capital  outlays,  and the  ability  to achieve  cost          savings and realize productivity improvements;     -    Availability of qualified personnel;     -    Changes in, or  failure,  or  inability,  to comply  with,  government          regulations, including, without limitation, regulations of the Federal          Communications Commission, the Alaska Public Utilities Commission, and          adverse outcomes from regulatory proceedings;     -    The cost of the Company's year 2000 compliance efforts;     -    Uncertainties  in federal  military  spending levels and military base          closures in markets in which the Company operates.     -    Other  risks  detailed  from  time to time in the  Company's  periodic          reports filed with the Securities and Exchange Commission.These  forward-looking  statements  (and  such  risks,  uncertainties  and otherfactors)  are made only as of the date of this report and the Company  expresslydisclaims any obligation or undertaking to disseminate  any updates or revisionsto any  forward-looking  statement  contained  in this  document  to reflect anychange in the  Company's  expectations  with regard to those  statements  or anyother change in events,  conditions or circumstances on which any such statementis based.  Readers  are  cautioned  not to put undue  reliance  on such  forwardlooking statements.                                     PART IItem 1.  BUSINESS.GeneralGCI was  incorporated  in 1979 under the laws of the State of Alaska and has itsprincipal  executive offices at 2550 Denali Street,  Suite 1000,  Anchorage,  AK99503 (telephone  number  907-265-5600).  Internet users can access  informationabout   the   Company   and   its    services   at    http://www.gci.com/    andhttp://www.alaskaunited.com/.  Internet  services  are hosted by the  Company athttp://www.gci.net/.GCI is  primarily a holding  company and  together  with its direct and indirectsubsidiaries,  is a  diversified  telecommunications  provider  with  a  leadingposition in facilities-based long-distance service in the State of Alaska and isAlaska's leading cable television and Internet services provider.The  Company  seeks to become  the first  significant  provider  in Alaska of anintegrated  package  of  long-distance,  local and  wireless  telecommunicationsservices,  cable  television  services and Internet  services that would be wellpositioned to take advantage of growth opportunities in the communications, dataand entertainment markets.Financial information about the Company's industry segmentsThe  Company  has  four  reportable  segments:   long-distance  services,  cableservices, local access services and Internet services.A  full  range  of  common-carrier  long-distance  and  other  telecommunicationservices are offered to business, government, other telecommunications companiesand  consumer  customers,  through its networks of fiber optic  cables,  digitalmicrowave,  and fixed and transportable  satellite earth stations.  Individuallyinsignificant  business units including Network  Solutions,  cellular resale andproduct  sales are  included  in the  "other"  industry  segment.  None of thesebusiness  units  have  ever  met the  quantitative  thresholds  for  determiningreportable segments.                                       11The Company  provides cable television  services to residential,  commercial andgovernment  users in the State of Alaska.  The Company's  cable systems serve 26communities  and areas in Alaska,  including  the state's  three  largest  urbanareas, Anchorage,  Fairbanks and Juneau.  Anchorage cable plant upgrades in 1998enabled the Company to offer digital cable television  services and retail cablemodem service  (through its Internet  segment) in Anchorage,  complementing  itsexisting service offerings. The Company plans to expand its product offerings asplant upgrades in other communities in Alaska are completed.The Company  introduced  facilities based competitive local exchange services inAnchorage,  Alaska in 1997. The Company has announced  plans to provide  similarcompetitive local exchange services in Alaska's other major population  centers,as access is allowed by the APUC.The Company  began  offering  wholesale  and retail  Internet  services in 1998.Deployment of the new undersea fiber optic cable  described below will allow theCompany to offer enhanced services with high-bandwidth requirements.For financial  information with respect to industry segments of the Company, seenote 9 of the Notes to Consolidated  Financial Statements included in Part II ofthis Report.Historical development of the Company's business during the past fiscal yearAlaska  United  Project.  The  Company  undertook a major  construction  project(referred to as Alaska  United) with the goal of  significantly  increasing  itscommunications bandwidth to and from locations in Alaska and the lower 49 statesand  through   interconnection   agreements  with  other  carriers,  to  foreignlocations.  After a  preliminary  route  survey was  completed  and initial costcomponents  determined,  a  detailed  sea  floor  survey  was  commissioned  andcompleted in 1996.  The results of this survey  pinpointed  the exact route thatthe Alaska  United fiber would take.  The Company  entered into a contract  withTyco Submarine Systems, Ltd. ("TSS"), one of the world's leading submarine cablevendor which has installed  more than 150,000 miles of undersea  cable.  TSS wasengaged to design,  engineer,  manufacture and install the undersea  cable.  Thecable was laid during the period from August to December 1998.  Testing occurredafter that and services  commenced  in late  January  1999 for the  Anchorage toFairbanks  segment  and  early  February  1999  for the  complete  system.  Withconstruction of Alaska United complete,  the Company began to transition trafficfrom leased  satellite,  terrestrial  and microwave  facilities to Alaska Unitedfacilities in early February 1999.The Alaska  United  project  provides a high  capacity  fiber optic link betweenpoints in Alaska and the lower 48 states  through  Seattle,  Washington.  AlaskaUnited lands at cable terminal stations in Whittier,  Valdez and Juneau, Alaska.From Whittier,  the fiber follows the Alaska  railroad,  highway,  and over-landrights-of-ways   to  Anchorage.   Between  Whittier  and  Valdez,   the  Companyconstructed a second  undersea  fiber optic cable.  The cable connects in Valdezwith a fiber constructed by Kanas Telecom, Inc. ("Kanas"). The Company exchangedDark Fiber with Kanas to obtain  facilities from Valdez to Fairbanks.  In Juneauand Seattle,  Alaska United connects through terminal  stations to the Company'sexisting  network.  The cable  terminal  stations house the power feed equipmentnecessary to power the undersea fiber optic cable system and the SONET equipmentwhich  transports  data across the  terrestrial  network and the undersea  fibernetwork.The Alaska United system is 2,331 miles long (1,995 miles  undersea and 336 overland) and has a total  design  capacity of 10 billion  bits per second (22 timeswhat was currently  available).  It can route traffic in different directions inthe event of equipment  failures,  and once paired with the  Company's  existingcapacity on the North  Pacific  Cable,  users can  achieve  route  diversity  toachieve multiple fiber paths for back-up purposes.  It will deliver a minimum of32,256  simultaneous clear channel voice or data circuits at transmission speedsof 2.5 billion bits per second. As demand increases,  capacity can be quadrupledto  support  a minimum  of  129,024  simultaneous  clear  channel  voice or datacircuits  at speeds of 10 billion  bits per  second.  The only other fiber opticcable  connecting  Alaska  with the  contiguous  United  States had  reached itscapacity  limit of 6,048  simultaneous  voice or data  circuits at  transmissionspeeds of 420 million bits per second.                                       12Financing for the Alaska  United  undersea  fiber  project  included $75 millionthrough a separate bank credit  agreement dated January 27, 1998 and $50 millionfrom funds raised  through the 1997 issuance of senior notes.  See note 6 to theaccompanying Notes to Consolidated  Financial  Statements included in Part II ofthis Report.Local Access  Services.  The Company began offering  local exchange  services inAnchorage in September  1997 and provided  service to  approximately  28,300 and3,300 lines at December 31, 1998 and 1997, respectively.The  Company's  local access  services  face  significant  competition  from themunicipally owned utility Anchorage  Telephone Utility ("ATU") and AT&T Alascom,Inc.  In  October   1998  the   Municipality   of  Anchorage   approved   AlaskaCommunications  Systems,  Inc.'s ("ACS") offer to acquire the operations of ATU.ACS is an  entity  formed  by Fox  Paine &  Company,  LLC  ("Fox  Paine")  and amanagement team led by former executives of Pacific Telecom,  Inc. ("PTI").  Thesale of ATU was  approved  by the  citizens of the  Municipality  in April 1998.Consummation  of the  transaction  is subject to  regulatory  approval and otherconditions.Century Telephone Enterprises,  Inc. ("CenturyTel") reported in August 1998 thatit  entered  into a  definitive  agreement  to  sell  the  stock  of its  Alaskaoperations  to ALEC  Acquisition  Corporation  ("ALEC").  ALEC is led by  formerexecutives of PTI and Fox Paine.  It is anticipated  that the  transaction  willclose in the second quarter 1999, subject to regulatory  approvals and customaryclosing conditions. CenturyTel acquired the Alaska properties as part of the PTIacquisition completed in December 1997.Due  to  uncertainties   surrounding   regulatory  approvals  and  possible  newrequirements that may be imposed by regulatory  authorities,  the Company is notable to determine if the sale of ATU or the  CenturyTel  properties  will have amaterial effect on the Company's  financial  position,  results of operations orliquidity.PTI,  through  subsidiary  companies,   provides  local  telephone  services  inFairbanks and Juneau,  Alaska.  Although the PTI  subsidiaries are classified asRural Telephone  Companies under the 1996 Telecom Act, PTI is currently owned byCentury Telephone Company of Louisiana, one of the largest independent telephonecompanies in the Nation.  PTI  subsidiaries'  legal status  entitles  them to anexemption  of certain  material  interconnection  terms of the 1996 Telecom Act,until  such  "rural  exemption"  is lifted by the State of Alaska.  The  Companyrequested that  continuation  of the "rural  exemption" of the PTI  subsidiariesrelating to the Fairbanks and Juneau  markets be examined.  In January 1998, theAPUC denied the Company's request to terminate the rural exemption. The basis ofthe APUC's decision was primarily that various rulemaking proceedings (includingUniversal  Service  and  access  charge  reform)  must be  completed  before theexemption  would be revoked.  Those  rulemaking  proceedings  have been  largelycompleted.  Further,  in March 1999 the Company received a favorable decision onits appeal of the APUC  decision,  and the issues have been remanded to the APUCfor  proceedings  leading  to a  decision  on or  before  July  2,  1999.  Otherlegislative  and judicial  efforts are also  underway to achieve a change in theAPUC  ruling.  The  Company  may,  however,  provide  local  service  on its ownfacilities to a limited number of consumers in Juneau and Fairbanks.The Company believes local access services  competition is in the best interestsof consumers  and intends to  vigorously  pursue before the APUC in the remandedproceedings  that the "rural  exemption"  not be continued for the Fairbanks andJuneau markets. The Company cannot, however,  predict the effect that ongoing orfuture regulatory  developments  might have on competitive local access servicesmarkets in Alaska or on the Company specifically.  See Part I, Item 1. Business,Regulation, Franchise Authority and Tariffs.Cable Services Expansion.  The Company completed an $11.5 million upgrade to itsAnchorage cable infrastructure in 1998 that significantly increased the capacityand reliability of the system, made it possible to support two-way  applicationssuch as cable modems (as further  described  below) and digital cable televisionprogramming, and provides the capacity for additional program offerings.Digital cable  television  services were offered in Anchorage in 1998,  offeringenhanced picture and audio quality,  over 100 channels of programs,  40 channelsof digital music, and many channels of premium and pay-per-view products.                                       13Internet Services. The Company's statewide  SchoolAccess(TM)  services (Internetaccess and related products and services for Alaska schools)  commenced  January1998.GCI began a limited rollout of its dial-up Internet service in April 1998, whichallowed  the Company to test its new  state-of-the-art  Internet  platform.  TheCompany  began its broad based  offering in October  1998 and  initiated a majorpromotion in February  1999.  Services  were  initially  offered to residents ofAnchorage,  Fairbanks,  Kodiak,  Juneau,  Kenai,  Soldotna,  Palmer and Wasilla,Alaska.  Other Alaska  communities  were added over the next several  months andcontinue to be added.  GCI.net  service  supports 56 kilobit per second  dial-upconnections  with  support  for both V.90 and Kflex  technologies.  The  Companybelieves its service has one of the best first-try connect rates and the fastestspeeds  available  of any  provider in Alaska.  The Company  plans to  introduceadditional service upgrades and promotional offerings in the future.The  Company  began a limited  introduction  of cable  modem  services  in 1998,providing high-speed, dedicated access to the Internet.Satellite  Transponders.  The Company entered into a purchase and lease-purchaseoption agreement in August 1995 for the acquisition of satellite transponders tomeet its long-term satellite capacity requirements.  The launch of the satellitein August 1998 failed. The Company did not assume launch risk and the launch hasbeen  rescheduled  for the fourth  quarter of 1999. The Company will continue tolease  transponder  capacity  until  the  delivery  of the  transponders  on thereplacement satellite.Rural Equal Access.  In 1996 the Company  constructed  56 new earth  stations inWestern  and  Northern  Alaska.  As  construction  of those DAMA  stations  werecompleted,  the  Company  requested  Equal  Access from the LECs  serving  thosecommunities.  Under Federal Communications  Commission rules,  substantially allLECs have three years to comply  with an equal  access  request.  The three yeartime  period  is  expiring  for  many  of  those   locations  and  LECs  startedimplementing the equal access conversion  process in late 1998 and will continueto convert  locations  though March 1999.  As a result,  approximately  34 ruralDAMA-served  communities  will be  converted  during this period to equal accessenabling the  Company's  customers to access its network  without  dialing extradigits.PCS and LMDS  licenses.  The Company  began  developing  plans for PCS  wirelesscommunications service deployment in 1995 and subsequently conducted a technicaltrial of its candidate technology.  The Company has invested  approximately $2.2million in its PCS license at December 31, 1998.  PCS  licensees are required tooffer service to at least one-third of their market population within five yearsor risk losing their  licenses.  Service must be extended to  two-thirds  of thepopulation within 10 years. The Company invested  approximately  $275,000 in itsLMDS  license in 1998.  LMDS  licensees  are  required  to provide  'substantialservice' in their  service  regions  within 10 years.  The Company is  currentlyevaluating its wireless  strategy and expects to complete such evaluation withinthe next six months.  The Company expects that its wireless  strategy will allowretention of the PCS and LMDS licenses pursuant to their terms.Narrative  description  of the  business  done  and  intended  to be done by theCompanyGeneralThe  Company  operates a  broadband  communications  network  that  permits  thedelivery of a seamless  integrated bundle of  communications,  entertainment andinformation services. The Company offers a wide array of consumer communicationsand  entertainment   services--including  local  telephone,   long-distance  andwireless  communications,  cable television,  consulting  services,  network anddesktop  computing  outsourced  services,  and dial-up and cable modem  Internetaccess services at a wide range of speeds--all under the GCI brand name.The  Company's  management  believes  that the size and growth  potential of thevoice, video and data market, the increasing  deregulation of  telecommunicationservices,  and the  increased  convergence  of  telephony,  wireless,  and cableservices  offer  the  Company   considerable   opportunities  to  integrate  itstelecommunication,  Internet and cable  services and expand into  communicationsmarkets  both  within  and,  longer-term,   outside  of  Alaska.  The                                         14Company's   management   expects   the   rate   of   growth   in   industry-widetelecommunication  revenues to continue to increase as the historical  dominanceof monopoly  providers is challenged as a result of  deregulation.  Considerablederegulation  has already  taken  place in the United  States as a result of the1996 Telecom Act with the barriers to competition between  long-distance,  localexchange and cable providers being lowered.  The Company's  management  believesthat its  acquisition of cable  television  systems and its development of localexchange  service,  Internet  services,  and  wireless  services  leave  it wellpositioned to take advantage of deregulated markets.The Company is one of Alaska's leading providers of telecommunication,  Internetand cable television services and maintains a strong competitive position. Thereis active  competition  in the sale of  substantially  all products and servicesoffered by the Company.For   calendar   year  1998,   the   Company   estimates   that  the   aggregatetelecommunications,  cable television,  and Internet markets in Alaska generatedrevenues of  approximately  $931  million.  Of this amount,  approximately  $475million was  attributable  to interstate and intrastate  long-distance  service,$327  million  was  attributable  to local  exchange  services,  $72 million wasattributed  to cable  television,  $38  million  was  attributable  to  wirelesscommunications services, and $19 million was attributable to Internet services.Alaska Voice, Video and Data MarketsThe Alaskan  voice,  video and data markets are unique within the United States.Alaska  is  physically  distant  from  the  rest  of the  United  States  and ischaracterized by large  geographical size and relatively small, dense populationclusters (with the exception of population centers such as Anchorage,  Fairbanksand   Juneau).   It   lacks   a   well-developed    terrestrial   transportationinfrastructure,  and the majority of Alaska's communities are accessible only byair or water.  As a result,  Alaska's  telecommunication  networks are differentfrom those found in the lower 49 states.Alaska today relies  extensively on satellite-based  long-distance  transmissionfor  intrastate  calling  between  remote  communities  where  investment  in  aterrestrial  network  would  be  uneconomic  or  impractical.  Also,  given  theremoteness  of Alaska's  communities  and lack,  in many  cases,  of major civicinstitutions  such  as  hospitals,  libraries  and  universities,  Alaskans  aredependent on telecommunications to access the resources and information of largemetropolitan  areas  in the rest of the  U.S.  and  elsewhere.  In  addition  tosatellite-based communications,  the telecommunications infrastructure in Alaskaincludes  traditional copper wire, digital microwave links between Anchorage andFairbanks and Juneau and fiber optic cable.  For  interstate  and  internationalcommunication,  Alaska  is  currently  connected  to the  lower 49 states by twoundersea fiber optic cables with a current  capacity of 57 DS3s (can be upgradedto 201 DS3s) and is backed-up by additional satellite capacity.Fiber optics is the preferred method of carrying Internet, voice, video and datacommunications,  eliminating the delay commonly found in satellite  connections.Widespread use of high capacity fiber optic  facilities  will allow expansion ofbusiness, government and educational infrastructure in Alaska.Long-Distance ServicesIndustry.   With  the  Communications  Act  of  1934,   telecommunications   wasestablished  as a  regulated  industry.  The main  objective  of this act was tocreate an affordable and universal telephone service for the American people. Asa result,  AT&T was  granted  exclusive  rights to serve the  telecommunicationsindustry.   The  next  several  decades  brought  significant   improvements  intechnology.  New advances  created  opportunities  for  providers of  lower-costservices to enter the market,  and in order to facilitate the entry of these newcompetitors,  regulatory policies were changed.  The government stepped into themarket on January 1, 1984, and broke-up AT&T's near monopoly.  The  government'sobjective  was to provide  for  greater  competition  in the  telecommunicationsindustry, as well as make room for the creation of more diversified products.The Federal  Communications  Commission  set price caps in 1989 to regulate  theprices that AT&T could  charge for their  services.  Yet, by 1991 the market hadbecome so much more  competitive  with regards to both  long-distance  and localcalls, that the FCC decided to deregulate most of AT&T's services.                                       15The United States  Congress passed the 1996 Telecom Act that permitted the localphone companies,  the  long-distance  companies,  and the cable service firms topenetrate each other's market. This has provided the telecommunications industrywith new  capabilities  resulting in an industry that is more  competitive  thanever  before.  To reduce  the  burden  and  facilitate  competitive  advantages,companies are merging and acquiring other telecommunication and cable televisionfirms.The long-distance telephone services market according to the Standard and Poor'stelecommunication survey is worth over $68 billion. AT&T is the main contributorto this sum, contributing over 50% of the total revenues.  The rest of the shareof the revenues is contributed  by MCI WorldCom,  Sprint Corp.  ("Sprint"),  andover 400 smaller firms. Under new regulations,  BOCs and ILECs are able to enterthe long-distance  market,  providing  additional  competitive  pressures on theindustry. To retain customers, as in the case of the long-distance carriers, andto win customers for the new competitors, rates may continue to be reduced.Advancements within the next few years are expected to combine services directedtoward voice communication with other activities such as data sharing, on-screencollaboration, faxing, and game playing, among many other things.The  Company  believes  that the  telecommunications  industry  in 1999  will besignificantly impacted by federal and state regulators.  Consummation of mergersbetween  long-distance  companies,  local access services  companies,  and cabletelevision  companies  is  expected  continue  to blur the  distinction  betweenproduct  lines  and  competitors.   Synergies   developed  through  mergers  andacquisitions and obtaining end-to-end connectivity with customers is expected todrive  profitability  and success in penetrating new markets.  Industry analystsbelieve that  successful  competitors  will be the  companies  that can minimizeregulatory  battles  and begin to offer a full suite of  integrated  services totheir customers, using a network that is largely under their control.Growth in data is expected to be a key component of continuing  industry revenuegrowth.  ISPs have become major customers and many long-distance  companies haveacquired ISPs and web-hosting companies.General.  The Company supplies a full range of common-carrier  long-distance andother   telecommunication   products  and  services.   The  Company  operates  astate-of-the-art,  competitive  telecommunications  network employing the latestdigital  transmission  technology  based upon fiber optic and digital  microwavefacilities  within and between  Anchorage,  Fairbanks  and  Juneau,  including aself-constructed  and financed  digital fiber optic cable and  additional  ownedcapacity on another  undersea  fiber optic  cable,  both  linking  Alaska to thenetworks  of other  carriers  in the lower 49 states,  and the use of  satellitetransmission to remote areas of Alaska (and for certain  inter-state  traffic aswell).  Virtually  all  switched  services are  computer  controlled,  digitallyswitched, and interconnected by a packet switched signaling network.The Company provides interstate and intrastate long-distance services throughoutAlaska using its own facilities or facilities  leased from other  carriers.  TheCompany   also   provides   (or  joins  in   providing   with  other   carriers)telecommunication  services to and from Alaska, Hawaii, the lower 48 states, andmany foreign nations and territories.The Company offers  cellular  services by reselling  other  cellular  providers'services.   The  Company  expects  to  offer  wireless  services  over  its  ownfacilities,  and has purchased in FCC auctions PCS and LMDS  wireless  broadbandlicenses  covering  markets in Alaska.  The  Company is  required  by the FCC toprovide  adequate  broadband PCS service to at least one-third of the populationin its licensed  areas within five years of being licensed and two-thirds of thepopulation in its licensed areas within ten years of being licensed. The Companyis required by the FCC to provide  `substantial  service' in its service  regionwithin 10 years to retain its LMDS  license.  The  licenses  are granted for tenyear terms from the original  date of issuance and may be renewed by the Companyby meeting the FCC's renewal criteria and upon compliance with the FCC's renewalprocedures.                                       16Products.  The Company's  long-distance  services industry segment is engaged inthe transmission of interstate and intrastate  switched MTS and private line andprivate network  communication  service between the major communities in Alaska,and the remaining  United States and foreign  countries.  The Company's  messagetoll services  include  intrastate,  interstate and  international  direct dial,toll-free 800, 888 and 877 services, 900 services, GCI calling card, debit card,operator and enhanced  conference  calling,  frame relay,  SDN, ISDN  technologybased  services,  as well as  termination  of  northbound  toll  service for MCIWorldCom, Sprint and several large resellers who do not have facilities of theirown in Alaska. The Company also provides  origination of southbound calling cardand  toll-free  800,  888 and 877 toll  services  for MCI  WorldCom  and Sprint.Regulated  telephone  relay  services for the deaf,  hard-of-hearing  and speechimpaired are provided through the Company's operator service center. The Companyoffers  its  message  services  to  commercial,   residential,   and  governmentsubscribers.  Subscribers may generally cancel service at any time. Toll relatedservices  account for  approximately  65.0%,  70.0%,  and 86.0% of the Company's1998,  1997, and 1996 revenues,  respectively.  Private line and private networkservices utilize voice and data transmission  circuits,  dedicated to particularsubscribers,  which link a device in one  location  to  another  in a  differentlocation.The Company has positioned  itself as a price and customer service leader in theAlaska  telecommunication  market. Rates charged for the Company's long-distanceservices  are  designed  to be equal to or below those for  comparable  servicesprovided by its competitors.In addition to  providing  communication  services,  the Company  also  designs,sells,  services  and  operates,  on  behalf  of  certain  customers,  dedicatedcommunication and computer networking equipment and provides field/depot,  thirdparty, technical support, telecommunications consulting and outsourcing servicesthrough its Network  Solutions  business.  The Company also supplies  integratedvoice and data  communication  systems  incorporating  interstate and intrastatedigital private lines,  point-to-point  and multipoint private network and smallearth station  services.  The  Company's  Network  Solutions  sales and servicesrevenue  totaled $13.3,  $10.2 and $10.8 million in the years ended December 31,1998, 1997 and 1996, respectively, or approximately 5.4%, 4.5% and 6.6% of totalrevenues,  respectively.  Presently,  there are five  companies  in Alaska  thatactively sell and maintain data and voice communication systems.The  Company's  ability  to  integrate   telecommunications  networks  and  datacommunication  equipment  has allowed it to maintain its market  position on thebasis of "value added" support  services  rather than price  competition.  Theseservices  are  blended  with  other  transport  products  into  unique  customersolutions, including managed services and outsourcing.Facilities. Currently, the Company's telecommunication facilities comprise majorearth stations at Eagle River,  Fairbanks,  Juneau, Prudhoe Bay, Valdez, Kodiak,Sitka,  Ketchikan,  Unalaska  and  Cordova,  all  in  Alaska  and  at  Issaquah,Washington,  serving  the  communities  in their  vicinity.  The Eagle River andFairbanks  earth  stations  are  linked  by  digital  microwave   facilities  todistribution  centers in Anchorage  and  Fairbanks,  respectively.  The Issaquahearth  station is  connected  with the Seattle  distribution  center by means ofdiversely  routed  fiber  optic  cable  transmission  systems,  each  having thecapability  to  restore  the other in the event of  failure.  The  Juneau  earthstation and  distribution  centers are colocated.  The  Ketchikan,  Prudhoe Bay,Valdez,  Kodiak,  Sitka,  Unalaska and Cordova  installations consist only of anearth station.  The Company constructed  microwave  facilities serving the KenaiPeninsula communities and owns a 49 percent interest in an earth station locatedon Adak Island in Alaska.  The Company  maintains an operator  service center inWasilla,  Alaska. Each of the distribution  centers contains electronic switchesto route calls to and from local exchange  companies and, in Seattle,  to obtainaccess to MCI WorldCom,  Sprint and other facilities to distribute the Company'ssouthbound traffic to the remaining 49 states and international destinations.The Company,  using its DAMA  facilities,  expanded its network to 56 additionallocations  within the State of Alaska in 1996.  The digital  DAMA system  allowscalls to be made between  remote  villages  using only one satellite hop therebyreducing satellite delay and capacity  requirements while improving quality. TheCompany   obtained  the  necessary  APUC  and  FCC  approvals   waiving  currentprohibitions  against  construction  of competitive  facilities in rural Alaska,allowing  for  deployment  of DAMA  technology  in 56 sites in rural Alaska                                        17on a demonstration basis.  Construction and partial deployment occurred in 1996,with  deployment  completed in 1997. All sites were  operational at December 31,1998.As described  previously,  the Company  completed  construction  and placed intoservice in February  1999 a fiber optic cable  connecting  Anchorage,  Whittier,Valdez,  Fairbanks and Juneau,  Alaska and Seattle Washington.  The Company alsoowns a portion of an  additional  undersea  fiber optic  cable.  The fiber opticcables allow the Company to carry its Anchorage,  Eagle River, Wasilla,  Palmer,Kenai Peninsula, Valdez, Whittier, Glenallen, Fairbanks, and Juneau area trafficto  and  from  the  contiguous  lower  48  states  over  terrestrial   circuits,eliminating the one-quarter second delay associated with satellite circuits. TheCompany's  preferred routing for this traffic is via undersea fiber optic cable,which makes available satellite capacity to carry the Company's rural interstateand intrastate traffic.The Company employs  satellite  transmission  for rural  intrastate  traffic andcertain other major routes and uses  advanced  digital  transmission  technologythroughout  its  system.  Pursuant  to  a  purchase  and  lease-purchase  optionagreement entered into in August 1995 the Company leases C-band  transponders onHughes  Communications  Galaxy,  Inc.  (now PanAmSat  Corporation  ("PanAmSat"))Galaxy IX satellite and has agreed to acquire satellite transponders on PanAmSatGalaxy XR satellite to meet its long-term satellite capacity  requirements.  TheGalaxy XR  satellite  is  expected  to be placed in  service  during  the fourthquarter of 1999.The Company employs  advanced  transmission  technologies to carry as many voicecircuits as possible through a satellite  transponder  without sacrificing voicequality.  Other  technologies such as terrestrial  microwave  systems,  metalliccable, and fiber optics tend to be favored more for point-to-point  applicationswhere the volume of traffic is substantial. With a sparse population spread overa  wide  geographic  area,   neither   terrestrial   microwave  or  fiber  optictransmission  technology  will be  economically  feasible in rural Alaska in theforeseeable future.Customers. The Company had approximately 82,000, 89,000 and 93,900 active Alaskasubscribers  to its message  telephone  service at December 31,  1998,  1997 and1996,  respectively.  Approximately  12,100,  11,500  and  11,000 of these  werebusiness and government users at December 31, 1998, 1997 and 1996, respectively,and the remainder were residential customers. Reductions in residential customercounts are primarily  attributed to new  competitive  pressures in Anchorage andother markets served by the Company.  MTS revenues averaged  approximately $11.1million per month during 1998.Equal access  conversions  have been  completed in all  communities  served withCompany  owned  facilities.  The Company  estimates  that it carries over 40% ofbusiness  MTS  traffic and  approximately  35% of  residential  MTS traffic as astatewide average for both originating interstate and intrastate traffic.A summary of switched MTS traffic minutes follows:                                       Interstate Minutes                                         ---------------------------------------                                                                                  Combined                                                                                 Interstate                                                                       Inter-    and Inter-     Intra-                                   South-        North-      Calling  national    national       state       TotalFor Quarter ended                  bound         bound        Card    Minutes     Minutes       Minutes     Minutes- ----------------------------------------------------------------------------------------------------------------------                                                              (amounts in thousands)                                                                                                                        March 31, 1996                    76,369        49,158       6,094    1,890      133,511        28,910     162,421 June 30, 1996                     81,753        51,465       6,049    1,964      141,231        30,671     171,902 September 30, 1996                86,094        52,856       6,453    1,896      147,299        31,253     178,552 December 31, 1996                 82,255        55,675       7,863    1,774      147,567        30,374     177,941                             -----------------------------------------------------------------------------------------     Total 1996                   326,471       209,154      26,459    7,524      569,608       121,208     690,816                             =========================================================================================                                       18                                       Interstate Minutes                                         ---------------------------------------                                                                                  Combined                                                                                 Interstate                                                                       Inter-    and Inter-     Intra-                                   South-        North-      Calling  national    national       state       TotalFor Quarter ended                  bound         bound        Card    Minutes     Minutes       Minutes     Minutes- ----------------------------------------------------------------------------------------------------------------------                                                              (amounts in thousands)                                                                                                                        March 31, 1997                    83,284        56,588       8,110    1,741      149,723        32,020     181,743 June 30, 1997                     85,933        58,420       7,189    1,795      153,337        34,405     187,742 September 30, 1997                93,510        60,390       5,530    1,842      161,272        34,755     196,027 December 31, 1997                 87,657        61,992       5,157    1,703      156,509        31,962     188,471                             -----------------------------------------------------------------------------------------     Total 1997                   350,384       237,390      25,986    7,081      620,841       133,142     753,983                             ========================================================================================= March 31, 1998                    86,899        64,116       4,810    1,889      157,714        33,082     190,796    June 30, 1998                     93,817        67,296       4,353    1,910      167,376        34,890     202,266  September 30, 1998               103,423        61,690       4,227    1,940      171,280        35,748     207,028  December 31, 1998                 90,792        61,514       4,197    1,706      158,209        33,598     191,807                               -----------------------------------------------------------------------------------------     Total 1998                   374,931       254,616      17,587    7,445      654,579       137,318     791,897                                =========================================================================================All minutes data were taken from the Company's billing statistics reports.In 1993, the Company entered into a significant  business  relationship with MCI(now MCI WorldCom) which includes the following agreements:     -    the Company  agreed to terminate all  Alaska-bound  MCI  long-distance          traffic and MCI agreed to terminate all of the Company's long-distance          traffic  terminating  in the  lower 49  states  excluding  Washington,          Oregon and Hawaii;     -    MCI licensed certain service marks to the Company for use in Alaska;     -    MCI, in connection with providing to the Company credit enhancement to          permit the Company to purchase a portion of an undersea  cable linking          Seward, Alaska, with Pacific City, Oregon, leased from the Company all          of the capacity owned by the Company on the undersea fiber optic cable          and the Company leased such capacity back from MCI;     -    MCI purchased certain service marks of the Company; and     -    the parties agreed to share some communications  network resources and          various marketing,  engineering and operating  resources.  The Company          also handles MCI's 800, 888 and 877 traffic  originating in Alaska and          terminating  in the  lower 49 states  and  handles  traffic  for MCI's          calling  card  customers  when they are in Alaska.  Concurrently  with          these  agreements,  MCI  purchased  approximately  31%  (19.1%  as  of          December  31,  1998) of GCI's  Common  Stock  and  presently  controls          nominations to two seats on the Board.  In conjunction  with the Cable          Acquisition  Transactions,  MCI  purchased an  additional  two million          shares at a premium to the then  current  market price for $13 million          or $6.50 per share.Revenues  attributed  to MCI WorldCom in 1998,  and MCI in 1997 and 1996 totaled$35.9  million,  $34.3 million and $29.2 million,  or 14.5%,  15.3% and 17.7% oftotal revenues,  respectively.  The contract was amended in March 1996 extendingits term three years to March 31, 2001.  The amendment  also reduced the rate indollars to be charged by the Company for  certain MCI  WorldCom  traffic for theperiod April 1, 1996 through July 1, 1999 and thereafter.In 1993 the Company entered into a long-term agreement with Sprint,  pursuant towhich the Company  agreed to terminate  all  Alaska-bound  Sprint  long-distancetraffic  and  Sprint  agreed  to  handle  substantially  all  of  the  Company'sinternational  traffic.  Services  provided pursuant to the contract with Sprintresulted in  revenues in                                        191998,  1997 and 1996 of  approximately  $25.4  million,  $24.4 million and $18.8million,   or   approximately   10.3%,   10.9%  and  11.4%  of  total  revenues,respectively.With the contracts and amendment  described  above,  the Company is assured thatMCI WorldCom and Sprint, the Company's two largest  customers,  will continue tomake use of the Company's  service during the extended  term.  Both MCI WorldComand Sprint are major  customers  of the  Company in its  long-distance  servicesindustry  segment.  Loss  of  one  or  both  of  these  customers  would  have asignificant detrimental effect on the Company's revenues and contribution. Thereare no other  individual  customers,  the loss of which  would  have a  materialimpact on the Company's revenues or gross profit.Other common carriers traffic routed to the Company for termination in Alaska islargely  dependent  on  traffic  routed  to MCI  WorldCom  and  Sprint  by theircustomers.  Pricing  pressures,  new program offerings and market  consolidationcontinue to evolve in the markets  served by MCI WorldCom  and Sprint.  If, as aresult, their traffic is reduced, or if their competitors' costs to terminate ororiginate traffic in Alaska are reduced,  the Company's traffic will also likelybe reduced,  and the Company's  pricing may be reduced to respond to competitivepressures.  The  Company is unable to predict  the effect on the Company of suchchanges,  however given the materiality of other common carriers revenues to theCompany,  a  significant  reduction in traffic or pricing  could have a materialadverse effect on the Company's  financial  position,  results of operations andliquidity.The Company provided private line and private network communication products andservices,  including  SchoolAccess(TM) private line facilities, to approximately1,269 commercial and government  accounts in 1998.  Approximately 7.9%, 7.1% and8.5% of total revenues were generated by these products and services  during theyears ended December 31, 1998, 1997 and 1996, respectively.Although the Company has several  agreements to facilitate the  origination  andtermination of international toll traffic, it has neither foreign operations norexport sales (see Part I, Item 1. Business,  Foreign and Domestic Operations andExport Sales).Competition.  The  long-distance  industry  is  intensely  competitive,  rapidlyevolving and subject to constant technological change. Competition is based uponprice and  pricing  plans,  the types of  services  offered,  customer  service,billing services,  perceived quality,  reliability and availability.  Certain ofthe Company's  competitors are substantially  larger and have greater financial,technical  and  marketing  resources  than the  Company.  Although  the  Companybelieves it has the human and  technical  resources  to pursue its  strategy andcompete  effectively in this  competitive  environment,  its success will dependupon its ability to  profitably  provide high  quality,  high value  services atprices  generally  competitive  with,  or  lower  than,  those  charged  by  itscompetitors.In the long-distance market, the Company competes against AT&T Alascom, ATU, theMatanuska Telephone Cooperative,  certain smaller rural LEC affiliates,  and mayin the future compete against new market entrants.  AT&T Alascom,  the Company'sprincipal  competitor  in  long-distance  services,  has  substantially  greaterresources than the Company.  This  competitor's  interstate rates are integratedwith those of AT&T Corp. and are regulated in part by the FCC. While the Companyinitially competed based upon offering  substantial  discounts,  those discountshave been eroded in recent  years due to lowering of prices by AT&T  Alascom andentry of other competitors into the long-distance markets served by the Company.Under  the  terms of AT&T's  acquisition  of  Alascom,  AT&T  Alascom  rates andservices must mirror those offered by AT&T, so changes in AT&T prices indirectlyaffect  the  rates  and  services  of the  Company.  AT&T's  and AT&T  Alascom'sinterstate  prices are  regulated  under a price cap plan whereby  their rate ofreturn is no longer  regulated or restricted.  Price  increases by AT&T and AT&TAlascom  generally improve the Company's ability to raise its prices while pricedecreases  pressure the Company to follow.  The Company believes it has, so far,successfully  adjusted its pricing and  marketing  strategies to respond to AT&Tand other competitors' pricing practices.  However, if competitors significantlylower their  rates,  the Company may be forced to reduce its rates,  which couldhave a material adverse effect on the Company.                                       20As allowed under the 1996 Telecom Act, ATU and other LECs entered the interstateand  international  long-distance  market,  and pursuant to APUC  authorization,entered the intrastate  long-distance  market in 1997. ATU and other LECs resellother  carriers'  services in the provision of their  interstate  and intrastatelong-distance servicesA carrier has publicly  announced that it has begun  construction of fiber opticfacilities  connecting  points in Alaska to the lower 48  states,  with  serviceexpected to commence in 1999.  An additional  fiber system would provide  directcompetition  to the  Company's  provision  of service on its owned  fiber  opticfacilities.  The Company believes it can successfully  compete with products andservices offered by the competing carrier.In the wireless  communications  services  market,  the  Company's  PCS businessexpects to compete  against  the  cellular  subsidiaries  of AT&T and ATU in theAnchorage  market and the  cellular  subsidiaries  of PTI and others  outside ofAnchorage.Cable ServicesIndustry.  The programmed video services industry includes traditional broadcasttelevision, cable television,  wireless cable, and DBS systems. Cable televisionproviders have added non-broadcast programming,  utilized improved technology toincrease  channel  capacity and expanded service markets to include more denselypopulated  areas  and  those  communities  in  which  off-air  reception  is notproblematic.  Broadcast  television  stations  including network  affiliates andindependent  stations  generally  serve the  urban  centers.  One or more  localtelevision  stations may serve smaller  communities.  Rural  communities may notreceive  local  broadcasting  or  have  cable  systems  but may  receive  directbroadcast programming via a satellite dish.In Alaska,  cable  television was introduced in the 1970s to provide  televisionsignals to communities with few or no available off-air  television  signals andto communities  with poor reception or other  reception  difficulties  caused byterrain  interference.  Since that time,  as on the  national  level,  the cabletelevision providers in Alaska have added non-broadcast programming.Advancements in technology,  facility  upgrades and network  expansion to enablemigration to digital  programming  are expected to have a significant  impact oncable  services in the future.  The  industry  is expected to be  challenged  bychanging  federal,  state  and  local  regulations,   intense  competition,  anduncertain technologies and standards.Acquisitions  and  mergers are  shaping  the cable  industry in a  technologicalconvergence  similar to what is  happening in the  telecommunications  industry.AT&T has  received  stockholder  and  regulatory  approvals  and  closed its $48billion  takeover  of cable  television  provider  Tele-Communications  Inc.  inFebruary  1999,  gaining the last mile  connection to homeowners  with fiber andcoaxial cable over which it is expected to sell online access and Internet phoneservice. AT&T is also negotiating with other cable companies for access to theirlines.Convergence  of TV and the  Internet  isn't  expected  to  become  a  widespreadphenomenon until at least 2000.  Analysts expect that as many as 5 million cablesubscribers may sign up in 1999 for high-speed  cable modems that will give themaccess to the Internet.  The Company is currently offering such high-speed cablemodem access in the Anchorage area.Basic  cable  pricing  is  expected  to be  impacted  by  two  forces;  possiblereimposition of rate regulations and additional  competition from wireless cableproviders.  After  averaging  3.4%  growth  for the last  five  years,  industryanalysts project that cable subscriber  growth in 1999 may slow to 1.8%, or 66.6million homes. Industry analysts predict that cable providers may see a 12% hikein ad revenues, to $6.9 billion.Direct-broadcast   satellite   operators   increased  their   subscriptions   byapproximately 39% in 1998, to 8.9 million,  according to industry analysts.  Theindustry  is  expected  to add 2.6 million  subscribers  in 1999.  With  digitaltransmissions  and  compression,  cable  operators  are  better  able to offer avariety and quality of channels to rival DBS, with pay-per-view choices that canapproximate video-on-demand.                                       21Digital  video is  projected to grow  significantly  over the next three to fouryears as cable  network  upgrade  efforts are  completed and the cost of digitalset-top  technology  decreases.  Margins  related  to  digital  programming  areexpected  to  climb  due  to  the  ability  to  reuse  programming  at low or noincremental cost.Analysts  believe data  services  will be an  additional  opportunity  for cableproviders in the next three to five years and that cable will be the most widelyavailable,  most cost  efficient  way to access the Internet at very high speedsand with high video quality. The incremental opportunity for cable from data mayrival  that  of  digital  video  according  to  industry  analysts.   Additionalopportunities  are expected in  voice-over  cable  applications  that will allowcable providers to offer local telephone service to cable subscribers.The  market  for  programmed  video  services  in  Alaska  includes  traditionalbroadcast  television,  cable  television,  wireless  cable,  and  DBS  systems.Broadcast  television  stations  including  network  affiliates and  independentstations  serve the urban  centers  in  Alaska.  Seven,  four and two  broadcaststations  serve  Anchorage,  Fairbanks  and Juneau,  respectively.  In addition,several smaller  communities  such as Bethel are served by one local  televisionstation.  Other rural  communities  without cable systems receive a single statesponsored channel of television by a satellite dish and a low power transmitter.In Alaska,  cable  television was introduced in the 1970s to provide  televisionsignals to communities with few or no available off-air  television  signals andto communities  with poor reception or other  reception  difficulties  caused byterrain  interference.  Since that time,  as on the  national  level,  the cabletelevision  providers in Alaska have added non-broadcast  programming,  utilizedimproved technology to increase channel capacity and expanded service markets toinclude more densely  populated  areas and those  communities  in which  off-airreception is not problematic.General.  As a result of acquisitions  completed effective October 31, 1996, theCompany  has become  Alaska's  leading  cable  television  service  provider  toresidential,  commercial  and  government  users  in the  State of  Alaska.  TheCompany's  cable  television  systems serve 26 communities  and areas in Alaska,including  the state's  three largest  urban areas,  Anchorage,  Fairbanks,  andJuneau.  The state-wide  Company cable systems  consist of  approximately  1,806miles of installed cable plant having 300 to 550 MHz of channel capacity.The  Company  completed  a $12.5  million  upgrade  in 1998  that  significantlyincreased  the  capacity  and  reliability  of the  Anchorage  and Juneau  cablesystems.  The Company laid more than 200 miles of fiber optic cable in Anchorageand increased the carrying  capacity of 900 miles of cable  television line from450 MHz to 550 MHz.The  result of such  upgrades  is an  increase  in channel  capacity  and systemreliability,  facilitating the delivery of additional video  programming and newservices such as enhanced video,  high-speed Internet access and telephony,  andthe capability to support two-way  applications such as cable modems and digitalcable.  The Company  completed field testing and deployed its digital  convertercable service in Anchorage in 1998. Digital  compression has enabled the Companyto increase the channel capacity of its Anchorage cable  communications  systemsto more than 100 channels,  provide digital audio  channels,  as well as improvepicture and sound quality.Products. The programming services offered to subscribers of the Company's cabletelevision systems differ by system (all information as of December 31, 1998).Anchorage,  Bethel,  Kenai and  Soldotna  systems.  Each  system  offers a basicservice. In addition, Anchorage and Bethel offer a CPS. A NPT is only offered inthe Anchorage cable system. The Anchorage system,  which is located in the urbancenter for Alaska, is fully addressable,  with all optional services  scrambled,aside from the broadcast basic. Kenai,  Soldotna, and Bethel had fewer channels,less service  options and less an urban  orientation,  and use traps for programcontrol.  As a result,  these smaller systems do not have access to pay-per-viewservices.                                       22The composition and rates of the levels of service vary between the systems. TheAnchorage  cable system offers a basic  service that  includes 21 channels.  TheAnchorage  cable system  offers a CPS that includes 29 channels at an additionalcost.  Subscribers,  for an additional cost, receive the six channel NPT servicewhich includes TNT, CNN, Discovery, MSNBC, Outdoor Life and the Sci-/Fi Channel.The Bethel cable system  offers a basic  service and a CPS of 13 channels for anadditional  cost per month.  Basic service for the  Kenai/Soldotna  cable systemconsisted of 32 channels.  Pay TV services are available either  individually oras part of a value package. Commercial subscribers such as hospitals, hotels andmotels  were  charged  negotiated  monthly  service  fees.  Apartment  and othermulti-unit dwelling complexes received basic services at a negotiated bulk rate.Fairbanks,  Juneau,  Ketchikan  and  Sitka  systems.  The  programming  servicescurrently offered to subscribers are structured so that each cable system offersa basic service and a CPS. Each of the cable systems has different basic servicepackages at different rates. Fairbanks, the second largest city in Alaska, has afully addressable  system and offers a 12 channel basic and 33 channel CPS tier.Three  channels of  pay-per-view  are  available  to basic and CPS  subscribers.Fairbanks,  North  Pole,  Fort  Wainwright,  and  Eielson Air Force Base are allserved by the Fairbanks headend and have the same lineup.  Fort Greely, a remotemilitary post, is a stand-alone system, which is fully addressable.  Fort Greelyhas 8  basic  channels,  a 21  channel  CPS  tier,  and 1  pay-per-view  channelavailable to all subscribers.  The Juneau cable system offers a 13 channel basicservice  package and a Tier 1 that  includes  basic service plus an additional 4channels.  The system  also offers a CPS Tier 2 that  consists of basic  serviceplus Tier 1 service and additional 40 channels.  The Ketchikan system offers a 9channel  basic  service and a CPS Tier 1 that  consists of basic service plus 33additional channels.  The system also offers a NPT Tier 2 that consists of basicservice, the CPS Tier 1 and an additional 5 channels. The Sitka system offers an8 channel basic service.  Expanded basic service  includes basic service plus 40additional channels.The Juneau  system was upgraded in 1998.  The  Ketchikan  and Sitka  systems areexpected to be upgraded in 2000. The Juneau  upgrade  consisted of extending thebandwidth to 550Mhz,  activating the reverse and introducing advanced analog settop boxes. The new set tops allowed Juneau subscribers access to impulse pay perview including highly secured 24 hour adult products,  30 channels of CD qualitymusic and a new on screen navigator.Kodiak, Valdez, Cordova, Petersburg,  Wrangell, Kotzebue and Nome systems. Thesesystems  offer up to 30 channels of the most popular  basic cable  channels,  aswell as the major broadcast networks,  packaged into three levels of service. InNome,  Kotzebue and Cordova,  basic service  consists of three channels,  one ofwhich is a PBS  channel.  PBS service is also  included  with the 10 channels ofbasic service in Kodiak,  7 in Valdez and 5 each in Wrangell and Petersburg.  Inaddition,  Wrangell and  Petersburg  have matching  line-ups with 30 channel CPStiers, 10 channel NPT tiers and 5 channels of premium service.  Nome offers a 23channel  CPS Tier 1, 9 channel  CPS Tier 2 and 5 channels  of  premium  service.Kotzebue closely matches Nome with the exception of one less channel in both CPSTier 1 and premium offering.  In addition to basic service,  Cordova offers a 22channel CPS Tier 1, 10 Channel CPS Tier 2 with 4 premium channels available.In 1998,  system  upgrades  were  completed in Kodiak and Valdez.  In Kodiak,  6channels  were  added  to  basic  service.  The CPS  tier  added 8 new  channelsincluding Disney which was formally a premium service.  The NPT tier was reducedto 11 channels with 2 new networks.  Premium services were repackaged for bettervalue.  The total available  channels are now 47. Nome and Kotzebue  systems arebeing  upgraded with  completion  expected in March 1999. The upgrade will allowthe launch of  additional  programming  and the shift of Disney from  premium totier service. The Cordova system is expected to be upgraded in 2000.Seward system. The Seward cable system was upgraded in 1997. Total channels wereincreased to 49,  packaged in two levels of service.  Basic service was expandedfrom 3 to 8 channels.  CPS had 30 channels  (including  basic  service)  and wasexpanded to 44. All of the  channels,  with the  exception of local  originationprogramming and a single translator channel licensed to the City of Seward, werereceived  via  satellite.  In addition  there were five  channels of premium payservices.  The system is fully  addressable.  The system provides 12 channels to300 outlets in a State of Alaska correction  facility through a separate receiveand headend site.                                       23Homer system.  The Homer cable system was upgraded in 1997.  Total channels wereincreased to 50 packaged into two levels of service.  Basic service was expandedfrom 8 channels to 12. CPS had 36 channels  (including  basic service  channels)and was expanded to 45 channels. All of the channels, with the exception of fourlocal translator  channels and local origination  programming,  are received viasatellite.  In addition,  five channels of premium pay services are offered. Thesystem is fully addressable.Facilities.  The Company's cable television businesses are located in Anchorage,Eagle River, Chugiak,  Peters Creek, Kenai,  Soldotna,  Bethel, Fort Richardson,Elmendorf Air Force Base, Fairbanks,  Fort Wainwright,  North Pole, Fort Greely,Eielson Air Force Base, Juneau, Sitka, Ketchikan, Petersburg, Wrangell, Cordova,Homer, Sitka, Valdez,  Kodiak,  Kotzebue,  and Nome, Alaska.  Company facilitiesinclude cable plant and head-end distribution equipment. Certain of the head-enddistribution  centers are  colocated  with customer  service and  administrativeoffices.Customers.   As  of  December  31,  1998  the  Company  cable   systems   passedapproximately  171,000 homes or  approximately  77% of all households in Alaska,and served approximately  112,000 subscribers.  1998 revenues derived from cabletelevision  services totaled $57.6 million,  or 23.4% of total revenues in 1998.As of December 31, 1997 the Company cable systems passed  approximately  167,500homes or approximately 78% of all households in Alaska, and served approximately108,000  subscribers.  1997  revenues  derived  from cable  television  servicestotaled $55.2 million, or 24.7% of total revenues.Competition.  A number of cable  operators  other than the Company provide cableservice in Alaska. All of these companies are relatively small, with the largesthaving fewer than 6,500  subscribers.  Cable television systems face competitionfrom alternative  methods of receiving and distributing  television  signals andfrom  other  sources  of news,  information  and  entertainment  such as off-airtelevision  broadcast  programming,  newspapers,  movie theaters,  live sportingevents,  interactive  computer  services,   Internet  services  and  home  videoproducts,  including  videotape  cassette and video disks. The extent to which acable television system is competitive depends, in part, upon the cable system'sability to provide quality programming and other services at competitive prices.The  Company's  Fairbanks,  Alaska  system faces  significant  competition  fromalternative  cable  television  providers.  Upgrades to the Company's  Fairbanksfacilities,  expanded  product  offerings  and increased  marketing  efforts areexpected to increase  market  penetration  from 45.6% at December 31, 1998.  TheCompany's average market  penetration rate for all systems was 61.4% at December31, 1998.The 1996  Telecom Act  authorizes  LECs and others to provide a wide  variety ofvideo  services  competitive  with  services  provided  by cable  systems and toprovide cable services directly to subscribers.  Certain LECs in Alaska may seekto provide video services within their telephone service areas through a varietyof  distribution  methods.  Cable  systems  could  be  placed  at a  competitivedisadvantage if the delivery of video services by LECs becomes  widespread sinceLECs  may  not  be  required,  under  certain  circumstances,  to  obtain  localfranchises  to deliver  such video  services  or to comply  with the  variety ofobligations  imposed  upon  cable  systems  under  such  franchises.  Issues  ofcross-subsidization  by LECs of video and telephony services also pose strategicdisadvantages for cable operators seeking to compete with LECs who provide videoservices.The Cable Systems face limited additional competition from private SMATV systemsthat serve condominiums,  apartment and office complexes and private residentialdevelopments.  The operators of these SMATV  systems often enter into  exclusiveagreements  with  building  owners  or  homeowners'  associations.  Due  to  thewidespread  availability of reasonably priced earth stations,  SMATV systems nowcan offer both improved  reception of local television  stations and many of thesame  satellite-delivered  program services offered by franchised cable systems.The ability of the Cable Systems to compete for  subscribers in residential  andcommercial developments served by SMATV operators is uncertain. The 1996 TelecomAct gives cable operators  greater  flexibility with respect to pricing of cabletelevision  services provided to subscribers in multi-dwelling  unit residentialand  commercial  developments.  It also broadens the definition of SMATV systemsnot subject to regulation as a franchised cable television service.                                       24The  availability of  reasonably-priced  HSD earth stations  enables  individualhouseholds to receive many of the satellite-delivered  program services formerlyavailable only to cable  subscribers.  Furthermore,  the 1992 Cable Act containsprovisions,  which the FCC has  implemented  with  regulations,  to enhance  theability  of cable  competitors  to  purchase  and make  available  to HSD ownerscertain satellite-delivered cable programs at competitive costs.In recent years, the FCC and the Congress have adopted policies providing a morefavorable operating  environment for new and existing technologies that provide,or have the  potential to provide,  substantial  competition  to cable  systems.These technologies include,  among others, DBS services that transmit signals bysatellite  to  receiving  facilities  located on the  premises  of  subscribers.Programming  is  currently  available  to the owners of DBS  facilities  throughconventional, medium and high-powered satellites.DBS systems are  expected to use video  compression  technology  to increase thechannel  capacity of their  systems to provide  movies,  broadcast  stations andother program services  competitive  with those of cable systems.  The extent towhich DBS systems are  competitive  with the service  provided by cable  systemsdepends,  among other  things,  on the  availability  of reception  equipment atreasonable  prices and on the ability of DBS  operators  to provide  competitiveprogramming.  DBS services do not currently  provide local  programming  and DBSsignals are subject to degradation from atmospheric  conditions such as rain andsnow.  The receipt of DBS signals in Alaska  currently has the  disadvantage  ofrequiring subscribers to install larger satellite dishes (generally three to sixfeet in diameter) because of the weaker satellite signals currently available innorthern  latitudes.  In addition,  existing  satellites  have a relatively  lowaltitude above the horizon when viewed from Alaska, making their signals subjectto  interference  from  mountains,  buildings and other  structures.  This couldchange in the future as more transponder  space becomes available in the westernarc through consolidation of DBS operators.Cable  television  systems  also  compete  with  wireless  program  distributionservices such as MMDS  providers  which use low-power  microwave  frequencies totransmit video programming over-the-air to subscribers. There are MMDS operatorswho  are  authorized  to  provide  or  are  providing  broadcast  and  satelliteprogramming  to  subscribers  in areas served by several of the Company's  cablesystems, including Anchorage,  Fairbanks and Juneau.  Additionally,  the FCC hasallocated  frequencies in the 28 gHz band for a new multichannel  wireless videoservice  similar to MMDS.  MMDS  operations  have the  disadvantage of requiringline-of-sight   access,  making  their  signals  subject  to  interference  frommountains,  buildings and other structures, and are subject to interference fromrain,  snow and  wind.  In 1997 ATU  purchased  a  minority  interest  in a MMDSprovider  that  currently  provides  service in some  portions of Anchorage  andFairbanks.  At this time,  the MMDS service has not been  integrated  with ATU'stelecommunications  services.  The Company is unable to predict whether wirelessvideo services will have a material impact on its operations.Other new technologies may become  competitive with  non-entertainment  servicesthat cable  television  systems  can offer.  The FCC has  authorized  televisionbroadcast  stations to transmit textual and graphic  information  useful both toconsumers and businesses.  The FCC also permits commercial and non-commercial FMstations to use their subcarrier  frequencies to provide non-broadcast  servicesincluding data  transmissions.  The FCC established an over-the-air  interactivevideo and data service that will permit two-way  interaction with commercial andeducational  programming along with  informational  and data services.  LECs andother  common  carriers  also  provide   facilities  for  the  transmission  anddistribution  to homes and  businesses of interactive  computer-based  services,including the Internet,  as well as data and other non-video  services.  The FCChas  conducted  spectrum  auctions  for licenses to provide PCS. PCS will enablelicense holders,  including cable operators, to provide voice and data services.The Company acquired a license to provide PCS services in Alaska.Advances in communications  technology as well as changes in the marketplace areconstantly  occurring.  The Company  cannot  predict the effect that  ongoing orfuture  developments might have on the  telecommunications  and cable televisionindustries or on the Company specifically.                                       25Cable television  systems generally operate pursuant to franchises  granted on anon-exclusive  basis.  The 1992 Cable Act gives  local  franchising  authoritiesjurisdiction  over basic cable  service  rates and  equipment  in the absence of"effective  competition,"  prohibits  franchising  authorities from unreasonablydenying requests for additional  franchises and permits franchising  authoritiesto operate  cable  systems.  Well-financed  businesses  from  outside  the cableindustry  (such as the public  utilities  that own certain of the poles on whichcable is  attached)  may become  competitors  for  franchises  or  providers  ofcompeting services.Local Access ServicesIndustry. 1998 was distinguished by a continuing lack of significant progress inopening the local access market up to  competition  on an  industry-wide  basis.While the most lucrative business customers have benefited from increased choiceand lower  prices,  residential  customers  in most  areas  will have to wait aslong-distance companies and CLECs drive to lower access costs through regulatoryrelief,  development of their own local access  solutions such as telephony overcable, LMDS wireless access, or the use of third party suppliers.Use of the Internet and expansion in the use of LANs and WANs have  generated anincreased  demand for access lines.  In the home,  the growing use of computers,faxes,  and the  Internet  led to  increases  in  access  lines and  usage.  Theemergence of new services,  including digital cellular,  personal communicationsservices,  interactive  TV, and video dial tone, has created  opportunities  forsignificant growth in local loop services.  These  opportunities are also layingthe foundation for a restructuring of the newly  competitive local loop servicesmarket.  Not only  are  competitors  entering  the core  business  of the  localtelephone  companies,  but they are beginning to pursue the fast-growing marketsthat previously were closed to them, such as consumer video.General. The Company's local access services division entered the local servicesmarket in Anchorage in 1997, providing services to residential,  commercial, andgovernment  users.  The Company can access  approximately  93% of Anchorage arealocal loops from its collocated remote digital facilities and DLC installations.The Company has experienced  significant  difficulty in successfully  convertingcustomers from the ILEC,  due to, among other  factors,  a lack of access to theILEC's  operational  support  systems that would allow the Company to access itscustomer's   information  held  by  the  ILEC,  lack  of  adequate   state-levelregulations  supporting  local  competition,  and  disputes  with the ILEC  overinterpretation of interconnection and arbitration agreements. In spite of strongdemand,  in the third and fourth  quarters  of 1998 the Company  delayed  activemarketing to residential local service customers in Anchorage.  The Company willcontinue to pursue resolution of these existing  operational and interconnectionissues while continuing to develop alternative methods of local entry.Products.  The Company  began  offering  local  exchange  services  initially inAnchorage  during late  September  1997.  The  Company's DLC system allows it tooffer full featured,  switched-based  local service products to both residentialand  commercial  customers.  In areas where the Company  does not have access toloop facilities, it offers resale of the ILEC's local service.The Company offers a number of specially priced package offerings and offers theonly local customer service representatives in Alaska who are available 24 hoursa day.  Features offered include enhanced call waiting,  caller ID, caller ID oncall waiting,  free caller ID box,  anonymous call rejection,  call  forwarding,call forward busy,  call forward no answer,  enhanced  call waiting,  fixed callforwarding, follow me call, intercom service forwarding, multi-distinctive ring,per  line  blocking,  selective  call  forwarding,  selective  call  acceptance,selective call rejection,  selective distinctive alert, speed calling, three waycalling,   voice  mail,  inside  wire  repair  plan,   non-listed   number,  andnon-published number.Facilities.  During 1997 the Company  installed  a host 5ESS  switching  system.Additionally the Company  collocated six remote  facilities beside or within theILEC's local  switching  offices to access  unbundled loop network  elements andinstalled a DLC system beside a smaller,  seventh ILEC wire center. These remoteand DLC  facilities  are  interconnected  to the host  switch via  Company-owneddiversely  routed  fiber optic  links.  During  1998,  the Company  expanded itscapacity  at each of the  remote  facilities  to allow  access to  approximately79,000   Anchorage   loops.   Additionally,   the  Company   provided   its  ownfacilities-based services to over 80 of                                       26Anchorage's  larger business  customers through further expansion and deploymentof SONET fiber transmission facilities,  leased and HDSL T-1 facilities, and DLCfacilities.Customers.  The  Company  had  approximately  28,300 and 3,300  active  lines inservice from Anchorage  subscribers to its local access services at December 31,1998 and 1997,  respectively.  1998 and 1997 revenues  derived from local accessservices   totaled  $9.9  million  and  $610,000,   respectively,   representingapproximately  4.0% and 0.3% of the Company's  total  revenues in 1998 and 1997,respectively.  Approximately  1,000  additional  lines  were  sold and  awaitingconnection at December 31, 1998.Competition.  In the local exchange  services market,  the Company believes thatthe 1996 Telecom Act, judicial  decisions,  and state legislative and regulatorydevelopments  will  increase  the  likelihood  that  barriers to local  exchangecompetition will be substantially reduced or removed.  These initiatives includerequirements  that LECs  negotiate  with entities such as the Company to provideinterconnection to the existing local telephone network,  to allow the purchase,at  cost-based  rates,  of access to unbundled  network  elements,  to establishdialing parity, to obtain access to rights-of-way and to resell services offeredby the ILECs.LECs in Alaska outside of Anchorage have a "rural  exemption" from some of theirobligations  until and unless the exemption is examined and not continued by theAPUC.  Certain  pricing  provisions  of  the  FCC's   Interconnection   Decisionimplementing  the  interconnection  portions  of the 1996  Telecom Act have beenchallenged and were stayed by the U.S. Court of Appeals for the Eighth  Circuit,on a  jurisdictional  basis.  The United States Supreme Court, in February 1999,upheld the  jurisdictional  basis of the FCC's  decisions,  and has remanded theproceeding back to the Eighth Circuit for further  proceedings.  In addition the1996  Telecom Act  expressly  prohibits  any legal  barriers to  competition  inintrastate or interstate  communications service under state and local laws. The1996 Telecom Act further  empowers the FCC, after notice and an opportunity  forcomment,  to  preempt  the  enforcement  of any  statute,  regulation  or  legalrequirement that prohibits, or has the effect of prohibiting, the ability of anyentity to provide any intrastate or interstate  telecommunications  service. SeePart I, Item 1. Business,  Regulation,  franchise authorizations and tariffs formore information.In the local exchange  market,  the Company will compete  against  various ILECsincluding  ATU in Anchorage and PTI in Juneau.  PTI acquired the local  exchangeportion of the  Fairbanks  Municipal  Utilities  System in 1997 and now provideslocal exchange services in Fairbanks.  The ACS acquisition of ATU is expected toclose in 1999. ACS management  includes former  executives of PTI. See - Part I,Item 1. Business,  Historical  development of the Company's  business during thepast fiscal year Local Access Services for more information.In early 1997 the  Company  received  approval  from the APUC to  provide  localexchange services throughout ATU's existing service area. The APUC also approvedan interconnection  agreement  negotiated and arbitrated between the Company andATU  pursuant to the terms of the 1996 Telecom Act. The Company now offers localexchange  services to  substantially  all  consumers  in the ATU  service  area,primarily through its own facilities and unbundled local loops leased from ATU.The Company  intends to enter new markets,  particularly  Juneau and  Fairbanks,with its local  access  services.  Full  competitive  entry into new  markets issubject to approval by the APUC. See -Regulation,  Franchise  Authorizations andTariffs, Telecommunications Operations for more information.The 1996 Telecom Act also provides ILECs with new competitive opportunities. TheCompany  believes  that  it has  certain  advantages  over  these  companies  inproviding  its  telecommunications   services,  including  the  Company's  brandawareness by Alaskan customers, its facilities based telecommunications network,and management's  prior experience in, and knowledge of, the Alaskan market. The1996 Telecom Act provides that rates charged by ILECs for interconnection to theincumbent carrier's network are to be nondiscriminatory  and based upon the costof providing such interconnection,  and may include a "reasonable profit," whichterms are subject to interpretation by regulatory  authorities.  If ILECs chargealternative   providers  (such  as  the  Company)  unreasonably  high  fees  forinterconnection to the LECs' networks, or significantly lower their retail ratesfor                                        27local exchange services, the alternative provider's local service business couldbe placed at a significant competitive disadvantage.Internet ServicesIndustry.  The Internet  continues  to expand at a  significant  rate,  with thenumber of sites almost doubling each year. In February 1998 there were more than29  million  sites  on the  Internet  worldwide,  with a  projected  90  millionconnected  by the turn of the  century.  The  signs are that the  Internet  willbecome as commonplace as the TV in a few years. Analysts predict that the amountof Internet  traffic will likely continue to rise as fast as capacity allows forthe  foreseeable  future.  Voice over the  Internet  may have a major  impact onbusiness and the entire telecommunications industry in the future.The use of Intranets  has  significantly  increased,  with an estimated 60 to 70percent of US corporations using an Intranet.  Current growth rates suggest that138 million  people  worldwide will be connected from their desks to an in-houseIntranet by 2001.An Intranet allows  information to be decentralized in an organization.  It usesInternet-compatible  standards, available on virtually any computer. An Intranetis also - by mainframe computer standards - fast and inexpensive to set up. Thisadds to its appeal,  particularly  for larger companies with complex legacy datasystems.Industry analysts believe that one of the key tools for business  advantage overthe next two years will be the Extranet. This is an Intranet (internal,  secure,full  of  sensitive  data)   connected  to  trusted   customers  and  suppliers.Implementing an Extranet creates the concept of the virtual enterprise, in whichall the  organizations in a supply chain integrate their systems and operations.This concept is not new, but has been  achieved in the past using EDI on privatenetworks. Extranets promise to remove many of the obstacles which have preventedfirms from  sharing  their data  (stock  levels,  production  schedules,  demandforecasts) with customers and suppliers. However, there are issues of standards,lack of consumer confidence and security.Music sits  perfectly  in the  digital  stream so it comes as no  surprise  thatleading  record  companies  and music  retailers  are  selling  direct  over theInternet.  According  to  industry  analysts,  CD sales to date are  small - $47million in 1997 - but are predicted to grow fast.  Technology  may turn productsinto a service, delivered over the Internet.Concerns about Internet-based commerce remain. One serious preoccupation is thatan overloaded Internet might crash. However,  capacity on the Internet continuesto increase.  Technology  enables fiber to carry more data,  and more cables andsatellite  channels are being  introduced.  In 1995,  the world's entire telecomtraffic  amounted  to a data rate of a terabit  a  second.  Currently,  a singleoptical fiber strand can carry three times that data.While more viewers are tuning out television networks,  they're logging onto theInternet.  In 1999,  43.9 million  American  households are expected by industryanalysts  to  be  able  to  go  online,  roughly  43%  of  the  country  raisingonline-shopping revenues by a projected 69%, to $11.9 billion, while advertisingrevenues will increase by a projected 62%, to $3.3 billion.Major court decisions and legislative action are expected to shape the worldwideInternet in 1999, including     -    the impact of the U.S. vs. Microsoft antitrust trial,     -    possible  recognition  that  traditional   encryption   regulation  is          obsolete,     -    minimum-regulation approaches to information privacy as a new consumer          movement  tries  to  use  international  privacy  law to  rein  in the          behavior of large corporations in the U.S. economy,     -    the  potential for  continuing  increases in  inexperienced  investors          investing  through online brokers and increased  instances of investor          losses that lead to arbitration claims against the brokers,     -    the  impact of more  Internet  patents  preventing  others  from doing          certain things, such as designing and maintaining certain types of Web          sites,     -    the legality of hyperlinking without permission,                                       28     -    pending re-introduction of database legislation in Congress that would          create a new form of intellectual property in databases,     -    decisions  regarding  whether   cryptographic  source  code  is  First          Amendment speech, and hence exportable,  or that no program is covered          by the First Amendment,     -    renewed  calls  by  the  FBI  and  others  for  domestic  controls  of          obscenity-related  cryptography,  and      -    the  development  of rating and filtering  systems  outside the United          States.General.  The Company's Internet services division entered the Internet servicesmarket in 1998,  providing  retail  services  to  residential,  commercial,  andgovernment users and providing  wholesale  carrier services to other ISPs. Cablenetwork  upgrades  in the  Anchorage  area have  allowed  the  Company  to offerhigh-speed cable modem Internet access, the first of its kind in Alaska.Products.  The  Company  currently  offers  two  types of  Internet  access  forresidential  use: dial up Internet  access and  high-speed  cable modem Internetaccess.  The  Company's  initial  residential  high-speed  cable modem  Internetservice  offers 256 kilobits per second  access speed as compared  with up to 56kilobits per second  access  through  standard  copper wire modem  access.  Free24-hour  customer  service and  technical  support via  telephone  or online areprovided.  The service also offers free data  transfer up to five  gigabytes permonth and can be left connected  24-hours-a-day,  365-days-a-year,  allowing forreal-time information and e-mail access.The  Company  believes  cable  modem  services  will be the next  generation  ofInternet access.  This service is expected to appeal to families,  professionalswho work-at-home,  educators,  those involved in electronic  commerce and peoplewho  enjoy  interactive   computer  games.  Cable  modem  access  overcomes  thelimitations of slower dial-up service and the higher cost of dedicated  Internetservices and provides always-available, high-speed access to the Internet. Cablemodems use Company owned coaxial cable that provides cable  television  service,instead of the traditional  copper wire from the ILEC.  Coaxial cable has a muchgreater carrying  capacity than telephone wire and can be used to simultaneouslydeliver both cable television and Internet access services.The Company  currently  offers several  Internet service packages for commercialuse: Dial up access, frame relay and high-speed cable modem Internet access. TheCompany's business  high-speed cable modem Internet service offers access speedsranging from 128  kilobits  per second to 512 kilobits per second,  free monthlydata  transfers of up to 25  gigabytes  and free  24-hour  customer  service andtechnical  support.  Business services also include dedicated Internet access, apersonalized web page and e-mail addressing.Significant  new marketing  campaigns were introduced in February and March 1999featuring  bundled  residential  and commercial  Internet  products.  Additionalbandwidth was made available to the Company's  Internet  segment  resulting fromcompletion  of the  Alaska  United  Project  as  previously  described.  The newInternet  offerings  are  coupled  with the  Company's  long-distance  and localservices   offerings  and  provide  free  basic  Internet  services  if  certainlong-distance  or  local  services  plans  are  selected.  Value-added  Internetfeatures are available for additional charges.The  Company  provides  Internet  access  for  Alaska  schools  using a platformincluding many of the latest advancements in technology.  Services are deliveredthrough a locally available circuit,  existing Company lines, or satellite earthstations.Facilities.  The Internet is an interconnected global public computer network oftens of thousands of packet-switched  networks using the Internet protocol.  TheInternet is effectively a network of networks routing data throughout the world.Access to the  Internet is provided  by the Company  using a platform  includingmany  of the  latest  advancements  in  technology.  The  physical  platform  isconcentrated  in Anchorage  and is extended into many remote areas of the state.The Company's Internet platform includes:     -    A frame relay trunk connecting the Anchorage POP to an Internet access          point in Seattle.     -    Routers on each end of the frame  relay  trunk to control  the flow of          data over the trunk.                                       29     -    The  Anchorage  POP consists of a main router,  a bank of servers that          perform  proxy  and  cache  functions,   database  servers   providing          authentication  and user demographic data, and access servers for dial          in users.SchoolAccess(TM)  Internet  service delivery to over 152 schools in rural Alaskais accomplished by three variations on primary delivery systems:     -    In  communities  where the Company has  terrestrial  interconnects  or          existing  service  over  regional  earth  stations,  the  Company  has          configured  intermediate  distribution  POPs.  Schools that are within          these service boundaries are connected locally to one of those POPs.     -    In  communities  where the  Company  has  extended  telecommunications          services  via its DAMA  earth  station  program,  SchoolAccess(TM)  is          provided via a satellite trunk circuit to an intermediate distribution          POP at the Eagle River Earth Station.     -    In communities or remote  locations where the Company has not extended          telecommunications  services,   SchoolAccess(TM)  is  provided  via  a          dedicated (usually on premise) DAMA VSAT satellite  station.  The DAMA          connects to an intermediate distribution POP located in Anchorage.In all cases,  Internet  access is delivered to a router  located at the servicepoint.  The Company's  Internet  management  platform  constantly  monitors thisdemarcation  router;  continual  communication  is  maintained  with  all of therouters in the  network.  The  availability  and quality of service,  as well asstatistical  information  on traffic  loading,  are  continuously  monitored forquality assurance. The management platform has the capability to remotely accessthe  routers,  permitting  changes in router  configuration  without the need tophysically be at the service point.GCI.net offers a unique  combination of innovative network design and aggressiveperformance  management.  The new Internet platform has received a certificationof Cisco  Powered  Network  status,  placing  it in the top one  percent  of allservice providers worldwide and the only ISP in Alaska with such designation.The  Company  operates  and  maintains  what it believes  is the  largest,  mostreliable, and highest performance Internet network in the State of Alaska.Customers. The Company had approximately 7,200 active residential subscribers toits Internet  service at February 9, 1999.  1998 revenues  derived from Internetservices totaled $4.6 million,  representing approximately 1.9% of the Company'stotal revenues.Competition.  The Internet industry is intensely  competitive,  rapidly evolvingand subject to constant  technological  change.  Competition is based upon priceand pricing plans,  the types of services  offered,  customer  service,  billingservices, perceived quality, reliability and availability.  Although the Companybelieves it has the human and  technical  resources  to pursue its  strategy andcompete  effectively in this  competitive  environment,  its success will dependupon its ability to profitably provide high quality, high value bundled servicesat prices  generally  competitive  with,  or lower  than,  those  charged by itscompetitors.As of December 31,  1998,  the Company  competed  with more than 25 Alaska basedInternet providers, and competed with other domestic, non-Alaska based providersthat  provide  national  service   coverage.   Several  of  the  providers  havesubstantially  greater  financial,  technical and marketing  resources  than theCompany.  The  Company  has,  so far,  successfully  adjusted  its  pricing  andmarketing strategies to respond to competitors' pricing practices.Environmental RegulationsThe Company and its subsidiaries may undertake  activities which,  under certaincircumstances  may  affect the  environment.  Accordingly,  they are  subject tofederal,  state,  and local  regulations  designed  to  preserve  or protect theenvironment.  The FCC, the Bureau of Land  Management,  the U.S. Forest Service,and the National Park Service are required by the National  Environmental PolicyAct of 1969 to consider the  environmental  impact                                        30prior to the  commencement of facility  construction.  Management  believes thatcompliance  with  such  regulations  has no  material  effect  on the  Company'sconsolidated  operations.  The  principal  effect of Company  facilities  on theenvironment  would be in the form of  construction of facilities and networks atvarious locations in Alaska and between Alaska and Seattle  Washington.  Companyfacilities  have been  constructed in accordance  with federal,  state and localbuilding codes and zoning  regulations  whenever and wherever  applicable.  Somefacilities  may be on lands  that may be subject  to state and  federal  wetlandregulation.Uncertainty as to the  applicability of  environmental  regulations is caused inmajor part by the  federal  government's  decision  to  consider a change in thedefinition of wetlands.  Most of the Company's facilities are on lands leased bythe  Company,  and,  with  respect to all of these  facilities,  the  Company isunaware of any violations of lease terms or federal,  state or local regulationspertaining to preservation or protection of the environment.The Company's Alaska United project consists,  in part, of deploying  land-basedand undersea fiber optic cable facilities between Anchorage,  Whittier,  Valdez,and Juneau,  Alaska and Seattle,  Washington.  The engineered  route passes overwetlands and other  environmentally  sensitive  areas.  The Company believes itsconstruction  methods used for buried  cable have a very  minimal  impact on theenvironment.  The agencies,  among others,  that are involved in permitting  andoversight of the  Company's  cable  deployment  efforts are the US Army Corps ofEngineers,  The National Marine Fisheries Service, US Fish & Wildlife,  US CoastGuard,  National Oceanic and Atmospheric  Administration,  Alaska  Department ofNatural  Resources,  and  the  Alaska  Office  of the  Governor  -  GovernmentalCoordination.  The Company is unaware of any  violations  of  federal,  state orlocal  regulations or permits  pertaining to  preservation  or protection of theenvironment.In the course of operating the cable  television  systems,  the Company has usedvarious materials defined as hazardous by applicable  governmental  regulations.These  materials  have been used for  insect  repellent,  locate  paint and poletreatment,  and as heating fuel, transformer oil, cable cleaner,  batteries, andin various  other ways in the  operation  of those  systems.  Management  of theCompany  does not believe that these  materials,  when used in  accordance  withmanufacturer instructions,  pose an unreasonable hazard to those who use them orto the environment.Patents, Trademarks, Licenses, Certificates of Public Convenience and Necessity,and Military FranchisesNeither the Company nor its affiliates  hold patents,  franchises or concessionsfor  telecommunications  services or local access  services.  The Company  holdsregistered  service  marks  for the terms  SchoolAccess(TM),  Free  Fridays  forBusiness(TM) and Unlimited  Weekends(TM).  The  Communications Act of 1934 givesthe FCC the  authority to license and  regulate  the use of the  electromagneticspectrum for radio communication. The Company through its long-distance servicesindustry  segment holds  licenses for its  satellite and microwave  transmissionfacilities for provision of its long-distance  services.  The Company acquired alicense for use of a  30-megahertz  block of spectrum for providing PCS servicesin Alaska.  The PCS  license has an initial  duration  of 10 years.  The Companyexpects to renew the PCS license for an additional 10-year term under FCC rules.The Company acquired a LMDS license in 1998 for use of a 150-megahertz  block ofspectrum in the 28 gigahertz Ka-band for providing wireless  services.  The LMDSlicense has an initial duration of 10 years. Within 10 years,  licensees will berequired  to  provide  'substantial  service'  in  their  service  regions.  TheCompany's operations may require additional licenses in the future.Applications  for transfer of control of 15 certificates  of public  convenienceand necessity held by the acquired cable  companies to the Company were approvedin an APUC order dated  September  23, 1996,  with  transfers to be effective onOctober 31, 1996.  Such transfer of control  allowed the Company to take controland operate the cable systems of the acquired cable companies located in Alaska.The approval of the transfer of the 15  certificates  of public  convenience andnecessity to the Company by the FCC is not required  under federal law, with onearea of limited  exception.  The Cable Companies operate in part through the useof several radio-band  frequencies licensed through the FCC. These licenses weretransferred to the Company prior to October 31, 1996.                                       31The Company  obtained  consent of the military  commanders at the military basesserviced by the  acquired  cable  systems to the  assignment  of the  respectivefranchises for those bases.Regulation, Franchise Authorizations and TariffsThe  following  summary of  regulatory  developments  and  legislation  does notpurport  to  describe  all  present  and  proposed  federal,  state,  and  localregulation and legislation  affecting the Company's  businesses.  Other existingfederal and state regulations are currently the subject of judicial proceedings,legislative hearings and administrative proposals which could change, in varyingdegrees,  the manner in which these industries  operate.  Neither the outcome ofthese  proceedings  nor their  impact upon the  industries  in which the Companyoperates or the Company itself can be predicted at this time.Telecommunications  Operations.  The  following  is a summary of  federal  laws,regulations  and  tariffs,  and a  description  of certain  state and local lawspertaining to the telecommunications  operations of the Company  (long-distance,local access and wireless).General.  The Company is subject to  regulation  by the FCC and by the APUC as anon-dominant  provider  of  long-distance   services.   Among  other  regulatoryrequirements,  the  Company  is  required  to  file  tariffs  with  the  FCC forinterstate and international  service,  and with the APUC for intrastate servicebut such tariffs  routinely  become effective  without  intervention by the FCC,APUC or other third parties  since the Company is a  non-dominant  carrier.  TheCompany  received  approval from the APUC in February 1997 to permit the Companyto provide  local  access  services  throughout  ATU's  existing  service  area.Military  franchise  requirements  also affect the Company in its  provision  oftelecommunications and cable television services to military bases.Because the Company is authorized  to offer local access  services in Anchorage,it is regulated as a CLEC by the APUC. In addition,  the Company will be subjectto other regulatory requirements,  including certain requirements imposed by the1996 Telecom Act on all LECs, which  requirements  include  permitting resale ofLEC services, number portability, dialing parity, and reciprocal compensation.As a PCS and LMDS licensee, the Company is subject to regulation by the FCC, andmust comply with certain buildout and other  conditions of the license,  as wellas with the FCC's  regulations  governing the PCS and LMDS  services.  On a morelimited basis, the Company may be subject to certain regulatory oversight by theAPUC  (e.g.,  in the areas of  consumer  protection),  although  states  are notpermitted  to  regulate  the rates of PCS,  LMDS and other  commercial  wirelessservice  providers.  PCS and LMDS  licensees  may also be subject to  regulatoryrequirements  of local  jurisdictions  pertaining  to, among other  things,  thesiting of tower facilities.1996 Telecom Act and Related Rulings. A key industry  development was passage ofthe 1996  Telecom  Act that was signed  into law  February  8, 1996.  The Act isintended by Congress to open up the  marketplace  to  competition  and has had adramatic impact on the telecommunications  industry. The legislation breaks downthe old barriers that prevented three groups of companies,  the LECs,  includingthe  RBOCs,  the  long-distance  carriers,  and the  cable  TV  operators,  fromcompeting  head-to-head  with  each  other.  The  Act  requires  LECs to let newcompetitors  into their  business.  It also  requires  the LECs to open up theirnetworks to ensure that new market entrants have a fair chance of competing. Thebulk of the  legislation  is devoted to  establishing  the terms under which theLECs must open up their networks.Enactment of the bill affected local exchange service markets almost immediatelyby  requiring   states  to  authorize   local  exchange   service   competition.Competitors, including resellers are able to market new bundled service packagesto attract  customers.  Over the long term, the  requirement  that LECs unbundleaccess to their networks may lead to increased price competition. Local exchangeservice  competition  may not  take  hold  immediately  because  interconnectionarrangements are not in place in most areas.In August 1996, the FCC adopted rules and regulations,  including  pricing rules(the "Pricing Rules") to implement the local competition  provisions of the 1996Telecom  Act,   including   with  respect  to  the  terms  and                                          32conditions of interconnection  with LEC networks and the standards governing thepurchase of unbundled  network elements and wholesale  services from LECs. Theseimplementing  rules rely on state public  utilities  commissions  to develop thespecific  rates and  procedures  applicable  to  particular  states  within  theframework prescribed by the FCC.On July 18,  1997,  the United  States  Court of Appeals for the Eighth  Circuitissued a decision  holding that the FCC lacks  authority  to  establish  pricingrules to implement the sections of the local competition  provisions of the 1996Telecom Act applicable to interconnection  with LEC networks and the purchase ofunbundled network elements and wholesale  services from LECs.  Accordingly,  theCourt  vacated the rules that the FCC had adopted in August 1996,  and which hadbeen  stayed by the Court  since  September  1996.  However,  since the stay wasissued,  most states have used the Pricing Rules as  guidelines in  establishingpermanent  rates, or interim rates that will apply pending the  determination ofpermanent rates in subsequent state proceedings.  Nevertheless,  there can be noassurance  that the prices and other  conditions  established in each state willprovide for effective local service entry and competition or provide the Companywith new market opportunities.On October 14, 1997,  the Eighth  Circuit  Court of Appeals  vacated an FCC Rulethat had prohibited ILECs from separating  network elements that are combined inthe LEC's  network,  except at the  request  of the  competitor  purchasing  theelements.  This  decision  increased  the  difficulty  and  costs  of  providingcompetitive  local access services through the use of unbundled network elementspurchased from the ILECs.On January 25, 1999, the United States Supreme Court issued a decision reversingin material part the decisions of the Eighth Circuit, and specifically upholdingthe  authority  of  the  FCC to  establish  pricing  rules  and  preventing  theseparation  of network  elements  that are already  combined.  The Supreme Courtremanded the cases to the Eighth circuit for further proceedings consistent withits decision.In 1997, the FCC issued important decisions on the structure and level of accesscharges and  universal  service.  These  decisions  will impact the  industry inseveral ways, including the following:     -    An  additional  subsidy  was  created  to  support  telecommunications          services for schools,  libraries and rural health care providers.  All          carriers  providing  telecommunications  services are required to fund          this program,  which is capped at $2.7 billion per year. However, LECs          can pass their portion of these costs on to long-distance carriers.     -    Per-minute  interstate  access rates charged by LECs will decline over          time to become cost-based.      -    Certain  monthly  flat-rate  charges  paid  by  some  local  telephone          customers increased beginning in 1998.     -    Certain per-minute access charges paid by long-distance companies were          converted to flat monthly charges based on pre-subscribed lines.     -    A basis has been  established for replacing  implicit access subsidies          with an explicit interstate universal service fund beginning in 1999.A number of LECs,  long-distance  companies and others have appealed some or allof the FCC's orders. The effective date of the orders has not been delayed,  butthe appeals are expected to take a year or more to conclude. The impact of theseFCC decisions on the Company is difficult to  determine,  but is not expected tobe material.Some BOCs have also challenged the 1996 Telecom Act  restrictions on their entryinto  long-distance  markets as  unconstitutional.  A federal  district court inWichita Falls, Texas, ruled the restrictions unlawful because they constituted alegislative  act that  imposed  punishment  without a judicial  proceeding.  TheUnited States government and others filed appeals of this decision.  The federaldistrict  court  delayed  implementing  its decision  pending  resolution of theappeals.  The Company is unable to predict the  outcome of such  rulemakings  orlitigation  or the  substantive  effect  (financial  or  otherwise)  of the 1996Telecom Act and the rulemakings on the Company.                                       33On January  26,  1998,  the United  States  Supreme  Court  agreed to review theaforementioned  decisions  of the Eighth  Circuit  Court of  Appeals.  Under thenormal procedures of the Court,  arguments were heard and a decision is expectedin 1999.In February 1999 the U.S. Supreme Court lifted a court order that barred the FCCfrom  imposing  local phone  competition  rules on the five Bell  companies as acondition for allowing  them to offer  long-distance  service.  The decision waswidely expected. The justices,  without comment,  voided a second Eighth CircuitCourt of Appeals opinion. The lower court had barred the FCC from imposing thosesame pricing rules as requirements for approval of long-distance applications.The BOCs continue to challenge the substance of the FCC rules,  arguing that therules do not allow them to fully  recover  the money they spent  building  theirnetworks. The Eighth Circuit Court of Appeals may rule on this issue in 1999.On March 4, 1999, an Alaska Superior Court Judge  determined that the APUC erredin reaching  its  decision to deny the  Company's  request to provide full localtelephone  service in  Fairbanks  and  Juneau,  Alaska.  This  service  would beprovided in competition  against PTI, the existing monopoly provider.  The Courtremanded the case back to the APUC for  proceedings  leading to a decision on orbefore July 2, 1999.  Among other things,  the Court has  instructed the APUC tocorrectly  assign  the burden of proof to PTI rather  than the  Company,  and todecide on the Company's  specific  requests to provide  service in Fairbanks andJuneau based on criteria  established  in the 1996 Telecom Act. The Court statedthat   "this   must   be   accomplished   cognizant   of  the   intent   of  theTelecommunications  Act to promote competition in the local market." The Companybelieves this  decision is important to bring about the benefits of  competitionto other communities in Alaska.Reciprocal  Compensation.  In response  to  requests  by  carriers  that the FCCclarify  how  local  telephone  companies  should  compensate  one  another  fordelivering traffic to Internet service providers,  the FCC concluded on February25, 1999 that long-distance carriers are bound by their existing interconnectionagreements,  as  interpreted  by state  commissions,  and thus  are  subject  toreciprocal compensation obligations to the extent provided by such agreements oras determined by state  commissions.  The FCC declared that Internet  traffic isjurisdictionally  mixed and appears to be largely  interstate in nature. But thedecision  preserves  the rule that exempts the  Internet  and other  informationservices from  interstate  access  charges.  This means that those consumers whocontinue to access the Internet by dialing a  seven-digit  number will not incurlong-distance  charges when they do so. In a notice of proposed rulemaking,  theFCC also asked for  comment on  proposals  governing  future  carrier-to-carriercompensation for handling this traffic.Specifically,  the FCC had been  asked by  parties to  determine  whether  localtelephone  companies  are  entitled  to  receive  reciprocal   compensation  fordelivering  calls to their  customers that are  information  service  providers,particularly  ISPs.  Generally,  new  entrants to the local  telephone  businesscontend  that  calls  to ISPs are  local  traffic  and,  therefore,  subject  toreciprocal compensation. Incumbent local telephone companies, on the other hand,generally  contend  that  calls  to ISPs are  beyond  the  scope  of  reciprocalcompensation agreements.The FCC,  in its  decision,  noted  that it  traditionally  has  determined  thejurisdictional  nature of communications by the end points of the communication.Accordingly, the FCC concluded that the calls at issue in that proceeding do notterminate  at  the  ISPs'  local   servers,   but  continue  to  their  ultimatedestinations, specifically at websites that are often located in other states orcountries.  As a result,  the FCC found that,  although some Internet traffic isintrastate,  a  substantial  portion  of  Internet  traffic  is  interstate  andtherefore subject to federal jurisdiction.This jurisdictional decision does not, however,  determine whether calls to ISPsare subject to reciprocal compensation in any particular instance. The FCC notedthat  parties  may have  agreed  that  ISP-bound  traffic  should be  subject toreciprocal compensation, or a state commission, in the exercise of its statutoryauthority to arbitrate  interconnection  disputes,  may have imposed  reciprocalcompensation  obligations  for this traffic.  In either case, the FCC noted thatcarriers are bound by their existing  interconnection  contracts, as interpretedby state commissions.                                       34The  FCC  also  stated  that  adopting  a  federal  rule  to  govern  reciprocalcompensation in the future would serve the public interest. As a general matter,the FCC tentatively  concluded that commercial  negotiations are the ideal meansof  establishing  the  terms  of  interconnection   contracts,   and  reciprocalcompensation agreements in particular.  The FCC, therefore, asked for comment ontwo alternative proposals for implementing such a regime in the future.The  FCC  tentatively   concluded  that  inter-carrier   compensation  for  thisinterstate   traffic  should  be  governed   prospectively  by   interconnectionagreements  negotiated  and  arbitrated  under  sections 251 and 252 of the Act.Resolution  of failures to reach  agreement on  inter-carrier  compensation  forinterstate ISP-bound traffic then would occur through arbitrations  conducted bystate commissions, which are appealable to federal district courts. The FCC alsoasked  for  comment  on  an  alternative  proposal,  under  which  inter-carriercompensation  would be governed by a set of federal rules, and disputes would beresolved by federal, state, or third-party arbitrators.Cable  Services.  The  following  is a summary of federal  laws and  regulationsmaterially affecting the growth and operation of the cable services industry anda description of certain state and local laws.General.  The  Company is subject to  federal  and state  regulation  as a cabletelevision  operator  pursuant  to the 1984 Cable Act and 1992  Cable Act,  bothamended by the 1996 Telecom Act. The 1992 Cable Act  significantly  expanded thescope of cable television  regulation on an industry-wide basis by imposing rateregulation, carriage requirements for local broadcast stations, customer serviceobligations  and other  requirements.  The 1992  Cable  Act and the FCC's  rulesimplementing   that  Act  generally  have  increased  the   administrative   andoperational expenses and in certain instances required rate reductions for cabletelevision systems and have resulted in additional  regulatory  oversight by theFCC and state or local authorities.Principal  responsibility  for  implementing  the policies of the 1934, 1984 and1992 Cable Acts and the 1996 Telecom Act is allocated  between the FCC and stateor local  franchising  authorities.  The FCC and state  regulatory  agencies arerequired to conduct numerous rulemaking and regulatory  proceedings to implementthe 1996 Telecom  Act,  and such  proceedings  may  materially  affect the cableindustry.Rate  Regulation.  The 1992  Cable  Act  authorized  rate  regulation  for cablecommunications  services and  equipment in  communities  that are not subject to"effective  competition,"  as defined by federal law. Most cable  communicationssystems are now subject to rate regulation for basic cable service and equipmentby local officials under the oversight of the FCC, which has prescribed detailedcriteria for such rate  regulation.  The 1992 Cable Act also requires the FCC toresolve  complaints about rates for CPSTs (other than  programming  offered on aper  channel or per  program  basis,  which  programming  is not subject to rateregulation)  and to reduce any such  rates  found to be  unreasonable.  The 1996Telecom Act eliminates  the right of  individuals  to file CPST rate  complaintswith the FCC and  requires  the FCC to issue a final order  within 90 days afterreceipt of CPST rate  complaints  filed by any franchising  authority.  The 1992Cable Act limits  the  ability of cable  television  systems to raise  rates forbasic and certain  cable  programming  services  (collectively,  the  "RegulatedServices").FCC  regulations  govern rates that may be charged to subscribers  for RegulatedServices.  The FCC uses a  benchmark  methodology  as the  principal  method  ofregulating rates for Regulated  Services.  Cable operators are also permitted tojustify rates using a cost-of-service  methodology,  which contains a rebuttablepresumption of an industry-wide 11.25% after tax rate of return on an operator'sallowable rate base. Franchising authorities are empowered to regulate the ratescharged  for  monthly  basic  service,   for  additional  outlets  and  for  theinstallation,  lease and sale of equipment  used by  subscribers  to receive thebasic cable service tier, such as converter boxes and remote control units.  TheFCC's rules require franchising authorities to regulate these rates on the basisof actual cost plus a reasonable  profit, as defined by the FCC. Cable operatorsrequired  to  reduce  rates may also be  required  to  refund  overcharges  withinterest.  The FCC has also adopted  comprehensive  and restrictive  regulationsallowing  operators  to modify  their  regulated  rates on a quarterly or annualbasis  using  various  methodologies  that  account for changes in the number ofregulated  channels,  inflation and increases in certain external costs, such asfranchise and other  governmental  fees,  copyright and  retransmission  consentfees, taxes,                                         35programming fees and franchise-related  obligations.  The Company cannot predictwhether the FCC will modify these "going forward" regulations in the future.The 1996  Telecom Act  provides  for rate  deregulation  of CPSTs by March 1999,although  legislation  has  been  proposed  to  extend  the  regulatory  period.Deregulation  may occur  sooner for systems in markets  where  comparable  videoprogramming services,  other than DBS, are offered by local telephone companies,or their  affiliates,  or by third parties using the local  telephone  company'sfacilities, or where "effective competition" is established under the 1992 CableAct. The 1996 Telecom Act also  modifies the uniform rate  provision of the 1992Cable Act by prohibiting  regulation of nonpredatory bulk discount rates offeredto subscribers in commercial and residential  developments and permits regulatedequipment  rates to be  computed by  aggregating  costs of broad  categories  ofequipment at the franchise, system, regional or company level.Anti-Buy Through Provisions. The 1992 Cable Act requires cable systems to permitsubscribers  to  purchase  video  programming  offered by the  operator on a perchannel or a per program basis without the necessity of  subscribing to any tierof service, other than the basic cable service tier, unless the system's lack ofaddressable  converter boxes or other technological  limitations does not permitit to do so. The  statutory  exemption  for cable  systems  that do not have thetechnological  capability  to offer  programming  in the manner  required by thestatute is available until a system obtains such capability,  but not later thanDecember 2002. The FCC may waive such time periods, if deemed necessary. Many ofthe  Company's  systems  do not  have  the  technological  capability  to  offerprogramming in the manner  required by the statute and thus currently are exemptfrom complying with the requirement.Must Carry/Retransmission  Consent. The 1992 Cable Act contains broadcast signalcarriage  requirements that allow local commercial television broadcast stationsto elect once every three years to require a cable  system to carry the station,subject to certain exceptions,  or to negotiate for "retransmission  consent" tocarry  the  station.  A cable  system  generally  is  required  to  devote up toone-third of its activated channel capacity for the carriage of local commercialtelevision stations whether pursuant to the mandatory carriage or retransmissionconsent  requirements  of the 1992 Cable Act.  Local  non-commercial  televisionstations are also given mandatory  carriage rights;  however,  such stations arenot given the option to  negotiate  retransmission  consent for the  carriage oftheir  signals by cable  systems.  Additionally,  cable  systems are required toobtain  retransmission  consent for all distant commercial  television  stations(except for commercial  satellite-delivered  independent "superstations" such asWGN),  commercial  radio  stations  and certain  low-power  television  stationscarried  by such  systems.  In March  1997,  the US  Supreme  Court  upheld  theconstitutional  validity  of the 1992  Cable  Act's  mandatory  signal  carriagerequirements.  The FCC will conduct a  rulemaking  in the future to consider therequirements, if any, for mandatory carriage of digital television signals.Designated Channels.  The Communications Act permits franchising  authorities torequire cable  operators to set aside certain  channels for public,  educationaland governmental  access  programming.  The 1984 Cable Act also requires a cablesystem with 36 or more  channels to designate a portion of its channel  capacityfor commercial  leased access by third parties to provide  programming  that maycompete with services  offered by the cable operator.  The FCC has adopted rulesregulating:  (i) the maximum  reasonable  rate a cable  operator  may charge forcommercial use of the designated channel capacity; (ii) the terms and conditionsfor commercial use of such channels;  and (iii) the procedures for the expeditedresolution  of disputes  concerning  rates or commercial  use of the  designatedchannel capacity.Franchise  Procedures.  The 1984  Cable Act  affirms  the  right of  franchisingauthorities (state or local,  depending on the practice in individual states) toaward  one  or  more  franchises   within  their   jurisdictions  and  prohibitsnon-grandfathered  cable  systems  from  operating  without a franchise  in suchjurisdictions.  The 1992 Cable Act  encourages  competition  with existing cablesystems  by (i)  allowing  municipalities  to  operate  their own cable  systemswithout  franchises;  (ii)  preventing  franchising  authorities  from  grantingexclusive   franchises  or  from  unreasonably   refusing  to  award  additionalfranchises   covering  an  existing  cable  system's  service  area;  and  (iii)prohibiting (with limited  exceptions) the common ownership of cable systems andcolocated  MMDS or  SMATV  systems.  The FCC has  relaxed  its  restrictions  onownership of SMATV  systems to permit a cable  operator to                                        36acquire SMATV systems in the operator's  existing  franchise area so long as theprogramming  services provided through the SMATV system are offered according tothe terms and conditions of the cable operator's local franchise agreement.  The1996 Telecom Act provides that the  cable/SMATV  and cable/MMDS  cross-ownershiprules do not apply in any  franchise  area where the operator  faces  "effectivecompetition" as defined by federal law.The Cable Acts also  provide  that in  granting or  renewing  franchises,  localauthorities  may  establish   requirements  for  cable-related   facilities  andequipment,  but not for video programming or information  services other than inbroad  categories.  The Cable Acts limit the payment of franchise  fees to 5% ofrevenues  derived from cable  operations and permit the cable operator to obtainmodification of franchise  requirements  by the franchise  authority or judicialaction if warranted by changed  circumstances.  A federal  appellate  court heldthat a cable  operator's  gross  revenue  includes  all  revenue  received  fromsubscribers,  without deduction, and overturned an FCC order which had held thata  cable  operator's  gross  revenue  does  not  include  money  collected  fromsubscribers  that is allocated to pay local  franchise  fees. The Company cannotpredict the ultimate resolution of these matters. The 1996 Telecom Act generallyprohibits  franchising  authorities from (i) imposing  requirements in the cablefranchising  process  that  require,  prohibit  or  restrict  the  provision  oftelecommunications  services by an operator,  (ii)  imposing  franchise  fees onrevenues derived by the operator from providing telecommunications services overits  cable  system,  or  (iii)  restricting  an  operator's  use of any  type ofsubscriber equipment or transmission technology.The 1984 Cable Act contains  renewal  procedures  designed to protect  incumbentfranchisees  against  arbitrary  denials  of  renewal.  The 1992  Cable Act madeseveral  changes  to the  renewal  process  which  could  make it  easier  for afranchising  authority  to deny  renewal.  Moreover,  even if the  franchise  isrenewed,  the  franchising  authority  may seek to impose  new and more  onerousrequirements  such  as  significant  upgrades  in  facilities  and  services  orincreased franchise fees as a condition of renewal.  Similarly, if a franchisingauthority's  consent is required  for the  purchase or sale of a cable system orfranchise,  such  authority  may  attempt to impose more  burdensome  or onerousfranchise   requirements   in  connection  with  a  request  for  such  consent.Historically,  franchises  have  been  renewed  for  cable  operators  that haveprovided  satisfactory  services  and  have  complied  with  the  terms of theirfranchises.  The Company  believes  that it has  generally  met the terms of itsfranchises and has provided quality levels of service.  The Company  anticipatesthat its future franchise renewal prospects generally will be favorable.Various courts have considered  whether  franchising  authorities have the legalright to limit the number of franchises awarded within a community and to imposecertain  substantive  franchise  requirements (e. g. access channels,  universalservice  and  other   technical   requirements).   These   decisions  have  beeninconsistent and, until the US Supreme Court rules  definitively on the scope ofcable  operators' First Amendment  protections,  the legality of the franchisingprocess generally and of various specific franchise requirements is likely to bein a state of flux.Ownership  Limitations.  Pursuant to the 1992 Cable Act,  the FCC adopted  rulesprescribing national subscriber limits and limits on the number of channels thatcan be occupied on a cable  system by a video  programmer  in which the operatorhas  an  attributable  interest.  The  effectiveness  of  these  FCC  horizontalownership  limits has been  stayed  because a federal  district  court found thestatutory limitation to be unconstitutional. An appeal of that decision has beenconsolidated   with  appeals   challenging   the  FCC's   regulatory   ownershiprestrictions  and is pending.  The 1996  Telecom Act  eliminates  the  statutoryprohibition on the common ownership,  operation or control of a cable system anda television  broadcast  station in the same service area and directs the FCC toreview its broadcast-cable  ownership  restrictions.  Pursuant to the mandate ofthe  1996  Telecom  Act,  the  FCC  eliminated  its  regulatory  restriction  oncross-ownership of cable systems and national broadcasting networks.                                       37LEC Ownership of Cable Systems.  The 1996 Telecom Act made far-reaching  changesin the  regulation  of LECs that provide  cable  services.  The 1996 Telecom Acteliminated  federal legal  barriers to  competition  in the local  telephone andcable  communications  businesses,  preempted legal barriers to competition thatpreviously  existed  in state  and  local  laws and  regulations,  and set basicstandards  for  relationships  between  telecommunications  providers.  The 1996Telecom  Act  eliminated  the  statutory  telephone   company/cable   televisioncross-ownership  prohibition,  thereby  allowing LECs to offer video services intheir telephone  service areas.  LECs may provide  service as traditional  cableoperators  with local  franchises or they may opt to provide  their  programmingover  unfranchised   "open  video  systems,"  subject  to  certain   conditions,including, but not limited to, setting aside a portion of their channel capacityfor use by unaffiliated program distributors on a non-discriminatory  basis. The1996 Telecom Act  generally  limits  acquisitions  and  prohibits  certain jointventures between LECs and cable operators in the same market.Pole Attachment.  The Communications Act requires the FCC to regulate the rates,terms and  conditions  imposed by public  utilities  for cable  systems'  use ofutility pole and conduit space unless state  authorities  can  demonstrate  thatthey  adequately  regulate  pole  attachment  rates.  In the  absence  of  stateregulation,  the FCC administers  pole  attachment  rates on a formula basis. Insome cases,  utility  companies have increased  pole  attachment  fees for cablesystems  that have  installed  fiber optic cables and that are using such cablesfor the distribution of non-video  services.  The FCC has concluded that, in theabsence of state  regulation,  it has jurisdiction to determine  whether utilitycompanies  have justified  their demand for additional  rental fees and that theCommunications  Act does not permit disparate rates based on the type of serviceprovided over the equipment  attached to the utility's  pole. The FCC's existingpole  attachment  rate formula,  which may be modified by a pending  rulemaking,governs charges for utilities for attachments by cable operators  providing onlycable  services.  The 1996  Telecom Act and the FCC's  implementing  regulationsmodify the current  pole  attachment  provisions  of the  Communications  Act byimmediately permitting certain providers of telecommunications  services to relyupon the protections of the current law and by requiring that utilities  providecable systems and telecommunications  carriers with nondiscriminatory  access toany pole, conduit or right-of-way controlled by the utility. The FCC adopted newregulations  to  govern  the  charges  for pole  attachments  used by  companiesproviding telecommunications services, including cable operators. These new poleattachment  rate  regulations  will  become  effective  in  February  2001.  Anyresulting increase in attachment rates will be phased in equal annual incrementsover a period of five years,  beginning in February 2001. The ultimate impact ofany revised FCC rate formula or of any new pole attachment  rate  regulations onthe Company cannot be determined at this time.Other  Statutory  Provisions.  The 1992 Cable Act,  the 1996 Telecom Act and FCCregulations  preclude any satellite  video  programmer  affiliated  with a cablecompany,  or with a common carrier providing video  programming  directly to itssubscribers,  from favoring an affiliated  company over competitors and requiressuch  programmers  to  sell  their  programming  to  other   multichannel  videodistributors. These provisions limit the ability of program suppliers affiliatedwith cable companies or with common carriers providing satellite-delivered videoprogramming  directly  to  their  subscribers  to  offer  exclusive  programmingarrangements  to  their  affiliates.  In  December  1997,  the FCC  initiated  arulemaking to address a number of possible  changes to its program access rules.Among the  issues on which the FCC has sought  comment  is  whether  the FCC hasjurisdiction  to extend  its  program  access  rules to  terrestrially-deliveredprogramming, and if it does have such jurisdiction, whether it should expand therules in this fashion. This rulemaking is pending at the FCC.The 1992 Cable Act  requires  cable  operators to block fully both the video andaudio portion of sexually explicit or indecent  programming on channels that areprimarily  dedicated to sexually oriented  programming or alternatively to carrysuch programming only at "safe harbor" time periods currently defined by the FCCas the hours  between 10 p. m. to 6 a. m. The  Communications  Act also includesprovisions,  among others, concerning horizontal and vertical ownership of cablesystems,  customer  service,  subscriber  privacy,  marketing  practices,  equalemployment opportunity, obscene or indecent programming, regulation of technicalstandards and equipment compatibility.Other FCC Regulations.  The FCC revised its cable inside wiring rules to providea more specific  procedure  for the  disposition  of internal  cable wiring thatbelongs to an incumbent  cable  operator  that is forced to terminate  its                                        38cable  services  in a MDU  building  by the  building  owner.  The  FCC is  alsoconsidering additional rules relating to MDU inside wiring that, if adopted, maydisadvantage   incumbent  cable  operators.   The  FCC  has  various  rulemakingproceedings  pending  that will  implement  the 1996  Telecom  Act;  it also hasadopted  regulations  implementing  various provisions of the 1992 Cable Act andthe  1996   Telecom   Act  that  are  the   subject  of   petitions   requestingreconsideration  of various  aspects of its  rulemaking  proceedings.  Other FCCregulations  covering  such areas as equal  employment  opportunity,  syndicatedprogram exclusivity, network program non-duplication, closed captioning of videoprogramming,  registration of cable systems,  maintenance of various records andpublic inspection files, microwave frequency usage, origination cablecasting andsponsorship   identification,   antenna  structure  notification,   marking  andlighting,  carriage of local sports broadcast programming,  application of rulesgoverning  political   broadcasts,   limitations  on  advertising  contained  innon-broadcast children's programming,  consumer protection and customer service,indecent   programming,   programmer   access  to  cable  systems,   programmingagreements,  technical standards,  consumer electronics equipment  compatibilityand DBS  implementation.  The FCC has the  authority to enforce its  regulationsthrough the  imposition of substantial  fines,  the issuance of cease and desistorders and/or the  imposition  of other  administrative  sanctions,  such as therevocation of FCC licenses  needed to operate  certain  transmission  facilitiesoften used in connection with cable operations.Other bills and administrative proposals pertaining to cable communications havepreviously  been  introduced  in Congress or  considered  by other  governmentalbodies over the past several years. It is probable that further attempts will bemade by Congress and other  governmental  bodies  relating to the  regulation ofcommunications services.Copyright.  Cable  communications  systems  are  subject  to  federal  copyrightlicensing  covering  carriage of  television  and radio  broadcast  signals.  Inexchange for filing  certain  reports and  contributing  a  percentage  of theirrevenues to a federal copyright royalty pool, cable operators can obtain blanketpermission to retransmit  copyrighted  material on broadcast signals. The natureand amount of future payments for broadcast  signal carriage cannot be predictedat this time. In a report to Congress,  the Copyright  Office  recommended  thatCongress  make  major  revisions  of both the  cable  television  and  satellitecompulsory licenses to make them as simple as possible to administer, to providecopyright owners with full compensation for the use of their works, and to treatevery  multichannel  video delivery  system the same,  except to the extent thattechnological  differences or differences in the regulatory  burdens placed uponthe  delivery  system  justify  different  copyright  treatment.   The  possiblesimplification,  modification or elimination of the compulsory copyright licenseis the subject of continuing  legislative review. The elimination or substantialmodification  of  the  cable  compulsory  license  could  adversely  affect  theCompany's  ability  to  obtain  suitable  programming  and  could  substantiallyincrease the cost of programming that remains  available for distribution to theCompany's   subscribers.   The  Company  cannot  predict  the  outcome  of  thislegislative activity.Cable operators distribute programming and advertising that use music controlledby  the  two  principal  major  music  performing  rights   organizations,   theAssociation  of  Songwriters,  Composers,  Artists and  Producers  ("ASCAP") andBroadcast Music, Inc. ("BMI"). In October 1989, the special rate court of the USDistrict  Court for the Southern  District of New York imposed  interim rates onthe cable  industry's use of  ASCAP-controlled  music. The same federal districtcourt  established  a  special  rate  court  for  BMI.  BMI and  cable  industryrepresentatives  concluded  negotiations  for  a  standard  licensing  agreementcovering  the  performance  of BMI  music  contained  in  advertising  and otherinformation  inserted by operators into cable  programming  and on certain localaccess  and  origination  channels  carried  on cable  systems.  ASCAP and cableindustry  representatives  have met to  discuss  the  development  of a standardlicensing  agreement  covering  ASCAP-controlled  music in local origination andaccess  channels  and pay-per-  view  programming.  Although the Company  cannotpredict the ultimate  outcome of these industry  negotiations or the amount,  ifany,  of  license  fees it may be  required  to pay for past and  future  use ofASCAP-controlled   music,  it  does  not  believe  such  license  fees  will  besignificant  to the  Company's  financial  position,  results of  operations  orliquidity.State and Local  Regulation.  Because a cable  communications  system uses localstreets  and  rights-of-way,  cable  systems  are  subject  to state  and  localregulation.  Cable  communications  systems  generally are operated  pursuant                                        39to  non-exclusive  franchises,  permits or licenses granted by a municipality orother state or local  government  entity.  Franchises  generally are granted forfixed terms and in many cases are terminable if the  franchisee  fails to complywith material provisions. The terms and conditions of franchises vary materiallyfrom jurisdiction to jurisdiction.  Each franchise generally contains provisionsgoverning  cable  service  rates,   franchise  fees,   franchise  term,   systemconstruction and maintenance  obligations,  system channel capacity,  design andtechnical  performance,  customer service standards,  franchise renewal, sale ortransfer of the franchise,  territory of the franchisee,  indemnification of thefranchising  authority,  use and occupancy of public  streets and types of cableservices  provided.  The 1992 Cable Act immunizes  franchising  authorities frommonetary damage awards arising from regulation of cable  communications  systemsor decisions made on franchise grants, renewals, transfers and amendments.Internet Operations. The following is a summary of federal laws, regulations andtariffs,  and a description  of certain  state and local laws  pertaining to theInternet operations of the Company.With significant  growth in Internet activity and commerce over the past severalyears the FCC and other  regulatory  bodies have been  challenged to develop newmodels that allow them to achieve the public  policy  goals of  competition  anduniversal  service.  Many aspects of  regulation  and  coordination  of Internetactivities and traffic are evolving and are facing unclear  regulatory  futures.Changes in  regulations  in the future will have a  significant  impact on ISPs,Internet commerce and Internet services.The Internet has been able to grow and develop  outside the existing  regulatorystructure because the FCC has made conscious  decisions to limit the applicationof its rules.  The federal  government's  efforts have been  directed  away fromburdening the Internet with regulation. ISPs and other companies in the Internetindustry have not been required to gain  regulatory  approval for their actions.The 1996 Telecom Act adopts such a position.  The 1996 Act states that it is thepolicy of the United States "to preserve the vibrant and competitive free marketthat presently exists for the Internet and other interactive  computer services,unfettered by Federal or State regulation."Regulatory  policy approaches toward the Internet have focused on several areas:avoiding  unnecessary  regulation,  questioning the applicability of traditionalrules,   Internet   governance   (such  as  the  allocation  of  domain  names),intellectual property, network reliability, privacy, spectrum policy, standards,security, and international regulation.Government  may influence the evolution of the Internet in many ways,  includingdirectly regulating, participating in technical standards development, providingfunding,  restricting  anti-competitive behavior by dominant firms, facilitatingindustry  cooperation  otherwise  prohibited  by antitrust  laws,  promoting newtechnologies,  encouraging cooperation between private parties, representing theUnited  States  in  international   intergovernmental  bodies,  and  large-scalepurchasing of services.There are many ways  Internet  growth  could be  negatively  impacted  which mayrequire future regulation and oversight.  Moving toward proprietary standards orclosed networks would reduce the degree to which new services could leverage theexisting  infrastructure.  The absence of competition in the ISP market,  or thetelecommunications   infrastructure   market,   could  reduce   incentives   forinnovation.  Excessive or misguided  government  intervention  could distort theoperation of the  marketplace,  and lead companies to expend valuable  resourcesworking through the regulatory process.  Insufficient government involvement mayalso, however, have negative  consequences.  Some issues may require a degree ofcentral  coordination,  even  if  only  to  establish  the  initial  terms  of adistributed,  locally-controlled  system.  The end  result,  in the  absence  ofcollective  action,  may be an outcome  that no one  favors.  In  addition,  thefailure of the federal government to identify Internet-related areas that shouldnot be subject to regulation  leaves open  opportunities  for state,  local,  orinternational bodies to regulate excessively and/or inconsistently.There  is no  one  entity  or  organization  that  governs  the  Internet.  Eachfacilities-based  network  provider  that  is  interconnected  with  the  globalInternet controls  operational aspects of their own network.  Certain functions,                                       40such as domain  name  routing and the  definition  of the TCP/IP  protocol,  arecoordinated   by  an  array  of   quasi-governmental,   intergovernmental,   andnon-governmental bodies. The United States government, in many cases, has handedover responsibilities to these bodies through contractual or other arrangements.In other  cases,  entities  have  emerged to  address  areas of need such as theInternet Society ("ISOC"),  a non-profit  professional  society founded in 1992.ISOC  organizes  working groups and  conferences,  and  coordinates  some of theefforts  of  other  Internet   administrative  bodies.  Internet  standards  andprotocols  are  developed  primarily  by the  Internet  Engineering  Task  Force("IETF"), an open international body mostly comprised of volunteers. The work ofthe IETF is  coordinated by the Internet  Engineering  Steering  Group,  and theInternet  Architecture  Board,  which are  affiliated  with ISOC.  The  InternetAssigned Numbers Authority handles Internet  addressing matters under a contractbetween the Department of Defense and the Information  Sciences Institute at theUniversity of Southern California.The legal  authority of any of these bodies is unclear.  Most of the  underlyingarchitecture  of the  Internet was  developed  under the  auspices,  directly orindirectly,  of the United States  government.  The government has not, however,defined  whether it retains  authority over Internet  management  functions,  orwhether these  responsibilities  have been delegated to the private sector.  Thedegree to which any existing  body can lay claim to  representing  "the Internetcommunity"  is also  unclear.  Membership  in the existing  Internet  governanceentities is drawn primarily from the research and technical communities.The 1996 Telecom Act provides  little direct  guidance as to whether the FCC hasauthority to regulate  Internet-based  services.  Section 223 concerns access byminors to obscene,  harassing, and indecent material over the Internet and otherinteractive computer networks, and sections 254, 706, and 714 address mechanismsto promote the availability of advanced  telecommunications  services,  possiblyincluding  Internet  access.  Section 230 states a policy goal "to  preserve thevibrant and competitive  free market that presently  exists for the Internet andother interactive computer services, unfettered by Federal or State regulation."None of these sections, however, specifically addresses the FCC's jurisdiction.Nothing in the 1996 Telecom Act expressly limits the FCC's authority to regulateservices and facilities connected with the Internet, to the extent that they arecovered by more general language in any section of the Act. Moreover,  it is notclear  what  such  a  limitation  would  mean  even  if  it  were  adopted.  TheCommunications Act directs the FCC to regulate  "interstate and foreign commercein  communication  by wire and  radio,"  and the FCC and  state  public  utilitycommissions  indisputably  regulate  the rates and  conditions  under which ISPspurchase services and facilities from telephone companies.  Given the absence ofclear  statutory  guidance,  the FCC must  determine  whether  or not it has theauthority or the obligation to exercise  regulatory  jurisdiction  over specificInternet-based  activities.  The FCC may also decide  whether to  forebear  fromregulating  certain  Internet-based  services.  Forbearance  allows  the  FCC todecline to adopt  rules that would  otherwise  be  required  by  statute.  Undersection 401 of the 1996 Telecom Act,  the FCC must forbear if  regulation  wouldnot be necessary to prevent anticompetitive  practices and to protect consumers,and forbearance would be consistent with the public interest.  Finally,  the FCCcould  consider  whether to preempt state  regulation of Internet  services thatwould be inconsistent with achievement of federal goals.The FCC has not  attempted to regulate the  companies  that provide the softwareand hardware for Internet telephony, or the access providers that transmit theirdata, as common carriers or telecommunications service providers. In March 1996,America's Carriers  Telecommunication  Association ("ACTA"), a trade associationprimarily  comprised of small and medium-size  interexchange  carriers,  filed apetition with the FCC asking the FCC to regulate Internet telephony. ACTA arguesthat providers of software that enables real-time voice  communications over theInternet  should be treated as common  carriers  and  subject to the  regulatoryrequirements  of Title II. The FCC has sought comment on ACTA's  request.  Othercountries are considering similar issues.The FCC has not  considered  whether  any of the rules that  relate to radio andtelevision broadcasters should also apply to analogous  Internet-based services.The vast majority of Internet traffic today travels over wire facilities,                                        41rather than the radio spectrum. As a policy matter, however, a continuous, live,generally-available  music  broadcast  over the Internet may appear similar to atraditional radio broadcast,  and the same arguments may be made about streamingvideo  applications.  The  FCC  will  need to  consider  the  underlying  policyprinciples  that, in the language of the Act and in FCC  decisions,  have formedthe basis for regulation of the television and radio broadcast industries.The FCC does not  regulate  the  prices  charged  by ISPs or  Internet  backboneproviders.  However,  the vast  majority of users  connect to the Internet  overfacilities of existing  telecommunications  carriers.  Those  telecommunicationscarriers are subject to varying levels of regulation at both the federal and thestate level. Thus,  regulatory  decisions exercise a significant  influence overthe  economics  of the  Internet  market.  Economics  is  expected  to drive thedevelopment of both the Internet and of other communications technologies.Internet  access is  understood  to be an  enhanced  service  under  FCC  rules,therefore ISPs are treated as end users,  rather than carriers,  for purposes ofthe FCC's interstate access charge rules. This distinction, created when the FCCestablished  the access charge system in 1983, is often  referred to as the "ESPexemption."  Thus,  when ISPs purchase lines from LECs, the ISPs buy those linesunder the same tariffs that any business  customer would use -- typically  voicegrade measured  business lines or 23 channel ISDN primary rate interface  (PRI).Although these services  generally involve a per-minute usage charge in additionto a monthly fee, the usage charge is assessed  only for outbound  calls.  ISPs,however,  exclusively use these lines to receive calls from their customers, andthus  effectively  pay flat monthly rates. By contrast,  IXCs that  interconnectwith LECs are  considered  carriers,  and thus are  required  to pay  interstateaccess charges for the services they  purchase.  Most of the access charges thatcarriers pay are  usage-sensitive  in both  directions.  Thus, IXCs are assessedper-minute charges for both originating and terminating calls. The FCC concludedin the Local  Competition Order that the rate levels of access charges appear tosignificantly  exceed the incremental cost of providing these services.  The FCCin December 1996 launched a comprehensive proceeding to reform access charges ina manner  consistent  with  economic  efficiency  and the  development  of localcompetition.The revenue  effects of Internet  usage today depend to a significant  extent onthe structure of state tariffs.  Internet usage  generates less revenue for LECsin states where flat local service  rates have been set low,  with  compensatingrevenues in the form of per-minute  intrastate  toll charges.  Because ISPs onlyreceive  local calls,  they do not incur these usage  charges.  By contrast,  instates where flat charges make up a higher percentage of LEC revenues, ISPs willhave a less  significant  revenue  effect.  ISP  usage is also  affected  by therelative  pricing of services such as ISDN Primary Rate Interface  (PRI),  framerelay, and fractional T-1 connections, which are alternatives to analog businesslines.   The  prices  for  these  services,   and  the  price  difference  on  aper-voice-channel  basis  between the options  available to ISPs,  varies widelyacross  different  states.  In many  cases,  tariffs  for these  and other  dataservices  are based on  assumptions  that do not  reflect the  realities  of theInternet access market today.  The scope of local calling areas also affects thearchitecture of Internet access services. In states with larger unmeasured localcalling areas, ISPs need fewer POPs in order to serve the same customers througha local call.The  Company is  presently  unable to  determine  what the  impact of  potentialInternet  regulatory  actions and decisions will be on the Company's  liquidity,results of operations and cash flows.Financial  information about the Company's  foreign and domestic  operations andexport salesAlthough the Company has several  agreements to facilitate the  origination  andtermination of international toll traffic, it has neither foreign operations norexport sales. The Company conducts operations  throughout the western contiguousUnited  States,  Alaska and  Hawaii and  believes  that any  subdivision  of itsoperations  into distinct  geographic  areas would not be  meaningful.  Revenuesassociated with international  toll traffic were $7.0 million,  $7.6 million and$8.3 million for the years ended December 31, 1998, 1997 and 1996, respectively.SeasonalityLong-distance  revenues have historically been highest in the summer months as aresult of temporary population  increases  attributable to tourism and increasedseasonal economic activity such as construction, commercial                                        42fishing,  and oil and gas activities.  Cable television  revenues,  on the otherhand,  are  higher in the winter  months  because  consumers  tend to watch moretelevision,  and spend more time at home, during these months. Local service andInternet  operations are not expected to exhibit  significant  seasonality.  TheCompany's ability to implement  construction projects is also reduced during thewinter months because of cold temperatures, snow and short daylight hours.Customer-sponsored researchThe Company has not expended material amounts during the last three fiscal yearson customer-sponsored research activities.Backlog of Orders and InventoryAs of December 31, 1998 and 1997, the Company's  long-distance  services segmenthad a backlog of equipment sales orders of approximately  $202,000 and $104,000,respectively.  The increase in backlog as of December 31, 1998 can be attributedprimarily to sales growth in 1998 as compared to 1997. The Company  expects thatall of the orders in backlog at the end of 1998 will be delivered during 1999.Geographic Concentration and Alaska EconomyThe  Company  offers  voice and data  telecommunication  and video  services  tocustomers   primarily   throughout  Alaska.  As  a  result  of  this  geographicconcentration,   the  Company's  growth  and  operations  depend  upon  economicconditions  in Alaska.  The  economy  of Alaska is  dependent  upon the  naturalresource  industries,  and in  particular  oil  production,  as well as tourism,government,  and United States military  spending.  Any  deterioration  in thesemarkets  could have an  adverse  impact on the  Company.  Almost $4 of every $10produced in Alaska comes from the oil  industry.  73 percent  ($1.5  billion) ofcore Alaska state  treasury  receipts came from the oil industry in 1998 throughproduction taxes, ad valorem taxes,  corporate income taxes, royalties and leasepayments.The volume of oil  transported by the  TransAlaska  Oil Pipeline System over thepast  20  years  has  been  as  high as 2.0  million  barrels  per day in  1988.Production  has begun to decline in recent years and is presently  down 40% fromthe 1988 levels.  The two largest  producers of oil in Alaska (the primary usersof the TransAlaska Oil Pipeline System) continue to explore, develop and producenew oil  fields  and to  enhance  recovery  from  existing  fields to offset thedecline in production  from the Prudhoe Bay field.  Both companies have investedlarge sums of money in developing and  implementing  oil recovery  techniques atthe Prudhoe Bay field and other nearby fields.Market prices for North Slope oil declined to below $10 per barrel in 1998, wellbelow the  average  price used by the State of Alaska to budget its oil  relatedrevenues.  Oil  companies  and service  providers  have  announced  cost cuttingmeasures to offset a portion of the declining revenues.  Oil company and relatedoil field service company  layoffs  reportedly will result in a reduction of oilindustry jobs by at least 39 percent in 1999.BP Alaska  Exploration  ("BP") announced that it would cut costs in Alaska by 30percent, including layoffs of approximately 600 employees and other cost-cuttingmeasures such as decreased production and delayed exploration efforts.  Projectsthat are underway are  reportedly  not affected by the cutbacks,  however BP didnotify state  officials that it would delay its  exploration of the Genesee testsite east of Prudhoe.Atlantic  Richfield Company ("ARCO") announced that it would cut 80 Alaska jobs,which reportedly amounts to five percent of its workforce in the state. ARCO hasalso indicated that the cost cuts will not affect the  development of the Alpinefield west of Prudhoe Bay.BP Amoco  announced  in April  1999 its  intention  to  purchase  ARCO for $26.8billion.  BP Amoco and ARCO together reportedly hold approximately 75 percent ofthe  ownership  of the Alaska  North  Slope oil fields and in the  company  thatoperates the Trans-Alaska  Pipeline System. Alaska law stipulates that no singlecompany can hold drilling leases to more than 500,000 onshore state-owned acres.                                       43The BP Amoco-ARCO  combination  would control about 860,000  acres,  however thecompanies  have  reportedly  said they will give up 360,000 acres to comply withAlaska laws. Realignment of operations following the acquisition reportedly willresult in the  layoff of 400  personnel  in Alaska.  The  Company is not able topredict the effect of the acquisition of ARCO by BP Amoco on Alaska's economy oron the Company.The effects of low oil prices will impact the state of Alaska's economy,  and isexpected  to  particularly  hurt  state and  local  government  and oil  servicecompanies.  As much as half of the  drilling  fleet that  worked on the slope in1998 could be idle during 1999. Oil field service and drilling  contractors  cutoperating  costs to  adjust  for  decreasing  production  and  exploration.  TheCompany,  as an outsourcing  services provider to the oil industry,  reduced itsoutsourcing work force by 8 employees in February 1999.The state of Alaska  December 1998 forecast for future oil  production and staterevenues  indicates  that  analysts  do not expect  oil  prices to  recover  forapproximately two years. As a result,  the Alaska Department of Revenue forecastanticipates  that production will fall from 1.28 million barrels a day in FiscalYear 1998 to 1.18 million in Fiscal Year 1999.Since actual revenues to the state of Alaska are expected to fall  significantlyshort of budgeted  revenues,  (an estimated $1.04 billion deficit for the comingbudget year), the Governor of the state of Alaska has announced his intention toimplement  cost-cutting  and  revenue  enhancing  measures.  The state of Alaskamaintains  surplus  accounts that are intended to fund budgetary  shortfalls andwould be expected to fund a portion of the revenue shortfall.Although the depressed  oil prices are expected to have a substantial  effect onAlaska's economy,  analysts believe that tourism, air cargo, and service sectorsare strong enough to offset a portion of the  downturn.  These  industries  havehelped  offset  the  prevailing  pattern  of oil  industry  downsizing  that hasoccurred during much of the last several years. Three other factors that supportAlaska's economy are the healthy national  economy,  low interest rates, and lowinflation.  Construction  is expected to remain  strong over the next few years;$315  million of federal  money is  expected to be  distributed  to the state ofAlaska for highways and other federally supported projects.Effective March 1997, the State of Alaska passed new legislation  relaxing stateoil royalties  with respect to marginal oil fields that the oil companies  claimwould not be economic to develop  otherwise.  No assurance can be given that oilcompanies  doing business in Alaska will be successful in discovering new fieldsor further developing  existing fields which are economic to develop and produceoil with access to the pipeline or other means of transport to market, even withthe reduced level of royalties.Should oil companies not be successful in these discoveries or developments,  orthe price of oil remain at its current depressed levels,  the long term trend ofcontinued  decline  in oil  production  from  the  Prudhoe  Bay  field  area  isinevitable with a  corresponding  adverse impact on the economy of the state, ingeneral,  and on demand for  telecommunications  and cable television  services,and,  therefore,  on the  Company,  in  particular.  The  Company is not able topredict the effect of declining  production  and prices on the State of Alaska'seconomy or on the Company.The  Company  has,  since  its  entry  into  the  telecommunication  marketplaceaggressively  marketed  its  services  to seek a larger  share of the  availablemarket.  However,  with a small  population  of  approximately  600,000  people,one-half  of whom are  located  in the  Anchorage  area and the rest of whom arespread  out over the vast  reaches  of Alaska,  the  customer  base in Alaska islimited.  No  assurance  can be given  that the  driving  forces  in the  Alaskaeconomy, and in particular,  oil production,  will continue at levels to providean environment for expanded economic activity.                                       44EmployeesThe Company and its direct and indirect  subsidiaries  employ  approximately 972persons as of  February  19,  1999.  The Company  and its  subsidiaries  are notparties to any union contracts with their  employees.  The Company believes thatits future success will depend upon its continued  ability to attract and retainhighly skilled and qualified employees.  The Company believes that its relationswith its employees are satisfactory.OtherNo material portion of the businesses of the Company is subject to renegotiationof  profits  or  termination  of  contracts  at  the  election  of  the  federalgovernment.Item 2.  PROPERTIESGeneral.  The Company's property,  plant and equipment in service totaled $282.8million at December 31, 1998, of which $148.0 relates to long-distance services,$95.6 relates to cable  services,  $27.9 relates to local access  services,  and$11.3  relates to Internet  services.  These  properties  consist  primarily  ofswitching equipment,  satellite earth stations,  fiber-optic networks, microwaveradio  and  cable  and  wire  facilities,   cable  head-end  equipment,  coaxialdistribution networks,  routers,  servers,  transportation  equipment,  computerequipment  and general  office  equipment.  Substantially  all of the  Company'sproperties secure its Senior Holdings Loan and Fiber Facility. See note 6 to theNotes to Consolidated  Financial  Statements  included in Part II of this Reportfor further discussion.The Company's  construction  in progress  totaled $119.6 million at December 31,1998, of which $114.9 relates to Alaska United fiber-optic facilities connectingAnchorage, Juneau, Fairbanks, Valdez and Whittier, Alaska to Seattle Washington,and $4.7 relates to  telecommunications  and Internet construction projects thatwere not complete at December 31, 1998.Long-Distance  Services.  The Company operates a  state-of-the-art,  competitivetelecommunications  network employing the latest digital transmission technologybased upon fiber  optic and  digital  microwave  facilities  within and  betweenAnchorage,  Fairbanks and Juneau.  The Company's  network includes digital fiberoptic cables linking Alaska to the contiguous 48 states and providing  access toother carriers' networks for  communications  around the world. The Company usessatellite  transmission  to remote  areas of Alaska and for  certain  interstatetraffic.The Company's  long-distance  services  segment owns  properties  and facilitiesincluding satellite earth stations, and distribution,  transportation and officeequipment.  Additionally,  the  Company  acquired in  December  1992,  access tocapacity on an undersea  fiber optic cable from Seward,  Alaska to Pacific City,Oregon.  The  undersea  fiber  optic  cable  capacity  is  owned  subject  to anoutstanding mortgage.  The Company completed construction of an additional fiberoptic cable facility  linking Alaska to Seattle,  Washington in February,  1999,which is owned subject to an outstanding mortgage.The Company  entered  into a purchase  and  lease-purchase  option  agreement inAugust 1995 for the acquisition of satellite transponders on the PanAmSat GalaxyXR satellite to meet its long-term satellite capacity requirements.  The balancepayable upon expected delivery of the transponders  during the fourth quarter of1999  in  addition  to  the  $9.1  million   deposit   previously   paid  totalsapproximately $43.5 million.  The Company's remaining  commitment will likely befunded from its Senior  Holdings  Loan. The purchase and  lease-purchase  optionagreement provides for the interim lease of transponder capacity on the PanAmSatGalaxy IX satellite through the delivery of the purchased transponders.The Company leases its  long-distance  services  industry  segment's  executive,corporate and  administrative  facilities  in  Anchorage,  Fairbanks and Juneau,Alaska.  The  Company's  operating,   executive,  corporate  and  administrativeproperties are in good condition.  The Company considers its properties suitableand adequate for its present needs and are being fully utilized.                                       45Cable  Services.  The Cable  Systems  serve 26  communities  and areas in Alaskaincluding  Anchorage,  Fairbanks  and Juneau,  the state's  three  largest urbanareas.  As of December 31, 1998 the Cable  Systems  consisted  of  approximately1,806 miles of installed  cable plant  having  between 300 to 550 MHz of channelcapacity.  The Company leases its cable services  industry  segment's  operatingfacilities  in  substantially  all  locations.   Such  properties  are  in  goodcondition.  The Company  considers its properties  suitable and adequate for itspresent and anticipated future needs.Local Access  Services.  The Company  operates a  state-of-the-art,  competitivelocal  access   telecommunications   network   employing   the  latest   digitaltransmission technology based upon fiber optic facilities within Anchorage.  TheCompany leases its local access services industry segment's operating facilitiesin Anchorage.  Such properties are in good condition.  The Company considers itsproperties suitable and adequate for its present and anticipated future needs.Internet Services. The Company operates a state-of-the-art, competitive Internetnetwork  employing  the latest  available  technology.  The  Company  leases itsInternet services industry segment's operating facilities,  located primarily inAnchorage.  Such  properties are in good  condition.  The Company  considers itsproperties suitable and adequate for its present and anticipated future needs.Item 3.  LEGAL PROCEEDINGSExcept as set forth in this item,  neither the Company,  its property nor any ofits  subsidiaries  or their  property  is a party to or subject to any  materialpending  legal  proceedings.  The  Company and its  subsidiaries  are parties tovarious claims and pending  litigation as part of the normal course of business.The Company is also involved in several  administrative  proceedings and filingswith the FCC,  Department  of Labor and  state  regulatory  authorities.  In theopinion of  management,  except as noted below,  the nature and  disposition  ofthese  matters are  considered  routine and  arising in the  ordinary  course ofbusiness which management believes, even if resolved unfavorably to the Company,would not have a  materially  adverse  affect on the  Company's  business or itsfinancial position, results of operations or liquidity.Item 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS       (a)  Date of meeting - June 4, 1998            Nature of meeting - 1998 annual meeting of shareholders       (b) Election of Directors:           Names of directors elected at the meeting:              Donne F. Fisher       Votes:  54,009,905 For;  1,367,485  Withheld              William P. Glasgow    Votes:  54,990,085 For;  387,305  Withheld              James M. Schneider    Votes:  55,105,849 For;  271,541  Withheld           Names of directors whose term of office continued after the meeting:              Carter F. Page              Ronald A. Duncan              Robert M. Walp              Jeffrey C. Garvey              John W. Gerdelman              Donald T. Lynch              Larry E. Romrell                                       46       (c) Not applicable.       (d) Not applicable.                                     PART IIItem 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERSMarket  Information  for Common Stock.  Shares of GCI's Class A common stock aretraded on the Nasdaq  National  Market tier of The Nasdaq Stock Market under thesymbol  GNCMA.  Shares  of  GCI's  Class  B  common  stock  are  traded  on  theOver-the-Counter  market.  The following table sets forth the high and low salesprice for the  above-mentioned  common  stock  for the  periods  indicated.  Theprices,  rounded up to the nearest eighth,  represent prices between dealers, donot include retail markups,  markdowns,  or commissions,  and do not necessarilyrepresent actual transactions.                                                       Class A                               Class B                                          -----------------------------------   -----------------------------------                                                 High            Low                   High            Low                                                 ----            ---                   ----            ---                                                                                                               1997:     First Quarter                               8 1/8           6                     8 1/8           6     Second Quarter                              8 5/8           6 1/4                 8 5/8           6 1/4     Third Quarter                               9 1/4           6 1/2                 9 1/4           6 1/2     Fourth Quarter                              8 1/8           6 3/8                 8 1/8           6 3/81998:     First Quarter                               8 3/8           6 1/8                 8 3/8           6 1/8     Second Quarter                              8               5 1/2                 8               5 1/2     Third Quarter                               6 1/8           2 5/8                 6 1/8           2 5/8     Fourth Quarter                              5               2 1/2                 5               2 1/2Holders.  As of December  31,  1998 there were 1,873  holders of record of GCI'sClass A common  stock and 626  holders of record of GCI's  Class B common  stock(amounts  do not  include the number of  shareholders  whose  shares are held ofrecord by brokers, but do include the brokerage house as one shareholder).Dividends.  GCI and GCI,  Inc.  have never paid cash  dividends  on their commonstock and have no present  intention of doing so.  Payment of cash  dividends inthe future,  if any,  will be determined by GCI's Board of Directors in light ofthe Company's earnings,  financial condition and other relevant  considerations.The Company's  existing bank loan  agreements  contain  provisions that prohibitpayment of dividends, other than stock dividends (see note 6 to the ConsolidatedFinancial Statements included in Part II of this Report).                                       47Item 6.  SELECTED FINANCIAL DATAThe  following  table  presents  selected  historical  information  relating  tofinancial condition and results of operations over the past five years.                                                                            Years ended December 31,                                                             -------------------------------------------------------                                                                1998       1997       1996       1995       1994                                                                ----       ----       ----       ----       ----                                                                (Amounts in thousands except per share amounts)                                                                                                                         Revenues (1)                                           $    246,795   223,809    164,894   129,279    116,981     Net earnings (loss) before income taxes and     extraordinary item (2)                                 $   (10,920)   (2,235)     12,690    12,601     11,681     Loss on early extinguishment of debt, net of     income tax benefit of $180                             $          0       521          0         0          0     Net earnings (loss)                                    $    (6,797)   (2,183)      7,462     7,502      7,134     Basic net earnings (loss) per common share             $     (0.14)    (0.05)       0.28      0.32       0.30     Diluted net earnings (loss) per common share           $     (0.14)    (0.05)       0.27      0.31       0.30     Total assets (3)                                       $    646,116   545,302    447,335    84,765     74,249     Long-term debt, including current portion (3)          $    351,657   250,084    223,242     9,980     12,554     Obligations under capital leases, including     current portion                                        $      2,186     1,188        746     1,047      1,297     Total stockholders' equity (3, 4)                      $    200,007   204,439    149,554    43,016     35,093     Dividends declared per Common share (5)                $       0.00      0.00       0.00      0.00       0.00     1    The 1997 revenue  increase is primarily  attributed  to the  Company's          reporting 12 months of cable  television  service revenues as compared          to two months reported in 1996.     2    The Company's net losses in 1998 and 1997 are primarily  attributed to          additional  depreciation,  amortization and interest expense resulting          from the cable company acquisitions in October 1996 and startup losses          from the  Company's  entry into local  access  services  and  Internet          services markets.     3    Increases  in  the  Company's   total  assets,   long-term   debt  and          stockholders'  equity in 1996 as  compared to 1995 result in part from          the  cable  company  acquisitions  and MCI  (now MCI  WorldCom)  stock          issuance  described  in  notes 2 and 8 to the  Notes  to  Consolidated          Financial Statements included in Part II of this Report.  Increases in          assets and long-term debt in 1998 as compared to 1997 result primarily          from the Company's  construction  of a fiber-optic  system  connecting          points in Alaska with Seattle  Washington as further described in note          11 to the  accompanying  Notes to  Consolidated  Financial  Statements          included in Part II of this Report.     4    The 1997 increase in stockholders'  equity is primarily  attributed to          the Company's  equity offering in August 1997,  described in note 8 to          the accompanying Notes to Consolidated  Financial  Statements included          in Part II of this Report.     5    The  Company has never paid a cash  dividend  on its common  stock and          does not anticipate  paying any dividends in the  foreseeable  future.          The  Company  intends  to  retain  its  earnings,   if  any,  for  the          development of its business.  Payment of cash dividends in the future,          if any, will be determined by the board of directors of the Company in          light  of  the  Company's  earnings,   financial   condition,   credit          agreements and other relevant  considerations.  The Company's existing          bank loan  agreements  contain  provisions  that  prohibit  payment of          dividends,  other than stock dividends, as further described in note 6          to the Notes to Consolidated  Financial Statements included in Part II          of this Report.                                       48Item 7. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONSThe following  discussion and analysis  should be read in  conjunction  with theCompany's  Consolidated  Financial  Statements  and the notes  thereto and otherfinancial data appearing  elsewhere in this Report on Form 10-K. See -CautionaryStatement Regarding Forward-Looking Statements.                                    OverviewThe Company has  experienced  significant  growth in recent  years  through bothstrategic  acquisitions and growth in its existing  businesses.  The Company hashistorically  met its cash  needs for  operations  through  its cash  flows fromoperating   activities.   Cash   requirements   for   acquisitions  and  capitalexpenditures have been provided through the Company's financing  activities,  aswell as its existing cash and cash equivalents.Long-distance   services.   The  Company  has  historically   reported  revenuesprincipally  from the  provision  of  interstate  and  intrastate  long-distanceservices to  residential,  commercial  and  governmental  customers and to othercommon carriers (principally MCI, now MCI WorldCom,  and Sprint). These servicesaccounted  for  approximately  91.9%  of the  Company's  long-distance  servicesrevenues  during 1998.  Factors that have the  greatest  impact on  year-to-yearchanges in  telecommunications  services  revenues  include  the rate per minutecharged to customers  and usage  volumes,  usually  expressed as minutes of use.These  factors in turn depend in part upon economic  conditions  in Alaska.  Theeconomy  of  Alaska  is  dependent  upon the  natural  resource  industries,  inparticular  oil  production,  as well as tourism,  government  and United Statesmilitary spending.The  Company's  telecommunication  cost of  sales  and  services  has  consistedprincipally of the direct costs of providing  services,  including  local accesscharges paid to LECs for the origination and termination of long-distance  callsin  Alaska,  fees  paid to other  long-distance  carriers  to carry  calls  thatterminate in areas not served by the Company's network (principally the lower 49states,  most of which calls are carried over MCI's network,  and  internationallocations,  which calls are carried principally over Sprint's network),  and thecost of equipment  sold to the Company's  customers.  During 1998,  local accesscharges  accounted for 42.6% of  telecommunications  cost of sales and services,fees  paid  to  other  long-distance   carriers  represented  33.2%,   satellitetransponder  lease and  undersea  fiber  maintenance  costs  represented  10.0%,telecommunications  equipment  accounted  for 4.8%,  and network  solutions  andoutsourcing  costs  represented  7.0% of  telecommunications  cost of sales  andservices.The Company's  long-distance selling,  general, and administrative expenses haveconsisted  of  operating   and   engineering,   customer   service,   sales  andcommunications,  management  information  systems,  general and  administrative,legal and regulatory expenses. Most of these expenses consist of salaries, wagesand  benefits of  personnel  and  certain  other  indirect  costs (such as rent,travel,  utilities,  insurance and property  taxes).  A  significant  portion oflong-distance selling,  general, and administrative expenses, 30.9% during 1998,represents the cost of the Company's advertising,  promotion and market analysisprograms.Long-distance  telecommunication services face significant competition from AT&TAlascom, Inc.,  long-distance resellers, and from local telephone companies thathave  entered  the  long-distance  market.  The  number of active  long-distancecustomers  billed by the Company has decreased  approximately  7.9% during 1998.Gains in the number of commercial and small business  customers billed were morethan  offset by a  reduction  in the  number of  residential  customers  billed.Increased  usage  volumes and traffic  carried for other  common  carriers  havegenerally  offset usage  reductions  attributed to the decrease in the number ofactive  residential  customers  billed.  The Company  believes  its  approach todeveloping, pricing, and providing long-distance services and bundling differentbusiness  segment  services  will  continue  to  allow it to be  competitive  inproviding those services.Other common carrier  traffic routed to the Company for termination in Alaska islargely  dependent  on  traffic  routed  to MCI  WorldCom  and  Sprint  by theircustomers.  Pricing  pressures,  new program offerings and                                        49market  consolidation  continue to evolve in the markets  served by MCI WorldComand Sprint. If, as a result,  their traffic is reduced, or if their competitors'costs to  terminate or originate  traffic in Alaska are reduced,  the  Company'straffic will also likely be reduced, and the Company's pricing may be reduced torespond to competitive pressures. The Company is unable to predict the effect onthe Company of such  changes,  however  given the  materiality  of other  commoncarrier revenues to the Company,  a significant  reduction in traffic or pricingcould  have a  material  adverse  effect on the  Company's  financial  position,results of operations and liquidity.Services  included  in  the  Other  segment  as  described  in  note  9  to  theaccompanying consolidated financial statements are included in the Long-DistanceServices segment for purposes of this Management's Discussion and Analysis.See Part I, Item 1. Business, Long-distance Services, Competition for additionalinformation regarding long-distance services competition.Cable services.  Following the cable system  acquisitions  effective October 31,1996, the Company now reports a significant level of revenues from the provisionof cable services. During 1998, cable revenues represented 23.4% of consolidatedrevenues. The cable systems serve 26 communities and areas in Alaska,  includingthe state's three largest population centers, Anchorage, Fairbanks and Juneau.The Company  generates cable services  revenues from three primary sources:  (1)programming  services,  including  monthly  basic or premium  subscriptions  andpay-per-view  movies or other  one-time  events,  such as sporting  events;  (2)equipment  rentals or  installation;  and (3)  advertising  sales.  During  1998programming services generated 85.7% of total cable services revenues, equipmentrental and  installation  fees accounted for 7.9% of such revenues,  advertisingsales accounted for 5.0% of such revenues,  and other services accounted for theremaining  1.4% of total  cable  services  revenues.  The primary  factors  thatcontribute  to  year-to-year  changes in cable  services  revenues  are  averagemonthly  subscription and pay-per-view  rates, the mix among basic,  premium andpay-per-view  services,  and the average  number of  subscribers  during a givenreporting period.The  cable  systems'  cost of sales  and  selling,  general  and  administrativeexpenses have  consisted  principally  of  programming  and copyright  expenses,labor, maintenance and repairs,  marketing and advertising,  rental expense, andproperty  taxes.  During 1998  programming  and copyright  expenses  representedapproximately  40.1% of total  cable  cost of sales  and  selling,  general  andadministrative   expenses.   Marketing   and   advertising   costs   representedapproximately 9.5% of such total expenses.Cable  services  face  competition  from  alternative  methods of receiving  anddistributing  television signals and from other sources of news, information andentertainment.  The Company believes its cable television services will continueto be competitive based on providing, at reasonable prices, a greater variety ofprogramming  and other  communication  services  than are  available  off-air orthrough  other  alternative   delivery  sources  and  upon  superior   technicalperformance and customer service. See Part I, Item 1. Business,  Cable Services,Competition for additional information regarding cable services competition.Local access  services.  The Company began offering  local exchange  services inAnchorage  during late  September  1997.  The  Company  generates  local  accessservices revenues from four primary sources:  (1) business and residential basicdial tone revenues;  (2) business private line and special access revenues;  (3)reciprocal  access  revenues  from  the  incumbent  LEC;  and (4)  business  andresidential  feature  and  other  charges,  including  voice  mail,  caller  ID,distinctive  ring,  inside wiring and  subscriber  line charges.  Local exchangeservices  revenues totaled $9.9 million  representing  4.0% of total revenues in1998.  The primary  factors that  contribute  to  year-to-year  changes in localaccess  services  revenues are the average  number of business  and  residentialsubscribers  during a given  reporting  period  and the  average  monthly  ratescharged for non-traffic sensitive services.                                       50Operating and engineering expenses represented approximately 8.8% of total localaccess services cost of sales and selling,  general and administrative  expensesduring 1998.  Marketing and advertising costs represented  approximately 4.7% ofsuch total  expenses,  customer  service and general  and  administrative  costsrepresented approximately 53.4% of such total expenses, and local access cost ofsales  represented  approximately  33.1% of such  total  expenses.  The  Companyexpects that it will  generate  operating  losses from local  exchange  servicesduring 1999.The Company's local access services face  significant  competition  from ATU andAT&T Alascom, Inc. The Company believes its approach to developing, pricing, andproviding  local access  services will continue to allow it to be competitive inproviding those services.  See Part I, Item 1. Business,  Local Access Services,Competition  and  Part  I,  Item  1.  Business,  Historical  development  of theCompany's  business  during the past fiscal  year,  Local  Access  Services  foradditional information regarding local access services competition.Internet  services.  The Company  began  offering  Internet  services in severalmarkets in Alaska during 1998. The Company generates  Internet services revenuesfrom three primary sources:  (1) access product services,  including  commercialDIAS, ISP DIAS, and retail dial-up service revenues;  (2) SchoolAccess(TM)  DIASand server revenues;  and (3) network  management  services.  Internet  servicesrevenues totaled $4.6 million  representing  1.9% of total revenues in 1998. Theprimary  factors that contribute to  year-to-year  changes in Internet  servicesrevenues  are  average  monthly  subscription  rates,  the  number of  customersselecting added features,  and the average number of subscribers  during a givenreporting period.Operating  and general and  administrative  expenses  represented  approximately17.4%  of total  Internet  services  cost of  sales  and  selling,  general  andadministrative expenses during 1998.Significant  new marketing  campaigns were introduced in February and March 1999featuring  bundled  residential  and commercial  Internet  products.  Additionalbandwidth was made available to the Company's  Internet  segment  resulting fromcompletion of the Alaska United Project.  The new Internet offerings are coupledwith the Company's  long-distance and local services  offerings and provide freebasic  Internet  services if certain  long-distance  or local services plans areselected. Value-added Internet features are available for additional charges.The Company competes with a number of Internet service providers in its markets.The Company believes its approach to developing, pricing, and providing Internetservices  will  continue  to  allow  it to be  competitive  in  providing  thoseservices.  See Part I., Item 1. Business,  Internet  Services,  Competition  forinformation regarding Internet services competition.Other  services,  other  expenses  and  net  loss.  Telecommunications  servicesrevenues  reported in the "Other"  segment have been  attributable  to corporatenetwork management  contracts,  telecommunications  equipment sales and service,other miscellaneous  revenues (including revenues from prepaid and debit callingcards, the  installation and leasing of customers' very small aperture  terminal("Vsat")  equipment,  and fees  charged to MCI  WorldCom  and Sprint for certainbilling  services),  and  costs  associated  with  PCS  wireless  communicationsservices.  The Company began developing plans for PCS service deployment in 1995and subsequently  conducted a technical trial of its candidate  technology.  TheCompany has invested  approximately  $2.1 million in its PCS license at December31, 1998.  PCS licensees are required to offer service to at least  one-third oftheir market population within five years or risk losing their licenses. Servicemust be extended to two-thirds of the population within 10 years. The Company iscurrently  reevaluating  its  wireless  strategy  and expects to  complete  suchreevaluation  within the next six months.  The Company expects that its wirelessstrategy will allow retention of the PCS license pursuant to its terms.Depreciation and  amortization  and interest expense on a consolidated  basis isexpected  to be higher in 1999 as  compared  to 1998  resulting  primarily  fromadditional  depreciation  on 1998 and 1999 capital  expenditures  and additionaloutstanding  long-term debt. As a result, the Company anticipates  recording netlosses in 1999.                                       51                              Results of OperationsThe  following  table sets forth  selected  Statement  of  Operations  data as apercentage of total revenues for the periods indicated  (underlying data roundedto the nearest thousands):                                                         Year Ended December 31,            Percentage Change                                                         -----------------------            -----------------                                                                                            1998        1997                                                                                             vs.         vs.                                                     1998         1997          1996        1997        1996                                                     ----         ----          ----        ----        ----                                                                                                               Statement of Operations Data:    Revenues:           Long-distance services                    70.7%        75.0%         94.3%       4.1%         8.0%           Cable services                            23.4%        24.6%          5.7%       4.5%       482.2%           Local services                             4.0%         0.3%           ---   1,524.3%           NA           Internet services                          1.9%         0.1%           ---   2,422.5%           NA                                               ----------------------------------------------------------------           Total revenues                           100.0%       100.0%        100.0%      10.3%        35.7%    Cost of sales and services                       47.0%        49.6%         56.2%       4.5%        19.9%    Selling, general and administrative       expenses                                      36.1%        32.9%         28.1%      21.2%        58.5%    Depreciation and amortization                    13.0%        10.6%          5.7%      34.8%       152.6%                                               ----------------------------------------------------------------           Operating income                           3.9%         6.9%         10.0%    (37.9%)       (6.1%)           Net earnings (loss) before income              taxes                                 (4.4%)       (1.0%)          7.7%   (388.6%)     (117.6%)           Net earnings (loss)                      (2.8%)       (1.0%)          4.5%   (211.4%)     (129.3%)Other Operating Data:    Cable operating income (1)                       12.4%        18.9%         23.2%    (31.7%)       374.6%    Local operating loss (2)                      (112.2%)     (581.8%)            NA   (213.3%)       307.9%    Internet operating (loss) income (3)              0.1%      (13.4%)            NA     106.1%           NA- -----------------------------------------------(1) Computed as a percentage of total cable services revenues. (2) Computed as a percentage  of total local  services  revenues.  (3) Computed as a percentage of total Internet services revenues.Year Ended December 31, 1998 Compared to Year Ended December 31, 1997.Revenues.  Total revenues  increased 10.3% from $223.8 million in 1997 to $246.8million  in  1998.   Long-distance   transmission   revenues  from   commercial,residential,  governmental,  and other common carrier  customers  increased 2.6%from $156.6 million in 1997 to $160.6 million in 1998. This increase reflected a5.3% increase in interstate  minutes of use to 654.0 million  minutes and a 4.6%increase in intrastate  minutes of use to 137.3 million  minutes.  Long-distancerevenue growth in 1998 was largely due to a 4.4% increase in revenues from othercommon  carriers  (principally  MCI WorldCom and Sprint),  from $58.7 million in1997 to $61.3  million in 1998.  Private line and private  network  transmissionservices  revenues  increased 22.0%, from $15.9 million in 1997 to $19.4 millionin 1998.The above increases in long-distance  transmission  revenues were offset in partby a 5.1%  reduction in the Company's  average rate per minute on  long-distancetraffic  from  $0.177  per  minute in 1997 to  $0.168  per  minute in 1998.  Thedecrease  in rates  resulted  from the  Company's  promotion  of and  customers'enrollment in new calling plans offering  discounted rates and length of servicerebates,  such  new  plans  being  prompted  in  part by the  Company's  primarylong-distance  competitor,  AT&T  Alascom,  reducing its rates and entry of LECsinto  long-distance  markets served by the Company.  Operator  services revenuesdecreased  14.3%  from $7.0  million in 1997 to $6.0  million  in 1998.  Trafficcarried  by the  Company's  operator  service  center                                        52decreased in part from  increased  usage of prepaid  calling  cards and cellulartelephones by tourists visiting the state of Alaska.Systems sales and services revenues (included in long-distance segment revenues)increased  30.7% from $10.2 million in 1997 to $13.3 million in 1998,  primarilydue to an increase in the number of large equipment  sales  transactions in 1998as compared to 1997 and increased revenues derived from outsourcing services.Cable  revenues  increased  4.5% from $55.2  million in 1997 to $57.6 million in1998.  Programming  services  revenues  increased  3.1% to $49.4 million in 1998resulting from an increase of 3,900 basic subscribers  served by the Company andan increase of $0.47 in revenue per average  basic  subscriber,  per month.  Newfacility  construction efforts in 1998 resulted in additional homes passed whichcontributed  to  additional  subscribers  and revenues.  Other factors  includedfacility  upgrades which allowed the  introduction  of digital cable services inAnchorage,  increased promotional and advertising efforts and increases in basicand premium service rates in certain areas. Advertising sales revenues increased31.9%  to $2.9  million  in 1998 due to  increased  promotion  of the  Company'sadvertising and ad insertion  capabilities.  Equipment  rental and  installationrevenues  increased  6.2% to $4.5  million  in 1998 due to  increased  equipmentrentals and  installation  services  provided by the Company.  Offsetting  theseincreases were reductions in pay-per-view and premium service revenues.Local access services  revenues  increased from $610,000 in 1997 to $9.9 millionin 1998. 1998 revenues reflect a full 12 months of local services operations andgrowth as  compared  to  start-up  operations  in 1997.  At  December  31,  1998approximately  28,000 lines were in service and  approximately  1,000 additionallines were awaiting connection.Internet  services  revenues  increased from $182,000 in 1997 to $4.6 million in1998. 1998 revenues reflect a full 12 months of Internet services operations andgrowth as compared to start-up operations in 1997. The Company had approximately7,200 active  residential  subscribers  to its  Internet  service at February 9,1999.Cost of sales and services. Cost of sales and services totaled $111.1 million in1997 and $116.1  million in 1998.  As a percentage  of total  revenues,  cost ofsales and services  decreased  from 49.6% in 1997 to 47.0% in 1998. The decreasein cost  of  sales  and  services  as a  percentage  of  revenues  is  primarilyattributed  to changes in the  Company's  product mix due to the addition of newproduct  lines  for a  full  year  of  operations  (local  access  services  andInternet),   and  reduced  long-distance  cost  of  sales  as  a  percentage  oflong-distance revenues. The margin improvement was partially offset by increasedcable services cost of sales as a percentage of cable services revenues.The decrease in  long-distance  cost of sales and  services as a  percentage  ofrevenues is primarily  attributed to: 1) a refund  received in the first quarterof  1998  totaling  approximately  $1.1  million  from a LEC in  respect  of itsearnings that exceeded regulatory requirements,  2) reductions in access chargespaid by the Company to other carriers for  distribution  of its traffic,  and 3)avoidance  of access  charges  resulting  from the  Company's  distribution  andtermination  of its traffic on its own network  instead of paying other carriersto distribute and terminate its traffic. The Company expects margins to widen asincreasing amounts of traffic are carried on its own facilities.Cable  cost of sales and  services  as a  percentage  of  revenues  is less as apercentage  of  revenues  than are  long-distance,  local  access  and  Internetservices cost of sales and services.  Cable services rate increases did not keeppace with  increases in  programming  and copyright  costs in 1998.  Programmingcosts  increased on most of the  Company's  offerings  and the Company  incurredadditional costs on new programming introduced in 1998.Local access  services  cost of sales and services  totaled 61.7% and 43.8% as apercentage  of 1998 and  1997  local  access  services  revenues,  respectively.Internet  services  cost of sales and  services  totaled  74.1% and  132.4% as apercentage  of 1998 and  1997  Internet  services  revenues,  respectively.  TheCompany's  local                                         53access and Internet services operations commenced in 1997.  Fluctuations in costof sales and  services  as a  percentage  of revenues  are  expected to occur asstart-up products develop into mature product lines.Selling,   general   and   administrative   expenses.   Selling,   general   andadministrative  expenses  increased  22.0% from  $73.6  million in 1997 to $89.8million in 1998, and, as a percentage of revenues,  increased from 32.9% in 1997to 36.4% in 1998. This increase resulted from:     -    Local access services operating,  engineering, sales, customer service          and  administrative  cost  increases,  from  $3.4  million  in 1997 as          compared to $12.3 million in 1998. The Company  initiated local access          services in September  1997. The increase was necessary to provide the          operations,  engineering,  customer service and support infrastructure          necessary to accommodate expected growth in the Company's local access          services customer base.     -    Increased  long-distance  general and administrative  expenses of $3.2          million in 1998 due to increased personnel and other costs in customer          service, engineering,  operations,  accounting, human resources, legal          and  regulatory,   and  management  information  services.   Increased          customer  service  expenses were  associated with support of increased          sales volumes and expenditures necessary to integrate customer service          operations across product lines.     -    Increased  long-distance sales,  advertising,  telemarketing,  carrier          relations,  business  development  and rural  services  costs totaling          $15.3  million in 1997  compared to $17.6  million in 1998.  Increased          selling  costs  were  associated  with  the  introduction  of  various          marketing plans and other  proprietary  rate plans and cross promotion          of products and services.     -    Cable services  operating,  engineering,  sales,  customer service and          administrative cost increases,  from $18.8 million in 1997 as compared          to $19.8  million in 1998.  The  increase  was  primarily  incurred to          promote and market the Company's cable services.     -    Internet services operating,  engineering, sales, customer service and          administrative  cost  increases,  from  $27,000 in 1997 as compared to          $715,000 in 1998. The Company initiated its Internet services in 1998.          The increase was  necessary  to provide the  operations,  engineering,          customer service and support  infrastructure  necessary to accommodate          expected growth in the Company's Internet services customer base.Depreciation and amortization.  Depreciation and amortization  expense increased34.5% from $23.8  million in 1997 to $32.0  million  in 1998.  The  increase  isattributable  to the Company's  $64.6 million of facilities  placed into serviceduring 1997 for which a full year of  depreciation  was recorded during the yearending December 31, 1998 and the $58.4 million of facilities placed into servicein 1998 for which a partial year of  depreciation  was  recorded  during 1998 onequipment and facilities placed into service in 1998.Interest expense, net. Interest expense, net of interest income, increased 12.5%from $17.6  million in 1997 to $19.8  million in 1998.  This  increase  resultedprimarily  from  increases in the  Company's  average  outstanding  indebtednessresulting   primarily  from  construction  of  new  long-distance  and  Internetfacilities,   expansion  and  upgrades  of  cable  television  facilities,   andinvestment in local access  services  equipment and  facilities.  Such increaseswere offset in part by  increases in the amount of interest  capitalized  during1998.Income tax benefit.  Income tax benefit  increased  from $0.6 million in 1997 to$4.1  million in 1998 due to the  Company  incurring  a larger  net loss  beforeincome taxes and  extraordinary  item in 1998 as compared to 1997. The Company'seffective  income tax rate  increased from 25.6% in 1997 to 37.8% in 1998 due tothe net loss and the  proportional  amount of items that are  nondeductible  forincome tax purposes.In conjunction with the 1996 Cable Companies acquisition, the Company incurred anet deferred  income tax  liability of $24.4  million and acquired net operatinglosses totaling $57.6 million.  The Company  determined that  approximately  $20million of the  acquired net  operating  losses would not be utilized for incometax  purposes,  and  elected  with its  December  31, 1996 income tax returns toforego  utilization of such acquired losses under Internal  Revenue Code section1.1502-32(b)(4).  Deferred  tax assets  were not  recorded  associated  with theforegone  losses and,  accordingly,  no valuation  allowance  was  provided.  AtDecember                                        5431,  1998,  the  Company  has  (1)  tax  net  operating  loss  carryforwards  ofapproximately  $51.0  million that will begin  expiring in 2008 if not utilized,and (2)  alternative  minimum tax credit  carryforwards  of  approximately  $2.0million  available to offset regular  income taxes payable in future years.  TheCompany's  utilization of remaining net operating loss  carryforwards is subjectto certain limitations pursuant to Internal Revenue Code section 382.Tax benefits  associated with recorded  deferred tax assets are considered to bemore likely than not  realizable  through  taxable  income  earned in  carrybackyears,  future reversals of existing taxable temporary  differences,  and futuretaxable income exclusive of reversing  temporary  differences and carryforwards.The  amount of  deferred  tax asset  considered  realizable,  however,  could bereduced  in the near term if  estimates  of future  taxable  income  during  thecarryforward period are reduced. The Company estimates that its effective incometax rate for financial statement purposes will be approximately 38% in 1999. TheCompany expects that its operations will generate net income before income taxesduring the carryforward  periods to allow utilization of loss  carryforwards forwhich no allowance has been established.Year Ended December 31, 1997 Compared to Year Ended December 31, 1996.Revenues.  Total revenues  increased 35.7% from $164.9 million in 1996 to $223.8million in 1997. The Company reported two months' of cable services  revenues in1996 following its acquisition of the Cable Systems  effective October 31, 1996.Cable  revenues  increased  $45.7  million to $55.2  million  resulting  from 12months' of activity being recorded in 1997. Long-distance  transmission revenuesfrom commercial,  residential,  governmental, and other common carrier customersincreased  9.8% from  $142.6  million in 1996 to $156.6  million  in 1997.  Thisincrease reflected a 9.0% increase in interstate minutes of use to 620.8 millionminutes  and a 9.8%  increase  in  intrastate  minutes  of use to 133.1  millionminutes.  Long-distance  revenue  growth  in  1997  was  largely  due to a 22.3%increase in revenues from other common  carriers  (principally  MCI and Sprint),from $48.0  million in 1996 to $58.7  million  in 1997 and a 12.7%  increase  inprivate line and private  network  transmission  services  revenues,  from $14.1million in 1996 to $15.9 million in 1997.The above increases in revenues were affected in part by a 1.1% reduction in theCompany's  average  rate per minute on  long-distance  traffic  from  $0.179 perminute in 1996 to $0.177 per minute in 1997. The decrease in rates resulted fromthe  Company's  promotion  of and  customers'  enrollment  in new calling  plansoffering  discounted rates and length of service  rebates,  such new plans beingprompted  in  part  by the  Company's  primary  long-distance  competitor,  AT&TAlascom,  reducing its rates and entry of LECs into long-distance markets servedby the Company.  Systems sales and services  revenues  decreased 6.4% from $10.9million in 1996 to $10.2 million in 1997,  primarily due to a reduced  number oflarge  equipment  sales   transactions  in  1997  as  compared  to  1996.  Otherlong-distance  revenues  decreased $0.7 million to $1.1 million due primarily toreduced revenues from short term Vsat leases.Cost of sales and services.  Cost of sales and services totaled $92.7 million in1996 and $111.1  million in 1997.  As a percentage  of total  revenues,  cost ofsales and services  decreased  from 56.2% in 1996 to 49.6% in 1997. The decreasein cost  of  sales  and  services  as a  percentage  of  revenues  is  primarilyattributed  to changes in the  Company's  product mix.  The Company  reported 12months of cable operations in 1997 as compared to two months in 1996. Cable costof sales and services as a percentage of sales are less than  long-distance  andlocal services cost of sales and services as a percentage of sales. The increasein cable  revenues as a percentage of total  revenues  (5.8% in 1996 to 24.7% in1997)  resulted  in an  overall  decrease  in the  Company's  cost of sales  andservices as a percentage of sales.Additionally,  cost of sales and  services  as a  percentage  of  revenues  wereaffected in part by  reductions in the rate per minute billed to the Company forthe local  access and  interstate  termination  services  it obtains  from thirdparties.  Decreases  in 1997 cost of sales and services as compared to 1996 wereoffset  in part  by  refunds  in the  first  two  quarters  of 1996  aggregatingapproximately $960,000 from a LEC and the National Exchange Carriers Associationin respect of earnings by them that exceeded regulatory requirements.                                       55Local access  services cost of sales and services  totaled 43.8% as a percentageof 1997 local access  services  revenues.  Internet  services  cost of sales andservices totaled 132.4% as a percentage of 1997 Internet services revenues.  TheCompany's  local  access and  Internet  services  operations  commenced in 1997.Fluctuations  in cost of sales and  services as a  percentage  of  revenues  areexpected to occur as start-up products develop into mature product lines.Selling,   general   and   administrative   expenses.   Selling,   general   andadministrative  expenses  increased  58.6% from  $46.4  million in 1996 to $73.6million in 1997, and, as a percentage of revenues,  increased from 28.1% in 1996to 32.9% in 1997. This increase resulted from:     -    The  Company's  reporting  12  months'  of cable  television  selling,          general  and  administrative  expenses  in  1997  ($18.8  million)  as          compared to two months' in 1996 ($3.0 million).     -    Operating,  engineering,  sales,  customer service and  administrative          costs totaling $4.1 million as compared to $870,000 in 1996 associated          with the Company's local services  segment which initiated  service in          September 1997.     -    Increased  telecommunication  general and  administrative  expenses of          $5.1  million in 1997 due to  increased  personnel  and other costs in          customer   service,   engineering,   operations,   accounting,   human          resources,  legal and regulatory, and management information services.          Cost increases were associated with the development,  introduction, or          planned  introduction,  and  support  of  new  products  and  services          including cable television services,  rural message and data telephone          services,  PCS services,  and Internet  services.  Increased  customer          service  expenses  were  associated  with support of  increased  sales          volumes and  expenditures  necessary  to  integrate  customer  service          operations across product lines.     -    Bad debt  expense  totaling  $3.0  million  for 1997  compared to $1.7          million in 1996 (directly associated with increased revenues).     -    Increased  long-distance  segment sales,  advertising,  telemarketing,          carrier  relations,  business  development  and rural  services  costs          totaling  $13.0  million in 1996  compared  to $15.3  million in 1997.          Increased  selling  costs were  associated  with the  introduction  of          various  marketing  plans and other  proprietary  rate plans and cross          promotion of products and services.Depreciation and amortization.  Depreciation and amortization  expense increased153.2% from $9.4  million in 1996 to $23.8  million in 1997.  Of this  increase,$13.3  million  resulted  from the  Company's  acquisition  of the cable systemseffective October 31, 1996, with the balance of the increase attributable to theCompany's  $38.6 million  investment in facilities  during 1996 for which a fullyear of  depreciation  was recorded during the year ending December 31, 1997 andthe 1997  investment of $73.7 million in facilities  for which a partial year ofdepreciation was recorded during 1997.Interest  expense,  net.  Interest  expense,  net of interest income,  increased375.7%  from  $3.7  million  in 1996 to $17.6  million  in 1997.  This  increaseresulted   primarily  from  increases  in  the  Company's  average   outstandingindebtedness  resulting  primarily  from its  acquisition  of the Cable Systems,construction of new facilities in rural Alaska,  expansion and upgrades of cabletelevision   facilities,   and  investment  in  local  services   equipment  andfacilities.  Such  increases  were offset in part by  increases in the amount ofinterest capitalized during 1997.Loss  on   extinguishment   of  debt.  The  Company   recorded  a  net  loss  onextinguishment  of debt of  $521,000  in 1997  resulting  from  refinancing  itspreviously outstanding Senior Credit Facility effective August 1, 1997. The lossresulted from the write-off of  unamortized  deferred debt issuance  costs.  Theloss is reported in the accompanying Consolidated Financial Statements net of anincome tax benefit of $180,000.Income tax expense.  Income tax expense decreased from $5.2 million in 1996 to abenefit of $0.6  million in 1997 due to the Company  incurring a net loss beforeincome taxes and extraordinary item in 1997 as compared to net earnings in 1996.The Company's effective income tax rate decreased from 41.2% in 1996                                        56to 25.6% in 1997 due to the net loss and the  proportional  amount of items thatare nondeductible for income tax purposes.SEASONALITY; FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONSThe following  chart provides  selected  unaudited  statement of operations datafrom the Company's quarterly results of operations during 1998 and 1997:                                                            (Amounts in thousands, except per share amounts)                                                      -------------------------------------------------------------                                                          First      Second       Third      Fourth        Total                                                          Quarter     Quarter     Quarter     Quarter       Year                                                      -------------------------------------------------------------                                                                                                                        1998     ----     Revenues         Long-distance services                    $      42,034      45,838      44,478      42,306      174,656         Cable services                            $      14,201      14,041      14,484      14,914       57,640         Local access services                     $       1,014       2,048       2,744       4,102        9,908         Internet services                         $         903       1,014       1,060       1,614        4,591                                                      -------------------------------------------------------------     Total revenues                                $      58,152      62,941      62,766      62,936      246,795     Operating income                              $       2,437       1,447       1,730       3,230        8,844     Net income (loss)                             $     (1,616)     (2,066)     (2,076)     (1,039)      (6,797)     Basic EPS                                     $      (0.03)      (0.04)      (0.04)      (0.02)       (0.14)     Diluted EPS                                   $      (0.03)      (0.04)      (0.04)      (0.02)       (0.14)     1997     ----     Revenues         Telecommunications services               $      39,201      42,097      44,378      42,176      167,852         Cable services                            $      13,656      14,055      13,294      14,160       55,165         Local access services                     $         ---         ---         255         355          610         Internet services                         $          24          34          29          95          182                                                      -------------------------------------------------------------     Total revenues                                $      52,881      56,186      57,956      56,786      223,809     Operating income                              $       3,292       2,786       3,786       5,518       15,382     Loss on debt extinguishment                   $         ---         ---         433          88          521     Net income (loss)                             $       (525)       (832)       (928)         102      (2,183)     Basic extraordinary item per share            $         ---         ---      (0.01)         ---       (0.01)     Diluted extraordinary item per share          $         ---         ---      (0.01)         ---       (0.01)     Basic net loss per share                      $      (0.01)      (0.02)      (0.02)         ---       (0.05)     Diluted net loss per share                    $      (0.01)      (0.02)      (0.02)         ---       (0.05)Total revenues for the quarter ended  December 31, 1998 ("fourth  quarter") were$62.9  million,  representing  a 0.2% increase from total  revenues in the thirdquarter of 1998 ("third quarter") of $62.8 million.  Increased new business linerevenues (local access services and Internet  services) were offset by decreasedlong-distance services revenues. The decrease in long-distance services revenuesresulted in part from a 7.4% decrease in minutes of traffic  carried  during thefourth  quarter  (approximately  15.3 million  minutes) as compared to the thirdquarter and a decrease in the average rate per minute  billed  during the fourthquarter  (approximately  $0.004)  as  compared  to the  third  quarter  (a  2.2%decrease).  Entry  of two LECs  into the  Anchorage  area  long-distance  marketcontributed  to  the  reductions  in  revenue  and  minutes  of  use.  Partiallyoffsetting  this  decrease was an increase in cable  services  revenues to $14.9million  in the fourth  quarter  from $14.5  million  in the third  quarter.  Asfurther  described below,  cable revenues are generally higher during the wintermonths as compared to the summer months.Cost of sales and services for the third and fourth  quarters were consistent atapproximately $29.7 million. As a percentage of revenues, fourth quarter cost ofsales and services was 47.2% as compared to 47.3 % for the third quarter.                                       57Selling,  general and administrative  expenses for the third and fourth quarterswere consistent at approximately $23.0 million. As a percentage of sales, fourthquarter selling,  general and administrative  expenses were 36.5% as compared to36.7 % for the third quarter.The  Company  reported  a net loss of $1.1  million  for the  fourth  quarter ascompared to a net loss of $2.1 million during the third quarter. The reduced netloss was  primarily  attributable  to reduced  depreciation  expense  during thefourth quarter as compared to the third quarter.  The Company  forecasts  annualcapital expenditures and computes  depreciation expense during the year based onsuch forecasts.  The actual amount of capital  additions  placed into service in1998 was less than the estimates  used to compute  depreciation  expense  duringprior quarters of 1998,  resulting in reduced depreciation expense in the fourthquarter.Long-distance  revenues have historically been highest in the summer months as aresult of temporary population  increases  attributable to tourism and increasedseasonal economic activity such as construction, commercial fishing, and oil andgas activities.  Cable television revenues, on the other hand, are higher in thewinter months because  consumers  spend more time at home and tend to watch moretelevision  during these months.  Local service  operations  are not expected toexhibit significant seasonality. The Company's ability to implement constructionprojects is also reduced during the winter months because of cold  temperatures,snow and short daylight hours.                         LIQUIDITY AND CAPITAL RESOURCESThe Company's 1998 cash flows from operating  activities  totaled $21.8 million,net of changes in the components of working capital.  Additional sources of cashduring 1998  included  long-term  borrowings of $103.2  million,  release to theCompany  of $39.4  million  of cash  restricted  to fund  capital  expenditures,repayments  of notes  receivable  totaling  $1.8  million,  proceeds  from GCI'sissuance of a stock warrant totaling $708,000, and class A common stock issuanceproceeds  totaling  $190,000.   The  Company's  expenditures  for  property  andequipment,  including construction in progress, totaled $149.0 million and $64.6million  in 1998 and  1997,  respectively.  Uses of cash  during  1998  includedrepayment of $2.0 million of long-term borrowings and capital lease obligations,purchases of other assets  totaling $3.1  million,  payment of deferred debt andstock issuance costs totaling $1.7 million,  an increase in notes  receivable of$1.7 million,  and purchase of GCI's common stock to fund deferred  compensationagreements totaling $568,000.Net  receivables  increased  $8.7 million from December 31, 1997 to December 31,1998  resulting  from  increased  revenues in 1998 as compared to 1997, and fromreceivables  associated  with the  Company's  provision of its  SchoolAccess(TM)services  which  totaled  $4.5  million at  December  31,  1998.  The Company isprocessing  reimbursement  requests  for  each  of  the  schools  utilizing  itsSchoolAccess(TM)  services for funding from the new federal School and LibrariesCorporation.  The Company  expects  payment of outstanding  balances  during thesecond and third quarters of 1999.Working  capital  totaled $8.3  million at December  31,  1998, a $13.3  millionincrease  from the working  capital  deficit of $5.0  million as of December 31,1997. The increase in working capital is primarily  attributed to increased cashbalances from 1998 operating  activities  including  increases in trade accountsreceivable,  and cash obtained  through the Company's credit  agreements,  stockoption and stock warrant transactions.The  Holdings  $200,000,000  ($150,000,000  as amended) and  $50,000,000  creditfacilities  mature June 30, 2005. The Holdings Loan  facilities  were amended in1999 (see below) and bear  interest,  as amended,  at either Libor plus 1.00% to2.50%,  depending  on  the  leverage  ratio  of  Holdings  and  certain  of  itssubsidiaries, or at the greater of the prime rate or the federal funds effectiverate (as defined) plus 0.05%,  in each case plus an additional  0.00% to 1.375%,depending  on the leverage  ratio of Holdings  and certain of its  subsidiaries.$106.7  million  and $64.7  million  were drawn on the credit  facilities  as ofDecember 31, 1998 and 1997,                                        58respectively.  Amounts drawn on the credit  agreements  during 1998 were used tofund property and equipment expansions and upgrades and provided working capitalnecessary for new product lines (local access services and Internet services).On April 13, 1999,  the Company  obtained  amendments  from its lenders that areparties to its Holdings credit facilities (see note 6 to the Accompanying  Notesto Consolidated  Financial  Statements).  These amendments contain,  among otherthings,  provisions  for  payment  of a one-time  amendment  fee of 0.25% of theaggregate  commitment,  an increase in the commitment fee by 0.125% per annum onthe unused  portion of the  commitment,  and an increase in the interest rate by0.25%. The amended facilities reduce the aggregate  commitment by $50 million to$200 million, and limit capital expenditures to $35 million in 1999, $35 millionin 2000 with no limits  thereafter  (excluding  amounts to be paid for purchasedsatellite transponder facilities).  The amended facilities require that Holdingsreceive $20 million in proceeds from a GCI preferred  stock  issuance by May 31,1999 (see below).The amended Holding's credit facilities and GCI, Inc.'s public notes (see note 6to  the  accompanying  Notes  to  Consolidated   Financial  Statements)  containrestrictions  on  the  operations  and  activities  of  the  Company,  includingrequirements  that the  Company  comply with  certain  financial  covenants  andfinancial ratios. Under the amended Holding's credit facility,  Holdings may notpermit the ratio of senior debt to  annualized  operating  cash flow of Holdingsand certain of its subsidiaries to exceed 3.5 to 1.0 through March 31, 1999 (3.0to 1.0 from April 1, 1999 through  December 31, 1999),  total debt to annualizedoperating  cash flow to exceed 7.0 to 1.0 from closing of the amendments to June30, 1999 (6.25 to 1.00 from July 1, 1999 through March 31, 2000), and annualizedoperating cash flow to interest expense to exceed 1.5 to 1.0 from closing of theamendments to September 30, 1999 (1.75 to 1.0 from October 1, 1999 through March31, 2000). Each of the foregoing ratios decreases in specified increments duringthe life of the  credit  facility.  The credit  facility  requires  Holdings  tomaintain a ratio of annualized  operating  cash flow to debt service of Holdingsand  certain  of its  subsidiaries  of at  least  1.25  to 1.0,  and  annualizedoperating  cash flow to fixed  charges of at least 1.0 to 1.0 (which  adjusts to1.05  to 1.0  in  April,  2003  and  thereafter).  The  public  notes  impose  arequirement that the leverage ratio of GCI, Inc. and certain of its subsidiarieswill not exceed 7.5 to 1.0 prior to December 31, 1999 and 6.0 to 1.0 thereafter,subject to the ability of GCI,  Inc.  and certain of its  subsidiaries  to incurspecified permitted indebtedness without regard to such ratios.On January 27, 1998 Alaska United closed a $75 million project finance  facility("Fiber Facility") to construct a fiber optic cable system connecting Anchorage,Fairbanks, Valdez, Whittier, Juneau and Seattle (see note 11 to the accompanyingNotes to Consolidated Financial  Statements).  The Fiber Facility provides up to$75 million in  construction  financing and bears  interest at either Libor plus3.0%, or at the lender's  prime rate plus 1.75%.  The interest rate will declineto Libor plus 2.5%-2.75%,  or, at the Company's option,  the lender's prime rateplus 1.25%-1.5%  after the project  completion date and when the loan balance is$40,000,000-60,000,000  or less.  Alaska  United is required to pay a commitmentfee equal to 0.375% per annum on the unused  portion  of the  commitment.  $61.2million was borrowed under the facility at December 31, 1998. The Fiber Facilityis a 10-year term loan that is interest only for the first 5 years. The facilitycan be extended an additional two years at any time between the second and fifthanniversary  of closing the  facility if the Company can  demonstrate  projectedrevenues  from  certain  capacity  commitments  will  be  sufficient  to pay alloperating  costs,  interest,  and principal  installments  based on the extendedmaturity.The  Fiber  Facility  contains,   among  others,   covenants  requiring  certainintercompany  loans and  advances in order to maintain  specific  levels of cashflow  necessary to pay operating  costs,  interest and  principal  installments.Additional  covenants  pertain  to the  timely  completion  of  certain  projectconstruction  milestones.  The Fiber  Facility  also  contains a guarantee  thatrequires,  among other terms and conditions,  Alaska United complete the projectby the completion  date and pay any  non-budgeted  costs of the project.  All ofAlaska United's assets, as well as a pledge of the partnership interests' owningAlaska  United,  collateralize  the Fiber  Facility.  Construction  of the fiberfacility was  completed  and the facility was placed into service on February 4,1999. The project was completed on-budget.                                       59The  Company  will use  approximately  half the  capacity  of the Alaska  Unitedproject to carry its own traffic,  in addition to its existing  owned and leasedfacilities. One of the Company's large commercial customers signed agreements inFebruary and March 1999 for the immediate  lease of three DS3 circuits on AlaskaUnited facilities within Alaska, and between Alaska and the lower 48 states. Thelease  agreements  provide  for three  year  terms,  with  renewal  options  foradditional  terms.  The  Company  continues  to  pursue  opportunities  to leasecapacity on its system.The Company's expenditures for property and equipment, including construction inprogress,  totaled  $149.0  million  and  $65.5  million  during  1998 and 1997,respectively.  The Company anticipates that its capital expenditures in 1999 maytotal  as much as $68.5  million,  including  approximately  $43.5  million  forsatellite  transponders.  Planned capital  expenditures over the next five yearsinclude those necessary for continued expansion of the Company's  long-distance,local exchange and Internet  facilities,  the development and  construction of aPCS network,  and continued  upgrades to its cable television plant.  Sources offunds for these planned capital  expenditures are expected to include internallygenerated  cash  flows and  borrowings  under the  Company's  credit  facilitiesdescribed above.The Company's ability to invest in discretionary capital and other projects willdepend  upon its future  cash flows and  access to  borrowings  under its creditfacilities.  Management  anticipates that cash flow generated by the Company andborrowings  under its  credit  facilities  will be  sufficient  to fund  capitalexpenditures  and  its  working  capital  requirements.  Should  cash  flows  beinsufficient  to  support  additional  borrowings,  such  investment  in capitalexpenditures will likely be reduced.The Company  entered  into a purchase  and  lease-purchase  option  agreement inAugust 1995 for the acquisition of satellite  transponders to meet its long-termsatellite  capacity  requirements.  The launch of the  satellite  in August 1998failed.  The  Company  did not  assume  launch  risk  and the  launch  has  beenrescheduled  for the fourth  quarter of 1999. The Company will continue to leasetransponder  capacity until the delivery of the  transponders on the replacementsatellite. The balance payable upon expected delivery of the transponders duringthe fourth  quarter of 1999 in addition to the $9.1 million  deposit  previouslypaid totals approximately $43.5 million.On April 2, 1999 the Company  received  commitments  for the  issuance of 20,000shares of convertible  redeemable accreting preferred stock ("Preferred Stock").Proceeds  totaling $20 million  (before  payment of costs and expenses)  will beused for general corporate  purposes and to provide  additional  liquidity.  TheCompany's  amended Senior  Holdings Loan  facilities  limit use of such proceeds(see note 6 to the accompanying Notes to Consolidated Financial Statements). ThePreferred Stock contains a $1,000 per share liquidation preference, plus accruedbut unpaid  dividends and fees.  Dividends will be payable  semi-annually at therate of 8.5% of the liquidation  preference.  Prior to the five-year anniversaryfollowing closing, dividends are payable, at the Company's option, in cash or inadditional  fully-paid shares of Preferred Stock.  Dividends are payable only incash  following the five-year  anniversary of closing.  Mandatory  redemption isrequired  12 years from the date of  closing.  The  Company  and  Holders of thePreferred  Stock will have the right after the four-year  anniversary of closing(or occurrence of a triggering  event,  as defined) to convert the stated value,in whole or in part,  into  registered  shares of GCI class A common stock.  Theconversion  price  will be the  lesser of $6.00 or 120% of the  average  closingprice of GCI's class A common stock for the 10 trading days prior to closing.At any time subsequent to the third anniversary  following closing, and assumingthe stock is trading at two times the conversion  price, the Company may requireimmediate  conversion at a price equal to two times the  conversion  price.  ThePreferred Stock, subject to lender approval, will be exchangeable in whole or inpart, at the Company's option,  into subordinated debt with terms and conditionscomparable to those governing the Preferred  Stock.  The Preferred Stock will besenior to all other classes of the Company's  equity  securities,  and will havevoting  rights  equal to that number of shares of common stock into which it canbe                                        60converted.  The holders of the Preferred  Stock will, as a class, be entitled toelect one GCI  director.  Closing is  expected  to take place prior to April 30,1999.The  long-distance  services,  local access services,  cable services,  Internetservices  and  wireless   services   industries  are   experiencing   increasingcompetition and rapid  technological  changes.  The Company's  future results ofoperations  will  be  affected  by  its  ability  to  react  to  changes  in thecompetitive  environment and by its ability to implement new  technologies.  TheCompany is unable to determine how  competition,  technological  changes and itsnet operating losses will affect its ability to obtain financing.The Company  believes  that it will be able to meet its  current  and  long-termliquidity and capital  requirements,  including fixed charges,  through its cashflows from operating  activities,  existing cash, cash  equivalents,  short-terminvestments, credit facilities, and other external financing and equity sources.                          NEW ACCOUNTING PRONOUNCEMENTSIn June 1998, the Accounting  Standards  Board issued SFAS No. 133,  "Accountingfor  Derivative   Instruments  and  Hedging  Activities,"  effective  for  yearsbeginning after June 15, 1999. SFAS No. 133 establishes accounting and reportingstandards  requiring  that  every  derivative   instrument,   including  certainderivative  instruments imbedded in other contracts,  be recorded in the balancesheet as either an asset or liability  measured at its fair value.  SFAS No. 133requires that changes in the derivative's fair value be recognized  currently inearnings  unless  specific  hedge  criteria  are  met.  Special  accounting  forqualifying hedges allow a derivative's gains or losses to offset related resultson the hedged item in the income  statement  and  requires  that a company  mustformally  document,  designate and assess the effectiveness of transactions thatreceive hedge  accounting.  Management  of the Company  expects that adoption ofSFAS No.  133 will not have a material  impact on the  Company's  year-end  2000financial statements.In April 1998, the American  Institute of Certified Public  Accountants  (AICPA)issued Statement of Position  ("SOP") 98-5,  "Reporting on the costs of Start-UpActivities".  SOP 98-5 provides guidance on the financial  reporting of start-upcosts and  organization  costs and  requires  costs of start-up  activities  andorganization  costs  to be  expensed  as  incurred.  SOP 98-5 is  effective  forfinancial  statements  for fiscal  years  beginning  after  December  15,  1998.Management of the Company expects that the adoption of SOP 98-5 will result in aone-time  expense of  approximately  $365,000  (net of income tax effect) in thefirst  quarter of 1999  associated  with the write-off of  unamortized  start-upcosts.                                 Alaska EconomyThe Company offers  telecommunication  and video services to customers primarilythroughout Alaska. As a result of this geographic  concentration,  the Company'sgrowth and operations depend upon economic  conditions in Alaska. The economy ofAlaska is dependent upon the natural resource industries,  and in particular oilproduction, as well as tourism, government, and United States military spending.Any  deterioration in these markets could have an adverse impact on the Company.Oil revenues  over the past several years have  contributed  in excess of 75% ofthe revenues from all segments of the Alaska economy and are expected to accountfor 73% in 1999.The volume of oil  transported by the  TransAlaska  Oil Pipeline System over thepast 20 years has been as high as 2.0 million  barrels per day in 1988. Over thepast several years,  it has begun to decline.  Market prices for North Slope oildeclined  to below $10 per  barrel in 1998,  well  below the  average  price perbarrel  used by the  State of Alaska to budget  its oil  related  revenues.  Oilcompanies and service providers have announced cost cutting measures to offset aportion of the  declining  revenues.  Oil company and related oil field  servicecompany layoffs reportedly will result in a reduction of oil industry jobs by atleast 39 percent in 1999.                                       61The effects of low oil prices will impact the state of Alaska's economy,  and isexpected  to  particularly  hurt  state and  local  government  and oil  servicecompanies.  As much as half of the  drilling  fleet that  worked on the slope in1998 could be idle during 1999. Oil field service and drilling  contractors  cutoperating  costs to  adjust  for  decreasing  production  and  exploration.  TheCompany,  as an outsourcing  services provider to the oil industry,  reduced itsoutsourcing work force by 8 employees in February 1999.Since oil  revenues to the state of Alaska are  expected  to fall  significantlyshort of budgeted  revenues,  (estimated  at $1.04 billion for the coming budgetyear),  the  Governor  of the state of Alaska has  announced  his  intention  toimplement  cost-cutting  and  revenue  enhancing  measures.  The State of Alaskamaintains  surplus  accounts that are intended to fund budgetary  shortfalls andwould be expected to fund a portion of the revenue shortfall.BP Amoco  announced  in April  1999 its  intention  to  purchase  ARCO for $26.8billion.  BP Amoco and ARCO together reportedly hold approximately 75 percent ofthe  ownership  of the Alaska  North  Slope oil fields and in the  company  thatoperates the Trans-Alaska  Pipeline System. Alaska law stipulates that no singlecompany can hold drilling leases to more than 500,000 onshore state-owned acres.The BP Amoco-ARCO  combination  would control about 860,000  acres,  however thecompanies  have  reportedly  said they will give up 360,000 acres to comply withAlaska laws. Realignment of operations following the acquisition reportedly willresult in the  layoff of 400 positions in Alaska.No assurance  can be given that oil companies  doing  business in Alaska will besuccessful in discovering new fields or further developing existing fields whichare  economic to develop  and  produce oil with access to the  pipeline or othermeans of  transport to market,  even with the reduced  level of  royalties.  TheCompany is not able to  predict  the  effect of  declines  in the price of NorthSlope oil or the  acquisition of ARCO by BP Amoco on Alaska's  economy or on theCompany.  See Part I, Item 1.  Business,  Geographic  Concentration  and  AlaskaEconomy.                                   SeasonalityLong-distance  revenues have historically been highest in the summer months as aresult of temporary population  increases  attributable to tourism and increasedseasonal economic activity such as construction, commercial fishing, and oil andgas activities.  Cable television revenues, on the other hand, are higher in thewinter months because  consumers tend to watch more  television,  and spend moretime at home, during these months.  The Company's local access services revenuesare not expected to exhibit  significant  seasonality.  The  Company's  Internetaccess services are expected to reflect  seasonality trends similar to the cabletelevision segment. The Company's ability to implement  construction projects isreduced  during the winter months because of cold  temperatures,  snow and shortdaylight hours.                                 Year 2000 CostsMany financial  information and operational systems in use today may not be ableto interpret  dates after  December 31, 1999 because such systems allow only twodigits to indicate the year in a date.  As a result,  such systems are unable todistinguish  January  1, 2000 from  January 1, 1900,  which  could have  adverseconsequences  on the  operations of an entity and the  integrity of  informationprocessing.  This could result in a system  failure or  miscalculations  causingdisruptions  of  operations,  including,  among other  things,  a shut down in acompany's  operations,  a  temporary  inability  to process  transactions,  sendinvoices or engage in similar normal business activities. This potential problemis referred to as the "Year 2000" or "Y2K" issue.State of readiness.  The Company has undertaken various  initiatives to evaluatethe Year  2000  readiness  of the  products  and  services  sold by the  Company("Products"),   the  information   technology  systems  used  in  the  Company'soperations ("IT Systems"),  its non-IT systems, such as power to its facilities,HVAC systems,  building security,  voice mail and other systems,  as well as thereadiness of its customers and suppliers.  The                                        62Company has identified  eight Year 2000 target areas that cover the entire scopeof the Company's  business and has  internally  established  teams  committed tocompleting an 8-step Compliance Validation Process ("CVP") for each target area.Each team is expected to fully  complete this process on or before  September 1,1999.  The table below  identifies  the  Company's  target  areas as well as the8-step CVP with its  expected  timeline.  Team  activity  is  currently  focusedtowards the process of completing Phase 2.        ----------------------------------------------- ---------------------------------------------------------------------                    Year 2000 Target Areas                               Compliance Validation Process        ----------------------------------------------- ---------------------------------------------------------------------                                                                                                          1.   Business Computer Systems                         PHASE 1        2.   Technical Infrastructure                   1. Team Formation               Completed 1st quarter 1997        3.   End-User Computing                         2. Inventory Assessment         Completed 4th quarter 1998        4.   Switching and Head-end Equipment           3. Compliance Assessment        Completed 4th quarter 1998        5.   Logistics                                  4. Risk Assessment              Completed 4th quarter 1998        6.   Facilities        7.   Customers                                  ------------------------------- -------------------------------------        8.   Suppliers/Key Service Providers                   PHASE 2                                                        5. Resolution/Remediation       Expected completion 2nd quarter 1999                                                        6. Validation                   Expected completion 3rd quarter 1999                                                        7. Contingency Plan             Expected completion 3rd quarter 1999                                                        8. Sign-Off Acceptance          Expected completion 4th quarter 1999        ----------------------------------------------- ------------------------------- -------------------------------------In 1997,  the  Company  established  a  corporate-wide  Year 2000 task  force toaddress  Y2K issues.  This effort is  comprehensive  and  encompasses  software,hardware,  electronic data interchange,  networks,  PC's,  facilities,  embeddedchips,  century  certification,  supplier  and customer  readiness,  contingencyplanning, and domestic and international operations. The Company is currently onschedule and is more than 50% complete as of December 31, 1998.  The Company hastested,  replaced or upgraded  most of its critical  business  applications  andsystems and has begun the century  testing phase for these  critical  technologysystems.  The target date to repair or replace the remaining  critical  businessinformation systems is June 30, 1999. The Company is assessing its telephone andcable  systems  and  equipment  and the target date to  complete  equipment  andfacilities  efforts is also June 30,  1999.  The  Company  has  prioritized  itsthird-party relationships as critical, severe or sustainable,  has completed theassessment  phase for third parties  (except for assessment of its key customerswhich is scheduled to be complete in March 1999),  has  requested a Y2K contractwarranty  in many new key  contracts  and is  developing  contingency  plans forcritical  third parties,  including key  customers,  suppliers and other serviceproviders.With respect to the  Company's  relationships  with third  parties,  the Companyrelies both domestically and internationally upon various vendors,  governmentalagencies,  utility companies,  telecommunications  service  companies,  deliveryservice companies and other service providers.  Although these service providersare outside the Company's control,  the Company has mailed letters to those withwhom it believes its  relationships  are material and has verbally  communicatedwith some of its strategic customers to determine the extent to which interfaceswith such entities are  vulnerable to Year 2000 issues and whether  products andservices purchased from or by such entities are Year 2000 ready.Over 400 companies have been contacted  directly by mail, by telephone,  throughon-site  visits or through  inquiry of their Y2K Internet web sites to determinetheir state of readiness.  Responses vary from  confirmation  that the supply ofproducts or services provided to the Company will continue without  interruptionor delay  through  the year 2000,  to  providing  their  plans for making  theirproducts or service  delivery  systems Y2K  compliant.  The Company is currentlyevaluating the  sufficiency of the responses  received from these third parties.The Company intends to complete follow-up activities,  including but not limitedto site  surveys,  phone  surveys and  mailings,  with  significant  vendors andservice providers as part of the Phase 2 validation.                                       63Costs to address year 2000 issues.  Costs  related to the Y2K issue are expensedas incurred and are funded  through the Company's  operating  cash flows and itscredit  agreements.   Through  December  31,  1998,  the  Company  has  expensedincremental  remediation costs totaling $1.1 million, with remaining incrementalremediation  costs  estimated at  approximately  $2.9 million.  Management  mustbalance the requirements for funding  discretionary  capital  expenditures  withrequired  year 2000  efforts  given its limited  resources.  The Company has notdeferred any critical  information  technology projects because of its Year 2000program efforts,  which are being addressed  primarily  through a dedicated teamwithin the Company's information technology group.Time and cost estimates are based on currently  available  information and couldbe affected by the ability to correct all relevant computer codes and equipment,and the Y2K readiness of the Company's business  partners,  among other factors.At this time, the Company does not possess information necessary to estimate thepotential  financial  impact  of Year 2000  compliance  issues  relating  to itsvendors, customers and other third parties.Risk of year 2000 issues.  If necessary  modifications  and  conversions  by theCompany  are not made on a timely  basis,  or if key third  parties  are not Y2Kready,  Y2K  problems  could have a  material  adverse  effect on the  Company'sfinancial condition,  results of operations and liquidity.  However, the Companyis focusing on identifying and addressing all aspects of its operations that maybe  affected  by the  Year  2000  issue  and is  addressing  the  most  criticalapplications first.Although the Company  considers  them  unlikely,  the Company  believes that thefollowing several situations, not in any particular order, make up the Company'smost reasonably likely worst case Year 2000 scenarios:     -    Disruption  of  electrical  power  supplies  resulting  from  extended          regional  power   failure(s).   The  Company's   major  switching  and          information  systems are  protected  by emergency  standby  electrical          generators in the event of  short-term  power  outages.  If electrical          supplies  from  regional  electric  utilities are disrupted for longer          periods  of time,  the  Company  may be  required  to  power-down  its          electronic switching,  head-end and computer equipment. The Company is          closely  monitoring  electrical  utilities that provide service to the          Company for their Year 2000 readiness. Based on their progress reports          and completion of assessments, the Company believes that there will be          no  significant  impact on its  operations  in the  major  communities          served  by the  Company.  Many  of the  electrical  companies  serving          smaller  rural   communities   employ  equipment  that  is  manual  or          controlled  by  non   date-effecting   equipment,   however  they  may          experience outages if they do not receive fuel from their suppliers.     -    Disruption of a Significant  Customer's  Ability to Accept Products or          Pay  Invoices.   The  Company's   significant   customers  are  large,          well-informed customers,  mostly in the telecommunications and oil and          gas industries,  who are disclosing  information to their vendors that          indicates  they are well along the path toward  Year 2000  compliance.          These  customers have  demonstrated  their  awareness of the Year 2000          issue by issuing  requirements  of their  suppliers and indicating the          stages of identification  and remediation which they consider adequate          for progressive  calendar quarters leading up to the century mark. The          Company's significant  customers,  moreover, are substantial companies          that the Company  believes would be able to make  adjustments in their          processes as required to cause timely payment of invoices.     -    Disruption of Supplies and Materials.  In early 1998 the Company began          an ongoing  process of surveying its vendors with regard to their Year          2000  readiness and is now in the process of assessing and  cataloging          their  responses  to the survey.  The Company is hopeful of  receiving          adequate   responses   from  remaining   critical   vendors  and  many          non-critical  vendors  within  the first  two  quarters  of 1999.  The          Company  expects to work with vendors that show a need for  assistance          or that provide inadequate  responses,  and in many cases expects that          survey  results  will be refined  significantly  by such  work.  Where          ultimate  survey  results show that the need arises,  the Company will          arrange for back-up vendors before the changeover  date.  Supplies and          materials necessary for invoicing and other                                        64          functions  will be  acquired  in bulk prior to  December  31,  1999 to          provide an adequate  inventory  to bridge up to three months of vendor          supply chain disruptions.     -    Disruption of the Company's administrative and billing IT systems. The          Company  is  proceeding  with  a  scheduled  upgrade  of  its  current          financial  software  systems  to  state-of-the-art  systems  and  such          process has required Year 2000  compliance in the various  invitations          for proposals. Year 2000 testing is occurring as upgrades proceed and,          in addition, will occur after all upgrades are completed at the end of          the first  quarter of 1999.  The  Company's  billing  and  information          systems continue to be assessed and remediated.  System processes have          been   prioritized  so  that  critical   date-sensitive   systems  and          functionality   are  remediated   first.   Non-critical   systems  and          functionality are remediated following critical systems. The Company's          efforts are  proceeding  on-target  and  on-budget.  Accordingly,  the          Company  believes  that,  after  assessment  and  remediation,  if any          disruptions do occur,  such will be dealt with promptly and will be no          more  severe  with  respect to  correction  or impact than would be an          unexpected billing or information system error.     -    Disruption of the Company's Non-IT Systems.  The Company  continues to          conduct a comprehensive  assessment of all non-IT  systems,  including          among other things its switching and head-end  systems and operations,          with respect to both embedded processors and obvious computer control.          For some  systems,  upgrades are already  scheduled and it is expected          that the Phase 1 assessments  will  highlight by the end of the second          quarter of 1999 any further remediation needs.  Considering the nature          of the equipment and systems  involved,  the Company  expects that the          timing of  assessment  to be such that it will be able to complete any          remediation  efforts on a reasonably  short schedule,  and in any case          before arrival of the Year 2000. The Company also believes that, after          such assessment and  remediation,  if any  disruptions do occur,  such          will be dealt with promptly and will be no more severe with respect to          correction  or  impact  than  would  be  an  unexpected  breakdown  of          well-maintained equipment.     -    De-Listing of Company as a Vendor to Certain Customers. Several of the          Company's  principal  customers have required  updated  reports in the          form of answers to extensive  multiple-choice surveys on the Company's          Year 2000 compliance efforts. According to these customers, failure to          reply  to the  readiness  survey  would  have led to  de-listing  as a          service  supplier at the present time,  resulting in possible  current          inability to bid on  procurements  requiring  service  delivery in the          future.  The Company has responded to these reports on a timely basis.          The Company  has not been  de-listed  as a supplier to any  customers.          Several  significant  customers  have  scheduled  monitoring  meetings          during 1999.Contingency  plans.  The  Company  is in  the  process  of  developing  specificcontingency plans for potential Year 2000 disruptions. The aforementioned 8-stepCompliance  Validation  Process includes  contingency  planning by each team andsuch plans, as developed, will be carefully reviewed by the Company. The Companyis developing contingency plans for its most critical areas, but details of suchplans will depend on the  Company's  final  assessment of the problem as well asthe evaluation and success of its remediation  efforts.  Future disclosures willinclude contingency plans as they become available.                             REGULATORY DEVELOPMENTSSee Part I, Item 1 Business.,  Regulation,  Franchise Authorizations and Tariffsfor regulatory developments affecting the Company.                                    InflationThe Company  does not believe that  inflation  has a  significant  effect on itsoperations.Item 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKThe  Company's  Senior  Holdings  Loan  described  in  note 6 to  the  financialstatements as well as in Management's  Discussion and Analysis  carries interestrate risk.  Amounts  borrowed under this Agreement bear interest at either Liborplus 0.75% to 2.25%,  depending on the leverage ratio of Holdings and certain of                                       65its  subsidiaries,  or at the  greater  of the prime rate or the  federal  fundseffective rate (as defined) plus 0.05%,  in each case plus an additional 0.0% to1.125%,  depending  on  the  leverage  ratio  of  Holdings  and  certain  of itssubsidiaries.  Should the lenders' base rate or the leverage ratios change,  theCompany's interest expense will increase or decrease accordingly. As of December31, 1998, the Company had borrowed $106.7 million subject to interest rate risk.On this  amount,  a 1%  increase  in the  interest  rate would cost the  Company$1,067,000 in additional gross interest cost on an annual basis.The Company's Fiber Facility described in note 6 to the financial  statements aswell as in  Management's  Discussion  and Analysis  carries  interest rate risk.Amounts  borrowed  under this Agreement bear interest at either Libor plus 3.0%,or at the Company's  choice,  the lender's  prime rate plus 1.75%.  The interestrate will decline to Libor plus  2.5%-2.75%,  or at the  Company's  choice,  thelender's prime rate plus 1.25%-1.5%  after the project  completion date and whenthe loan balance is  $60,000,000  or less.  Should the lenders' base rate or theleverage ratios change, the Company's interest expense will increase or decreaseaccordingly.  As of December 31, 1998,  the Company had borrowed  $61.2  millionsubject to interest  rate risk.  On this  amount,  a 1% increase in the interestrate would cost the Company  $612,000 in  additional  gross  interest cost on anannual basis.Item 8.  CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAThe consolidated  financial statements of the Company are filed under this Item,beginning  on  Page  67.  The  financial   statement  schedules  required  underRegulation S-X are filed pursuant to Item 14 of this Report.Item 9. CHANGES IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON ACCOUNTING  AND        FINANCIAL DISCLOSURENone.                                    PART IIIIncorporated herein by reference from the Company's Proxy Statement for its 1999Annual Shareholders' meeting.                                       66                          INDEPENDENT AUDITORS' REPORT                          ----------------------------The Board of Directors and StockholdersGeneral Communication, Inc.:We  have  audited  the  accompanying  consolidated  balance  sheets  of  GeneralCommunication,  Inc. and  Subsidiaries as of December 31, 1998 and 1997, and therelated  consolidated  statements of operations,  stockholders'  equity and cashflows for each of the years in the  three-year  period ended  December 31, 1998.These consolidated  financial statements are the responsibility of the Company'smanagement.  Our  responsibility is to express an opinion on these  consolidatedfinancial statements based on our audits.We  conducted  our  audits  in  accordance  with  generally   accepted  auditingstandards.  Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free of materialmisstatement.  An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements.  An audit also includesassessing the  accounting  principles  used and  significant  estimates  made bymanagement,  as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.In our opinion the consolidated  financial  statements referred to above presentfairly,   in  all  material   respects,   the  financial   position  of  GeneralCommunication,  Inc. and  Subsidiaries as of December 31, 1998 and 1997, and theresults  of their  operations  and their cash flows for each of the years in thethree-year period ended December 31, 1998 in conformity with generally  acceptedaccounting principles.                                                 /s/                                                 KPMG LLPAnchorage, AlaskaMarch 26, 1999, except for notes 6 and 12, which are dated as of April 13, 1999                                       67                                   GENERAL COMMUNICATION, INC. AND SUBSIDIARIES                                           Consolidated Balance Sheets                                                                                          December 31,                            ASSETS                                                      1998        1997- ---------------------------------------------------------------------------------    ----------- -----------                                                                                      (Amounts in thousands)                                                                                                           Current assets:    Cash and cash equivalents                                                      $      12,008       3,048                                                                                     ----------- -----------    Receivables:        Trade                                                                             38,890      29,599        Income taxes (note 7)                                                              4,262       4,752        Other                                                                                412         649                                                                                     ----------- -----------                                                                                          43,564      35,000        Less allowance for doubtful receivables                                              887       1,070                                                                                     ----------- -----------           Net receivables                                                                42,677      33,930                                                                                     ----------- -----------    Prepaid and other current assets                                                       2,132       2,520    Deferred income taxes, net (note 7)                                                    1,947       1,675    Inventories                                                                            1,878       2,164    Notes receivable (note 4)                                                                650         897                                                                                     ----------- -----------           Total current assets                                                           61,292      44,234                                                                                     ----------- -----------Restricted cash (note 11)                                                                    ---      39,406                                                                                     ----------- -----------Property and equipment in service, at cost (notes 6, 9, 10, and 11):    Land and buildings                                                                     1,109         981    Telephony distribution systems                                                       144,896     116,016    Cable television distribution systems                                                 89,736      69,445    Support equipment                                                                     42,056      32,596    Transportation equipment                                                               2,183       2,643    Property and equipment under capital leases                                            2,819       2,718                                                                                     ----------- -----------                                                                                         282,799     224,399    Less accumulated depreciation                                                         82,972      58,406                                                                                     ----------- -----------        Net property and equipment in service                                            199,827     165,993        Construction in progress                                                         119,645      18,513                                                                                     ----------- -----------           Net property and equipment                                                    319,472     184,506                                                                                     ----------- -----------Cable  franchise  agreements,  net of  amortization  of  $11,184  and  $6,022 at   December 31, 1998 and 1997, respectively (note 2)                                     195,308     200,470Other intangible assets, net of amortization (notes 2 and 5)                              45,874      46,064Deferred loan and Senior Notes costs, net of amortization                                  9,877       9,379Transponder deposit (note 11)                                                              9,100       9,100Undersea fiber optic cable deposit (note 11)                                                 ---       9,094Notes receivable (note 4)                                                                  1,432       1,331Other assets, at cost, net of amortization                                                 3,761       1,718                                                                                     ----------- -----------           Total other assets                                                            265,352     277,156                                                                                     ----------- -----------           Total assets                                                            $     646,116     545,302                                                                                     =========== ===========See accompanying notes to consolidated financial statements.                                                                     (Continued)                                       68                                  GENERAL COMMUNICATION, INC. AND SUBSIDIARIES                                          Consolidated Balance Sheets                                                  (Continued)                                                                                           December 31,             LIABILITIES AND STOCKHOLDERS' EQUITY                                       1998         1997- ---------------------------------------------------------------------------------    ----------- -----------                                                                                      (Amounts in Thousands)                                                                                                           Current liabilities:    Current maturities of long-term debt (note 6)                                  $       1,799       1,634    Current maturities of obligations under capital leases (notes 10       and 11)                                                                               511         198    Accounts payable                                                                      27,550      24,965    Accrued interest                                                                       8,072       7,649    Accrued payroll and payroll related obligations                                        6,555       5,680    Accrued liabilities                                                                    3,197       5,111    Subscriber deposits and deferred revenues                                              5,300       3,898    Accrued income taxes (note 7)                                                            ---         111                                                                                     ----------- -----------        Total current liabilities                                                         52,984      49,246Long-term debt, excluding current maturities (note 6)                                    349,858     248,450Obligations under capital leases, excluding   current maturities (note 11)                                                            1,189         400Obligations under capital leases due to related party, excluding    current maturities (notes 10 and 11)                                                     486         590Deferred income taxes, net of deferred income tax benefit (note 7)                        38,275      38,904Other liabilities                                                                          3,317       3,273                                                                                     ----------- -----------        Total liabilities                                                                446,109     340,863                                                                                     ----------- -----------Stockholders' equity (notes 2, 3, 6, 7 and 8): Common stock (no par):        Class A.  Authorized 100,000,000 shares; issued and outstanding          45,895,415 and 45,279,045 shares at December 31, 1998 and          1997, respectively                                                             172,708     170,322        Class B. Authorized  10,000,000 shares; issued and outstanding 4,060,620          and  4,062,892  shares at December  31,  1998 and 1997,  respectively;          convertible on a share-per-share basis into          Class A common stock                                                             3,432       3,432        Less cost of 347,958 and 202,768  Class A common shares held in treasury          at December 31, 1998 and 1997, respectively                                     (1,607)     (1,039)    Paid-in capital                                                                        5,609       4,425    Notes receivable issued upon stock option exercise (note 4)                             (637)        ---    Retained earnings                                                                     20,502      27,299                                                                                     ----------- -----------        Total stockholders' equity                                                       200,007     204,439                                                                                     ----------- -----------        Commitments and contingencies (notes 10, 11 and 12)        Total liabilities and stockholders' equity                                 $     646,116     545,302                                                                                     =========== ===========See accompanying notes to consolidated financial statements.                                       69                                          GENERAL COMMUNICATION, INC. AND SUBSIDIARIES                                              Consolidated Statements of Operations                                          Years ended December 31, 1998, 1997 and 1996                                                                           1998              1997             1996                                                                       -------------     ------------     -------------                                                                        (Amounts in thousands except per share amounts)                                                                                                                      Revenues (notes 9 and 10)                                            $     246,795          223,809           164,894Cost of sales and services                                                 116,073          111,077            92,664Selling, general and administrative expenses                                89,833           73,583            46,412Depreciation and amortization expense (note 9)                              32,045           23,767             9,409                                                                       -------------     ------------     -------------        Operating income (note 9)                                            8,844           15,382            16,409Interest expense, net (notes 3 and 6)                                       19,764           17,617             3,719                                                                       -------------     ------------     -------------        Net earnings (loss) before income taxes and          extraordinary item                                               (10,920)          (2,235)           12,690Income tax expense (benefit) (notes 3 and 7)                                (4,123)            (573)            5,228                                                                       -------------     ------------     -------------        Net earnings (loss) before extraordinary loss on early          extinguishment of debt                                            (6,797)          (1,662)            7,462        Loss on early extinguishment of debt, net of income tax          benefit of $180 (note 6)                                             ---              521               ---                                                                       -------------     ------------     -------------        Net earnings (loss)                                          $      (6,797)          (2,183)            7,462                                                                       =============     ============     =============Basic earnings (loss) per common share:    Net earnings (loss) before extraordinary loss                    $       (0.14)           (0.04)             0.28    Extraordinary loss                                                        0.00            (0.01)             0.00                                                                       -------------     ------------     -------------        Net earnings (loss)                                          $       (0.14)           (0.05)             0.28                                                                       =============     ============     =============Diluted earnings (loss) per common share:    Net earnings (loss) before extraordinary loss                    $       (0.14)           (0.04)             0.27    Extraordinary loss                                                        0.00            (0.01)             0.00                                                                       -------------     ------------     -------------        Net earnings (loss)                                          $       (0.14)           (0.05)             0.27                                                                       =============     ============     =============See accompanying notes to consolidated financial statements.                                       70                                           GENERAL COMMUNICATION, INC. AND SUBSIDIARIES                                         Consolidated Statements of Stockholders' Equity                                           Years ended December 31, 1998, 1997 and 1996                                                                                              Class A             Notes                                                          Shares of        Class A    Class B  Shares            Receiv-                                                         Common Stock      Common     Common   Held in  Paid-in   able   Retained(Amounts in thousands)                                 Class A  Class B    Stock      Stock   Treasury  Capital  Issued  Earnings                                                    -------------------------------------------------------------------------------                                                                                                                                       Balances at December 31, 1995                           19,680   4,176    $13,912     3,432     (389)    4,041      ---     22,020Net earnings                                               ---     ---        ---       ---       ---      ---      ---      7,462Class B shares converted to Class A shares                 102   (102)        ---       ---       ---      ---      ---        ---Tax effect of excess stock compensation expense   for tax purposes over amounts recognized for   financial reporting purposes (note 7)                   ---     ---        ---       ---       ---      187      ---        ---Shares issued to MCI (notes 2 and 8)                     2,000     ---     13,000       ---       ---      ---      ---        ---Shares issued pursuant to acquisitions, net of   costs totaling $432 (note 2)                         14,723     ---     86,278       ---       ---      ---      ---        ---Shares purchased and held in Treasury                      ---     ---        ---       ---     (621)      ---      ---        ---Shares issued under stock option plan                       82     ---        231       ---       ---      ---      ---        ---Shares issued and issuable under officer stock   option agreements                                       ---     ---        ---       ---       ---        1      ---        ---                                                    -------------------------------------------------------------------------------Balances at December 31, 1996                           36,587   4,074    113,421     3,432   (1,010)    4,229      ---     29,482Net loss                                                   ---     ---        ---       ---       ---      ---      ---    (2,183)Class B shares converted to Class A shares                  11    (11)        ---       ---       ---      ---      ---        ---Tax effect of excess stock compensation expense   for tax purposes over amounts  recognized for   financial reporting purposes (note 7)                   ---     ---        ---       ---       ---       65      ---        ---Shares issued upon public offering, net of   issuance costs of $4,024 (note 8)                     7,000     ---     46,726       ---       ---      ---      ---        ---Shares issued upon conversion of convertible note   net of fees of $16 (notes 2 and 8)                    1,538     ---      9,983       ---       ---      ---      ---        ---Shares acquired pursuant to officer deferred   compensation agreement                                  ---     ---        ---       ---      (29)      ---      ---        ---Shares issued under stock option plan                       57     ---        192       ---       ---       63      ---        ---Shares issued and issuable under officer stock   option agreements                                        86     ---        ---       ---       ---       68      ---        ---                                                    -------------------------------------------------------------------------------Balances at December 31, 1997                           45,279   4,063    170,322     3,432   (1,039)    4,425      ---     27,299Net loss                                                   ---     ---        ---       ---       ---      ---      ---    (6,797)Class B shares converted to Class A shares                   2     (2)        ---       ---       ---      ---      ---        ---Tax effect of excess stock compensation expense   for tax purposes over amounts  recognized for   financial reporting purposes (note 7)                   ---     ---        ---       ---       ---      157      ---        ---Shares purchased and held in Treasury                      ---     ---        ---       ---     (568)      ---      ---        ---Shares issued under stock option plan (note 8)             315     ---        827       ---       ---      319      ---        ---Notes issued upon stock option exercise (note 4)           ---     ---        ---       ---       ---      ---    (637)        ---Shares issued to Employee Stock Purchase Plan              299     ---      1,574       ---       ---      ---      ---        ---Warrants issued (note 8)                                   ---     ---        ---       ---       ---      708      ---        ---Stock offering issuance costs                              ---     ---       (15)       ---       ---      ---      ---        ---                                                    -------------------------------------------------------------------------------Balances at December 31, 1998                           45,895   4,061   $172,708     3,432   (1,607)    5,609    (637)     20,502                                                    ===============================================================================See accompanying notes to consolidated financial statements.                                       71                                         GENERAL COMMUNICATION, INC. AND SUBSIDIARIES                                            Consolidated Statements of Cash Flows                                         Years ended December 31, 1998, 1997 and 1996                                                                                 1998             1997             1996                                                                            -------------     -----------     ------------                                                                                         (Amounts in thousands)                                                                                                                         Cash flows from operating activities:    Net earnings (loss)                                                   $       (6,797)          (2,183)          7,462    Adjustments to reconcile net earnings (loss) to net cash provided by       operating activities:        Depreciation and amortization                                             32,045           23,767           9,409        Deferred income tax (benefit) expense                                       (744)           4,410           2,252        Employee Stock Purchase Plan expense funded with stock                     1,574              ---             ---        Deferred compensation and compensatory stock options                         376              477             507        Disposals of property and equipment                                           62               71              30        Loss on early extinguishment of debt                                         ---              701             ---        Bad debt expense (recovery), net of write-offs                              (183)             473             (34)        Other noncash income and expense items                                        92             (125)            (42)        Change in operating assets and liabilities (note 3)                       (4,643)           3,202           2,724                                                                            -------------    -------------    ------------           Net cash provided by operating activities                              21,782           30,793          22,308                                                                            -------------    -------------    ------------Cash flows from investing activities:    Acquisitions of businesses, net of cash acquired (notes 2 and 3)                 ---             (547)        (72,818)    Purchases of property and equipment, including construction period       interest                                                                 (148,973)         (64,644)        (38,642)    Restricted cash investment                                                    39,406          (39,406)            ---    Purchases of other assets and intangible assets                               (3,140)          (1,292)        (10,959)    Payment of undersea fiber optic cable deposit                                    ---           (9,094)            ---    Notes receivable issued                                                       (1,715)            (698)           (515)    Payments received on notes receivable                                          1,769               32             288                                                                            -------------    -------------    ------------           Net cash used in investing activities                                (112,653)        (115,649)       (122,646)                                                                            -------------    -------------    ------------Cash flows from financing activities:    Long-term borrowings - senior notes                                              ---          180,000             ---    Long-term borrowings - bank debt                                             103,224           88,305         208,000    Repayments of long-term borrowings and capital lease obligations              (2,017)        (231,021)         (5,039)    Retirement of bank debt assumed                                                  ---              ---        (105,200)    Proceeds from equity offering                                                    ---           50,750             ---    Proceeds from common stock issuance                                              190              192          13,231    Payment of debt and stock issuance costs                                      (1,706)         (13,642)           (701)    Proceeds from warrant issuance                                                   708              ---             ---    Purchase of treasury stock                                                      (568)             (29)           (621)                                                                            -------------    -------------    ------------           Net cash provided by financing activities                              99,831           74,555         109,670                                                                            -------------    -------------    ------------           Net increase (decrease) in cash and cash equivalents                    8,960          (10,301)          9,332           Cash and cash equivalents at beginning of year                          3,048           13,349           4,017                                                                            -------------    -------------    ------------           Cash and cash equivalents at end of year                       $       12,008            3,048          13,349                                                                            =============    =============    ============ See accompanying notes to consolidated financial statements.                                       72                           GENERAL COMMUNICATION, INC.                   Notes to Consolidated Financial Statements(l)     Organization and Summary of Significant Accounting Principles        (a)    Organization and Business               General Communication,  Inc. ("GCI"), an Alaska corporation,  was               incorporated   in  1979.   GCI  and  its  direct   and   indirect               subsidiaries  (collectively,  the "Company") offer  long-distance               telephone service between Anchorage, Fairbanks, Juneau, and other               communities in Alaska and the remaining United States and foreign               countries.  Cable  television  services  are  offered  throughout               Alaska and facilities-based competitive local access services are               offered in Anchorage,  Alaska.  The Company provides  services to               certain common carriers terminating traffic in Alaska, interstate               and intrastate private line services,  Internet services, managed               services to certain  commercial  customers and sells and services               dedicated  communications systems and related equipment.  Private               network  point-to-point  data  and  voice  transmission  services               between Alaska,  Hawaii and the western  contiguous United States               are  offered  and the  Company  owns and leases  capacity  on two               undersea  fiber  optic  cables  used  in  the   transmission   of               interstate  private  line,  switched  message  long-distance  and               Internet  services between Alaska and the remaining United States               and foreign countries.        (b)    Principles of Consolidation               The  consolidated  financial  statements  include the accounts of               GCI,  its   wholly-owned   subsidiary   GCI,  Inc,  GCI,   Inc.'s               wholly-owned  subsidiary  GCI Holdings,  Inc., GCI Holding Inc.'s               wholly-owned    subsidiaries   GCI   Communication   Corp.,   GCI               Communication   Services,   Inc.   and  GCI  Cable,   Inc.,   GCI               Communication  Services' wholly-owned subsidiary GCI Leasing Co.,               Inc., GCI Transport  Company,  Inc.,  GCI Transport  Co.,  Inc.'s               wholly-owned  subsidiaries  GCI Fiber  Co.,  Inc.  and Fiber Hold               Company,  Inc. and GCI Fiber Co.,  Inc.'s and Fiber Hold Company,               Inc.'s  wholly  owned  partnership  Alaska  United  Fiber  System               Partnership.    All   significant   intercompany   balances   and               transactions have been eliminated in consolidation.        (c)    Earnings (Loss) Per Common Share               The Company follows the provisions of SFAS No. 128, "Earnings per               Share." Basic earnings (loss) per share is calculated by dividing               income (loss)  available to common  shareholders  by the weighted               average  common  shares  outstanding.  Diluted EPS  includes  the               effect of all potentially  dilutive  securities,  such as options               and  convertible   preferred  stock.  Shares  used  to  calculate               earnings  (loss) per share consist of the  following  (amounts in               thousands):                                                                             1998           1997           1996                                                                          -----------    ----------    ----------                                                                                                                                  Weighted average common shares outstanding                 49,186         44,924        26,498                 Common equivalent shares outstanding                          ---            ---           802                                                                          -----------    ----------    ----------                                                                            49,186         44,924        27,300                                                                          ===========    ==========    ==========               Common equivalent  shares  outstanding of 521,000 and 816,000 are               anti-dilutive  at December 31, 1998 and 1997,  respectively,  and               are not  included in the diluted  net  earnings  (loss) per share               calculation.  Weighted average shares associated with outstanding               stock  options  totaling  2,071,000,   1,073,000  and  35,000  at               December  31,  1998,  1997  and  1996,  respectively,  have  been               excluded from the diluted earnings (loss) per share  calculations               because the options'  exercise price was greater than the average               market price of the common shares.        (d)    Cash and Cash Equivalents               Cash equivalents consist of short-term, highly liquid investments               that are readily convertible into cash.                                       73                            (Continued)                           GENERAL COMMUNICATION, INC.                   Notes to Consolidated Financial Statements        (e)    Inventories               Inventory  of  merchandise  for resale and parts is stated at the               lower of cost or market.  Cost is determined  using the first-in,               first-out  method for parts and either  the  first-in,  first-out               method or the specific  identification  method for equipment held               for resale.        (f)    Property and Equipment               Telecommunications Property and Equipment               Telecommunications  property  and  equipment  is  stated at cost.               Construction  costs  of  facilities  are  capitalized.  Equipment               financed  under  capital  leases is recorded at the lower of fair               market  value  or the  present  value  of  future  minimum  lease               payments.  Construction in progress represents telecommunications               distribution  systems and support equipment not placed in service               on December 31, 1998;  management intends to place this equipment               in service during 1999.               Telecommunications   equipment  depreciation  is  computed  on  a               straight-line  basis  based  upon the  shorter  of the  estimated               useful  lives of the  assets or the lease  term,  if  applicable,               ranging  from 5 to 24  years  for  buildings,  telecommunications               distribution  equipment  (including switches and earth stations),               support  equipment,  transportation  equipment  and  property and               equipment  under  capital  lease.  Maintenance  and  repairs  are               charged to expense as incurred.  Expenditures  for major renewals               and betterments are  capitalized.  Gains or losses are recognized               at the time of ordinary retirements,  sales or other dispositions               of property.               Cable Television Property and Equipment               Cable television  property and equipment is stated at cost. Cable               television equipment  depreciation is computed on a straight-line               basis over the estimated  useful lives of the assets ranging from               5  to  10  years  for  cable  distribution  facilities,  head-end               systems,   converters,   support  equipment  and   transportation               equipment.  Maintenance  and  repairs  are  charged to expense as               incurred.  Expenditures  for major renewals and  betterments  are               capitalized.  Gains  or  losses  are  recognized  at the  time of               ordinary retirements, sales or other dispositions of property.        (g)    Intangible Assets               Intangible  assets are  valued at  unamortized  cost.  Management               reviews the valuation and amortization of intangible  assets on a               periodic  basis,   taking  into   consideration   any  events  or               circumstances   which  might  indicate   diminished   value.  The               assessment  of the  recoverability  is based on whether the asset               can be recovered through undiscounted future cash flows.               Cable franchise  agreements represent certain perpetual operating               rights to provide  cable  services  and are being  amortized on a               straight-line basis over 40 years.               Goodwill  represents  the  excess of cost over fair  value of net               assets acquired and is being  amortized on a straight-line  basis               over periods of 20 to 40 years.               The cost of the Company's PCS license and related financing costs               have been capitalized as an intangible asset. Once the associated               assets are placed into service,  the recorded cost of the license               and related  financing  costs will begin being  amortized  over a               40-year period using the straight-line method.                                       74                            (Continued)                           GENERAL COMMUNICATION, INC.                   Notes to Consolidated Financial Statements        (h)    Deferred Loan and Senior Notes Costs               Debt and Senior Notes  issuance  costs are deferred and amortized               using the straight-line  method,  which approximates the interest               method, over the term of the related debt and notes. Amortization               of issuance  costs for the Alaska United Fiber Facility (see note               6)  are  charged  to   Construction   in   Progress   during  the               construction  period of the undersea  fiber optic cable (see note               11).        (i)    Other Assets               Other  assets  are  recorded  at  cost  and  are  amortized  on a               straight-line basis over periods of 2-10 years.        (j)    Revenue from Services and Products               Revenues  generated  from  long-distance  services are recognized               when  the  services  are  provided.  Revenues  from  the  sale of               equipment  are  recognized at the time the equipment is delivered               or  installed.   Service  revenues  are  derived  primarily  from               maintenance  contracts  on  equipment  and  are  recognized  on a               prorated basis over the term of the contract.  Cable  television,               local    service,    Internet    service   and    private    line               telecommunication  revenues are  generally  billed in advance and               are  recognized  as the  associated  service is  provided.  Other               revenues are recognized when the service is provided.        (k)    Research and Development and Advertising Expense               The Company  expenses  advertising  and research and  development               costs  as  incurred.   Advertising  expenses  were  approximately               $5,028,000,  $2,897,000  and $2,411,000 for the years ended 1998,               1997 and 1996, respectively.        (l)    Interest Expense               Interest  costs  incurred  during  the  construction   period  of               significant  capital  projects are  capitalized.  Interest  costs               capitalized by the Company totaled  $7,764,000,  $1,886,000,  and               $1,034,000  during the years ended  December 31,  1998,  1997 and               1996.        (m)    Income Taxes               Income  taxes are  accounted  for  using the asset and  liability               method.  Deferred tax assets and  liabilities  are recognized for               their future tax consequences attributable to differences between               the financial  statement  carrying amounts of existing assets and               liabilities and their  respective tax bases.  Deferred tax assets               and  liabilities are measured using enacted tax rates expected to               apply to taxable  earnings in the years in which those  temporary               differences are expected to be recovered or settled. Deferred tax               assets are  recognized  to the extent that the  benefits are more               likely to be realized than not.        (n)    Stock Option Plan               The Company accounts for its stock option plan in accordance with               the provisions of Accounting Principles Board ("APB") Opinion No.               25,  "Accounting  for Stock  Issued to  Employees,"  and  related               interpretations.  As such, compensation expense would be recorded               on the  date of grant  only if the  current  market  price of the               underlying stock exceeded the exercise price. On January 1, 1996,               the  Company  adopted  SFAS  123,   "Accounting  for  Stock-Based               Compensation,"  ("SFAS 123") which permits  entities to recognize               as  expense  over  the  vesting  period  the  fair  value  of all               stock-based awards on the date of grant. Alternatively,  SFAS 123               also allows  entities to continue to apply the  provisions of APB               Opinion  No. 25 and  provide  pro forma net  income and pro forma               earnings per share  disclosures  for employee stock option grants               made in 1995 and future years as if the  fair-value-based  method               defined in SFAS 123 had been applied.  The Company has elected to               continue  to apply  the  provisions  of APB  Opinion  No.  25 and               provide the pro forma disclosure provisions of SFAS 123.                                       75                            (Continued)                           GENERAL COMMUNICATION, INC.                   Notes to Consolidated Financial Statements        (o)    Use of Estimates               The  preparation  of  financial  statements  in  conformity  with               generally accepted  accounting  principles requires management to               make estimates and assumptions  that affect the reported  amounts               of assets and liabilities and disclosure of contingent assets and               liabilities  at the  date  of the  financial  statements  and the               reported  amounts of revenues and expenses  during the  reporting               period. Actual results could differ from those estimates.        (p)    Concentrations of Credit Risk               Financial  instruments  that  potentially  subject the Company to               concentrations  of  credit  risk  are  primarily  cash  and  cash               equivalents and accounts  receivable.  Excess cash is invested in               high quality short-term liquid money instruments issued by highly               rated financial institutions. At December 31, 1998, substantially               all of the Company's cash and cash  equivalents  were invested in               short-term liquid money instruments.  The Company's customers are               located  primarily   throughout  Alaska.  As  a  result  of  this               geographic  concentration,  the Company's  growth and  operations               depend upon economic  conditions in Alaska. The economy of Alaska               is  dependent  upon  the  natural  resources  industries,  and in               particular oil production,  as well as tourism,  government,  and               United  States   military   spending.   Though   limited  to  one               geographical  area, the concentration of credit risk with respect               to the Company's receivables is minimized due to the large number               of customers,  individually  small balances,  short payment terms               and deposit requirements by certain product lines.        (q)    Fair Value of Financial Instruments               SFAS  No.  107,   "Disclosures  about  Fair  Value  of  Financial               Instruments,"  requires disclosure of the fair value of financial               instruments  for which it is  practicable to estimate that value.               SFAS  No.  107  specifically  excludes  certain  items  from  its               disclosure requirements. The fair value of a financial instrument               is the amount at which the  instrument  could be  exchanged  in a               current  transaction  between  willing  parties,  other than in a               forced sale or liquidation.  The carrying amounts at December 31,               1998 and 1997 for the Company's  financial assets and liabilities               approximate their fair values.        (r)    Impairment of  Long-Lived  Assets  and  Long-Lived  Assets  to Be               Disposed Of               The Company  adopted the provisions of SFAS No. 121,  "Accounting               for the Impairment of Long-Lived Assets and for Long-Lived Assets               to Be Disposed Of," on January 1, 1996.  This Statement  requires               that long-lived  assets and certain  identifiable  intangibles be               reviewed   for   impairment   whenever   events  or   changes  in               circumstances  indicate that the carrying  amount of an asset may               not be recoverable.  Recoverability of assets to be held and used               is measured by a comparison of the carrying amount of an asset to               future net cash flows  expected to be generated by the asset.  If               such assets are  considered to be impaired,  the impairment to be               recognized is measured by the amount by which the carrying amount               of the assets exceeds the fair value of the assets.  Assets to be               disposed of are reported at the lower of the  carrying  amount or               fair value less costs to sell. Adoption of this Statement did not               have a  material  impact  on the  Company's  financial  position,               results of operations, or liquidity.        (s)    New Accounting Pronouncements               In June 1998, the Accounting Standards Board issued SFAS No. 133,               "Accounting for Derivative  Instruments and Hedging  Activities,"               effective for years  beginning  after June 15, 1999. SFAS No. 133               establishes  accounting  and reporting  standards  requiring that               every  derivative   instrument,   including  certain   derivative               instruments  imbedded  in other  contracts,  be  recorded  in the               balance  sheet as either an asset or  liability  measured  at its               fair  value.   SFAS  No.  133   requires   that  changes  in  the               derivative's  fair  value be  recognized  currently  in  earnings               unless  specific hedge criteria are met.  Special  accounting for               qualifying hedges allow a derivative's  gains or losses to offset               related  results on the hedged item in the income  statement  and               requires  that a company must  formally  document,  designate and               assess the  effectiveness  of  transactions  that  receive  hedge               accounting.  Management  of the Company  expects that                                        76                            (Continued)                           GENERAL COMMUNICATION, INC.                   Notes to Consolidated Financial Statements               adoption  of SFAS No. 133 will not have a material  impact on the               Company's year-end 2000 financial statements.               In  April  1998,  the  American  Institute  of  Certified  Public               Accountants  (AICPA) issued  Statement of Position  ("SOP") 98-5,               "Reporting  on  the  costs  of  Start-Up  Activities".  SOP  98-5               provides  guidance on the financial  reporting of start-up  costs               and organization costs and requires costs of start-up  activities               and  organization  costs to be expensed as incurred.  SOP 98-5 is               effective for  financial  statements  for fiscal years  beginning               after December 15, 1998.  Management of the Company  expects that               the  adoption  of SOP 98-5 will  result in a one-time  expense of               approximately  $365,000  (net of income tax  effect) in the first               quarter of 1999  associated  with the  write-off  of  unamortized               start-up costs.        (t)    Year 2000 Costs               The Company  charges  incremental  Y2K assessment and remediation               costs to expense as incurred.        (u)    Reclassifications               Reclassifications  have been made to the 1996 and 1997  financial               statements to make them comparable with the 1998 presentation.(2)     Acquisitions        Cable Television Systems        Effective  October  31,  1996,  following   shareholder  and  regulatory        approvals,  the Company  completed the acquisition of seven Alaska cable        television   companies  ("Cable  Systems").   Under  the  terms  of  the        transactions,  accounted  for  using  the  purchase  method,  the  final        purchase price was $280.1 million, which was the aggregate value for all        the Cable Systems and included certain  transaction and financing costs.        The purchase  price  included  issuance of 14.7 million  shares of GCI's        Class  A  common  stock  and  cash,  debt  assumption  and  issuance  of        subordinated notes.  Financing for the transactions was obtained through        borrowings  under a new  $205  million  bank  credit  facility  and from        additional capital provided from the sale of two million shares of GCI's        Class A common stock to MCI (now MCI WorldCom) for $6.50 per share.        Acquisition costs totaling $304.4 million were allocated to tangible and        identifiable  intangible  assets and liabilities  based upon fair market        values.  Approximately  $206.5  million was  allocated to the  franchise        agreements and approximately $42.4 was allocated to goodwill.        Various tax  attributes of the Cable Systems gave rise to a deferred tax        liability  (see note 7) of $24.4  million  recorded  by the Company as a        result of the acquisition.        During January 1997,  holders of the GCI subordinated  notes exercised a        conversion  option which  allowed  them to exchange  their notes for GCI        Class A common shares at a predetermined  conversion  price of $6.50 per        share.  As a result,  the note  holders  received  a total of  1,538,457        shares of GCI Class A common stock.        The final  closing  required  approval  of the Alaska  Public  Utilities        Commission  ("APUC"),  which was granted on September 23, 1996. The APUC        approval  included several  conditions  placed on the transfer,  such as        continuing the existing conditions  requiring provision of public access        channels and  requiring  the cable  operations to file annual income and        operating statements.        Astrolabe Group, Inc.        Effective December 2, 1997, the Company purchased all of the outstanding        shares of Astrolabe  Group,  Inc. The $1,324,000  purchase was accounted        for using the purchase method. The purchase price consisted of a                                        77                            (Continued)                           GENERAL COMMUNICATION, INC.                   Notes to Consolidated Financial Statements        payment of $600,000  and the  issuance  of options to  purchase  100,000        shares of GCI's Class A common stock for $.01 per share. (3)    Consolidated Statements of Cash Flows Supplemental Disclosures        Changes in  operating  assets and  liabilities  consist of  (amounts  in        thousands):          Year ended December 31,                                        1998            1997             1996                                                                     ------------    ------------    -------------                                                                                                                            (Increase) in accounts receivable                        $      (9,054)         (1,540)          (4,738)          (Increase) decrease in income tax receivable                       490          (3,726)          (1,026)          (Increase) decrease in prepaid and other current assets            388            (274)            (467)          (Increase) decrease in inventories                                 286            (575)             412          Increase in accounts payable                                     2,585           1,050            5,517          Increase (decrease) in accrued liabilities                      (1,914)            938              914          Increase in accrued payroll and payroll related              obligations                                                    875           1,850            1,723          Increase (decrease) in accrued income taxes                       (111)            111             (547)          Increase in accrued interest                                       423           4,941            2,188          Increase (decrease) in subscriber deposits and              deferred revenues                                            1,402             449               (4)           (Decrease) in components of other liabilities                     (13)            (22)          (1,248)                                                                     ------------    ------------    -------------                                                                   $      (4,643)          3,202            2,724                                                                     ============    ============    =============        Acquisitions of businesses, net of cash acquired consists of (amounts in        thousands):          Year ended December 31,                                                         1997          1996                                                                                     ----------------------------                                                                                                                        Fair value of assets acquired, net of liabilities assumed                $     1,259          304,441          Bank debt and net working capital deficit assumed                                ---         (110,538)          Common stock issued to sellers                                                   ---          (86,710)          Convertible, subordinated debt issued to sellers                                 ---          (10,000)          Net deferred income tax liability                                                ---          (24,375)          Deferred credit                                                                 (712)             ---                                                                                     ------------    ------------              Net cash used to acquire businesses                                  $       547           72,818                                                                                     ============    ============          No acquisitions occurred in 1998.        The holders of $10 million of convertible  subordinated  notes exercised        their  conversion  rights in January  1997  resulting in the exchange of        such notes for 1,538,457 shares of the Company's Class A common stock.        Net income tax refunds received totaled $4,243,000 and $1,546,000 during        the years  ended  1998 and 1997,  respectively,  and  income  taxes paid        totaled $4,361,000 during the year ended 1996.        Interest  paid  totaled  approximately   $29,630,000,   $17,709,000  and        $4,572,000 during the years ended 1998, 1997 and 1996, respectively.                                       78                            (Continued)                           GENERAL COMMUNICATION, INC.                   Notes to Consolidated Financial Statements        The Company  recorded  $157,000,  $65,000 and $187,000  during the years        ended  1998,  1997  and  1996,  respectively,   in  paid-in  capital  in        recognition  of the  income  tax  effect  of excess  stock  compensation        expense for tax purposes over amounts recognized for financial reporting        purposes.        During the year ended  December 31, 1998 the Company funded the employer        matching  portion of  Employee  Stock  Purchase  Plan  contributions  by        issuing GCI Class A Common Stock valued at $1,574,000. (4)    Notes Receivable        Notes receivable consist of the following (amounts in thousands):                                                                                              December 31,                                                                                      ---------------------------                                                                                          1998           1997                                                                                      ---------------------------                                                                                                                           Note receivable from officer bearing interest at the rate paid by the              Company on its senior indebtedness, unsecured, due on November 1,              2002                                                                  $         600           ---           Note receivable from officer bearing interest at the rate paid by the              Company on its senior indebtedness,  secured by GCI Class A common              stock, due on the 90th day after termination of employment or July              30, 1998, whichever is earlier                                                  ---           500           Note receivable from officer bearing interest at the rate paid by the              Company on its senior indebtedness, partially secured by GCI Class              A and Class B common stock, due on December 31, 2001                            350           ---           Note receivable from officer bearing interest at 10%, secured by              Company stock; due in full on August 26, 2004                                   224           224           Notes receivable from officers and others bearing interest up to 10%              or at the rate paid by the  Company  on its  senior  indebtedness,              unsecured  and secured by Company  common  stock,  shares of other              common stock, property and equipment; due through August 26, 2004             1,289         1,155           Interest receivable                                                                256           349                                                                                      ---------------------------               Total notes receivable                                                       2,719         2,228               Less notes receivable issued upon stock option exercise,                 classified as a component of stockholders' equity                            637           ---               Less current portion, including current interest receivable                    650           897                                                                                      ---------------------------               Long-term portion, including long-term interest receivable           $       1,432         1,331                                                                                      ===========================                                       79                            (Continued)                           GENERAL COMMUNICATION, INC.                   Notes to Consolidated Financial Statements(5)     Other Intangible Assets        Other intangible assets consist of the following (amounts in thousands):                                                                                        December 31,                                                                               -----------------------------                                                                                     1998          1997                                                                               -----------------------------                                                                                                                        Goodwill                                                       $       45,954         45,922              PCS license and related costs                                           2,196          2,051              Other intangibles                                                       1,181            260                                                                               -----------------------------                                                                                     49,331         48,233              Less accumulated amortization                                           3,457          2,169                                                                               -----------------------------                  Other intangible assets, net of amortization               $       45,874         46,064                                                                                    =============================(6)     Long-term Debt        Long-term debt consists of the following (amounts in thousands):                                                                                        December 31,                                                                                ----------------------------                                                                                    1998           1997                                                                                ----------------------------                                                                                                                       Senior notes (a)                                               $      180,000        180,000               Senior Holdings Loan (b)                                              106,700         64,700              Fiber Facility (c)                                                     61,224            ---              Undersea Fiber and Equipment Loan Agreement (d)                         3,733          5,384                                                                                ----------------------------                                                                                    351,657        250,084              Less current maturities                                                 1,799          1,634                                                                                ----------------------------              Long-term debt, excluding current maturities                   $      349,858        248,450                                                                                      ============================        (a)    On August 1, 1997 GCI, Inc.  issued  $180,000,000 of 9.75% senior               notes due 2007 ("Senior Notes").  The Senior Notes were issued at               face  value.   Net  proceeds  to  GCI,   Inc.   after   deducting               underwriting  discounts  and  commissions  totaled  $174,600,000.               Issuance costs of $5,576,000 are being  amortized to amortization               expense over the term of the Senior Notes.               The  Senior  Notes are not  redeemable  prior to August 1,  2002.               After  August 1, 2002 the  Senior  Notes  are  redeemable  at the               option  of GCI,  Inc.  under  certain  conditions  and at  stated               redemption  prices.  The  Senior  Notes  include  limitations  on               additional   indebtedness  and  prohibit  payment  of  dividends,               payments for the purchase, redemption,  acquisition or retirement               of GCI,  Inc.'s  stock,  payments  for early  retirement  of debt               subordinate to the note, liens on property, and asset sales. GCI,               Inc. was in compliance with all covenants  during the year ending               December 31, 1998. The Senior Notes are unsecured  obligations of               the Company.               Net  proceeds  from  the  stock  (see  note  8) and  Senior  Note               offerings and initial draws on the new Senior  Holdings Loan (see               note 6(b)) facilities were used to repay  borrowings  outstanding               under  the  Company's  then  existing  credit  facilities  and to               provide  initial  funding for  construction  of the Alaska United               undersea fiber optic cable (see notes 6 (c) and 11).        (b)    The  Company,   through   Holdings,   entered  into  $200,000,000               ($150,000,000  as  amended)  and  $50,000,000  credit  facilities               ("Senior  Holdings Loan") effective August 1, 1997 that mature on               June 30, 2005. The Senior  Holdings Loan  facilities,  as amended               effective  April 13,  1999,  bear  interest at either                                         80                            (Continued)                           GENERAL COMMUNICATION, INC.                   Notes to Consolidated Financial Statements               Libor plus 1.00% to 2.50%,  depending  on the  leverage  ratio of               Holdings  and certain of its  subsidiaries,  or at the greater of               the prime rate or the federal funds  effective  rate (as defined)               plus  0.05%,  in each case plus an  additional  0.00% to  1.375%,               depending  on the  leverage  ratio of Holdings and certain of its               subsidiaries.   Borrowings   under  the  Senior   Holdings   Loan               facilities  totaled  $106,700,000 and $64,700,000 at December 31,               1998 and 1997,  respectively.  The  Company is  required to pay a               commitment  fee equal to 0.50% per annum on the unused portion of               the  commitment.  Commitment  fee expense on the Senior  Holdings               Loan  totaled  $512,000  and  $240,000  during  the  years  ended               December 31, 1998 and 1997, respectively.               While  Holdings  may elect at any time to reduce  amounts due and               available under the Senior Holdings Loan facilities,  a mandatory               prepayment is required each quarter if the outstanding borrowings               at the following dates of payment exceed the allowable borrowings               using the following percentages:                                                                              Percentage of                                                                               Reduction of                                                                               Outstanding                             Date Range of Quarterly Payments                   Facilities                  -------------------------------------------------------- -------------------                                                                                                        September 30, 2000 through December 31, 2001                   3.750%                  March 31, 2002 through December 31, 2003                       5.000%                  March 31, 2004 through December 31, 2004                       5.625%                  March 31, 2005                                                 7.500%                  July 31, 2005                                                  7.500% and all remaining outstanding                                                                                 balances               The  facilities  contain,   among  others,   covenants  requiring               maintenance  of  specific   levels  of  operating  cash  flow  to               indebtedness  and  to  interest   expense,   and  limitations  on               acquisitions and additional indebtedness. The facilities prohibit               any direct or  indirect  distribution,  dividend,  redemption  or               other  payment to any person on account of any general or limited               partnership  interest  in, or shares  of  capital  stock or other               securities  of Holdings or any of its  subsidiaries.  The amended               facilities  require that Holdings receive $20 million in proceeds               from a GCI  preferred  stock  issuance  by May 31, 1999 (see note               12).  Holdings was in  compliance  with all Senior  Holdings Loan               facilities covenants during the year ended December 31, 1998.               The  Senior  Holdings  Loan  facilities  are   collateralized  by               essentially  all of  Holdings'  assets  as  well as a  pledge  of               Holdings' stock by GCI, Inc.               $3.4 million of the Senior  Holdings  Loan  facilities  have been               used to  provide a letter of credit to secure  payment of certain               access  charges  associated  with  the  Company's   provision  of               telecommunications services within the State of Alaska.               In  connection  with the  funding  of the  Senior  Holdings  Loan               facilities,  Holdings  paid  bank  fees  and  other  expenses  of               approximately   $2,972,000,   which   is   being   amortized   to               amortization expense over the life of the agreement.               In  connection  with the April 13,  1999  amendment,  the Company               agreed to pay all fees and expenses of its lenders,  including an               amendment fee of 0.25% of the aggregate commitment.        (c)    On January 27, 1998, the Company, through Alaska United, closed a               $75,000,000   project  finance  facility  ("Fiber  Facility")  to               construct  a  fiber  optic  cable  system  connecting  Anchorage,               Fairbanks,                                         81                            (Continued)                           GENERAL COMMUNICATION, INC.                   Notes to Consolidated Financial Statements               Valdez, Whittier, Juneau and Seattle as further described in note               11.  Borrowings under the Fiber Facility  totaled  $61,224,000 at               December 31, 1998. The Fiber Facility  provides up to $75 million               in construction financing and bears interest at either Libor plus               3.0%, or at the Company's  choice,  the lender's  prime rate plus               1.75%.  The interest rate will decline to Libor plus  2.5%-2.75%,               or  at  the  Company's  choice,  the  lender's  prime  rate  plus               1.25%-1.5%   when  the  loan  balance  is  $60,000,000  or  less.               Borrowings  under  the  Fiber  Facility  totaled  $61,224,000  at               December 31, 1998.  Alaska United is required to pay a commitment               fee  equal to  0.375%  per  annum on the  unused  portion  of the               commitment.  The Fiber  Facility  is a 10-year  term loan that is               interest only for the first 5 years. The facility can be extended               to a 12 year term loan at any time  between  the second and fifth               anniversary   of  closing   the   facility  if  the  Company  can               demonstrate  projected revenues from certain capacity commitments               will be sufficient to pay all operating  costs,  and interest and               principal installments based on the extended maturity.               The Fiber Facility contains,  among others,  covenants  requiring               certain  intercompany  loans and  advances  in order to  maintain               specific levels of cash flow necessary to pay operating costs and               interest and principal installments. Additional covenants pertain               to  the  timely   completion  of  certain  project   construction               milestones.  The Fiber  Facility also  contains a guarantee  that               requires,  among  other  terms  and  conditions,   Alaska  United               complete the project by the  completion  date (April 1, 1999) and               pay any non-budgeted  costs of the project.  Alaska United was in               compliance  with  all  covenants  during  the  period  commencing               January 27, 1998 (date of the Fiber  Facility)  through  December               31, 1998.               All of  Alaska  United's  assets,  as  well  as a  pledge  of the               partnership  interests'  owning Alaska United,  collateralize the               Fiber Facility.               In  connection  with the  funding of the Fiber  Facility,  Alaska               United paid bank fees and other expenses of $2,019,000  which are               being   amortized  to   Construction   in  Progress   during  the               construction  period of the undersea fiber optic cable.  When the               fiber optic cable is place in service the issuance  costs will be               amortized to amortization expense over the life of the agreement.        (d)    On December 31, 1992,  Leasing Company entered into a $12,000,000               loan agreement  ("Undersea Fiber and Equipment Loan  Agreement"),               of which  approximately  $9,000,000  of the proceeds were used to               acquire  capacity  on the  undersea  fiber  optic  cable  linking               Seward,  Alaska and Pacific City, Oregon.  Concurrently,  Leasing               Company leased the capacity under a ten year all events,  take or               pay,  contract  with MCI (now MCI  WorldCom),  who  subleased the               capacity back to the Company.  The lease and sublease  agreements               provide for  equivalent  terms of 10 years and identical  monthly               payments of $200,000.  The proceeds of the lease  agreement  with               MCI were pledged as primary security for the financing.  The loan               agreement  provides  for monthly  payments of $170,000  including               principal and interest through the earlier of January 1, 2003, or               until  repaid.  The loan  agreement  provides for interest at the               prime  rate  less  one-quarter  percent.   Additional  collateral               includes  substantially  all of the  assets  of  Leasing  Company               including  the fiber  capacity and a security  interest in all of               its outstanding stock. MCI as a second position security interest               in the assets of Leasing Company.        (e)    GCI Cable entered into a credit  facility  totaling  $205,000,000               effective  October 31, 1996,  associated  with the acquisition of               the Cable  Companies as described in note 2. In August 1997,  the               Senior GCI Cable Loan was repaid using  proceeds  from the Senior               Notes  (see note  6(a)) and the  Senior  Holdings  Loan (see note               6(b)).               In connection with the funding of the loan agreement,  GCI Cable,               Inc. paid bank fees and other expenses of approximately  $764,000               in 1996.  The  unamortized  portion  of these bank fees and other                                       82                            (Continued)                           GENERAL COMMUNICATION, INC.                   Notes to Consolidated Financial Statements               expenses (net of income tax benefit of $180,000)  was  recognized               as an extraordinary  loss on the early  extinguishment of debt in               1997.        (f)    The Company entered into a $62,500,000  interim  telephony credit               facility  with its senior  lender  during  April 1996.  In August               1997,  the Credit  Agreement  was repaid using  proceeds from the               Senior  Notes (see note 6(a)) and the  Senior GCI  Holdings  Loan               (see note 6(b)).        (g)    GCI issued convertible subordinated notes totaling $10,000,000 in               connection  with  the  cable  acquisitions  described  in note 2.               During  January 1997, the holders of the GCI  subordinated  notes               exercised a  conversion  option  which  allowed  them to exchange               their  notes  for GCI Class A common  shares  at a  predetermined               conversion price of $6.50 per share. As a result, the former note               holders received 1,538,457 shares of GCI Class A common stock.         (h)   As  consideration  for MCI's (now MCI WorldCom)  role in enabling               Leasing  Company to finance and acquire the undersea  fiber optic               cable  capacity  described  at note 6(d) above,  Leasing  Company               agreed  to pay  MCI  $2,040,000  in  sixty  monthly  payments  of               $34,000.   For  financial  statement   reporting  purposes,   the               obligation was recorded at its remaining  present value,  using a               discount  rate of 10% per annum.  The  agreement was secured by a               second  position  security  interest  in the  assets  of  Leasing               Company. The obligation was fully paid at December 31, 1997.        As of December 31, 1998  maturities  of  long-term  debt were as follows        (amounts in thousands):                  Year ending December 31,                                                                              1999                                 $        1,799                  2000                                          1,934                  2001                                            ---                  2002                                            ---                  2003                                         12,950                  2004 and thereafter                         334,974                                                         --------------                                                       $      351,657                                                         ==============(7)     Income Taxes        Total income tax expense (benefit) was allocated as follows:                                                                                         Years ended                                                                                        December 31,                                                                             ---------------------------------                                                                                1998          1997      1996                                                                             ---------------------------------                                                                                   (Amounts in thousands)                                                                                                                                  Earnings (loss) from continuing operations                 $  (4,123)       (573)     5,228                  Extraordinary item                                               ---        (180)       ---                                                                             ---------------------------------                                                                                (4,123)       (753)     5,228                  Stockholders' equity, for stock option                      compensation expense for tax purposes in                       excess of amounts recognized for financial                      reporting purposes                                           (157)        (65)      (187)                                                                             ---------------------------------                                                                             $  (4,280)       (818)     5,041                                                                             =================================                                       83                            (Continued)                           GENERAL COMMUNICATION, INC.                   Notes to Consolidated Financial Statements        Income tax expense (benefit) consists of the following:                                                                                        Years ended                                                                                        December 31,                                                                             ---------------------------------                                                                                1998          1997      1996                                                                             ---------------------------------                                                                                   (Amounts in thousands)                                                                                                                                  Current tax expense (benefit):                      Federal taxes                                        $    (2,858)     (4,333)     2,292                      State taxes                                                 (521)       (830)       684                                                                             ---------------------------------                                                                                (3,379)     (5,163)     2,976                                                                             ---------------------------------                  Deferred tax expense (benefit):                      Federal taxes                                               (629)      3,800      1,734                      State taxes                                                 (115)        610        518                                                                             ---------------------------------                                                                                  (744)      4,410      2,252                                                                             ---------------------------------                                                                           $    (4,123)       (753)     5,228                                                                             =================================        Total income tax expense  (benefit)  differed from the "expected" income        tax expense  (benefit)  determined  by applying  the  statutory  federal        income tax rate of 34% as follows:                                                                                                Years ended                                                                                                December 31,                                                                                  ---------------------------------------                                                                                         1998          1997       1996                                                                                  ---------------------------------------                                                                                             (Amounts in thousands)                                                                                                                                           "Expected" statutory tax expense (benefit)                    $       (3,713)        (997)      4,314                  State income taxes, net of federal benefit                              (594)        (181)        793                  Income tax effect of goodwill amortization, nondeductible                     expenditures and other items, net                                     441          107          55                  Change in valuation allowance                                            ---          ---        (225)                  Other                                                                   (257)         318         291                                                                                  ---------------------------------------                                                                                $       (4,123)        (753)      5,228                                                                                  =======================================                                       84                            (Continued)                           GENERAL COMMUNICATION, INC.                   Notes to Consolidated Financial Statements        The tax effects of temporary  differences  that give rise to significant        portions of the  deferred tax assets and  deferred  tax  liabilities  at        December 31, 1998 and 1997 are presented below.                                                                                         December 31,                                                                                  --------------------------                                                                                       1998         1997                                                                                  --------------------------                                                                                     (Amounts in thousands)                                                                                                                             Net current deferred tax assets:                      Accounts receivable, principally due to allowance for                         doubtful accounts                                      $          354          430                      Compensated absences, accrued for financial reporting                         purposes                                                          804          566                      Workers compensation and self insurance health                         reserves, principally due to accrual for financial                         reporting purposes                                                244          266                      Other                                                                545          413                                                                                  --------------------------                          Total gross current deferred tax assets                        1,947        1,675                          Less valuation allowance                                         ---          ---                                                                                  --------------------------                             Net current deferred tax assets                    $        1,947        1,675                                                                                  ==========================                  Net long-term deferred tax assets:                      Net operating loss carryforwards                          $       20,871       15,378                      Alternative minimum tax credits                                    2,081          751                      Deferred compensation expense for financial reporting                         purposes in excess of amounts recognized for tax                         purposes                                                        1,027          966                      Employee stock option compensation expense for                         financial reporting purposes in excess of amounts                         recognized for tax purposes                                       327          198                      Sweepstakes award in excess of amounts recognized for                         tax purposes                                                      201          206                      Other                                                                 99           75                                                                                  --------------------------                          Total long-term deferred tax assets                           24,606       17,574                                                                                  --------------------------                  Net long-term deferred tax liabilities:                      Plant and equipment, principally due to differences in                         depreciation                                                   56,244       51,643                      Amortizable assets                                                 4,784        3,898                      Costs recognized for tax purposes in excess of amounts                         recognized for book purposes                                    1,319          ---                      Other                                                                534          937                                                                                  --------------------------                          Total gross long-term deferred tax liabilities                62,881       56,478                                                                                  --------------------------                             Net combined long-term deferred tax liabilities                                                                                $       38,275       38,904                                                                                  ==========================        In conjunction  with the 1996 Cable Companies  acquisition,  the Company        incurred  a net  deferred  income tax  liability  of $24.4  million  and        acquired  net  operating  losses  totaling  $57.6  million.  The Company        determined that  approximately $20 million of the acquired net operating        losses would not be utilized for income tax                                         85                            (Continued)                           GENERAL COMMUNICATION, INC.                   Notes to Consolidated Financial Statements        purposes,  and elected  with its December 31, 1996 income tax returns to        forego  utilization of such acquired losses under Internal  Revenue Code        section   1.1502-32(b)(4).   Deferred   tax  assets  were  not  recorded        associated  with the  foregone  losses and,  accordingly,  no  valuation        allowance  was provided.  At December 31, 1998,  the Company has (1) tax        net operating loss  carryforwards  of  approximately  $51.0 million that        will begin expiring in 2008 if not utilized, and (2) alternative minimum        tax credit  carryforwards  of  approximately  $2.0 million  available to        offset  regular  income taxes  payable in future  years.  The  Company's        utilization of remaining  acquired net operating loss  carryforwards  is        subject to annual limitations  pursuant to Internal Revenue Code section        382 which could reduce or defer the utilization of these losses.        Tax benefits associated with recorded deferred tax assets are considered        to be more likely than not realizable  through  taxable income earned in        carryback  years,   future  reversals  of  existing  taxable   temporary        differences,  and future taxable income exclusive of reversing temporary        differences  and  carryforwards.   The  amount  of  deferred  tax  asset        considered  realizable,  however,  could be  reduced in the near term if        estimates of future  taxable income during the  carryforward  period are        reduced.(8)     Stockholders' Equity        Common Stock        GCI's Class A common stock and Class B common stock are identical in all        respects,  except  that each share of Class A common  stock has one vote        per  share  and each  share of Class B common  stock  has ten  votes per        share.  In addition,  each share of Class B common stock  outstanding is        convertible,  at the  option  of the  holder,  into one share of Class A        common stock.        After the transaction described in note 2, MCI (now MCI WorldCom) owns a        total of 8,251,509 shares of GCI's Class A and 1,275,791 shares of GCI's        Class B common stock which represent  approximately 18 and 31 percent of        the issued and  outstanding  shares of the respective  class at December        31, 1998 and 1997, respectively.        After  the  transaction  described  in note 2, the  owners  of the cable        television  properties  acquired  in 1996  owned a total  of  14,723,077        shares  of GCI's  Class A common  stock  representing  approximately  40        percent of the issued and outstanding  Class A common shares at December        31,  1996.  The  holders  of the  GCI  subordinated  notes  exercised  a        conversion option in January 1997. As a result the noteholders  received        1,538,457 shares of GCI's Class A common stock.        GCI  issued  7,000,000  shares of its Class A common  stock on August 1,        1997 for $7.25 per share,  before deducting  underwriting  discounts and        commissions.  Net  proceeds  to GCI  totaled  $47,959,000.  Other  costs        associated with the stock issuance totaled $1,233,000.        Stock Option Plan        In December 1986, GCI adopted a Stock Option Plan (the "Option Plan") in        order  to  provide  a  special  incentive  to  the  Company's  officers,        non-employee directors, and employees by offering them an opportunity to        acquire an equity  interest in GCI. The Option Plan, as amended in 1998,        provides for the grant of options for a maximum of  5,700,000  shares of        GCI Class A common stock,  subject to adjustment  upon the occurrence of        stock dividends, stock splits, mergers,  consolidations or certain other        changes in corporate  structure or capitalization.  If an option expires        or  terminates,  the shares  subject to the option will be available for        further grants of options under the Option Plan. The Option Committee of        GCI's Board of Directors administers the Option Plan.        The Option Plan provides that all options  granted under the Option Plan        must expire not later than ten years after the date of grant.  If at the        time an option is  granted  the  exercise  price is less than the market        value of the                                        86                            (Continued)                           GENERAL COMMUNICATION, INC.                   Notes to Consolidated Financial Statements        underlying  common stock, the "in the money" amount at the time of grant        is  expensed  ratably  over the vesting  period of the  option.  Options        granted  pursuant to the Option Plan are only exercisable if at the time        of exercise the option holder is an employee or non-employee director of        GCI.        Information for the years 1996, 1997 and 1998 with respect to the Option        Plan follows:                                                                                        Weighted                                                                                        Average                                                                                        Exercise           Range of                                                                      Shares              Price          Exercise Prices                                                                ---------------      -------------     ------------------                                                                                                                                       Outstanding at December 31, 1995              2,288,199            $3.19            $0.75-$4.00                  Granted                                             321,000            $5.79            $3.75-$6.50                  Exercised                                           (82,291)           $2.80            $0.75-$4.00                  Forfeited                                           (79,785)           $3.11            $0.75-$4.50                                                                ---------------                      Outstanding at December 31, 1996              2,447,123            $3.54            $0.75-$6.50                  Granted                                           1,051,000            $6.36            $0.01-$7.63                  Exercised                                           (57,285)           $3.37            $0.75-$4.00                  Forfeited                                           (65,938)           $4.82            $0.75-$6.50                                                                ---------------                      Outstanding at December 31, 1997              3,374,900            $4.39            $0.01-$7.63                  Granted                                           1,150,459            $6.38            $3.25-$7.25                  Exercised                                          (264,600)           $2.98            $1.00-$4.00                  Forfeited                                          (181,000)           $6.49            $4.00-$7.00                                                                ---------------                      Outstanding at December 31, 1998              4,079,759            $4.95            $0.01-$7.63                                                                ===============                      Available for grant at December                        31, 1998                                       657,817                                                                ===============        Stock Options Not Pursuant to a Plan        In June 1989, an officer was granted  options to acquire 100,000 Class A        common  shares at $.75 per share.  The  options  vested in equal  annual        increments over a five-year period,  expiring in February 1999.  Options        to acquire 50,000 shares were exercised during 1998.        The Company  entered  into an  incentive  agreement in June 1989 with an        officer  providing for the  acquisition  of 85,190  remaining  shares of        Class A common  stock of the  Company  for $.001  per share  exercisable        through June 1997.  The shares under the incentive  agreement  vested in        equal annual  increments over a three-year  period and were exercised in        June 1997.        Stock Warrants Not Pursuant to a Plan        The Company entered into a warrant agreement in December 1998 with Prime        II  Management,  L.P.  ("PMLP").  In lieu of cash  payments for services        under the amended  Management  Agreement,  PMLP agreed to accept a stock        warrant which provides for the purchase of 425,000 shares of GCI class A        common stock,  with immediate vesting at the option date and an exercise        price of $3.25 per share. The warrant expires December 2003.                                       87                            (Continued)                           GENERAL COMMUNICATION, INC.                   Notes to Consolidated Financial Statements        The Company entered into a warrant agreement in exchange for services in        December 1998 with certain of its legal  counsel which  provides for the        purchase  of  16,667  shares  of GCI class A common  stock,  vesting  in        December 1999,  with an exercise price of $3.00 per share,  and expiring        December 2003.        SFAS 123 Disclosures        The Company's stock options and warrants expire at various dates through        December 2008. At December 31, 1998, 1997 and 1996, the weighted-average        remaining  contractual lives of options  outstanding were 6.71, 6.82 and        6.73 years, respectively.        At December 31, 1998,  1997 and 1996, the number of  exercisable  shares        under option was 1,827,130,  1,664,015 and 1,275,903,  respectively, and        the  weighted-average  exercise price of those options was $3.49,  $3.15        and $2.85, respectively.        The per  share  weighted-average  fair  value of stock  options  granted        during 1998 was $4.08 for compensatory and non-compensatory options; for        1997, $6.71 per share for  compensatory  options and $6.50 per share for        non-compensatory options; and for 1996, $6.94 per share for compensatory        options and $4.40 per share for  non-compensatory  options.  The amounts        were  determined  as of the  options'  grant  dates  using  a  qualified        Black-Scholes  option-pricing model with the following  weighted-average        assumptions:  1998 - risk-free  interest  rate of 4.75%,  volatility  of        0.6951 and an expected life of 5.7 years; 1997 - risk-free interest rate        of 5.46%,  volatility of 1.8558 and an expected  life of 5.5 years;  and        1996 - risk-free  interest  rate of 5.48%,  volatility  of 1.8558 and an        expected life of 5.7 years.        Summary  information  about the  Company's  stock  options and  warrants        outstanding at December 31, 1998:                          Options and Warrants Outstanding                             Options and Warrants Exercisable          -----------------------------------------------------------------------   -------------------------------------                                                   Weighted                                                              Number        Average                                    outstanding    Remaining        Weighted             Number           Weighted            Range of Exercise          as of       Contractual       Average          Exercisable as   Average Exercise                  Prices              12/31/98        Life        Exercise Price       of 12/31/98           Price          -----------------------------------------------------------------------   -------------------------------------                                                                                                                                  $0.01 - $1.75            406,000        4.15            $1.17                336,000           $1.41             $3.00 - $3.00            778,667        3.52            $3.00                762,000           $3.00             $3.25 - $3.75             79,459        9.71            $3.28                  3,330           $3.75             $4.00 - $4.00            792,300        5.84            $4.00                445,300           $4.00             $4.50 - $4.50             20,000        7.09            $4.50                 20,000           $4.50             $6.00 - $6.00            459,500        8.78            $6.00                 91,000           $6.00             $6.50 - $6.50            430,500        8.73            $6.50                 38,500           $6.50             $6.63 - $6.94            115,000        9.08            $6.84                      0           $0.00             $7.00 - $7.00            671,000        8.31            $7.00                 88,000           $7.00             $7.25 - $7.63            390,000        8.77            $7.39                 43,000           $7.54                                -------------------------------------------------   -------------------------------------             $0.01 - $7.63          4,142,426        6.71            $4.89              1,827,130           $3.49                                =================================================   =====================================                                       88                            (Continued)                           GENERAL COMMUNICATION, INC.                   Notes to Consolidated Financial Statements        Had  compensation  cost for the Company's 1996, 1997 and 1998 grants for        stock-based compensation plans been determined consistent with SFAS 123,        the  Company's  net income (loss) and net income (loss) per common share        would  approximate the pro forma amounts below (in thousands  except per        share data):                                                                    As Reported        Pro Forma                                                                 -----------------------------------                                                                                                         1996:          Net earnings                                                $  7,462            7,212          Basic net earnings per common share                         $   0.28             0.27          Diluted net earnings per common share                       $   0.27             0.26          1997:          Net loss                                                    $(2,183)          (3,387)          Basic net loss per common share                             $ (0.05)           (0.08)          Diluted net loss per common share                           $ (0.05)           (0.08)          1998:          Net loss                                                    $(6,797)          (8,697)          Basic net loss per common share                             $ (0.14)           (0.18)          Diluted net loss per common share                           $ (0.14)           (0.18)        Pro forma net income (loss)  reflects  options granted in 1998, 1997 and        1996.  Therefore,  the full impact of calculating  compensation cost for        stock  options  under  SFAS 123 is not  reflected  in the pro  forma net        income amounts presented above since compensation cost is reflected over        the options' vesting period of generally 5 years and  compensation  cost        for options granted prior to January 1, 1995 is not considered.        Class A Common Shares Held in Treasury        The Company  acquired 105,111 shares of its Class A common stock in 1989        for  approximately  $328,000 to fund a deferred bonus  agreement with an        officer of the  Company.  The  agreement  provides  that the  balance is        payable after the later of termination of employment or six months after        the effective date of the agreement.  In September  1995,  July 1996 and        March 1997, the Company acquired a total of 97,657  additional shares of        Class A common  stock  for  approximately  $711,000  to fund  additional        deferred  compensation  agreements for two of its officers. In April and        May, 1998, the Company acquired a total of 145,000  additional shares of        Class A common  stock  for  approximately  $568,000  to fund  additional        deferred compensation agreements for three of its officers.        Employee Stock Purchase Plan        In  December  1986,  GCI adopted an Employee  Stock  Purchase  Plan (the        "Plan") qualified under Section 401 of the Internal Revenue Code of 1986        (the  "Code").  The Plan provides for  acquisition  of GCI's Class A and        Class B common stock at market value.  The Plan permits each employee of        GCI and  affiliated  companies  who has completed one year of service to        elect to participate in the Plan. Eligible employees may elect to reduce        their  compensation  in any even dollar  amount up to 10 percent of such        compensation  up to a maximum of $10,000 in 1998; they may contribute up        to 10 percent of their compensation with after-tax dollars,  or they may        elect a combination of salary reductions and after-tax contributions.        The  Company  may  match  employee  salary   reductions  and  after  tax        contributions  in any amount,  elected by GCI's board of directors  each        year,  but not more than 10 percent of any one  employee's  compensation        will be matched in any year. The combination of salary reductions, after        tax contributions and matching contributions cannot exceed 25 percent of        any employee's compensation  (determined after salary reduction) for any        year. Matching contributions vest over six years. Employee contributions        may  be  invested  in GCI  common  stock,  MCI  WorldCom  common  stock,        Tele-Communications,  Inc. ("TCI") common stock or various                                        89                            (Continued)                           GENERAL COMMUNICATION, INC.                   Notes to Consolidated Financial Statements        mutual  funds.  AT&T's  recent  acquisition  of TCI will  result  in the        conversion  of TCI  shares of common  stock  into AT&T  shares of common        stock.  Alternative  investment  choices  may be  offered  by  the  Plan        commencing  as early as the third or fourth  quarter  of 1999.  Employee        contributions  invested in GCI common stock receive up to 100% matching,        as  determined  by GCI's  board of  directors  each year,  in GCI common        stock.  Employee  contributions  invested in other than GCI common stock        receive  up to 50%  matching,  as  determined  by  the  GCI's  board  of        directors  each  year,  in GCI  common  stock.  The  Company's  matching        contributions  allocated to participant  accounts totaled  approximately        $2,278,000,  $1,800,000  and $1,013,000 for the years ended December 31,        1998,  1997, and 1996,  respectively.  The Plan may, at its  discretion,        purchase  shares of GCI  common  stock  from GCI at market  value or may        purchase  GCI's  common  stock on the open  market.  In 1998 the Company        funded  employer  matching  contributions  through  the  issuance of new        shares of GCI common stock rather than market  purchases  and expects to        continue to do so in 1999.(9)     Industry Segments Data        The Company  adopted  SFAS No. 131,  "Disclosures  About  Segments of an        Enterprise and Related  Information",  in 1998 which changes the way the        Company  reports   information   about  its  operating   segments.   The        information  for 1997 and 1996 has been  restated  from the prior year's        presentation in order to conform to the 1998 presentation.        The  Company's   reportable  segments  are  business  units  that  offer        different products.  The reportable segments are each managed separately        because  they  manage  and  offer   distinct   products  with  different        production and delivery processes.        The Company has four reportable segments as follows:         Long-distance  services.  A full range of common-carrier  long-distance         services are offered to business,  government, other telecommunications         companies and consumer  customers,  through its networks of fiber optic         cables, digital microwave,  and fixed and transportable satellite earth         stations.         Cable  services.  The Company  provides  cable  television  services to         residential,  commercial and  government  users in the State of Alaska.         The Company's  cable systems serve 26 communities  and areas in Alaska,         including the state's three largest urban areas,  Anchorage,  Fairbanks         and Juneau.  Anchorage cable plant upgrades in 1998 enabled the Company         to offer  digital  cable  television  services  and retail  cable modem         service   (through  its  Internet   Services   segment)  in  Anchorage,         complementing  its existing  service  offerings.  The Company  plans to         expand its product  offerings as plant  upgrades are completed in other         communities in Alaska.         Local  access  services.   The  Company  introduced   facilities  based         competitive  local exchange  services in Anchorage in 1997. The Company         has announced  plans to ultimately  provide similar  competitive  local         exchange services in Alaska's other major population centers, as access         is allowed by the APUC.         Internet  services.  The Company  began  offering  wholesale and retail         Internet  services in 1998.  Deployment of the new undersea fiber optic         cable (see note 11) will allow the Company to offer  enhanced  services         with high-bandwidth requirements.         Other services.  Services  provided by the Company that are included in         the other  segment are managed  services,  product  sales and  cellular         telephone  services.  Included in the other  segment are the results of         insignificant   business  units  described  above  which  do  meet  the         quantitative  thresholds for determining  reportable segments.  None of         these  business  units have ever met the  quantitative  thresholds  for         determining reportable segments. Also included in the other segment are         corporate  related  expenses,  including  marketing,                                         90                            (Continued)                           GENERAL COMMUNICATION, INC.                   Notes to Consolidated Financial Statements         customer service, management information systems, accounting, legal and         regulatory,  human  resources  and  other  general  and  administrative         expenses.     The Company  evaluates  performance  and allocates  resources  based on (1)     profit or loss from operations before depreciation,  amortization, interest     and income taxes, and (2) operating income or loss. The accounting policies     of the reportable  segments are the same as those  described in the summary     of significant  accounting  policies included in note 1. Intersegment sales     are recorded at cost plus an agreed upon intercompany profit.     All revenues are earned  through sales of services and products  within the     United States of America ("USA").  All of the Company's  long-lived  assets     are located within the USA.     Summarized  financial  information   concerning  the  Company's  reportable     segments follows (amounts in thousands):                                                       Long-                    Local                                                      Distance     Cable        Access     Internet                                                      Services    Services     Services    Services      Other      Total                                                 --------------------------------------------------------------------------                                                                                                                                                       1998                          ----         Revenues:           Intersegment                               $  2,716      1,330         1,284        ---          ---      5,330           External                                    157,350     57,640         9,908      4,591       17,306    246,795                                                 --------------------------------------------------------------------------              Total revenues                           160,066     58,970        11,192      4,591       17,306    252,125                                                 --------------------------------------------------------------------------         Cost of sales and services:           Intersegment                                  1,284        ---         1,254      2,727          ---      5,265           External                                     79,323     13,407         6,113      3,402       13,828    116,073                                                 --------------------------------------------------------------------------              Total cost of sales and services          80,607     13,407         7,367      6,129       13,828    121,338                                                 --------------------------------------------------------------------------         Contribution:           Intersegment                                  1,432      1,330            30    (2,727)          ---         65           External                                     78,027     44,233         3,795      1,189        3,478    130,722                                                 --------------------------------------------------------------------------              Total contribution                        79,459     45,563         3,825    (1,538)        3,478    130,787         Selling, general and administrative           expenses                                     21,019     15,630         8,477        782       43,926     89,833                                                 --------------------------------------------------------------------------                                                        58,440     29,933       (4,652)    (2,320)     (40,448)     40,954         Depreciation and amortization                   6,976     17,281         2,597        501        4,690     32,045                                                 --------------------------------------------------------------------------         Operating income (loss)                      $ 51,464     12,652       (7,249)    (2,821)     (45,138)      8,909                                                 ==========================================================================         Total assets                                 $231,727    316,976        31,062     16,535       49,816    646,116                                                 ==========================================================================         Capital expenditures                         $110,177     20,727         8,104      3,836        6,129    148,973                                                 ==========================================================================                                       91                            (Continued)                           GENERAL COMMUNICATION, INC.                   Notes to Consolidated Financial Statements                                                       Long-                    Local                                                      Distance     Cable        Access     Internet                                                      Services    Services     Services    Services      Other      Total                                                 --------------------------------------------------------------------------                                                                                                                                                       1997         Revenues:           Intersegment                               $    ---        516           ---        ---          172        688           External                                    154,681     55,165           610        182       13,171    223,809                                                 --------------------------------------------------------------------------              Total revenues                           154,681     55,681           610        182       13,343    224,497                                                 --------------------------------------------------------------------------         Cost of sales and services:           Intersegment                                    ---        ---           472        ---          ---        472           External                                     86,346     12,610           739        241       11,141    111,077                                                 --------------------------------------------------------------------------              Total cost of sales and services          86,346     12,610         1,211        241       11,141    111,549                                                 --------------------------------------------------------------------------         Contribution:           Intersegment                                    ---        516         (472)        ---          172        216           External                                     68,335     42,555         (129)       (59)        2,030    112,732                                                 --------------------------------------------------------------------------              Total contribution                        68,335     43,071         (601)       (59)        2,202    112,948         Selling, general and administrative           expenses                                     18,724     18,812         2,802        26        33,219     73,583                                                 --------------------------------------------------------------------------                                                        49,611     24,259       (3,403)       (85)     (31,017)     39,365         Depreciation and amortization                   6,676     13,320           525         3         3,243     23,767                                                 --------------------------------------------------------------------------         Operating income (loss)                      $ 42,935     10,939       (3,928)       (88)     (34,260)     15,598                                                 ==========================================================================         Total assets                                 $161,968    311,643        20,357      8,510       42,824    545,302                                                 ==========================================================================         Capital expenditures                         $ 23,107     18,199         9,379      7,496        6,463     64,644                                                 ==========================================================================                          1996         Revenues:           Intersegment                               $    ---         40           ---        ---          ---         40           External                                    141,374      9,475           ---        ---       14,045    164,894                                                 --------------------------------------------------------------------------              Total revenues                           141,374      9,515           ---        ---       14,045    164,934                                                 --------------------------------------------------------------------------         Cost of sales and services:           Intersegment                                     40        ---           ---        ---          ---         40           External                                     80,193      2,067           ---        ---       10,404     92,664                                                 --------------------------------------------------------------------------              Total cost of sales and services          80,233      2,067           ---        ---       10,404     92,704                                                 --------------------------------------------------------------------------         Contribution:           Intersegment                                   (40)         40           ---        ---          ---        ---           External                                     61,181      7,408           ---        ---        3,641     72,230                                                 --------------------------------------------------------------------------              Total contribution                        61,141      7,448           ---        ---        3,641     72,230                                       92                            (Continued)                           GENERAL COMMUNICATION, INC.                   Notes to Consolidated Financial Statements                                                       Long-                    Local                                                      Distance     Cable        Access     Internet                                                      Services    Services     Services    Services      Other      Total                                                 --------------------------------------------------------------------------                                                                                                                                      Selling, general and administrative           expenses                                     15,442      2,992           842        ---       27,136     46,412                                                 --------------------------------------------------------------------------                                                        45,699      4,456         (842)        ---     (23,495)     25,818         Depreciation and amortization                   5,025      2,220           ---        ---        2,164      9,409                                                 --------------------------------------------------------------------------         Operating income (loss)                      $ 40,674      2,236         (842)        ---     (25,659)     16,409                                                 ==========================================================================         Total assets                                 $102,739    306,743         3,475        154       34,224    447,335                                                 ==========================================================================         Capital expenditures                         $ 27,765        909         3,475        154        6,339     38,642                                                 ==========================================================================         -----------------------         Long-distance services,  local access service and Internet services are         billed  utilizing  a unified  accounts  receivable  system  and are not         reported  separately by business segment.  All such accounts receivable         are  included  above  in the  long-distance  services  segment  for all         periods presented.        A  reconciliation  of total segment  revenues to  consolidated  revenues        follows:         Years ended December 31,                                                    1998            1997           1996                                                                            -----------------------------------------------                                                                                                                                    Total segment revenues                                            $        252,125         224,497        164,934            Less intersegment revenues eliminated in consolidation                      (5,330)           (688)           (40)                                                                            -----------------------------------------------              Consolidated revenues                                        $        246,795         223,809        164,894                                                                                ===============================================        A reconciliation  of total segment  operating income to consolidated net        income (loss) before income taxes and extraordinary item follows:         Years ended December 31,                                                     1998            1997          1996                                                                            -----------------------------------------------                                                                                                                                     Total segment operating income                                    $          8,909          15,598         16,409          Less intersegment contribution eliminated in consolidation                     (65)           (216)           ---                                                                            -----------------------------------------------              Consolidated operating income                                           8,844          15,382         16,409         Interest expense, net                                                      (19,764)        (17,617)        (3,719)                                                                            -----------------------------------------------              Consolidated net income (loss) before income taxes and                extraordinary item                                         $        (10,920)         (2,235)        12,690                                                                              ===============================================        The Company provides message telephone service to MCI WorldCom (see note        10) and Sprint, major customers.  The Company earned revenues,  included        in  the  long-distance  segment,  pursuant  to a  contract  with  Sprint        totaling approximately $25,398,000,  $24,357,000 and $18,781,000 for the        years  ended  December  31,  1998,  1997  and  1996  respectively.  As a        percentage of total revenues,  Sprint revenues totaled 10.3%,  10.9% and        11.4% for the years ended December 31, 1998, 1997 and 1996 respectively. (10)   Related Party Transactions        Pursuant  to  the  terms  of a  contract  with  MCI  WorldCom,  a  major        shareholder  of GCI  (see  note  8),  the  Company  earned  revenues  of        approximately  $35,892,000,  $34,315,000  and  $29,208,000 for the years        ended December 31, 1998, 1997 and 1996, respectively. As a percentage of        total revenues, MCI WorldCom revenues totaled 14.5%, 15.3% and 17.7% for        the years ended December 31, 1998, 1997 and 1996  respectively.  Amounts        receivable,   net  of  accounts  payable,   from  MCI  WorldCom  totaled        $4,836,000 and                                         93                            (Continued)                           GENERAL COMMUNICATION, INC.                   Notes to Consolidated Financial Statements        $3,933,000 at December 31, 1998 and 1997, respectively. The Company paid        MCI  WorldCom  for  distribution  of its  traffic in the lower 49 states        amounts totaling approximately $12,639,000,  $14,319,000 and $12,224,000        for the years ended December 31, 1998, 1997 and 1996, respectively.        The Company  entered into a long-term  capital  lease  agreement in 1991        with the wife of the Company's  president  for property  occupied by the        Company.  The lease is guaranteed  by the Company.  The lease term is 15        years with monthly  payments  increasing in $800  increments at each two        year  anniversary  of the lease.  Monthly  lease costs will  increase to        $17,600 effective October 1999. If the owner sells the premises prior to        the end of the tenth  year of the lease,  the owner  will  rebate to the        Company  one-half of the net sales price received in excess of $900,000.        If the  property  is not sold prior to the tenth year of the lease,  the        owner will pay the Company  the  greater of one-half of the  appreciated        value of the property over $900,000,  or $500,000.  The leased asset was        capitalized  in 1991 at the  owner's  cost of  $900,000  and the related        obligation was recorded in the accompanying financial statements.        GCI Cable, Inc. ("GCI Cable") is a party to a Management  Agreement with        Prime II  Management,  L.P.  ("PMLP").  Certain of the Prime sellers are        affiliated with PMLP. The Management Agreement began on November 1, 1996        and expires on October 31, 2005,  however,  it can be terminated earlier        upon loss of a license  to operate  the  systems,  sale of the  systems,        breach of  contract,  or upon  exercise  of an option to  terminate  the        Management  Agreement  by PMLP or GCI Cable any time after  October  31,        2000. The agreement was amended December 15, 1998.        Under the  terms of the  amended  Management  Agreement,  PMLP  performs        certain services for GCI Cable and will be compensated as follows:             November 01, 1996 through October 31, 1997    $1,000,000             November 01, 1997 through December 31, 1997   $  125,000             January 01, 1998 through January 31, 1999     Warrant to purchase                                                            425,000 shares of GCI                                                           stock             February 01, 1999 through October 31, 1999    $  200,000             November 01, 1999 through October 31, 2000    $  400,000             (plus reimbursement for certain expenses)        In connection with the agreement,  GCI Cable received services valued at        approximately  $752,000,  $1,040,000 and $197,000 including reimbursable        expenses  for the  periods  ended  December  31,  1998,  1997 and  1996,        respectively. (11)   Commitments and Contingencies        Leases        The Company as Lessee. The Company leases business offices,  has entered        into site lease  agreements  and uses certain  equipment  and  satellite        transponder  capacity pursuant to operating lease  arrangements.  Rental        costs under such  arrangements  amounted to  approximately  $11,609,000,        $11,574,000  and $7,364,000 for the years ended December 31, 1998,  1997        and 1996, respectively.                                       94                            (Continued)                           GENERAL COMMUNICATION, INC.                   Notes to Consolidated Financial Statements        A summary of future minimum lease payments for all leases as of December        31, 1998 follows:           Year ending December 31:                                             Operating      Capital                                                                              ---------------------------                                                                                 (Amounts in thousands)                                                                                                                        1999                                                         $       13,388           771               2000                                                                  5,549           767               2001                                                                  3,937         1,127               2002                                                                  2,377           466               2003                                                                  2,204           381               2004 and thereafter                                                   3,093           643                                                                              ---------------------------                   Total minimum lease payments                             $       30,548         4,155                                                                              =============                   Less amount representing interest                                              (1,969)                   Less current maturities of obligations under capital                     leases                                                                         (511)                                                                                            -------------                  Subtotal - long-term obligations under capital leases                            1,675                  Less long-term obligations under capital leases due to                     related party, excluding current maturities                                    (486)                                                                                            -------------                  Long-term obligations under capital leases, excluding                     related party,  excluding current maturities                          $       1,189                                                                                            =============        The leases generally  provide that the Company pay the taxes,  insurance        and maintenance  expenses  related to the leased assets.  It is expected        that in the normal course of business,  except for satellite transponder        capacity,  leases  that  expire will be renewed or replaced by leases on        other properties.        The Company as Lessor.  Subsequent  to December  31,  1998,  the Company        signed  agreements  with a large  commercial  customer for the immediate        lease of three DS3 circuits on Alaska United  facilities  within Alaska,        and between Alaska and the lower 48 states. The lease agreements provide        for three year terms, with renewal options for additional terms.        Deferred Compensation Plan        During 1995,  the Company  adopted a  non-qualified,  unfunded  deferred        compensation  plan to  provide a means by which  certain  employees  may        elect to defer  receipt of  designated  percentages  or amounts of their        compensation  and to  provide a means for  certain  other  deferrals  of        compensation.  The Company may, at its discretion,  contribute  matching        deferrals  equal  to the  rate  of  matching  selected  by the  Company.        Participants  immediately vest in all elective  deferrals and all income        and gain attributable thereto. Matching contributions and all income and        gain attributable thereto vest over a six-year period.  Participants may        elect  to be  paid in  either  a  single  lump  sum  payment  or  annual        installments  over a period not to exceed 10 years.  Vested balances are        payable upon termination of employment,  unforeseen  emergencies,  death        and total disability.  Participants are general creditors of the Company        with  respect  to  deferred  compensation  plan  benefits.  Compensation        deferred pursuant to the plan totaled  approximately  $117,000,  $58,000        and $167,000 as of December 31, 1998, 1997 and 1996, respectively.        Satellite Transponders        The Company entered into a purchase and lease-purchase  option agreement        in August 1995 for the acquisition of satellite transponders to meet its        long-term satellite capacity  requirements.  The launch of the satellite        in August 1998  failed.  The Company did not assume  launch risk and the        launch has been  rescheduled for the                                        95                            (Continued)                           GENERAL COMMUNICATION, INC.                   Notes to Consolidated Financial Statements        fourth quarter of 1999.  The Company will continue to lease  transponder        capacity  until  delivery  of  the   transponders   on  the  replacement        satellite.   The  balance   payable  upon   expected   delivery  of  the        transponders  during the fourth  quarter of 1999 in addition to the $9.1        million deposit previously paid totals approximately $43.5 million.        Self-Insurance        The Company is self-insured for losses and liabilities related primarily        to health and welfare  claims up to  predetermined  amounts  above which        third party  insurance  applies.  A reserve of $545,000  was recorded at        December  31,  1998  to  cover  estimated  reported  losses,   estimated        unreported losses based on past experience  modified for current trends,        and estimated  expenses for  investigating  and settling claims.  Actual        losses will vary from the recorded  reserve.  While management uses what        it believes is  pertinent  information  and factors in  determining  the        amount of  reserves,  future  additions to the reserves may be necessary        due to changes in the information and factors used.        Litigation        The Company is involved in various disputes, lawsuits, legal proceedings        and  regulatory  matters  that  have  arisen  in the  normal  course  of        business.  While the ultimate results of these items cannot be predicted        with  certainty,  management does not expect at this time the resolution        of them to have a material  adverse  effect on the  Company's  financial        position, results of operations or liquidity.        Cable Service Rate Reregulation        Beginning in April 1993, the Federal  Communications  Commission ("FCC")        adopted   regulations   implementing  the  Cable   Television   Consumer        Protection  and  Competition  Act of 1992  ("The  Cable  Act of  1992").        Included are rules  governing  rates charged by cable  operators for the        basic service tier, the installation, lease and maintenance of equipment        (such as converter  boxes and remote  control units) used by subscribers        to  receive  this tier and for cable  programming  services  other  than        programming   offered  on  a  per-channel  or  per-program   basis  (the        "regulated services"). Generally, the regulations require affected cable        systems to charge rates for regulated services that have been reduced to        prescribed  benchmark levels,  or alternatively,  to support rates using        costs-of-service methodology.        Until  March 31,  1999,  the  regulated  services  rates  charged by the        Company may be reviewed  by the State of Alaska,  operating  through the        APUC for basic  service,  or by the FCC for cable  programming  service.        Refund  liability  for basic  service  rates is  limited  to a  one-year        period.  Refund  liability  for cable  programming  service rates may be        calculated  from the date a  complaint  is filed  with the FCC until the        rate reduction is  implemented.  Beginning March 31, 1999, the rates for        cable  programming  services (service tiers above basic service) will no        longer be regulated.  Only regulation of basic rates,  initially through        the APUC, will remain.        In order for the State of Alaska to exercise rate  regulation  authority        over the Company's  basic service rates,  25% of a systems'  subscribers        must  request such  regulation  by filing a petition  with the APUC.  At        December 31,  1998,  the State of Alaska has rate  regulation  authority        over the Juneau system's basic service rates.  (The Juneau system serves        8.3% of the Company's  total basic service  subscribers  at December 31,        1998.)  Juneau's  current rates have been approved by the APUC and there        are no other  pending  filings  with the  APUC,  therefore,  there is no        refund liability for basic service at this time.        Undersea Fiber Optic Cable Contract Commitment        The  Company  signed a  contract  in July 1997 for  construction  of the        undersea portion of a fiber optic cable system  connecting the cities of        Anchorage,  Juneau,  and Seattle via a subsea route. The total system is        expected to cost  approximately  $125  million.  Subsea and  terrestrial        connections extended the fiber optic cable to Fairbanks via Whittier and        Valdez.  Construction efforts began in September 1998 and were completed        in early February 1999.  Commercial services commenced in February 1999.        Pursuant to the                                       96                            (Continued)                           GENERAL COMMUNICATION, INC.                   Notes to Consolidated Financial Statements        contract,  the  Company  paid $77.2  million  and $9.1        million during the years ended December 31, 1998 and 1997, respectively,        and will pay the remaining  balance in installments  through April 1999.        Approximately  $39.4 million of proceeds from the public  offerings (see        note 8),  net of the $9.1  million  paid in 1997,  were  contributed  to        Alaska  United.  The use of such proceeds was  restricted to funding the        construction  and  deployment  of the fiber optic  cable  system and was        reported as  Restricted  Cash at December  31, 1997 in the  accompanying        Consolidated  Financial Statements.  The restricted cash was released to        Alaska United in 1998 to fund  construction and deployment  efforts.  In        January 1998, the Company secured up to $75 million in bank financing to        fund the remaining cost of construction  and deployment,  of which $61.2        million was outstanding at December 31, 1998 (see note 6 (c)).        Year 2000        In 1997, the Company initiated a plan to identify,  assess and remediate        Year 2000 issues within each of its  significant  computer  programs and        certain equipment which contain micro-processors. The plan is addressing        the issue of computer  programs and embedded computer chips being unable        to distinguish  between the year 1900 and the year 2000, if a program or        chip uses only two  digits  rather  than four to define  the  applicable        year. The Company has divided the plan into two major phases.  The first        phase,  including  team  formation,  inventory  assessment,   compliance        assessment and risk  assessment,  were completed during 1998. The second        phase,   including   resolution/remediation,   validation,   contingency        planning and sign-off acceptance,  was in progress at December 31, 1998.        Systems  which have been  determined  not to be Year 2000  compliant are        being either replaced or  reprogrammed,  and thereafter  tested for Year        2000  compliance.  The plan anticipates that by mid-1999 the conversion,        implementation and testing phases will be completed.  The current budget        for the total cost of remediation  (including  replacement  software and        hardware) and testing,  as set forth in the plan, is approximately  $4.0        million.        The Company is in the process of  identifying  and  contacting  critical        suppliers and customers whose  computerized  systems  interface with the        Company's  systems,  regarding  their plans and  progress in  addressing        their Year 2000  issues.  The Company has received  varying  information        from  such  third  parties  on  the  state  of  compliance  or  expected        compliance.  Contingency plans are being developed in the event that any        critical supplier or customer is not compliant.        The failure to correct a material  Year 2000 problem  could result in an        interruption in, or a failure of, certain normal business  activities or        operations.  Such failures  could  materially  and adversely  affect the        Company's  operations,  liquidity  and financial  condition.  Due to the        general uncertainty inherent in the Year 2000 problem, resulting in part        from the uncertainty of the Year 2000 readiness of third-party suppliers        and  customers,  the Company is unable to determine at this time whether        the  consequences  of Year 2000 failures will have a material  impact on        the Company's operations, liquidity or financial condition.(12)    Subsequent Event         On April 2, 1999 the Company  received  commitments  for the issuance of        20,000  shares  of  convertible  redeemable  accreting  preferred  stock        ("Preferred  Stock").  Proceeds  totaling $20 million (before payment of        costs and expenses) will be used for general  corporate  purposes and to        provide additional liquidity. The Company's amended Senior Holdings Loan        facilities  limit use of such proceeds (see note 6). The Preferred Stock        contains a $1,000 per share  liquidation  preference,  plus  accrued but        unpaid  dividends and fees.  Dividends will be payable  semi-annually at        the rate of 8.5% of the liquidation  preference.  Prior to the five-year        anniversary  following closing,  dividends are payable, at the Company's        option,  in cash or in additional  fully-paid shares of Preferred Stock.        Dividends are payable only in cash  following the five-year  anniversary        of closing.  Mandatory  redemption is required 12 years from the date of        closing.                                         97                            (Continued)                           GENERAL COMMUNICATION, INC.                   Notes to Consolidated Financial Statements        The Company and Holders of the Preferred Stock will have the right after        the  four-year  anniversary  of closing (or  occurrence  of a triggering        event,  as defined) to convert  the stated  value,  in whole or in part,        into registered shares of GCI class A common stock. The conversion price        will be the  lesser  of $6.00 or 120% of the  average  closing  price of        GCI's class A common stock for the 10 trading days prior to closing.        At any time subsequent to the third anniversary  following closing,  and        assuming  the stock is trading at two times the  conversion  price,  the        Company may require  immediate  conversion at a price equal to two times        the conversion  price. The Preferred Stock,  subject to lender approval,        will be exchangeable in whole or in part, at the Company's option,  into        subordinated  debt  with  terms  and  conditions   comparable  to  those        governing the Preferred Stock. The Preferred Stock will be senior to all        other classes of the Company's equity  securities,  and will have voting        rights  equal to that number of shares of common stock into which it can        be converted.  The holders of the Preferred  Stock will, as a class,  be        entitled  to elect one GCI  director.  Closing is expected to take place        prior to April 30, 1999.(13)    Supplementary Financial Data        The following is a summary of unaudited  quarterly results of operations        for the years ended December 31, 1998 and 1997.        (Amounts in thousands, except per share amounts)                                                             First      Second        Third      Fourth      Total                                                            Quarter     Quarter      Quarter     Quarter      Year                                                            -------     -------      -------     -------      ----                                                                                                                             1998       ----       Total revenues                                 $     58,152      62,941       62,766      62,936      246,795       Net loss                                       $     (1,616)     (2,066)      (2,076)     (1,039)      (6,797)       Basic net loss per common share                $      (0.03)      (0.04)       (0.04)      (0.02)       (0.14)       Diluted net loss per common share              $      (0.03)      (0.04)       (0.04)      (0.02)       (0.14)       1997       ----       Total revenues                                 $     52,881      56,186       57,956      56,786      223,809       Net earnings (loss)                            $       (525)       (832)        (928)        102       (2,183)       Basic loss per common share:         Net loss before extraordinary item           $      (0.01)      (0.02)       (0.01)        ---        (0.04)         Extraordinary loss                           $        ---         ---        (0.01)        ---        (0.01)         Net loss                                     $      (0.01)      (0.02)       (0.02)        ---        (0.05)       Diluted loss per common share:         Net loss before extraordinary item           $      (0.01)      (0.02)       (0.01)        ---        (0.04)         Extraordinary loss                           $        ---         ---        (0.01)        ---        (0.01)         Net loss                                     $      (0.01)      (0.02)       (0.02)        ---        (0.05)                                       98                                                                                       PART IVItem 14.  EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K                                                                                                            Page No.                                                                                                            --------                                                                                                                  (a)(l)  Consolidated Financial Statements                                                                              Included in Part II of this Report:                  Independent Auditor's Report..............................................................67                  Consolidated Balance Sheets, December 31, 1998 and 1997...................................68 -- 69                  Consolidated Statements of Operations,                     Years ended December 31, 1998, 1997 and 1996...........................................70                  Consolidated Statements of Stockholders' Equity,                     Years ended December 31, 1998, 1997 and 1996...........................................71                  Consolidated Statements of Cash Flows,                     Years ended December 31, 1998, 1997 and 1996...........................................72                  Notes to Consolidated Financial Statements................................................73 -- 98(a)(2)  Consolidated Financial Statement Schedules           Included in Part IV of this Report:                  Independent Auditors' Report..............................................................106                  Schedule VIII - Valuation and Qualifying Accounts,                     Years ended December 31, 1998, 1997 and 1996...........................................107      Other  schedules  are  omitted  as  they  are  not  required  or  are  not      applicable,  or the  required  information  is  shown  in  the  applicable      financial statements or notes thereto.                                       99                            (b)     Exhibits        Listed  below are the  exhibits  that are filed as a part of this Report        (according  to the  number  assigned  to them in Item 601 of  Regulation        S-K):         Exhibit No.                                          Description        ------------------------------------------------------------------------------------------------------------                                        3.1            Restated Articles of Incorporation of the Company dated August 16, 1993. (23)          3.2            Bylaws of the Company  (1)          4.1            1997 Amendment No. 1 to Voting Agreement dated October 31, 1996, among Prime II                            Management L.P., as agent for the Voting Prime Sellers, MCI Telecommunications                            Corporation, Ronald A. Duncan, Robert M. Walp and TCI GCI, Inc. (23)          10.1           Employee stock option agreements issued to individuals Spradling, O'Hara, Strid, Behnke,                            Lewkowski and Snyder (3)          10.2           Lease agreement between GCI Communication Services, Inc. and National Bank of Alaska                            Leasing Corporation dated January 15, 1992 (4)          10.3           Westin Building Lease (5)          10.4           Duncan and Hughes Deferred Bonus Agreements (6)          10.5           Compensation Agreement between General Communication, Inc. and William C. Behnke dated                            January 1, 1997 (19)          10.6           Order approving Application for a Certificate of Public Convenience and Necessity to                            operate as a Telecommunications (Intrastate Interexchange Carrier) Public Utility                            within Alaska (3)          10.7           1986 Stock Option Plan, as amended (21)          10.8           Loan agreement between National Bank of Alaska and GCI Leasing Co., Inc. dated December                            31, 1992 (4)          10.9           Pledge and Security Agreement between National Bank of Alaska and GCI Communication                            Services, Inc. dated December 31, 1992 (4)          10.10          Lease Agreement between MCI Telecommunications Corporation and GCI Leasing Co., Inc.                            dated December 31, 1992 (4)          10.11          Sublease Agreement between MCI Telecommunications Corporation and General Communication,                            Inc. dated December 31, 1992 (4)          10.12          Financial Assistance Agreement between MCI Telecommunications Corporation and GCI                            Leasing Co., Inc. dated December 31, 1992 (4)          10.13          MCI Carrier Agreement between MCI Telecommunications Corporation and General                            Communication, Inc. dated January 1, 1993 (8)          10.14          Contract for Alaska Access Services Agreement between MCI Telecommunications Corporation                            and General Communication, Inc. dated January 1, 1993 (8)          10.15          Promissory Note Agreement between General Communication, Inc. and Ronald A. Duncan,                            dated August 13, 1993 (9)          10.16          Deferred Compensation Agreement between General Communication, Inc. and Ronald A.                            Duncan, dated August 13, 1993 (9)          10.17          Pledge Agreement between General Communication, Inc. and Ronald A. Duncan, dated August                            13, 1993 (9)          10.18          Revised Qualified Employee Stock Purchase Plan of General Communication, Inc. (10)          10.19          Summary Plan Description pertaining to the Revised Qualified Employee Stock Purchase                            Plan of General Communication, Inc. (10)          10.20          The GCI Special Non-Qualified Deferred Compensation Plan (11)                                       100         Exhibit No.                                          Description        ------------------------------------------------------------------------------------------------------------                                        10.21          Transponder Purchase Agreement for Galaxy X between Hughes Communications Galaxy, Inc.                            and GCI Communication Corp. (11)          10.22          Equipment Purchase Agreement between GCI Communication Corporation and                            Scientific-Atlanta, Inc. (11)          10.23          Management Agreement, between Prime II Management, L.P., and GCI Cable, Inc., dated                            October 31, 1996 (12)          10.24          Third Amended and Restated Credit Agreement, dated as of October 31, 1996, between GCI                            Communication Corp., and NationsBank of Texas, N.A. (13)          10.25          Licenses: (5)          10.25.1           214 Authorization          10.25.2           International Resale Authorization          10.25.3           Digital Electronic Message Service Authorization          10.25.4           Fairbanks Earth Station License          10.25.5           Fairbanks (Esro) Construction Permit for P-T-P Microwave Service          10.25.6           Fairbanks (Polaris) Construction Permit for P-T-P Microwave Service          10.25.7           Anchorage Earth Station Construction Permit          10.25.8           License for Eagle River P-T-P Microwave Service          10.25.9           License for Juneau Earth Station          10.25.10          Issaquah Earth Station Construction Permit          10.26          ATU Interconnection Agreement between GCI Communication Corp. and Municipality of                            Anchorage, executed January 15, 1997 (18)          10.27          First Amendment to Third Amended and Restated Credit Agreement entered into among GCI                            Communication Corp., NationsBank of Texas, N.A., Toronto Dominion (Texas), Inc.,                            Credit Lyonnais New York Branch, and National Bank of Alaska (15)          10.28          Second Amendment to Third Amended and Restated Credit Agreement entered into among GCI                            Communication Corp., NationsBank of Texas, N.A., Toronto Dominion (Texas), Inc.,                            Credit Lyonnais New York Branch, and National Bank of Alaska (20)          10.29          Asset Purchase Agreement, dated April 15, 1996, among General Communication, Inc.,                            ACNFI, ACNJI and ACNKSI (12)          10.30          Asset Purchase Agreement, dated May 10, 1996, among General Communication, Inc., and                            Alaska Cablevision, Inc. (12)          10.31          Asset Purchase Agreement, dated May 10, 1996, among General Communication, Inc., and                            McCaw/Rock Homer Cable System, J.V. (12)          10.32          Asset Purchase Agreement, dated May 10, 1996, between General Communication, Inc., and                            McCaw/Rock Seward Cable System, J.V. (12)          10.33          Amendment No. 1 to Securities Purchase and Sale Agreement, dated October 31, 1996, among                            General Communication, Inc., and the Prime Sellers Agent (13)          10.34          First Amendment to Asset Purchase  Agreement,  dated October 30, 1996, among General                             Communication, Inc., ACNFI, ACNJI and ACNKSI (13)          10.35          Amendment to Revised Qualified Employee Stock Purchase Plan of General Communication,                            Inc.  (18)          10.36          Order Approving Arbitrated Interconnection Agreement as Resolved and Modified by Order                            U-96-89(8) dated January 14, 1997 (18)          10.37          Amendment to the MCI Carrier Agreement executed April 20, 1994 (18)          10.38          Amendment No. 1 to MCI Carrier Agreement executed July 26, 1994 (16)          10.39          MCI Carrier Addendum--MCI 800 DAL Service effective February 1, 1994 (16)          10.40          Third Amendment to MCI Carrier Agreement dated as of October 1, 1994 (16)          10.41          Fourth Amendment to MCI Carrier Agreement dated as of September 25, 1995 (16)                                       101         Exhibit No.                                          Description        ------------------------------------------------------------------------------------------------------------                                        10.42          Fifth Amendment to the MCI Carrier Agreement executed April 19, 1996 (18)          10.43          Sixth Amendment to MCI Carrier Agreement dated as of March 1, 1996 (16)          10.44          Seventh Amendment to MCI Carrier Agreement dated November 27, 1996 (20)          10.45          First Amendment to Contract for Alaska Access Services between General Communication,                            Inc. and MCI Telecommunications Corporation dated April 1, 1996 (20)          10.46          Service Mark License Agreement between MCI Communications Corporation and General                            Communication, Inc. dated April 13, 1994 (19)          10.47          Radio Station Authorization (Personal Communications Service License), Issue Date June                            23, 1995 (19)          10.48          Framework Agreement between National Bank of Alaska (NBA) and General Communication,                            Inc. dated October 31, 1995 (17)          10.49          1997 Call-Off Contract between National Bank of Alaska (NBA) and General Communication,                            Inc. (GCI) dated November 1, 1996 (20)          10.50          Contract No. 92MR067A Telecommunications Services between BP Exploration (Alaska), Inc.                            and GCI Network Systems dated April 1, 1992 (20)          10.51          Amendment No. 03 to BP Exploration (Alaska) Inc. Contract No. 92MRO67A effective August                            1, 1996 (20)          10.52          Lease Agreement dated September 30, 1991 between RDB Company and General Communication,                            Inc. (3)          10.53          Certificate of Public Convenience and Necessity No. 436 for Telecommunications Service                            (Relay Services) (19)          10.54          Order Approving Transfer Upon Closing, Subject to Conditions, and Requiring Filings                            dated September 23, 1996 (19)          10.55          Order Granting Extension of Time and Clarifying Order dated October 21, 1996 (19)          10.56          Contract for Alaska Access Services among General Communication, Inc. and GCI                            Communication Corp., and Sprint Communications Company L.P. dated June 1, 1993 (20)          10.57          First Amendment to Contract for Alaska Access Services between General Communication,                            Inc. and Sprint Communications Company L.P. dated as of August 7, 1996 (20)          10.58          Employment and Deferred Compensation Agreement between General Communication, Inc. and                            John M. Lowber dated July 1992 (19)          10.59          Deferred Compensation Agreement between GCI Communication Corp. and Dana L. Tindall                            dated August 15, 1994 (19)          10.60          Transponder Lease Agreement between General Communication Incorporated and Hughes                            Communications Satellite Services, Inc., executed August 8, 1989 (9)          10.61          Addendum to Galaxy X Transponder Purchase Agreement between GCI Communication Corp. and                            Hughes Communications Galaxy, Inc. dated August 24, 1995 (19)          10.62          Order Approving Application, Subject to Conditions; Requiring Filing; and Approving                            Proposed Tariff on an Inception Basis, dated February 4, 1997 (19)          10.63          Resale Solutions Switched Services Agreement between Sprint Communications Company L.P.                            and GCI Communications, Inc. dated May 31, 1996 (20)          10.64          Commitment Letter from Credit Lyonnais New York Branch, NationsBank of Texas, N.A. and                            TD Securities (USA) Inc. for Fiber Facility dated as of July 3, 1997 (19)          10.65          Commitment Letter from NationsBank for Credit Facility dated July 2, 1997 (19)          10.66          Supply Contract Between Submarine Systems International Ltd. And GCI Communication Corp.                            dated as of July 11, 1997. (23)                                       102         Exhibit No.                                          Description        ------------------------------------------------------------------------------------------------------------                                        10.67          Supply Contract Between Tyco Submarine Systems Ltd. And Alaska United Fiber System                            Partnership Contract Variation No. 1 dated as of December 1, 1997. (23)          10.68          $200,000,000 Amended and Restated Credit Agreement between GCI Holdings, Inc. and                            NationsBank of Texas, N.A., as administrative agent, Credit Lyonnais New York Branch,                            as documentation agent, and TD Securities (USA), Inc. as syndication agent, dated as                            of November 14, 1997. (23)          10.69          $50,000,000 Amended and Restated Credit Agreement between GCI Holdings, Inc. and                            NationsBank of Texas, N.A., as administrative agent, Credit Lyonnais New York Branch,                            as documentation agent, and TD Securities (USA), Inc. as syndication agent, dated as                            of November 14, 1997. (23)          10.70          Credit and Security Agreement Dated as of January 27, 1998 among Alaska United Fiber                            System Partnership as Borrower and The Lenders Referred to Herein and Credit Lyonnais                            New York Branch as Administrative Agent and Nationsbank of Texas, N.A. as Syndication                            Agent and TD Securities (USA) , Inc. as Documentation Agent. (24)          10.71          Third Amendment to Contract for Alaska Access Services between General Communication,                            Inc. and MCI Telecommunications Corporation dated February 27, 1998 *  See note          21.1           Subsidiaries of the Registrant (23)          23.1           Consent of KPMG LLP (Accountant for Company) *          27.1           Financial Data Schedule *          99             Additional Exhibits:          99.1              The Articles of Incorporation of GCI Communication Corp. (2)          99.2              The By-laws of GCI Communication Corp. (2)          99.3              The Articles of Incorporation of GCI Communication Services, Inc. (4)          99.4              The By-laws of GCI Communication Services, Inc. (4)          99.5              The Articles of Incorporation of GCI Leasing Co., Inc. (4)          99.6              The By-laws of GCI Leasing Co., Inc. (4)          99.7              The By-laws of GCI Cable, Inc. (14)          99.8              The Articles of Incorporation of GCI Cable, Inc. (14)          99.9              The By-laws of GCI Cable / Fairbanks, Inc. (14)          99.10             The Articles of Incorporation of GCI Cable / Fairbanks, Inc. (14)          99.11             The By-laws of GCI Cable / Juneau, Inc. (14)          99.12             The Articles of Incorporation of GCI Cable / Juneau, Inc. (14)          99.13             The By-laws of GCI Cable Holdings, Inc. (14)          99.14             The Articles of Incorporation of GCI Cable Holdings, Inc. (14)          99.15             The By-laws of GCI Holdings, Inc.  (19)          99.16             The Articles of Incorporation of GCI Holdings, Inc.  (19)          99.17             The Articles of Incorporation of GCI, Inc.  (18)          99.18             The Bylaws of GCI, Inc.  (18)          99.19             The By-laws of GCI Transport, Inc. (23)          99.20             The Articles of Incorporation of GCI Transport, Inc. (23)          99.21             The By-laws of Fiber Hold Co., Inc. (23)          99.22             The Articles of Incorporation of Fiber Hold Co., Inc. (23)          99.23             The By-laws of GCI Fiber Co., Inc. (23)          99.24             The Articles of Incorporation of GCI Fiber Co., Inc. (23)          99.25             The By-laws of GCI Satellite Co., Inc. (23)          99.26             The Articles of Incorporation of GCI Satellite Co., Inc. (23)                                       103         Exhibit No.                                          Description        ------------------------------------------------------------------------------------------------------------                                        99.27             The Partnership Agreement of Alaska United Fiber System (23)          -------------------------             *           Filed herewith.           Note          Certain  information  has  been  redacted from  Exhibit                            10.71 which the Company desires to keep  undisclosed                            and a copy of the unredacted document has been filed                            separately   with  the   Securities   and   Exchange                            Commission.            1            Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period                            ended March 31, 1994            2            Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended                            December 31, 1990            3            Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended                            December 31, 1991            4            Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended                            December 31, 1992            5            Incorporated   by   reference   to   the   Company's Registration   Statement   on  Form                              10  (File   No. 0-15279),  mailed  to the  Securities  and  Exchange Commission                            on December 30, 1986            6            Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended                            December 31, 1989.            7            Incorporated by reference to the Company's Current Report on Form 8-K dated January 13,                            1993.            8            Incorporated by reference to the Company's Current Report on Form 8-K dated June 4, 1993.            9            Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended                            December 31, 1993.            10           Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended                            December 31, 1994.            11           Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended                            December 31, 1995.            12           Incorporated by reference to the Company's Form S-4 Registration Statement dated October                            4, 1996.            13           Incorporated by reference to the Company's Current Report on Form 8-K dated November 13,                            1996.            14           Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended                            December 31, 1996.            15           Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period                            ended March 31, 1997.            16           Incorporated by reference to the Company's Current Report on Form 8-K dated March 14,                            1996, filed March 28, 1996.            17           Incorporated by reference to the Company's Amendment to Annual Report dated December 31,                            1995 on Form 10-K/A as amended on August 6, 1996.            18           Incorporated herein by reference to the Company's Form S-3 Registration Statement (File                            No. 333-28001) dated May 29, 1997.            19           Incorporated  herein by reference  to the  Company's Amendment No. 1 to Form S-3/A                             Registration Statement (File No. 333-28001) dated July 8, 1997.            20           Incorporated  herein by reference  to the  Company's Amendment No. 2 to Form S-3/A                            Registration Statement (File No. 333-28001) dated July 21, 1997.                                       104            21           Incorporated  herein by reference  to the  Company's Amendment No. 3 to Form S-3/A                             Registration Statement (File No. 333-28001) dated July 22, 1997.            22           Incorporated herein by reference to the Company's Form S-8 POS Registration Statement                            (File No. 33-60222) dated February 20, 1998.            23           Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended                            December 31, 1997.            24           Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period                            ended June 30, 1998.(c)     Reports on Form 8-K        None.                                       105                          INDEPENDENT AUDITORS' REPORT                          ----------------------------The Board of Directors and StockholdersGeneral Communication, Inc.:Under date of March 26, 1999, we reported on the consolidated  balance sheets ofGeneral Communication, Inc. and Subsidiaries ("Company") as of December 31, 1998and 1997 and the related  consolidated  statements of operations,  stockholders'equity  and cash  flows for each of the  years in the  three-year  period  endedDecember 31, 1998,  which are included in the  Company's  1998 Annual  Report onForm 10-K.  In  connection  with our audits of the  aforementioned  consolidatedfinancial  statements,  we  also  audited  the  related  consolidated  financialstatement schedule in the consolidated financial statements,  which is listed inthe index in Item  14(a)(2) of the  Company's  1998 Annual  Report on Form 10-K.This  consolidated  financial  statement  schedule is the  responsibility of theCompany's  management.  Our  responsibility  is to  express  an  opinion on thisconsolidated financial statement schedule based on our audits.In our opinion this consolidated  financial statement schedule,  when consideredin relation to the basic  consolidated  financial  statements  taken as a whole,presents fairly, in all material respects the information set forth therein.                                                     /s/                                                     KPMG LLPAnchorage, AlaskaMarch 26, 1999                                       106                                                        Schedule VIII                                                        -------------                                         GENERAL COMMUNICATION, INC. AND SUBSIDIARIES                                              Valuation and Qualifying Accounts                                         Years ended December 31, 1998, 1997 and 1996                                                                             Additions          Deductions                                                                       --------------------     ----------                                                         Balance at     Charged                 Write-offs      Balance                                                          beginning    to profit                  net of        at end                    Description                            of year     and loss       Other     recoveries      of year- -----------------------------------------------          ----------    ---------      -----     ----------      -------                                                                             (Amounts in thousands)                                                                                                                            Year ended December 31, 1998: Allowance for doubtful  receivables                                              $1,070        2,795         ---           2,978         887                                                            =====       ======       =====          ======      ======Year ended December 31, 1997: Allowance for doubtful  receivables                                              $  597        3,025         ---           2,552       1,070                                                            =====       ======       =====          ======     =======Year ended December 31, 1996: Allowance for doubtful  receivables                                              $  295        1,736         354  (1)      1,788         597                                                            =====        =====       =====          ======       =====(1) Allowance for doubtful  receivables  acquired  pursuant to the Cable Companyacquisitions  described  in  Note  2 to  the  Company's  consolidated  financialstatements.                                       107SIGNATURESPursuant to the  requirements of Section 13 or 15(d) of the Securities  ExchangeAct of 1934,  the  registrant  has duly  caused  this report to be signed on itsbehalf by the undersigned thereunto duly authorized.                                             GENERAL COMMUNICATION, INC.                                             By:    /s/ Ronald A. Duncan                                                        Ronald A. Duncan, President                                                    (Chief Executive Officer)Date:  March 24, 1999Pursuant to the requirements of the Securities Exchange Act of 1934, this reporthas been signed below by the following  persons on behalf of the  registrant andin the capacities and on the date indicated.              Signature                                        Title                                 Date- --------------------------------------      ------------------------------------------       -------------------                                                                                                   /s/ Carter F. Page                          Chairman of Board and Director                   March 19, 1999- --------------------------------------                                                       -------------------Carter F. Page/s/ Robert M. Walp                          Vice Chairman of Board and Director              March 24, 1999- --------------------------------------                                                       -------------------Robert M. Walp/s/ Ronald A. Duncan                        President and Director                           March 24, 1999- --------------------------------------      (Principal Executive Officer)                    -------------------Ronald A. Duncan                            /s/ Ronald R. Beaumont                      Director                                         March 19, 1999- --------------------------------------                                                       -------------------Ronald R. Beaumont/s/ Donne F. Fisher                         Director                                         March 24, 1999- --------------------------------------                                                       -------------------Donne F. Fisher/s/ William P. Glasgow                      Director                                         March 24, 1999- --------------------------------------                                                       -------------------William P. Glasgow/s/ Stephen R. Mooney                       Director                                         March 18, 1999- --------------------------------------                                                       -------------------Stephen R. Mooney/s/ Larry E. Romrell                        Director                                         March 24, 1999- --------------------------------------                                                       -------------------Larry E. Romrell                                                                     (Continued)                                       108SIGNATURES(Continued)              Signature                                        Title                                 Date- --------------------------------------      ------------------------------------------       -------------------/s/ James M. Schneider                      Director                                         March 24, 1999- --------------------------------------                                                       -------------------James M. Schneider/s/ John M. Lowber                          Senior Vice President, Chief Financial           March 24, 1999- --------------------------------------      Officer, Secretary and Treasurer                 -------------------John M. Lowber                              (Principal Financial Officer)                                            /s/ Alfred J. Walker                        Vice President, Chief Accounting                 March 24, 1999- --------------------------------------      Officer                                          -------------------Alfred J. Walker                            (Principal Accounting Officer)                                       109                               THIRD AMENDMENT TO                       CONTRACT FOR ALASKA ACCESS SERVICESThis Third  AMENDMENT to the CONTRACT FOR ALASKA  ACCESS  SERVICES is made as ofthis 27th day of February,  1998, between GENERAL  COMMUNICATIONS,  INC. and itswholly owned subsidiary GCI COMMUNICATION CORP., an Alaska corporation (together"GCI") with  offices  located at 2550 Denali  Street,  Suite,  1000,  Anchorage,Alaska 99503-2781,  and MCI TELECOMMUNICATIONS  CORPORATION ("MCI") with officeslocated at 1801 Pennsylvania Avenue, N.W., Washington, DC 20006.WHEREAS,  GCI and MCI  entered  into a  contract  for  ALASKA  ACCESS  SERVICES,effective as of January 1, 1993 andWHEREAS, GCI and MCI desire to amend the Contract,NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiencyof which are hereby acknowledged, GCI and MCI agree as follows:1.  Paragraph  2. B. (2) of the  contract  shall be  deleted  and the  following    inserted in its place:         (2) ********  (except for  ********)  shall be charged at the following             rates per minute in the appropriate periods:              Date                              Rate in Dollars              ----                              ---------------         March 1, 1998                               ********         January 1, 1999                             ********         January 1, 2000 & thereafter                ********There shall be no time of day discount.  ******** shall pay the ********  accessand Alascom interchange charges for ********.Any query charges associated with the routing of ********  will be  passed on to********.[CERTAIN  INFORMATION  HAS BEEN REDACTED  FROM THIS  DOCUMENT  WHICH THE COMPANYDESIRES TO KEEP UNDISCLOSED AND A COPY OF THE UNREDACTED DOCUMENT HAS BEEN FILEDDEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.]2. All other terms and  conditions  of the  Contract  remain  unchanged  by thisAmendment and are in full force and effect.3. This Amendment will be effective on March 1, 19984. This  Amendment  together with the Contract is the complete  agreement of theparties and supersedes all other prior contracts and representations  concerningits subject matter. Any further amendments must be in writing and signed by bothparties.IN WITNESS  WHEREOF,  the parties hereto each acting with proper  authority haveexecuted this Amendment on the date indicated below.MCI COMMUNICATIONS COMPANYBy: /s/ Printed Name:  Donald T. LynchTitle:  Senior Vice PresidentGCI COMMUNICATION CORPORATIONBy:  /s/Printed Name:  Richard WestlundTitle:  V.P. Carrier RelationsEXHIBIT 23.1.1The Board of DirectorsGeneral Communication, Inc.:We consent to  incorporation  by reference in the  registration  statements (No.33-60728  and No. 33 60222) on Forms S-8 of General  Communication,  Inc. of ourreport  dated March 26,  1999,  except for notes 6 and 12, which are dated as ofApril  13,  1999,  relating  to  the  consolidated  balance  sheets  of  GeneralCommunication,  Inc. and  subsidiaries as of December 31, 1998 and 1997, and therelated  consolidated  statements of operations,  stockholders'  equity and cashflows for each of the years in the  three-year  period ended  December 31, 1998,and the related schedule,  which report appears in the December 31, 1998, annualreport on Form 10-K of General Communication, Inc.                                           /s/                                           KPMG LLPAnchorage, AlaskaApril 13, 1999          
                     5        THIS SCHEDULE CONTAINS SUMMARY FINANCIAL  INFORMATION EXTRACTED FROM THE        CONSOLIDATED  STATEMENT  OF INCOME FOR THE YEAR ENDED  DECEMBER 31, 1998        AND THE  CONSOLIDATED  BALANCE  SHEET  AS OF  DECEMBER  31,  1998 AND IS        QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.                         0000808461                        GENERAL COMMUNICATION, INC.                                   1,000                                                                                                        12-MOS                              DEC-31-1998                                 JAN-01-1998                                   DEC-31-1998                                         12,008                                   0                                  43,564                                   887                                    1,878                               61,292                                         402,444                                 82,972                                 646,116                          52,984                                        351,533                          0                                    0                                       179,505                                     20,502                   646,116                                        0                               246,795                                          0                                  116,073                               119,083                               2,795                             20,679                                (10,920)                                   (4,123)                            (6,797)                                 0                                0                                      0                                   (6,797)                                  (0.14)                                  (0.14)