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, 2000 Or ( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File No. 0-15279 GENERAL COMMUNICATION, INC. (Exact name of registrant as specified in its charter) ALASKA 92-0072737 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)2550 Denali Street Suite 1000 Anchorage, Alaska 99503(Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (907) 265-5600 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Class A common stock Class B common stock (Title of class) (Title of class)Indicate by check mark whether the registrant (1) has filed all reports 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 28, 2001 was approximately$267,120,000. The number of shares outstanding of the registrant's common stock as of February 28, 2001, was: Class A common stock - 48,765,081 shares; and Class B common stock - 3,902,297 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 7, 2001 are incorporated by reference into Part III of this report. 1 GENERAL COMMUNICATION, INC. 2000 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS Page ---- Glossary...............................................................................................................3Cautionary Statement Regarding Forward-Looking Statements.............................................................11Part I................................................................................................................13 Item 1. Business..................................................................................................13 Item 2. Properties................................................................................................54 Item 3. Legal Proceedings.........................................................................................57 Item 4. Submission of Matters to a Vote of Security Holders.......................................................57Part II...............................................................................................................58 Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.................................58 Item 6. Selected Financial Data...................................................................................58 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.....................60 Item 7A. Quantitative and Qualitative Disclosures About Market Risk................................................76 Item 8. Consolidated Financial Statements and Supplementary Data..................................................76 Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure......................77Part III..............................................................................................................77Part IV..............................................................................................................110 Item 14. Exhibits, Consolidated Financial Statement Schedules, and Reports on Form 8-K...........................110 This Annual Report on Form 10-K is for the year ending December 31, 2000. ThisAnnual Report modifies and supersedes documents filed prior to this AnnualReport. The SEC allows us to "incorporate by reference" information that we filewith them, which means that we can disclose important information to you byreferring you directly to those documents. Information incorporated by referenceis considered to be part of this Annual Report. In addition, information that wefile with the SEC in the future will automatically update and supersedeinformation contained in this Annual Report. 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-distancecalls and provide the customer connection for private line services.ACS -- Alaska Communications Systems, Inc., previously ALEC Holdings, Inc. --ACS, one of our competitors, includes acquired properties from Century TelephoneEnterprises, Inc. and the Anchorage Telephone Utility ("ATU"). ATU provided local telephone and long distance services primarily in Anchorage and cellulartelephone services in Anchorage and other Alaska markets.ALASKA UNITED -- Alaska United Fiber System Partnership -- an 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.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 kbps to 622 mbps. ATM may support gigabit speeds in the future.AT&T -- AT&T Corp. -- Acquired Tele-Communications, Inc. ("TCI") in a 1999merger; one of our competitors.AT&T Alascom -- Alascom, Inc. -- a wholly owned subsidiary of AT&T and one of our competitors.BASIC SERVICE -- The basic service tier includes, at a minimum, 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 remainingRegional 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 that can move through acommunications medium in a given amount of time.BRI -- Basic Rate Interface -- An ISDN offering that allows two 64 kbps "B"channels and one 16 kbps "D" channel to be carried over one typical single pairof copper wires. This is the type of service that would be used to connect asmall branch or home office to a remote network. Through the use of Bonding(bandwidth on Demand) the two 64 kbps channels can be combined to create morebandwidth as it becomes necessary. For data services such as Internet access,these channels can be bonded together to provide 2B+D transmission at a rate of128 kbps. New technology increases the bandwidth of ISDN BRI connections to 230kbps.BROADBAND -- A high-capacity communications circuit/path, usually implying aspeed greater than 256 kbps. 3CAP -- 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.CLEC -- 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 connectionequipment inside the LEC's central offices. Virtual collocation is an alternative 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, also referred to as"we," "us" and "our."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 that 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 mbps (sometimes called a T-3).DEDICATED -- Telecommunications lines dedicated or reserved for use byparticular customers. 4DIGITAL -- 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).DLC -- 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.DSL - Digital Subscriber Line -- Technology that allows Internet access at datatransmission speeds greater than those of modems over conventional telephonelines.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 utilitycompanies and others, such as the Company.FDDI -- Fiber Distributed Data Interface -- Based on fiber optics, FDDI is a100-megabit 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 mbps) packet-baseddata interface standard that transmits bursts of data over WANs. Frame-relaypackets vary in length from 7 to 1024 bytes. Data oriented, it is generally notused for voice or video.FTC -- Federal Trade Commission -- A federal regulatory body empowered toestablish and enforce rules and regulations governing companies involved intrade and commerce.GCC -- GCI Communication Corp., an Alaska corporation and a wholly owned subsidiary of Holdings.GCI -- General Communication, Inc., an Alaska corporation and the Registrant.GCI, Inc. -- a wholly owned subsidiary of GCI, an Alaska corporation and issuerof $180 million of publicly traded bonds.HOLDINGS -- a wholly owned subsidiary of GCI, Inc., an Alaska corporation and party 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). 5INTEREXCHANGE -- 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-bandsignaling. 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.KANAS -- Kanas Telecom, Inc. - a corporation owned primarily by WorldCom. Kanasowns and operates a fiber optic cable system constructed along the trans-Alaskaoil pipeline corridor extending from Prudhoe Bay to Valdez, Alaska.LAN -- 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 generally prohibited from providing long-distance service between the LATA in which theyprovide local exchange services, and any other LATA.LDAP - Lightweight Directory Access Protocol -- A distributed, hierarchicaldirectory service access protocol that is used to access repositories of usersand other network related entitiesLEC -- 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. 6LOCAL 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 Hawaii and the 48 contiguous statessouth of or below Alaska.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 Mbps.MDU -- Multiple Dwelling Unit -- MDUs include multiple-family buildings, such asapartment and condominium complexes.MMDS -- Multichannel Multipoint Distribution Service - also known as wirelesscable. The FCC established the Multipoint Distribution Service (MDS) in 1972.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.NARROWBAND -- 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 turnkey telecommunications 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 7and call pickup. A PBX uses technology similar to that used by a central officeswitch (on a smaller scale). (The acronym PBX originally stood for "Plug BoardExchange.")POP -- Point of Presence -- The physical access location interface between a LECand an 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) accessusually made up of private lines (with some PBX switching).PTI -- PTI Communications of Alaska, Inc. -- now ACS of Fairbanks, Inc., a subsidiary of ACS.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.RBOC -- Regional Bell Operating Company -- Any of the remaining regional Bellholding companies which the AT&T Divestiture Decree established to serve asparent companies for the BOCs.RCA -- REGULATORY COMMISSION OF ALASKA -- 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). Previously known as the Alaska Public Utilities Commission (APUC).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 - The Private Securities Litigation Reform Act of 1995.SENIOR HOLDINGS LOAN -- Holding's $150,000,000 and $50,000,000 creditfacilities. You should see note 5(b) to the accompanying Notes to ConsolidatedFinancial Statements included in Part II of this Report for more information. 8SETTLEMENT 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.SLC -- Subscriber Line Charge -- A charge for the telephone line that connects alocal telephone company to the subscriber's telephone system or medium.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 mbps to 13.22 Gigabits per second,effective for ISDN services including ATM.SPRINT -- Sprint Corporation -- one of our significant customers.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 1.5 mbps.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 mbps or 16 mbps.TRANSPORT CHARGES -- Expenses paid to facilities-based carriers for transmissionbetween or within LATAs.TRS 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. VSAT -- Very Small Aperture Terminal -- A portable satellite terminal thatallows connection via a satellite link.WAN -- Wide Area Network - A 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. 9WORLD WIDE WEB or WEB -- A collection of computer systems supporting acommunications protocol that permits multi-media presentation of informationover the Internet.WORLDCOM -- WorldCom, Inc. -- owns approximately 18% of our common stock,presently controls nominations to two seats on our Board, and is one of oursignificant customers. Prior to May 1, 2000, the Company was named MCI WorldCom,Inc.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 were allowed toimmediately begin manufacturing, research and development; GTE Corp. could beginproviding interexchange services through its telephone companies nationwide;laws in 27 states that foreclosed competition were knocked down; co-carrierstatus for CLECs was ratified; and the physical collocation of competitors'facilities in LECs central offices was allowed.The legislation breaks down the old barriers that prevented three groups 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 eliminated rateregulation of the cable programming service tier in 1999. Further, theregulatory environment will continue to change pending, among other things, theoutcome of legal challenges and FCC rulemaking and enforcement activity inrespect of the 1992 Cable Act and the completion of a significant number of FCCrulemakings under the 1996 Telecom Act. 10 Cautionary Statement Regarding Forward-Looking StatementsYou should carefully review the information contained in this Annual Report, butshould particularly consider any risk factors that we set forth in this AnnualReport and in other reports or documents that we file from time to time with theSEC. In this Annual Report, in addition to historical information, we state ourbeliefs of future events and of our future operating results, financial positionand cash flows. In some cases, you can identify those so-called "forward-lookingstatements" by words such as "may," "will," "should," "expects," "plans,""anticipates," "believes," "estimates," "predicts," "potential," or "continue"or the negative of those words and other comparable words. You should be awarethat those statements are only our predictions and are subject to risks anduncertainties. Actual events or results may differ materially. In evaluatingthose statements, you should specifically consider various factors, includingthose outlined below. Those factors may cause our actual results to differmaterially from any of our forward-looking statements. For these statements, we claim the protection of the safe harbor for forward-looking statements providedby the Securities Reform Act. - Material adverse changes in the economic conditions in the markets we serve and in general economic conditions; - 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; - Our responses to competitive products, services and pricing, including pricing pressures, technological developments, alternative routing developments, and the ability to offer combined service packages that include local, cable and Internet services; the extent and pace at which different competitive environments develop for each segment of our business; the extent and duration for which competitors from each segment of the telecommunications industry are able to offer combined or full service packages prior to our being able to do so; the degree to which we experience material competitive impacts to our traditional service offerings prior to achieving adequate local service entry; and competitor responses to our products and services and overall market acceptance of such products and services; - The outcome of our negotiations with ILECs and state regulatory arbitrations and approvals with respect to interconnection agreements; and our 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 expansion, Internet (consumer and business) services expansion 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, DSL services, and transmission services; - 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 FCC, the RCA, and adverse outcomes from regulatory proceedings; 11 - Uncertainties in federal military spending levels and military base closures in markets in which we operate; - Industry consolidation and mergers; - Other risks detailed from time to time in our 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 we expressly disclaimany obligation or undertaking to disseminate any updates or revisions to anyforward-looking statement contained in this document to reflect any change inour expectations with regard to those statements or any other change in events,conditions or circumstances on which any such statement is based, except asrequired by law. Readers are cautioned not to put undue reliance on suchforward-looking statements. 12 Part IItem 1. BusinessGeneralIn this Annual Report, "we," "us" and "our" refer to General Communication, Inc. and its direct and indirect subsidiaries.GCI was incorporated in 1979 under the laws of the State of Alaska and has itsprincipal executive offices at 2550 Denali Street, Suite 1000, Anchorage, AK99503 (telephone number 907-265-5600). Internet users can access informationabout GCI and its services at http://www.GCI.com/ andhttp://www.alaskaunited.com/. The Company hosts Internet services 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.We are a significant provider in Alaska of an integrated package oflong-distance, local and wireless telecommunications services, cable televisionservices and Internet services and are well positioned to take advantage ofgrowth opportunities in the communications, data and entertainment markets.Financial Information About Industry Segments We have four reportable segments: long-distance services, cable services, localaccess services and Internet services. For information required by this section,you should see Part II, Item 7, Management's Discussion and Analysis ofFinancial Condition and Results of Operations. Also refer to Note 9 included inPart II, Item 8, Consolidated Financial Statements and Supplementary Data.Historical Development of our Business During the Past Fiscal Year Properties ExpansionWe entered into a purchase and lease-purchase option agreement for theacquisition of satellite transponders to meet our long-term satellite capacityrequirements. The Galaxy XR satellite was successfully launched January 24, 2000from Arianespace Space Center in Kourou, French Guiana, and was made availableto us March 5, 2000. We finalized a long-term lease purchase transaction uponfinal acceptance of the satellite transponders. The satellite increases oursatellite capacity and provides long-distance voice, fax, Internet and datatraffic capabilities primarily for our customers in rural Alaska. We use sixC-band and one Ku-band transponders on Galaxy XR. The seven transpondersrepresent a capital lease investment of approximately $48 million. Eachtransponder is capable of carrying a minimum of 1,800 simultaneous voice or datacalls.The Ku-band transponder is used to carry high-speed Internet traffic to 68 ruralAlaska schools, as well as voice and data services to remote fishing, mining andlogging operations. Voice, fax, Internet, telemedicine and distance educationapplications are delivered over both C-band and Ku-band.We announced in February 2001 that an agreement had been reached to acquire fromWorldCom an 85 percent controlling interest in the corporation owning the800-mile fiber optic cable system that extends from Prudhoe Bay, Alaska toValdez, Alaska via Fairbanks. Following execution of a long-term servicescontract between Kanas and WorldCom and subject to other terms of the agreement,we will issue to WorldCom shares of a new series of Class C preferred stockvalued at $10 million. We plan to enhance the system and incorporate itsoperation into our operations control systems. These enhancements are expectedto improve our voice, Internet and 13data services in interior Alaska, as well as third party vendors' services thatutilize capacity on the fiber optic system. We expect to receive the requiredRCA approval during the second quarter of 2001.In connection with the fiber system acquisition agreement, we entered into aninterim services agreement with Alyeska Pipeline Service Company to providecertain voice, video and data services to support operations of the Trans AlaskaPipeline System. The parties have drafted a proposed 15-year agreement that willbe submitted to the Board of Directors of both companies for consideration. Theinterim agreement provides for provisional services during this review process.Local Access Services ExpansionWe began offering local exchange services in Anchorage in September 1997. Weprovided service to approximately 62,100 subscribers at December 31, 2000, a37.7% increase from December 31, 1999; representing an estimated 32% of theAnchorage market. We currently expect to compete with ACS subsidiaries in Fairbanks, FortWainwright and Eielson Air Force Base (military bases near Fairbanks) inmid-2001, and in Juneau in late 2001 or early 2002. You should see Part I, Item1. Business, Narrative Description of our Business - Local Access Services, andPart I, Item 1. Regulation, Franchise Authorities and Tariffs -Telecommunication Operations for more information. Electronic access to certainof ACS's support systems is expected to occur beginning in 2001.We deployed wireless local loop technology in the Anchorage area in 2000 usingfrequency available to us through our PCS license (see PCS and LMDS licensesbelow). We continue to evaluate the feasibility of an expanded implementation ofwireless local loop technology.Internet and Broadband Services ExpansionWe began offering Internet services in 1998. Our GCI.net service supports 56kbps dial-up connections with support for both V.90 and Kflex technologies, andsupports cable modem services currently available at speeds up to 1,544 kbps. Webelieve our service has one of the best first-try connect rates and the fastestspeeds available of any provider in Alaska. We provided service to approximately63,000 subscribers at December 31, 2000, a 16.7% increase from December 31,1999.A considerable expansion of facilities was made in 2000 to support cable modemimplementation in Anchorage, Fairbanks, North Pole, Eielson Air Force Base, FortWainwright, Fort Richardson and Juneau. Capital investment in four wire centersin Anchorage was completed in 2000 to support our DSL product called Livewire.Livewire service is primarily offered to customers in Anchorage not served byour cable plant. An expansion of dial-up service was completed in 2000 allowingservice delivery to Seward. We enhanced our systems in 2000 to add redundancy toour e-mail and LDAP platforms.Our statewide SchoolAccess(TM) services (Internet access and related productsand services for Alaska schools) commenced January 1998, with recent upgrades of47 sites doubling access speeds to 128 kbps. Schools utilizing theSchoolAccess(TM) product are increasingly integrating the Internet into theireducational programs. We provided SchoolAccess(TM) and other Internet servicesto approximately 175 rural schools and 100 urban schools in Alaska at the end of2000. Our Internet access service is now used by more than half of the studentsin the state of Alaska. We added a content filtering service in 2000 that allowssubscribers to filter objectionable Internet content and scan for e-mailviruses.We recently signed agreements with nine school districts comprising 35 schoolslocated in rural Arizona and New Mexico to deploy our SchoolAccess(TM) services.We expect service activation in the third quarter of 2001.We deployed high-speed broadband services in 2000 to four regional heathcorporations in Alaska using an asymmetrical satellite network. This new serviceallows remote communities to access health specialists and 14others in Alaska and elsewhere for consultation and diagnostic services using acombination of video, voice and data.We acquired customers from three local ISPs during 2000 that added to oursubscriber counts, and are acquiring assets and customers from an additionallocal ISP in 2001 that is expected to add over 3,000 subscribers during thesecond quarter.We announced in February 2001 that we signed an agreement to provide Internetaccess to 10 rural Alaska villages in the Northwest Arctic region of Alaska withdial-up and high-speed Internet access service. We expect the service tocommence in the third quarter of 2001. High-speed Internet services will bedelivered locally in the villages through the ILEC's DSL service or our fixedwireless service. All long-haul transport will be delivered through oursatellite and associated facilities. Prior to this agreement, villages in theNorthwest Arctic did not have local access to Internet services.We converted our Internet technical support in early 2001 to an in-house servicethat operates 24 hours a day, seven days a week, and added approximately 30 jobsto the Anchorage economy. Cable Services ExpansionWe continued to upgrade and expand our cable infrastructure in 2000. Theseefforts increased the capacity and reliability of our systems, making possibletwo-way applications such as cable modems and digital cable televisionprogramming, and provided capacity for additional program offerings.We began offering digital cable television services in Anchorage and Fairbanksin 1998 and 2000, respectively, offering enhanced picture and audio quality.Digital cable service allows us to use digital compression to substantiallyincrease the capacity of our cable communications systems, improve picturequality and provide CD quality audio. Digital cable subscriber counts increased132.8% in 2000 as compared to 1999.We introduced cable modem services in 1998, providing high-speed, dedicatedaccess to the Internet through our coaxial cable network. Cable modem subscribercounts increased 182.5% in 2000 as compared to 1999. Approximately 80 percent ofour cable customers are able to receive cable modem service. Cable modems aredeployed in approximately 9.1% of the homes passed by our cable systems inmarkets offering such service, which we believe is well above the nationalaverage.We launched video-on-demand service to certain of our Anchorage commercialcustomers and expect to provide this service to more customers in 2001. Welaunched residential pay per view and added new channels in several of ourmarkets during 2000.We finalized the acquisition of a local cable system operator's assets in theFairbanks area in the first quarter of 2001, adding approximately 1,000subscribers to our network.We continue to evaluate technology and the feasibility of using our cable plantfor telephone services.PCS and LMDS LicensesWe have invested approximately $1.96 million in our PCS license at December 31,2000. In June 2000 we began providing fixed wireless dial-tone services inAnchorage over our PCS system, meeting the FCC requirement to offer service toat least one-third of our market population within five years of being licensed.We presently offer our fixed wireless service to customers that are notconnected to the ILEC or our physical plant. We plan to offer our fixed wirelessservice in certain rural communities in 2001 to support the high-speed Internetoffering described above. 15We invested approximately $275,000 in our LMDS license in 1998. LMDS licenseesare required to provide 'substantial service' in their service regions within 10years.Narrative Description of our BusinessGeneralWe operate a broadband communications network that permits the delivery of aseamless integrated bundle of communications, entertainment and informationservices. We offer a wide array of consumer communications and entertainmentservices--including local telephone, long-distance and wireless communications,cable television, consulting services, network and desktop computing outsourcedservices, and dial-up and broadband (cable modem and DSL) Internet accessservices at a wide range of speeds--all under the GCI brand name.We believe that the size and growth potential of the voice, video and datamarket, the increasing deregulation of telecommunication services, and theincreased convergence of telephony, wireless, and cable services offer usconsiderable opportunities to continue to integrate our telecommunication,Internet and cable services and expand into communications markets both withinand, longer-term, outside of Alaska.Considerable deregulation has already taken place in the United States as aresult of the 1996 Telecom Act with the barriers to competition betweenlong-distance, local exchange and cable providers being lowered. We believe ouracquisition of cable television systems and our development of local exchangeservice, Internet services, broadband services, and wireless services leave uswell positioned to take advantage of deregulated markets.We are one of Alaska's leading providers of telecommunication, Internet and cable television services and maintain a strong competitive position. There isactive competition in the sale of substantially all products and services weoffer.Alaska Voice, Video and Data MarketsWe estimate that the aggregate telecommunications, cable television, andInternet markets in Alaska generated revenues in 2000 of approximately $1.1billion. Of this amount, approximately $535 million was attributable tointerstate and intrastate long-distance service, $400 million was attributableto local exchange services, $82 million was attributed to cable television, and$83 million was attributable to all other services, including wireless andInternet services.The Alaskan voice, video and data markets are unique within the United States.Alaska is physically distant from the rest of the United States and is generallycharacterized 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 continues to rely extensively on satellite-based long-distancetransmission for intrastate calling between remote communities where investmentin a terrestrial network would be uneconomic or impractical. Also, given thephysical isolation of Alaska's communities and lack, in many cases, of majorcivic institutions 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 fiber optic cables between Anchorage, Valdez, Fairbanks, Prudhoe Bay,and Juneau, traditional copper wire, and digital microwave radio on the KenaiPeninsula and other locations. For interstate and international communication,Alaska is connected to the Lower 48 states by three fiber optic cables.Fiber optics is the preferred method of carrying Internet, voice, video and datacommunications over long distances, eliminating the delay commonly found insatellite connections. Widespread use of high capacity fiber 16optic facilities is expected to allow continued expansion of business,government and educational infrastructure in Alaska.Long-Distance ServicesIndustryThe FCC reports that two percent of all U.S. consumer spending is devoted totelephone service, with approximately $108 billion derived from toll services in1999. There were 99.1 million households that had telephone services in 1999, anincrease of 20 million households since 1983. Approximately $33 billion isderived from Intrastate, $55 billion from Interstate, and $20 billion fromInternational toll services. Interstate minutes of use quadrupled to 600 billionminutes from 1983 to 1999, while long distance toll revenues increased 65%, from$60 billion in 1983 to $99 billion in 1999.The United States Congress passed the 1996 Telecom Act that permitted the localphone companies, the long-distance companies, and the cable service firms tocompete in each other's market. Its purpose was to move from a regulatedmonopoly model of telecommunications to a deregulatory competitive marketsmodel. The 1996 Telecom Act has provided the telecommunications industry withnew capabilities resulting in an industry that is more competitive than everbefore.Many competitors have entered the long-distance services market since AT&T'sdivestiture, resulting in a reduction in AT&T's market share from 90% in 1984 to41% in 1999. The two largest market entrants, WorldCom and Sprint, have obtaineda 33% combined market share through 1999.Advancements are expected to continue to combine wireline and wireless servicesdirected toward voice communication with other activities such as data sharing,on-screen collaboration, faxing, Internet access, and game playing, among manyother things.We believe that federal and state regulators will continue to impact the telecommunications industry in 2001. Consummation of mergers betweenlong-distance companies, local access services companies, and cable televisioncompanies have occurred which blur the distinction between product lines andcompetitors. Synergies developed through mergers and acquisitions and obtainingend-to-end connectivity with customers is expected to drive long-runprofitability and success in penetrating new markets. A number of mergersreceived final regulatory approval in 2000 and early 2001. The FCC approved theQwest-US West merger in March 2000; the Bell Atlantic-GTE merger in June 2000;and the AT&T-MEDIAONE merger in June 2000. Finally, the AOL-Time Warner mergerreceived FCC approval in January 2001.Profitability has not occurred as quickly as planned, however, leading to AT&Tand WorldCom's announced reorganizations. AT&T announced in 2000 that it intendsto split into four, separately traded companies -- consumer, business, broadbandand wireless -- in an effort to compete more effectively and combat a decliningstock price. WorldCom, also struggling with a declining stock price, announcedin November 2000 that it intends to create two separately traded trackingstocks: WorldCom which will reflect the performance of its core data, Internet,hosting and international businesses, and MCI, which will reflect theperformance of its consumer, small business, wholesale long-distance voice anddial-up Internet access operations. WorldCom reports that it expects to completethe transaction during the first half of 2001.Industry analysts believe companies will be successful in the long-term if theycan minimize regulatory battles and offer a full suite of integrated services totheir customers, using a network that is largely under their control.Growth in data is expected to continue to be a key component of industry revenuegrowth. We believe that the data telecommunications business will eventuallyrival and perhaps become larger than the traditional voice telephony market.ISPs have become major customers and many long-distance companies have acquiredISPs and web-hosting companies. 17Strategies deploying telephone services by cable operators remains varied.Currently circuit-switched cable telephony is commercially deployed, and trialscontinue for cable-delivered IP telephony. Major cable system operators continueto evaluate and deploy circuit-switched cable telephony. Others are offeringcable telephony on a limited basis, waiting instead for IP technology to becomewidely available before accelerating rollout of telephone services to customers.Several major system operators are testing IP telephony, while others areplanning such trials. Industry analysts believe that technical obstacles must beovercome before IP telephony can be commercially deployed.GeneralWe supply a full range of common carrier long-distance and othertelecommunication products and services. We operate a modern, competitivetelecommunications network employing the latest digital transmission technologybased upon fiber optic and digital microwave facilities within and betweenAnchorage, Fairbanks and Juneau, including a self-constructed and financeddigital fiber optic cable and additional owned capacity on another underseafiber optic cable, both linking Alaska to the networks of other carriers in thelower 49 states, and the use of satellite transmission to remote areas of Alaska(and for certain interstate traffic as well). Virtually all switched servicesare computer controlled, digitally switched, and interconnected by a packetswitched SS7 signaling network.We provide interstate and intrastate long-distance services throughout Alaskausing our own facilities or facilities leased from other carriers. We alsoprovide (or join in providing with other carriers) telecommunication services toand from Alaska, Hawaii, the lower 48 states, and many foreign nations andterritories.We offer cellular services by reselling other cellular providers' services. Weoffer wireless local access services over our own facilities, and have purchasedPCS and LMDS wireless broadband licenses in FCC auctions covering markets inAlaska.ProductsOur long-distance services industry segment is engaged in the transmission ofinterstate and intrastate-switched MTS and private line and private networkcommunication service between the major communities in Alaska, and the remainingUnited States and foreign countries. Our message toll services include intrastate, interstate and international direct dial, toll-free 800, 888, 877and 866 services, 900 services, GCI calling card, debit card, operator andenhanced conference calling, frame relay, SDN, ISDN technology based services,as well as termination of northbound toll service for WorldCom, Sprint andseveral large resellers who do not have facilities of their own in Alaska. Wealso provide origination of southbound calling card and toll-free 800, 888, 877and 866 toll services for WorldCom and Sprint. Regulated telephone relayservices for the deaf, hard-of-hearing and speech impaired are provided throughour operator service center in Wasilla, Alaska. We offer our message services tocommercial, residential, and government subscribers. Subscribers may generallycancel service at any time. Toll, private line and related services account forapproximately 60.4%, 57.0% and 65.5% of our 2000, 1999 and 1998 revenues,respectively. Private line and private network services utilize voice and datatransmission circuits, dedicated to particular subscribers, which link a devicein one location to another in a different location.We have positioned ourselves as a price and customer service leader in theAlaska telecommunication market. Rates charged for our long-distance servicesare designed to be equal to or below those for comparable services provided byour competitors.In addition to providing communication services, we also design, sell, serviceand operate, on behalf of certain customers, dedicated communication andcomputer networking equipment and provide field/depot, third party, technicalsupport, telecommunications consulting and outsourcing services through ourNetwork Solutions business. We also supply integrated voice and datacommunication systems incorporating interstate and intrastate 18digital private lines, point-to-point and multipoint private network and smallearth station services. Our Network Solutions sales and services revenue totaled$11.1, $11.3 and $12.1 million in the years ended December 31, 2000, 1999 and1998, respectively, or approximately 3.8%, 4.0% and 4.9% of total revenues,respectively. Presently, there are 18 competing companies in Alaska thatactively sell and maintain data and voice communication systems. Twelve arelocated in Anchorage, four in Fairbanks and two in Juneau.Our ability to integrate telecommunications networks and data communicationequipment has allowed us to maintain our market position on the basis of "valueadded" support services rather than price competition. These services areblended with other transport products into unique customer solutions, includingmanaged services and outsourcing.FacilitiesOur telecommunication facilities include a fiber optic cable connectingAnchorage, Whittier, Valdez, Fairbanks and Juneau, Alaska and Seattle,Washington, which was placed into service in February 1999. We also own aportion of an additional undersea fiber optic cable. The fiber optic cablesallow us to carry our Anchorage, Eagle River, Wasilla, Palmer, Kenai Peninsula,Valdez, Whittier, Delta Junction, Prudhoe Bay, Glenallen, Fairbanks, and Juneau,Alaska traffic to and from the contiguous lower 48 states over terrestrialcircuits, eliminating the one-quarter second delay associated with satellitecircuits. We utilize capacity on another fiber optic cable to transport ourtraffic from Valdez to Fairbanks, Alaska.Other facilities include major earth stations at Eagle River, Fairbanks, Juneau,Prudhoe Bay, Kodiak, Sitka, Ketchikan, Dutch Harbor, Barrow, Bethel, Nome,Dillingham, Kotzebue, King Salmon, Adak, and Cordova, all in Alaska, and atIssaquah, Washington, serving the communities in their vicinity. The Eagle Riverand Fairbanks earth stations are linked by digital microwave facilities todistribution centers in Anchorage and Fairbanks, respectively. We completedconstruction of a fiber optic cable system from the Anchorage distributioncenter to the Eagle River central office in second quarter of 2000. 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 collocated. We also have digital microwavefacilities serving the Kenai Peninsula communities.We use our DAMA facilities to serve 56 additional locations throughout Alaska.The digital DAMA system allows calls to be made between remote villages usingonly one satellite hop thereby reducing satellite delay and capacityrequirements while improving quality. We obtained the necessary RCA and FCC approvals waiving current prohibitions against construction of competitivefacilities in rural Alaska, allowing for deployment of DAMA technology in 56sites in rural Alaska on a demonstration basis. In addition, over 80 VSATfacilities provide dedicated Internet access to rural public schools throughoutAlaska.Our Anchorage, Fairbanks, and Juneau distribution centers contain electronicswitches to route calls to and from local exchange companies and, in Seattle, toobtain access to WorldCom, Sprint and other facilities to distribute oursouthbound traffic to the remaining 49 states and international destinations. InAnchorage, a Lucent digital host switch is connected with fiber to seven remotefacilities that are co-located in the ILEC's switching centers, to provide bothlocal and long distance service. An extensive metropolitan area fiber network inAnchorage supports cable television, Internet and telephony services. TheAnchorage, Fairbanks, and Juneau facilities also include digital accesscross-connect systems, frame relay data switches, Internet platforms, and inAnchorage, a co-location facility for interconnecting and hosting equipment forother carriers. We also maintain an operator service center in Wasilla, Alaska.We completed construction and placed into service in February 1999 a fiber opticcable connecting Anchorage, Whittier, Valdez, Fairbanks and Juneau, Alaska andSeattle Washington. We also own a portion of an additional undersea fiber opticcable. The fiber optic cables allow us to carry our Anchorage, Eagle River,Wasilla, Palmer, Kenai Peninsula, Valdez, Whittier, Delta Junction, Prudhoe Bay,Glenallen, Fairbanks, and Juneau area traffic to 19and from the lower 48 states over terrestrial circuits, eliminating theone-quarter second delay associated with satellite circuits. Our preferredrouting for this traffic is via undersea fiber optic cable, which makesavailable satellite capacity to carry our rural interstate and intrastatetraffic.We employ satellite transmission for rural intrastate traffic and certain othermajor routes. We acquired satellite transponders on PanAmSat Corporation("PanAmSat") Galaxy XR satellite in March 2000 to meet our long-term satellitecapacity requirements.We employ advanced digital 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 nor fiber optictransmission technology is considered to be economically feasible in ruralAlaska in the foreseeable future.CustomersWe had approximately 88,600, 90,800 and 82,000 active Alaska subscribers to ourmessage telephone service at December 31, 2000, 1999 and 1998, respectively.Approximately 12,200, 12,500 and 12,100 of these were business and governmentusers at December 31, 2000, 1999 and 1998, respectively, and the remainder wereresidential customers. Reductions in our residential, business and governmentcustomer counts were primarily attributed to new competitive pressures inAnchorage and other markets we serve. MTS revenues (excluding operator servicesand private line revenues) averaged approximately $11.8 million per month during2000.Equal access conversions have been completed in all communities served withowned facilities. We estimate that we carry over 45% of business and over 45% ofresidential traffic as a statewide average for both originating interstate andintrastate MTS traffic.A summary of our switched MTS traffic (in minutes) follows: Interstate Minutes --------------------------------------- Combined Interstate Inter- and Inter- Intra- South- North- Calling national national State TotalFor Quarter ended bound (1) bound Card Minutes Minutes Minutes Minutes---------------------------------------------------------------------------------------------------------------------- (Amounts in thousands) 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 ========================================================================================= March 31, 1999 94,623 57,039 3,694 1,578 156,934 34,950 191,884 June 30, 1999 128,623 52,954 3,383 1,649 186,609 37,241 223,850 September 30, 1999 146,473 56,577 3,273 1,680 208,003 38,078 246,081 December 31, 1999 137,077 64,823 3,204 1,609 206,713 36,055 242,768 ----------------------------------------------------------------------------------------- Total 1999 506,796 231,393 13,554 6,516 758,259 146,324 904,583 ========================================================================================= 20 Interstate Minutes --------------------------------------- Combined Interstate Inter- and Inter- Intra- South- North- Calling national national State TotalFor Quarter ended bound (1) bound Card Minutes Minutes Minutes Minutes---------------------------------------------------------------------------------------------------------------------- (Amounts in thousands) March 31, 2000 143,659 69,678 2,847 1,577 217,761 37,414 255,175 June 30, 2000 149,095 67,754 2,616 1,610 221,075 38,546 259,621 September 30, 2000 157,993 73,802 2,493 1,698 235,986 39,329 275,315 December 31, 2000 129,091 76,202 2,467 1,429 209,189 35,729 244,918 ----------------------------------------------------------------------------------------- Total 2000 579,838 287,436 10,423 6,314 884,011 151,018 1,035,029 ========================================================================================= ---------------------------- 1 The 1999 and 2000 Interstate Southbound minutes include traffic carried from Washington to Oregon by the Company on behalf of an OCC customer. All minutes data were taken from our internal billing statistics reports.We entered into a significant business relationship with MCI (now WorldCom) in1993 that included the following agreements, among others.- We agreed to terminate all Alaska-bound MCI long-distance traffic and MCI agreed to terminate all of our long-distance traffic terminating in the lower 49 states excluding Washington, Oregon and Hawaii.- The parties agreed to share some communications network resources and various marketing, engineering and operating resources. We also carry MCI's 800, 888, 877 and 866 traffic originating in Alaska and terminating in the lower 49 states and handle traffic for MCI's calling card customers when they are in Alaska.Concurrently with these agreements, MCI purchased approximately 31% (18% as ofDecember 31, 2000) of GCI's Common Stock and presently controls nominations totwo seats on the Board. In conjunction with the acquisition of certain cabletelevision companies in 1996, MCI purchased an additional two million shares ata premium to the then current market price for $13 million or $6.50 per share.Revenues attributed to WorldCom in 2000 and 1999, and MCI in 1998 totaled $53.1million, $43.7 million and $39.5 million, or 18.1%, 15.6% and 16.0% of totalrevenues, respectively. The contract was amended in March 2001 extending itsterm five years to March 2006. The amendment reduces the rate to be charged byus for certain WorldCom traffic over the extended term of the contract.In 1993 we entered into a long-term agreement with Sprint, pursuant to which weagreed to terminate all Alaska-bound Sprint long-distance traffic and Sprintagreed to handle substantially all of our international traffic. Servicesprovided pursuant to the contract with Sprint resulted in revenues in 2000, 1999and 1998 of approximately $25.4 million, $23.1 million and $28.7 million, orapproximately 8.7%, 8.3% and 11.6% of total revenues, respectively. The contractwas amended in March 2001 extending its term two years to March 2004. Theamendment reduces the rate to be charged by us for certain Sprint traffic overthe extended term of the contract.With the contracts and amendment described above, we are assured that WorldComand Sprint, our two largest customers, will continue to make use of our servicesduring the extended term. WorldCom was a major customer of our long-distanceservices industry segment through 2000; Sprint met the threshold forclassification as a major customer through 1998. Loss of one or both of thesecustomers would have a significant detrimental effect on our revenues andcontribution. There are no other individual customers, the loss of which would have a material impact on our revenues or gross profit. 21Other common carrier traffic routed to us for termination in Alaska is largelydependent on traffic routed to our carrier customers by their customers. Pricingpressures, new program offerings and market consolidation continue to evolve inthe markets served by our carrier customers. If, as a result, their traffic isreduced, or if their competitors' costs to terminate or originate traffic inAlaska are reduced, our traffic will also likely be reduced, and we may have toreduce our pricing to respond to competitive pressures. We are unable to predictthe effect of such changes on our business, however given the materiality ofother common carrier revenues to us; a significant reduction in traffic orpricing could have a material adverse effect on our financial position, resultsof operations and liquidity.We provided private line and private network communication products andservices, including SchoolAccess(TM) private line facilities, to approximately2,040 commercial and government accounts in 2000. These products and servicesgenerated approximately 9.9%, 7.9% and 7.9% of total revenues during the yearsended December 31, 2000, 1999 and 1998, respectively.Although we have several agreements to facilitate the origination andtermination of international toll traffic, we have neither foreign operationsnor export sales (see Part I, Item 1. Business, Foreign and Domestic Operationsand Export Sales).CompetitionThe long-distance industry is intensely competitive, rapidly evolving andsubject to constant technological change. Competition is based upon price andpricing plans, the types of services offered, customer service, billingservices, performance, perceived quality, reliability and availability. Certainof our competitors are substantially larger than us and have greater financial,technical and marketing resources than we have. Although we believe we have thehuman and technical resources to pursue our strategy and compete effectively inthis competitive environment, our success will depend upon our ability toprofitably provide high quality, high value services at prices generallycompetitive with, or lower than, those charged by our competitors.In the long-distance market, we compete against AT&T Alascom, ACS, the MatanuskaTelephone Association, certain smaller rural LEC affiliates, and may in thefuture compete against new market entrants. AT&T Alascom, our principalcompetitor in long-distance services, has substantially greater resources andaccess to capital than we have. This competitor's interstate rates areintegrated with those of AT&T Corp. and are regulated in part by the FCC. Whilewe initially 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 we serve.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 our rates and services. AT&T's and AT&T Alascom's interstate prices areregulated under a price cap plan whereby their rate of return is not regulatedor restricted. Price increases by AT&T and AT&T Alascom generally improve ourability to raise prices while price decreases pressure us to follow. We believewe have, so far, successfully adjusted our pricing and marketing strategies torespond to AT&T and other competitors' pricing practices. However, ifcompetitors significantly lower their rates, we may be forced to reduce ourrates, which could have a material adverse effect on us.As allowed under the 1996 Telecom Act, ATU (now ACS) and other LECs entered theinterstate and international long-distance market, and pursuant to RCAauthorization, entered the intrastate long-distance market. ACS and other LECsgenerally resell other carriers' services in the provision of their interstateand intrastate long-distance servicesAnother carrier completed construction of fiber optic facilities connectingpoints in Alaska to the lower 48 states in 1999. The additional fiber systemprovides direct competition to services we provide on our owned fiber optic 22facilities. We believe we are successfully competing with products and services offered by the other carrier. The fiber system also provides an alternativerouting path for us in case of a major fiber outage in our systems.In the wireless communications services market, we expect our PCS business tocompete against the cellular subsidiaries of AT&T and ACS and resellers of thoseservices in Anchorage and other markets. The wireless communications industrycontinues to experience significant consolidation. AT&T has acquired wirelesscompanies and negotiated roaming arrangements that give it a national presence.Mergers and joint ventures in the industry have created large, well-capitalizedcompetitors with substantial financial, technical, marketing and otherresources. These competitors may be able to offer nationwide services and plansmore quickly and more economically than we can, and obtain roaming rates thatare more favorable than those that we obtain. We currently resell AT&T analogand digital cellular services and provide wireless local access services on ourown facilities.Our long-distance services sales efforts are primarily directed towardincreasing the number of subscribers we serve, selling bundled services, andgenerating incremental revenues through product and feature up-saleopportunities. We sell our long-distance communications services throughtelemarketing, direct mail advertising, door-to-door selling, up-selling by ourcustomer contact personnel, and local media advertising.Cable ServicesIndustryThe programmed video services industry includes traditional broadcasttelevision, cable television, wireless cable, and DBS systems. Technologyconvergence may also soon allow programmed video via the Internet but reluctanceto change the current delivery structure will likely limit the availability ofprogramming in the near term. Cable television providers have addednon-broadcast programming, utilized improved technology to increase channelcapacity and expanded service markets to include more densely populated areasand those communities in which off-air reception is not problematic. Broadcasttelevision stations including network affiliates and independent stationsgenerally serve the urban centers. One or more local television stations mayserve smaller communities. Rural communities may not receive local broadcastingor have cable systems but may receive direct broadcast programming via asatellite 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 expansions to enablemigration to digital programming are expected to have a significant impact oncable services in the future. We expect that changing federal, state and localregulations, intense competition, and uncertain technologies and standards willcontinue to challenge the industry.Acquisitions, mergers and divestitures are shaping the cable industry in atechnological convergence similar to what is happening in the telecommunicationsindustry. The FCC reports that the ten largest operators now serve close to 90percent of all U.S. cable subscribers. AT&T completed its $48 billion takeoverof cable television provider Tele-Communications Inc. in February 1999, gainingthe last mile connection to homeowners with fiber and coaxial cable over whichit is expected to sell online access and Internet phone service. AT&T isreportedly considering exchanging certain of its cable systems with Comcast andCox Communications in exchange for their stakes in Excite@ Home. AT&T mustsatisfy certain FCC ownership limitations and may be required to divest ofadditional cable systems in the future. See Part I, Item I, Business,Regulation, Franchise Authorizations and Tariffs - Cable Service for moreinformation. 23Analysts estimate that 2000 year-end total cable industry revenue reached $41.7billion, an estimated 13.6 percent increase over 1999, and that revenue persubscriber per year reached approximately $616.56, or $51.38 per subscriber permonth. The FCC has reported that multiple service operators charged 5.8% morefor basic and cable service tiers during the 12-month period ending July 1,2000. The rate increases were equal among competitive and noncompetitiveoperators, the FCC noted. Increased programming costs, especially higher sports rights fees, and system upgrades and equipment cost increases reportedlyaccounted for higher cable rates. Rates stayed unchanged on a cost-per-channelbasis, and the cost of basic service rose 2.3%.Industry analysts believe cable broadband connections will grow from anestimated 3.5 million at the end of 2000 to 14.7 million at the end of 2005.During that same period, DSL connections are expected to increase from 1.5million to 10.5 million.The FCC reported that the number of cable subscribers continued to grow,reaching 67.7 million as of June 2000, up about 1.5 percent from the 66.7million cable subscribers in June 1999. The total number of non-cablemultichannel video programming distributors ("MVPDs") subscribers grew from 14.2million as of June 1999 to 16.7 million as of June 2000, an increase of 17.6%.The growth of non-cable MVPD subscribers continues to be primarily attributableto the growth of DBS that appears to attract former cable subscribers andconsumers not previously subscribing to an MVPD. Between June 1999 and June2000, the number of DBS subscribers was reported to have grown from 10.1 millionhouseholds to almost 13 million households, which is nearly three times thecable subscriber growth rate. DBS subscribers are reported to represent 15.4percent of all MVPD subscribers. DBS operators increased their subscriptions inAlaska to approximately 6% of homes, according to Skytrend reports.Consumers historically reported that their inability to receive local signalsfrom DBS operators negatively affected their decision as to whether to subscribeto DBS. Increased DBS subscribership in 2000 has been attributed, at least inpart, to the authority granted to DBS providers to distribute local broadcasttelevision stations in their local markets by the Satellite Home ViewerImprovement Act of 1999 ("SHVIA") enacted on November 29, 1999. Under SHVIA, DBSoperators can offer a programming package more comparable to and competitivewith the services offered by cable operators. Moreover, in the last year, asrequired by SHVIA, the FCC has adopted rules for satellite companies with regardto mandatory carriage of broadcast signals, retransmission consent, and programexclusivity that closely parallel the requirements for cable service. See PartI, Item 1. Business, Regulation, Franchise Authorizations and Tariffs - CableServices for more information.The most significant convergence of service offerings continues to be thepairing of Internet service with other service offerings. There is evidence thata wide variety of companies throughout the communications industries areattempting to become providers of multiple services, including data access.Cable operators continue to expand the broadband infrastructure that permitsthem to offer high-speed cable modem Internet access.Currently, the most popular way to access the Internet over cable is through theuse of a cable modem and personal computer. Virtually all the major multipleservice operators offer Internet access via cable modems in portions of theirnationwide service areas. A small portion of cable Internet access is deliveredthrough a television receiver rather than a personal computer. Many cableoperators also are planning to integrate telephony and high-speed data access.Like cable, the DBS industry is developing ways to bring advanced services totheir customers. We are currently offering high-speed cable modem access inAnchorage, Juneau, Fairbanks, North Pole, Eielson Air Force Base, FortWainwright, Fort Richardson and Valdez.We expect basic cable to be impacted by two forces: possible reimposition ofrate regulations, and additional competition from wireless cable providers.After averaging 3.4% growth for the last five years, industry analysts projectthat cable subscriber growth in 2001 may slow to 1.3% or 69.3 million homes.Industry analysts predict that cable providers may see a 3% hike in ad revenuesfrom 2000 to 2001, to $6.9 billion. 24Industry analysts project that the number of digital video subscribers may growmore than 200% over the next four years as cable network upgrade efforts arecompleted and the cost of digital set-top technology decreases. Margins relatedto digital programming are expected to climb due to the ability to reuseprogramming at low or no incremental cost.Analysts believe data services will be an additional opportunity for cableproviders 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 speeds and 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.With digital transmissions and compression, cable operators are better able tooffer a variety and quality of channels to rival DBS, with pay-per-view choicesthat can approximate video-on-demand ("VOD"). We recently installed a commercialversion of VOD for the Anchorage hotel market and are evaluating the feasibilityof eventually deploying this technology in the residential market. With VODservice, customers can access a wide selection of movies and other programmingat any time, with digital picture quality. VOD allows customers full VCRfunctionality, including the ability to pause, rewind and fast-forward programs.They can also stop a program and resume watching it several hours later duringthe rental period.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 that is typically a PBS affiliate. Other rural communities without cablesystems receive a single state sponsored channel of television by a satellitedish and a low power transmitter.GeneralWe are the largest operator of cable systems in Alaska, serving approximately120,400 residential, commercial and government users. Our cable televisionsystems serve 31 communities and areas in Alaska, including the state's threelargest urban areas, Anchorage, Fairbanks, and Juneau. Our statewide cablesystems consist of approximately 1851 miles of installed cable plant having 330to 550 MHz of channel capacity.We completed system upgrades in 1998, 1999 and 2000, deploying more than 200miles of fiber optic cable in Anchorage and increased the carrying capacity of900 miles of cable television plant from 450 MHz to 550 MHz. In 2000 wecompleted a $900,000 upgrade in Fairbanks to 450 MHz. The result of theseupgrades is an increase in channel capacity and system reliability, facilitatingthe delivery of additional video programming and new services such as enhancedvideo, high-speed Internet access and telephony, and the capability to supporttwo-way applications such as cable modems and digital cable. We began deployingour digital cable service in Anchorage in 1998. Digital compression has enabledus to increase the channel capacity of our Anchorage cable communicationssystems to more than 170 channels, provide digital audio channels, as well asimprove picture and sound quality.ProductsProgramming services offered to our cable television systems subscribers differby system (all information as of December 31, 2000).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 orienta- 25tion, and use traps for program control. As a result, these smaller systems donot have access to pay-per-view services. The Anchorage system carries digitalservice, offering enhanced picture and audio quality, over 100 channels ofprograms, 50 channels of digital music, and over 50 channels of premium andpay-per-view products. We began providing VOD in the Anchorage market in 2000.The composition and rates of the levels of service vary between the systems. TheAnchorage cable system offers a basic service that includes 19 channels. TheAnchorage cable system offers a CPS that includes 32 channels at an additionalcost. Subscribers, for an additional cost, receive the six-channel NPT service,which includes TNT, CNN, Discovery, MSNBC, Outdoor Life and the Sci-Fi Channel.The Bethel cable system offers a basic service of 11 channels and a CPS tier of24 channels for an additional cost per month. Basic service for theKenai/Soldotna cable system consisted of 37 channels. Pay TV services are available either individually or as part of a value package. Commercialsubscribers such as hospitals, hotels and motels are charged negotiated monthlyservice fees. Apartment and other multi-unit dwelling complexes receive basicservices at a negotiated bulk rate.Fairbanks, Juneau, Ketchikan and Sitka systems. The programming services wecurrently offer to subscribers are structured so that each cable system offers abasic 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 13-channel basic, a 34-channel CPS tier.Two 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, including digitalservice beginning in 2000. Such service includes digital special interest (13channels), digital music (45 channels), digital premium service (16 channels),and digital Pay Per View (16 channels). Fort Greely, a remote military post, isa stand-alone system, which is fully addressable. Fort Greely has 8 basicchannels, a 21 channel CPS tier, and 1 pay-per-view channel available to allsubscribers. The reverse path in the Fairbanks market was activated during thethird quarter of 1999 and we now offer cable modem Internet access.The Juneau cable system offers an 18-channel basic service package and a CPSthat includes basic service plus an additional 43 channels. The system alsooffers an additional 31 channels of digital music and a set-top box withnavigator features. Juneau is currently rolling out digital set-tops in order totake advantage of digital compression and add premium multiplexes to enhance theservice offering. The Ketchikan system offers a 12 channel basic service and apreferred level of service that offers an additional 38 channels. The Sitkasystem offers a 12 channel basic service. Preferred service includes basicservice plus 36 additional channels. We plan to deploy advanced analogtechnology in Sitka in 2001 to further enhance the service offering and offeradvanced navigational features. The Ketchikan, Petersburg and Sitka systems alllaunched a digital music service called DMX. This service offers 30 channels ofcommercial free music and is offered for $7.95 per month.The Juneau system was upgraded in 1998. We expect to upgrade the Ketchikansystem in 2002. The Juneau upgrade consisted of extending the bandwidth to550MHz, activating the reverse and introducing advanced analog set top boxes.The new set top boxes allow Juneau subscribers to access impulse pay per viewincluding highly secured 24 hour adult products, 30 channels of CD quality musicand a new on-screen navigator. The next phase, which began in December 2000,introduces compatible digital technology in Juneau and migrates existingadvanced analog technology into smaller markets of Southeast Alaska.The Juneau system launched high-speed Internet access in May 1999 via cablemodems. The system ended 2000 with 2,300 high-speed cable modems in service.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 two or three levels ofservice. In Nome, Kotzebue, Kodiak and Cordova, basic service consists of ten oreleven channels, one of which is a PBS channel. PBS service is also includedwith the 8 channels of basic service in Valdez and 11 each in Wrangell andPetersburg. In addition, Wrangell and Petersburg have matching line-ups with 37 26additional channels in the preferred level of service, and an additional 5channels of premium service. Nome and Kotzebue offer a 33 channel CPS and 5channels of premium service. In addition to basic service, Cordova offers a 20channel CPS, 10 Channel NPT with 3 premium channels available.We completed system upgrades in Kodiak and Valdez in 1998. In Kodiak, 6 channelswere added to basic service. The CPS tier added 8 new channels including Disney,which was formally a premium service. The NPT tier was reduced to 11 channelswith 2 new networks. Premium services were repackaged for better value. Thetotal available channels are now 47. Valdez added 5 channels to basic serviceand expanded the CPS tier with 6 channels including Disney. Although remainingat 9 channels, 5 new services were added to the NPT tier as traditional serviceswere migrated into the other tiers. Nome and Kotzebue system upgrades werecompleted in March 1999. The upgrade allowed the launch of additionalprogramming and the shift of Disney from premium to tier service.Seward system. We upgraded the Seward cable system in 1997. Total channels were increased to 49, packaged in two levels of service. Basic service was expandedfrom 3 to 9 channels. CPS had 30 channels (including basic service) and wasexpanded to 40. 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 and recently launched two channels ofpay per view. The system provides 18 channels to 300 outlets in a State ofAlaska correction facility through a separate headend.Homer system. We upgraded the Homer cable system 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 46 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 and recently launched two channels of pay per view.FacilitiesOur cable television businesses are located in Anchorage, Bethel, Chugiak,Cordova, Douglas, Eagle River, Eielson AFB, Elmendorf AFB, Fairbanks, FortGreely, Fort Richardson, Fort Wainwright, Homer, Juneau, Kachemak, Kenai,Ketchikan, Kodiak, Kodiak Coast Guard Air Station, Kotzebue, Mount Edgecombe,Nome, North Pole, Petersburg, Peters Creek, Saxman, Seward, Sitka, Soldotna,Ward Cove, and Wrangell Alaska. Our facilities include cable plant and head-enddistribution equipment. Certain of our head-end distribution centers areco-located with customer service, sales and administrative offices.CustomersOur cable systems passed approximately 177,000, 174,000 and 171,000 homes atDecember 31, 2000, 1999 and 1998, respectively, and served approximately120,400, 116,700 and 111,900 subscribers at December 31, 2000, 1999 and 1998,respectively. Revenues derived from cable television services totaled $67.9million, $61.1 million and $57.6 million in 2000, 1999 and 1998, respectively.CompetitionA number of other cable operators provide cable service in Alaska. All of thesecompanies are relatively small, with the largest having fewer than 7,500subscribers. Cable television systems face competition from alternative methodsof receiving and distributing television signals and from other sources of news,information and entertainment such as off-air television broadcast programming,newspapers, movie theaters, live sporting events, interactive computer services,Internet services and home video products, including videotape cassette andvideo disks. The extent to which a cable television system is competitivedepends, in part, upon the cable system's ability to provide quality programmingand other services at competitive prices. 27Our Fairbanks system faces significant competition from alternative serviceproviders. The 2000 upgrade to our Fairbanks facilities, expanded productofferings and increased marketing efforts are expected to increase marketpenetration from 47.4% at December 31, 2000 (45.6% at December 31, 1999). Ouraverage market penetration rate for all systems was 62.2% at December 31, 2000.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 specificCertificates of Public Convenience to deliver such video services or to complywith the variety of obligations imposed upon cable systems under suchcertificates. Issues of cross-subsidization by LECs of video and telephonyservices also pose strategic disadvantages for cable operators seeking tocompete with LECs who provide video services.Our 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. We continue todevelop and deploy competitive packages of services (video, data and telephony)to these residential and commercial developments. The 1996 Telecom Act givescable operators greater flexibility with respect to pricing of cable televisionservices provided to subscribers in multi-dwelling unit residential andcommercial developments. It also broadens the definition of SMATV systems notsubject to regulation as a franchised cable television service.The availability of reasonably-priced direct-to-home earth stations enablesindividual households to receive many of the satellite-delivered programservices formerly available only to cable subscribers. Furthermore, the 1992Cable Act contains provisions, which the FCC has implemented with regulations,to enhance the ability of cable competitors to purchase and make available todirect-to-home owners certain satellite-delivered cable programs at competitivecosts.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 using video compression technology to increase the channelcapacity of their systems to provide movies, broadcast stations and otherprogram services competitive with those of cable systems. The extent to whichDBS systems are competitive with the service provided by cable systems depends,among other things, on the availability of reception equipment at reasonableprices and on the ability of DBS operators to provide competitive programming.DBS services are slowly adding broadcast stations to their product offeringsbeginning with the largest broadcast markets eliminating the problem of havingto add a second external off-air antenna. DBS signals are subject to degradationfrom atmospheric conditions such as rain and snow. The receipt of DBS signals inAlaska currently has the disadvantage of requiring subscribers to install largersatellite dishes (generally three to six feet in diameter) because of the weakersatellite signals currently available in northern latitudes, particularly incommunities surrounding, and north of, Fairbanks. In addition, existingsatellites have a relatively low altitude above the horizon when viewed fromAlaska, making their signals subject to interference from mountains, buildingsand other structures. A limited service using smaller satellite dishes is madeavailable by 28focusing transponder signal strength toward Alaska. This "Alaska" package issimilar to a "Hawaii" package offering but if more than a limited number ofchannels are desired an upgrade in dish size is currently required.Two major companies, DirecTV and Echostar, are currently offering nationwidehigh-power DBS services. Echostar has placed certain of its satellites in morefavorable western arc positions that allow them to offer service in the lowerhalf of Alaska with antennas less than one meter in diameter. Recently enactedfederal legislation establishes, among other things, a permanent compulsorycopyright license that permits satellite carriers to retransmit local broadcasttelevision signals to subscribers who reside inside the local televisionstation's market. These companies have already begun transmitting localbroadcast signals in certain major television markets and have announced theirintention to expand this local television broadcast retransmission service toother domestic markets. With this legislation, satellite carriers become morecompetitive to cable communications system operators like us because they arenow able to offer programming which more closely resembles what we offer. We areunable to predict the effects this legislation and these competitivedevelopments might have on our business and operations.Our cable television systems also compete with wireless program distributionservices such as MMDS providers that use low-power microwave frequencies totransmit video programming over-the-air to subscribers. There are MMDS andmulti-channel UHF operators who are authorized to provide or are providingbroadcast and satellite programming to subscribers in areas served by several ofour cable systems, including Anchorage, Fairbanks and Juneau. Additionally, theFCC has allocated frequencies in the 28 GHz band for multi-channel wirelessvideo service similar to MMDS. Wireless operations have the disadvantage of requiring line-of-sight access, making their signals subject to interferencefrom mountains, buildings and other structures, and are subject to interferencefrom rain, snow and wind. ACS owns a controlling interest in a multi-channel UHFservice that currently provides service in some portions of Anchorage andFairbanks. MMDS is also offered by Alaska Wireless in Fairbanks and includes awireless modem service. WanTV sold the Anchorage MMDS license to Sprint. Thisservice is no longer accepting new customers. We are unable to predict whetherwireless video services will have a material impact on our operations.Recently, a number of companies in the lower-49 states, including telephonecompanies and ISP's, have asked local, state and federal governments to mandatethat cable communications systems operators provide capacity on their cableinfrastructure so that these companies and others may deliver Internet servicesdirectly to customers over cable facilities. See Part I, Item 1, Business,Regulation, Franchise Authorizations and Tariffs - Cable Services for moreinformation.The deployment of DSL allows Internet access to subscribers at data transmissionspeeds equal to or greater than that of modems over conventional telephonelines. Numerous companies, including telephone companies, have introduced DSLservice and certain telephone companies are seeking to provide high-speedbroadband services, including interactive online services, without regard topresent service boundaries and other regulatory restrictions.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.We own a license to provide PCS services in Alaska. 29Advances in communications technology as well as changes in the marketplace areconstantly occurring. We cannot predict the effect that ongoing or futuredevelopments might have on the telecommunications and cable televisionindustries or on us specifically.Cable 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.Our cable services sales efforts are primarily directed toward increasing thenumber of subscribers we serve, selling bundled services, and generatingincremental revenues through product and feature up-sale opportunities. We sellour cable services through telemarketing, direct mail advertising, door-to-doorselling, up-selling by our customer contact personnel, and local mediaadvertising.Local Access ServicesIndustryUse 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 forgrowth in local loop services. These new services are fundamentallyrestructuring the competitive local loop services market.Emerging from the new competitive landscape are CLECs who offer Internet access and data services to medium and large size businesses. They obtaininterconnection agreements with ILECs for DSL-qualified unbundled networkelement loops. One loop, so qualified and equipped with appropriate accessdevices, enables the delivery of high speed (generally less than 768 kbps butsometimes faster rates), always-connected Internet access, LAN/WANinterconnectivity, and private line and private network circuits.Cable telephony is still not prevalent, as the industry struggles with thequality of service and the increased delay surrounding deployment of firstgeneration Voice over Internet Protocol technologies. The cable industry late in1999 released its first Packet Cable standards that promise to support tollquality Internet protocol telephony.Wireless local loop access technologies (other than fixed rate cellulartelephone service), while developing for international applications, have notyet developed a significant market presence in the United States. AT&T Wireless'fixed wireless plan, called Project Angel - is being test-marketed in theAnchorage area. Initially conceived as AT&T's proprietary strategy for bypassinglocal phone carriers, industry analysts believe AT&T has reconfigured it toprimarily deliver always-on high-speed Internet access at 512 kbps where thecarrier lacks cable system facilities in markets such as Anchorage. AT&T plansto offer service in Houston and Los Angeles, and add about 10 additional marketsto the four it already has launched: Dallas, Houston, San Diego and Anchorage.CLECs reported providing 12.7 million local service lines at June 30, 2000,approximately 6.7% of the lines in service nationwide, an increase of 53% from8.3 million lines at the end of 1999. CLECs are reported to provideapproximately one-third of end-user lines over their own loop facilities. CLECrevenues were reported increasing from $3.5 billion in 1998 to $6.3 billion in1999. ILECs were reported to have provided 5.7 million resale lines and 3million unbundled network element loops nationwide at June 30, 2000. 30GeneralOur local access services division entered the local services market inAnchorage in 1997, providing services to residential, commercial, and governmentusers. We can access approximately 93% of Anchorage area local loops from ourcollocated remote facilities and DLC installations.ProductsOur collocated remote facilities access the ILEC's unbundled network elementloops and its DLC systems, allowing us to offer full featured, switched-basedlocal service products to both residential and commercial customers. In areaswhere we do not have access to Anchorage ILEC loop facilities, we offer serviceusing our fixed wireless facilities or total service resale of the ILEC's localservice.Our package offerings are competitively priced and include popular features,such as the following. - Enhanced call waiting - Caller ID - Caller ID on call waiting - Free caller ID box - Anonymous call rejection - Call forwarding - Call forward busy - Call forward no answer - Enhanced call waiting - Fixed call forwarding - 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 way calling - Voice mail - Inside wire repair plan - Non-listed number - Non-published numberFacilitiesWe utilize a Lucent host switching system (5ESS), have collocated six remotefacilities beside or within the ILEC's local switching offices to accessunbundled loop network elements, and have installed a DLC system beside asmaller, seventh ILEC wire center. Remote and DLC facilities are interconnectedto the host switch via our diversely routed fiber optic links. Our expandedcapacity at each of the remote facilities allows us access to approximately79,000 Anchorage loops. Additionally, we provided our own facilities-basedservices to over 100 of Anchorage's larger business customers through furtherexpansion and deployment of SONET fiber transmission facilities, leased and HDSL T-1 facilities, and DLC facilities.CustomersWe had approximately 62,100, 45,100 and 28,300 active lines in service fromAnchorage subscribers to our local access services at December 31, 2000, 1999and 1998, respectively. The 2000 line count consists of approximately 30,800residential access lines and 31,300 business access lines, including 6,100Internet service provider access lines. We ended 2000 with market share gains inall market segments, in particular in the business segment in which access linesincreased 8% and ISP lines increased 27% as compared to December 31, 1999.Without an active media presence, we were able to gain residential market share,growing that market segment 28% as compared to 1999. We estimate that ouroverall local access services market share exceeds 31%, in excess of thenational average penetration of approximately 7% as reported by the FCC.Revenues derived from local access services in 2000, 1999 and 1998 totaled $20.2million, $15.5 million and $9.9 million, respectively, representingapproximately 6.9%, 5.6% and 4.0% of our total revenues in 2000, 1999 and 1998,respectively. Approximately 800 additional lines were sold and awaitingconnection at December 31, 2000. 31CompetitionWe believe that the 1996 Telecom Act, judicial decisions, and state legislativeand regulatory developments will increase the likelihood that barriers to localexchange competition will continue to be reduced or removed. These initiativesinclude requirements that LECs negotiate with companies such as us 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.The 1996 Telecom Act also provides ILECs with new competitive opportunities. Webelieve that we have certain advantages over these companies in providingtelecommunications services, including awareness by Alaskan customers of the GCIbrand-name, our facilities-based telecommunications network, and our priorexperience in, and knowledge of, the Alaskan market. The 1996 Telecom Actprovides that rates charged by ILECs for interconnection to the incumbentcarrier's network are to be nondiscriminatory and based upon the cost ofproviding such interconnection, and may include a "reasonable profit," whichterms are subject to interpretation by regulatory authorities. If ILECs chargeus unreasonably high fees for interconnection to their networks, orsignificantly lower their retail rates for local exchange services, our localservice business could be placed at a significant competitive disadvantage.In the local exchange market we currently compete with an ACS subsidiary inAnchorage. We also compete against AT&T in the Anchorage service area. AT&Toffers local exchange service only to residential customers through totalservice resale and AT&T Wireless' fixed wireless local loop services. Wereceived approval from the RCA in July 1999 to provide local exchange servicesin ACS's existing service areas in Fairbanks, Juneau, Ft Wainwright, and EielsonAFB. We completed arbitration to define the terms of interconnection with ACSfor entry to these markets and interconnection agreements with ACS were approvedin October 2000. In mid 2001 we anticipate we will be competing with ACSsubsidiaries in Fairbanks, Fort Wainwright and Eielson Air Force Base (militarybases near Fairbanks), North Pole, and in Juneau in late 2001 or early 2002. Youshould see Part I, Item 1. Business, Regulation, Franchise Authorizations andTariffs - Telecommunications Operations for more information.We expect further competitors in the Anchorage, Fairbanks and Juneaumarketplaces, as AFS has negotiated interconnection agreements with ACS and AFSand DSLnet have received certification for various markets. The Company expectscompetition from these latter entrants in the business customer telephonyaccess, Internet access, DSL and private line markets. We believe ourlong-standing presence in Alaska and the strength of our brand (as well asACS's) will make competitive entry difficult for these new entrants.We continue to offer local exchange services to substantially all consumers inthe Anchorage service area, primarily through our own facilities and unbundledlocal loops leased from ACS. We are currently involved in arbitration to revisethe interim interconnection rates and the terms in the existing interconnectionagreement with ACS for the Anchorage service area. Our local services sales efforts continue to focus on increasing the number ofcommercial and small business subscribers we serve, selling bundled services,and generating incremental revenues through product and feature up-saleopportunities. We sell our local services through telemarketing, direct mailadvertising, up selling by our customer contact personnel, and door-to-doorselling.Internet ServicesIndustryThe Internet continues to expand at a significant rate, with the number of sitesalmost doubling over the last several years. The FCC estimates that thepercentage of U.S. households with computers increased from 38.6% in 1997 to51.0% in 2000, and that the percentage of U.S. households with Internet accessincreased from 18.6% in 1997 to 41.5% in 2000. 32The FCC reports that 56 percent of the U.S. population had Internet access as ofNovember 2000. Current trends indicate that in a few years the Internet maybecome as commonplace as TV. Analysts predict that the amount of Internettraffic will likely continue to rise as fast as capacity allows for theforeseeable future. Voice over the Internet may have a major impact on businessand the entire telecommunications industry in the future. Industry analystsestimate that there will be more than 20 million installed cable modem customersin North America by year-end 2004, up from 1.8 million at the end of 1999. TheFCC reports that high-speed lines (greater than 200 kbps in at least onedirection) increased 57% during the first half of 2000 to a total of 4.3 millionlines in service, as compared to 2.8 million lines at the end of 1999. MostAmerican households still access the Internet using analog telephone dial-upmodems at speeds of less than 56 kbps. As of year-end 1999, industry analystsestimated that 98.2 percent of all Internet households were accessing theInternet using dial-up modems. Telephone dial-up is projected to remain theprincipal means of accessing the Internet until about 2004, when it is expectedthat only 49.7 percent of Internet households will use dial-up access, with theremaining 50.3 percent accessing the Internet through high-speed broadbandfacilities.Although wireless and satellite broadband technologies continue to be deployed,DSL technologies remain the most significant competitors to Internet over cable.ADSL, the most widely used form of DSL, offers data speeds from between 1.5 Mbpsand 6.1 Mbps, less than cable's maximum speed of 27 Mbps. Currently, the numberof DSL subscribers is significantly less than the number of cable broadbandsubscribers. By June 2000, there were reported to be 820,000 DSL subscriberscompared to more than 2.3 million cable modem Internet access subscribers. Therollout of DSL and other broadband technologies is accelerating, with anestimated 1.7 million DSL subscribers at year-end 2000.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. The use of Intranets has significantly increased, with an estimated 60to 70 percent of US corporations using an Intranet. Current growth rates suggestthat 138 million people worldwide may be connected from their desks to anin-house Intranet in 2001.An Extranet is similar to an Intranet (internal, secure, full of sensitivedata), however it connects trusted customers and suppliers. Industry analystsbelieve that the use of Extranets will continue to accelerate. Implementing anExtranet creates the concept of the virtual enterprise, in which all theorganizations in a supply chain integrate their systems and operations. Thisconcept is not new, but has been achieved in the past using EDI on privatenetworks. Extranets promise to remove many of the obstacles that 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 is ideally suited for the digital world, with leading record companies andmusic retailers now selling direct over the Internet. New compression algorithmsand technology (such as MP3) allow consumers to purchase and download music oftheir choice to play on their personal computer, handheld device, or CD players.Technology is beginning to turn products into a service, delivered over theInternet. We expect this segment of the retail market to expand significantly.Copyright and related legal concerns are significant due to the ease in which electronic media can be distributed and copied.Concerns about Internet-based commerce are diminishing. One seriouspreoccupation is that an overloaded Internet might crash. However, capacity onthe Internet continues to increase. Technology enables fiber to carry more data,and more cables and satellite channels are being introduced. Industry analystsestimated that in 1995, the world's entire telecom traffic amounted to a datarate of a terabit a second. Currently, a single optical fiber strand can carrythree times that amount of data with lab research indicating that many timesmore capacity will be possible in the future. 33We believe major court decisions and legislative action will shape the worldwideInternet in 2001 and beyond, including: - The impact of the U.S. vs. Microsoft antitrust trial, - The impact of the Napster copyright litigation, - 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, - Potential 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, - Continuing calls for domestic controls of obscenity-related cryptography, and - The development of rating and filtering systems outside the United States.GeneralOur Internet services division entered the Internet services market in 1998,providing retail services to residential, commercial, and government users andproviding wholesale carrier services to other ISPs. Cable network upgrades inthe Anchorage area have allowed us to offer high-speed cable modem Internetaccess, the first of its kind in Alaska. We were the first provider in Anchorageto offer commercially available DSL products.ProductsWe currently offer two types of Internet access for residential use: dial upInternet access and high-speed cable modem Internet access. Our residentialhigh-speed cable modem Internet service offers up to 1,544 kbps access speed ascompared with up to 56 kbps access through standard copper wire dial up modemaccess. We provide free 24-hour customer service and technical support viatelephone or online. The entry level cable modem service also offers free datatransfer up to five gigabytes per month and can be left connected24-hours-a-day, 365-days-a-year, allowing for real-time information and e-mailaccess. We also offer a low price upgrade to double the bandwidth of theentry-level service. In 2000, we saw a 20% take rate of this service. This isevidence of the continuing demand for higher speed access. Additional cablemodem service packages tailored to both heavy residential and commercialInternet users are also available.Cable modem services appeal to small businesses, families, professionals whowork-at-home, educators, those involved in electronic commerce, and those whoenjoy interactive computer games. Cable modem access overcomes the limitationsof slower dial-up service and the higher cost of dedicated Internet services andprovides always-available, high-speed access to the Internet. Cable modems useour coaxial cable plant that provides cable television service, instead of thetraditional ILEC copper wire. Coaxial cable has a much greater carrying capacitythan telephone wire and can be used to simultaneously deliver both cabletelevision (analog or digital) and Internet access services.We currently offer several Internet service packages for commercial use: dial-upaccess, DSL, T1 and fractional T1 leased line, frame relay and high-speed cablemodem Internet access. Our business high-speed cable modem Internet serviceoffers access speeds ranging from 256 kbps to 1,544 kbps, free monthly datatransfers of up to 25 gigabytes and free 24-hour customer service and technical support. Our DSL offering can support speeds of up to 768 kbps over the samecopper line used for phone service. We expect higher speeds to be made availablein 2001. Business services also include a personalized web page, domain nameservices, and e-mail addressing. 34We also provide dedicated access Internet service to commercial and publicorganizations in Alaska. We offer a premium service and currently support manyof the largest organizations in the state such as the State of Alaska and theAnchorage School District. We have hundreds of other enterprise customers, bothlarge and small, using this service.Bandwidth is made available to our Internet segment through our Alaska Unitedundersea fiber cable and our Galaxy XR transponders as previously described. OurInternet offerings are coupled with our long-distance and local servicesofferings and provide free basic Internet services if certain long-distance orlocal service plans are selected. Value-added Internet features are availablefor additional charges.We provide Internet access for schools and health organizations using a platformincluding many of the latest advancements in technology. Services are deliveredthrough a locally available circuit, our existing lines, and/or satellite earthstations.FacilitiesThe Internet is an interconnected global public computer network of tens ofthousands of packet-switched networks using the Internet protocol. The Internetis effectively a network of networks routing data throughout the world. Weprovide access to the Internet using a platform that includes many of the latestadvancements in technology. The physical platform is concentrated in Anchorageand is extended into many remote areas of the state. Our Internet platformincludes: - Circuits connecting our Anchorage facilities to multiple Internet access points in Seattle through multiple, diversely routed networks. - Multiple routers on each end of the circuits to control the flow of data and to provide resiliency. - Our Anchorage facility consists of routers, a bank of servers that perform support and application functions, database servers providing authentication and user demographic data, layered 2 gigabit switch fabrics for intercommunications and broadband services (cable modem and DSL), and access servers for dial-in users. - SchoolAccess(TM)Internet service delivery to over 257 schools in rural Alaska is accomplished by three variations on primary delivery systems: - In communities where we have terrestrial interconnects or provide existing service over regional earth stations, we have configured intermediate distribution facilities. Schools that are within these service boundaries are connected locally to one of those facilities. - In communities where we have extended telecommunications services via our DAMA earth station program, SchoolAccess(TM) is provided via a satellite circuit to an intermediate distribution facility at the Eagle River Earth Station. - In communities or remote locations where we have not extended telecommunications services, SchoolAccess(TM) is provided via a dedicated (usually on premise) DAMA VSAT satellite station. The DAMA connects to an intermediate distribution facility located in Anchorage.In all dedicated access cases, Internet access is delivered to a router locatedat the service point. Our Internet management platform constantly monitors thisrouter; continual communication is maintained with all of the routers in thenetwork. The availability and quality of service, as well as statisticalinformation on traffic loading, are continuously monitored for qualityassurance. The management platform has the capability to remotely accessrouters, permitting changes in router configuration without the need tophysically be at the service point. This management platform allows us to offeroutsourced network monitoring and management services to commercial businesses.Many of the largest commercial networks in the State of Alaska use this service.GCI.net offers a unique combination of innovative network design and aggressiveperformance management. Our Internet platform has received a certification thatplaces it in the top one percent of all service providers world- 35wide and the only ISP in Alaska with such designation. We operate and maintainwhat we believe is the largest, most reliable, and highest performance Internetnetwork in the State of Alaska.CustomersWe had approximately 62,500, 48,300 and 7,200 active residential and commercialdial-up Internet subscribers at December 31, 2000, 1999 and 1998, respectively.We had approximately 16,100, 5,700 and 200 active residential and commercialcable modem Internet subscribers at December 31, 2000, 1999 and 1998,respectively. Revenues derived from Internet services totaled $8.4 million, $4.8million and $1.7 million, in 2000, 1999 and 1998, respectively, representingapproximately 2.9%, 1.7% and 0.7% of our total revenues in 2000, 1999 and 1998,respectively.Our Internet services sales efforts are primarily directed toward increasing thenumber of subscribers we serve, selling bundled services, and generatingincremental revenues through product and feature upsale opportunities. We sellour Internet services through telemarketing, direct mail advertising,door-to-door selling, up-selling by our customer contact and technical supportpersonnel, and local media advertising.CompetitionThe Internet industry is intensely competitive, rapidly evolving and subject toconstant technological change. Competition is based upon price and pricingplans, the types of services offered, customer service, billing services,perceived quality, reliability and availability. Although we believe we have thehuman and technical resources to pursue our strategy and compete effectively inthis competitive environment, our success will depend upon our ability toprofitably provide high quality, high value bundled services at prices generallycompetitive with, or lower than, those charged by our competitors.As of December 31, 2000, we competed with more than 10 Alaska based Internetproviders, and competed with other domestic, non-Alaska based providers thatprovide national service coverage. Several of the non-Alaskan based providershave substantially greater financial, technical and marketing resources than wehave. We have, so far, successfully adjusted our pricing and marketingstrategies to respond to competitors' pricing practices.Environmental RegulationsWe may undertake activities that, under certain circumstances may affect theenvironment. Accordingly, they are subject to federal, state, and localregulations designed to preserve or protect the environment. The FCC, the Bureauof Land Management, the U.S. Forest Service, and the National Park Service arerequired by the National Environmental Policy Act of 1969 to consider theenvironmental impact prior to the commencement of facility construction. Webelieve that compliance with such regulations has no material effect on ourconsolidated operations. The principal effect of our facilities on theenvironment would be in the form of construction of facilities and networks atvarious locations in Alaska and between Alaska and Seattle Washington. Ourfacilities 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 our facilities are on leased property, and, withrespect to all of these facilities, we are unaware of any violations of leaseterms or federal, state or local regulations pertaining to preservation orprotection of the environment.Our Alaska United project consists, in part, of deploying land-based andundersea fiber optic cable facilities between Anchorage, Whittier, Valdez, andJuneau, Alaska, and Seattle, Washington. The engineered route passes overwetlands and other environmentally sensitive areas. We believe our constructionmethods used for buried cable have a very minimal impact on the environment. Theagencies, among others, that are involved in permitting and oversight of ourcable deployment efforts are the US Army Corps of Engineers, The National MarineFisheries Service, US Fish & Wildlife, US Coast Guard, National Oceanic andAtmospheric Administration, 36 Alaska Department of Natural Resources, and the Alaska Office of the Governor -Governmental Coordination. We are 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, we have used variousmaterials defined as hazardous by applicable governmental regulations. Thesematerials have been used for insect repellent, locate paint and pole treatment,and as heating fuel, transformer oil, cable cleaner, batteries, and in variousother ways in the operation of those systems. We do not believe that thesematerials, when used in accordance with manufacturer instructions, pose anunreasonable hazard to those who use them or to the environment.Patents, Trademarks, Licenses, Certificates of Public Convenience and Necessity,and Military FranchisesWe do not hold patents, franchises or concessions for telecommunicationsservices or local access services. We do hold registered service marks for theterms SchoolAccess(TM), Free Fridays for Business(TM) and UnlimitedWeekends(TM). The Communications Act of 1934 gives the FCC the authority tolicense and regulate the use of the electromagnetic spectrum for radiocommunication. We hold licenses through our long-distance services industrysegment for our satellite and microwave transmission facilities for provision oflong-distance services.We acquired a license for use of a 30-MHz block of spectrum for providing PCSservices in Alaska. We are required by the FCC to provide adequate broadband PCSservice to at least two-thirds of the population in our licensed areas withinten years of being licensed. The PCS license has an initial duration of 10years. At the end of the license period, a renewal application must be filed. Webelieve renewal will generally be granted on a routine basis upon showing ofcompliance with FCC regulations and continuing service to the public. Licensesmay be revoked and license renewal applications may be denied for cause. Weexpect to renew the PCS license for an additional 10-year term under FCC rules.We acquired a LMDS license in 1998 for use of a 150-MHz block of spectrum in the28 GHz Ka-band for providing wireless services. The LMDS license has an initialduration of 10 years. Within 10 years, licensees will be required to provide'substantial service' in their service regions. Our operations may requireadditional licenses in the future.Earth stations are licensed generally for 10 years. The FCC also issues a singleblanket license for a large number of technically identical earth stations(e.g., VSATs).Applications for transfer of control of 15 certificates of public convenienceand necessity held by the acquired cable companies were approved in an RCA orderdated September 23, 1996, with transfers to be effective on October 31, 1996.Such transfer of control allowed us to take control and operate the cablesystems of the acquired cable companies located in Alaska. The approval of thetransfer of these 15 certificates of public convenience and necessity is notrequired under federal law, with one area of limited exception. The cablecompanies operate in part through the use of several radio-band frequencieslicensed through the FCC. These licenses were transferred to us prior to October31, 1996.We obtained consent of the military commanders at the military bases serviced bythe acquired cable systems to the assignment of the respective franchises forthose 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 our businesses. Other existing federal andstate regulations are currently the subject of judicial proceedings, legislativehearings and administrative proposals that could change, in varying degrees, themanner in which these industries operate. We cannot predict at this time theoutcome of these proceedings, their impact on the industries in which weoperate, or their impact on us. 37Telecommunications Operations.The following is a summary of federal laws, regulations and tariffs, and adescription of certain state and local laws pertaining to our telecommunications operations (long-distance, local access and wireless services).General. We are subject to regulation by the FCC and by the RCA as anon-dominant provider of long-distance services. We file tariffs with the FCCfor interstate and international long-distance services, and with the RCA forintrastate service. Such tariffs routinely become effective without interventionby the FCC, RCA or other third parties since we are a non-dominant carrier. Wereceived approval from the RCA in February 1997 permitting us to provide localaccess services throughout ATU's (now ACS) existing Anchorage service area.Military franchise requirements also affect our ability to providetelecommunications and cable television services to military bases.On June 30, 1999, the APUC was repealed by an act passed earlier in the year bythe Alaska State Legislature and was immediately reconstituted as the RCA,combining the functions of the APUC and certain other oversight functions. TheGovernor of the state of Alaska appointed new commissioners as a result of thisrestructuring. Established within the commission is a communications carrierssection that is tasked with developing, recommending, and administering policiesand programs with respect to the regulation of rates, services, accounting, andfacilities of communications common carriers within the state involving the useof wire, cable, radio, and space satellites. We believe the new commission isgenerally more responsive to telecommunications issues brought to its attentionand more supportive of competitive telecommunication regulatory policy.The 1996 Telecom Act preempts state statutes and regulations that restrict theprovision of competitive local telecommunications services. State commissionscan, however, impose reasonable terms and conditions upon the provision oftelecommunications service within their respective states. Because we areauthorized to offer local access services in Anchorage, we are regulated as aCLEC by the RCA. In addition, we will be subject to other regulatoryrequirements, including certain requirements imposed by the 1996 Telecom Act onall LECs, which requirements include permitting resale of LEC services, numberportability, dialing parity, and reciprocal compensation.As a PCS and LMDS licensee, we are subject to regulation by the FCC, and mustcomply with certain build-out and other conditions of the license, as well aswith the FCC's regulations governing the PCS and LMDS services. On a morelimited basis, we may be subject to certain regulatory oversight by the RCA(e.g., in the areas of consumer protection), although states are not permittedto regulate the rates of PCS, LMDS and other commercial wireless serviceproviders. PCS and LMDS licensees may also be subject to regulatory requirementsof local jurisdictions pertaining to, among other things, the location of towerfacilities.1996 Telecom Act and Related Rulings. A key industry development was passage ofthe 1996 Telecom Act. The Act was intended by Congress to open up themarketplace to competition and has had a dramatic impact on thetelecommunications industry. The intent of the legislation was to break down thebarriers that have prevented three groups of companies, LECs, including RBOCs,long-distance carriers, and cable TV operators, from competing head-to-head witheach other. The Act expressly prohibits any legal barriers to competition inintrastate or interstate communications service under state and local laws, andempowers the FCC, after notice and an opportunity for comment, to preempt theenforcement of any statute, regulation or legal requirement that prohibits, orhas the effect of prohibiting, the ability of any entity to provide anyintrastate or interstate telecommunications service. The Act requires incumbentLECs to let new competitors into their business. It also requires incumbent LECsto open up their networks to ensure that new market entrants have a fair chanceof competing. The bulk of the legislation is devoted to establishing the termsunder which incumbent LECs must open up their networks.The FCC's Common Carrier Bureau has focused in recent years on adoptingmarket-opening and universal service rules for the local exchange and longdistance markets. The Common Carrier Bureau has also focused on review ofapplications by BOCs to provide long distance service as well as review oftelecommunications com- 38pany mergers. In addition, they continue to consider regulatory reforms thatcould occur as competition in the provision of telecommunications servicesdevelops.Enactment of the bill immediately affected local exchange service markets by requiring states to authorize local exchange service competition. Competitors,including resellers, are able to market new bundled service packages to attractcustomers. Over the long term, the requirement that incumbent LECs unbundleaccess to their networks may lead to increased price competition. Local exchangeservice competition has not yet occurred in all markets on a national basisbecause interconnection arrangements are not yet in place in many areas. We haveexecuted interconnection agreements with ACS for the Anchorage, Juneau andFairbanks markets.The 1996 Telecom Act requires the FCC to establish rules and regulations toimplement its local competition provisions. In August 1996, the FCC issued rulesgoverning interconnection, resale, unbundled network elements, the pricing ofthose facilities and services, and the negotiation and arbitration proceduresthat would be utilized by states to implement those requirements. These rulesrely on state public utilities commissions to develop the specific rates andprocedures applicable to particular states within the framework prescribed bythe FCC. These rules were vacated in part by a July 1997 ruling of the UnitedStates Court of Appeals for the Eighth Circuit. On January 25, 1999, the UnitedStates Supreme Court issued an opinion upholding the authority of the FCC toestablish rules, including pricing rules, to implement statutory provisionsgoverning both interstate and intrastate services under the 1996 Telecom Act andremanded the proceeding back to the Eighth Circuit for further proceedings. TheSupreme Court also upheld rules allowing carriers to select provisions fromamong different interconnection agreements approved by state commissions for thecarriers' own agreements and a rule allowing carriers to obtain combinations ofunbundled network elements. On remand, the Eighth Circuit overturned variousinterconnection and pricing portions of the FCC regulations under the 1996Telecom Act, but stayed the application of its pricing decision pending reviewby the Supreme Court of the United States. The Supreme Court has grantedcertiorari on the pricing provisions and will be considering the case in itsupcoming term.The 1996 Telecom Act provides that registered utility holding companies andsubsidiaries may provide telecommunications services, including cabletelevision, notwithstanding the Public Utility Holding Company Act. Electricutilities must establish separate subsidiaries, known as "exempttelecommunications companies" and must apply to the FCC for operating authority.Like telephone companies, electric utilities have substantial resources at theirdisposal, and could be formidable competitors to traditional cable systems.Several such utilities have been granted broad authority by the FCC to engage inactivities that could include the provision of video programming.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 us is difficult to determine. Some BOCs have also challengedthe 1996 Telecom Act restrictions on their entry into long-distance markets asunconstitutional. We are unable to predict the outcome of such rulemakings orlitigation or the effect (financial or otherwise) of the 1996 Telecom Act andthe rulemakings on us. The BOCs continue to challenge the substance of the FCCrules, arguing that the rules do not allow them to fully recover the money theyspent building their networks.Critics are becoming increasingly vocal asking Congress to modify if notaltogether rework the 1996 Telecom Act, citing a lack of competition in thelocal phone and broadband sectors. There is a lack of consensus on what changesare needed, however, or who is to blame for the Act's perceived failures. Thestrongest momentum appears to be in support of loosening regulations on BOCs sothey can better compete in broadband, a move CLECs say could diminish localphone competition.Rural Exemption. ACS, through subsidiary companies, provides local telephoneservices in Fairbanks and Juneau, Alaska. The ACS subsidiaries are classified asRural Telephone Companies under the 1996 Telecom Act, 39which entitles them to an exemption of certain material interconnection terms ofthe 1996 Telecom Act, until and unless such "rural exemption" is examined andnot continued by the RCA. We requested that continuation of the rural exemptionof the ACS subsidiaries relating to the Fairbanks and Juneau markets beexamined. In January 1998, the APUC denied our request to terminate the ruralexemption. The basis of the APUC's decision was primarily that variousrulemaking proceedings (including universal service and access charge reform) must be completed before the exemption would be revoked. Those rulemakingproceedings have been largely completed.On March 4, 1999, an Alaska Superior Court Judge determined that the APUC erredin reaching its decision to deny our request to provide full local telephoneservice in Fairbanks and Juneau, Alaska. This service would be provided incompetition against Pacific Telecom, Inc. ("PTI," now a subsidiary of ACS), theexisting monopoly provider. Among other things, the Court instructed the APUC tocorrectly assign the burden of proof to PTI rather than us, and to decide on ourspecific requests to provide service in Fairbanks and Juneau based on criteriaestablished in the 1996 Telecom Act. The Court stated "this must be accomplishedcognizant of the intent of the 1996 Telecom Act to promote competition in thelocal market." The Court remanded the case back to the APUC for proceedingsleading to their ruling.On July 1, 1999, the APUC ruled that the rural exemptions from local competitionin Juneau, Fairbanks and North Pole would not be continued, which allowed us tonegotiate for unbundled elements for the provision of competitive local servicein these markets. ACS requested reconsideration of this decision, and on October11, 1999 the RCA issued an order terminating rural exemptions in the Fairbanksand Juneau markets. ACS has appealed these decisions.We believe this decision is important to bring about the benefits of competitionto other communities in Alaska. We continued to negotiate with ACS for unbundlednetwork elements for the provisioning of competitive local assess services inthese markets, arbitrated the rates and terms and the RCA approvedinterconnection agreements for unbundled elements in October 2000.Internet Service Providers Regulated as Telecommunications Carriers. The FCCaffirmed in a report adopted on April 10, 1998, that Internet service providerswould not be subject to regulation as telecommunications carriers under the 1996Telecom Act. They thus will not be subject to universal service subsidies andother regulations. Further, in August 1998, the FCC proposed new rules thatwould allow ILECs to provide their own DSL services through separate affiliatesthat are not subject to ILEC regulation. On November 18, 1999, the FCC decidedto require ILECs to share telephone lines with DSL providers, an action that mayfoster competition by allowing competitors to offer DSL services without theircustomers having to lease a second telephone line. Whether this development willbe implemented in an effective way remains to be seen. Moreover, it isimpossible to predict whether the FCC or Congress may change the rules underwhich these services are offered and, if such changes are made, the extent ofthe impact of such changes on our business.Access Fees. The FCC regulates the fees that local telephone companies chargelong distance companies for access to their local networks. The FCC isconsidering various proposals that would restructure and could reduce accesscharges. Changes in the access charge structure could fundamentally change theeconomics of some aspects of our business.Access to Unbundled Network Elements. The Supreme Court vacated an FCC rulesetting forth the specific unbundled network elements that ILECs must makeavailable, finding that the FCC had failed to apply the appropriate statutorystandard. On November 5, 1999, the FCC responded to the Court's decision byissuing a decision that maintains competitors' access to a wide variety ofunbundled network elements. Six of the seven unbundled elements the FCC hadoriginally required carriers to provide in its 1996 order implementing the 1996Telecom Act remain available to competitors. These elements are loops, includingloops used to provide high-capacity and advanced telecommunications services;network interface devices; local circuit switching, subject to restrictions inmajor urban markets; dedicated and shared transport; signaling and call-relateddatabases; and 40operations support systems. The FCC removed access to operator and directoryassistance service from the list of available unbundled network elements. Inaddition, the FCC added to its list certain unbundled network elements that werenot at issue in 1996. These elements include subloops, or portions of loops, anddark fiber loops and transport. The FCC did not, however, require ILECs tounbundle facilities used to provide DSL service. The FCC did not decide, butsought additional information on, the question of whether carriers may combinecertain unbundled network elements to provide special access services to competewith those provided by the ILECs. The ability to obtain unbundled networkelements is an important element of our local access services business, and we believe that the FCC's actions in this area have generally been positive.However, we cannot predict the extent to which the existing rules will besustained in the face of additional legal action and the scope of the rules thatare yet to be determined by the FCC.Recurring and non-recurring charges for telephone lines and other unbundlednetwork elements may increase based on the rates proposed by the ILECs andapproved by the RCA from time to time, which could have an adverse effect on theresults of our operations. We are currently involved in arbitration to revisethe interim interconnection rates and the terms in the existing interconnectionagreement with ACS for the Anchorage service area. Moreover, because thecost-based methodology for determining these rates is still subject to judicialreview, we are uncertain about how these rates will be determined in the future.Universal Service. In 1997, the FCC issued important decisions on universalservice establishing new funding mechanisms for high-cost, low-income serviceareas to ensure that certain subscribers living in rural and high-cost areas, aswell as certain low-income subscribers, continue to have access totelecommunications and information services at prices reasonably comparable tothose charged for similar services in urban areas.These mechanisms also are meant to foster the provision of advancedcommunications services to schools, libraries and rural health-care facilities.Under the rules adopted by the FCC to implement these requirements, we and allother telecommunications providers are required to contribute to a fund tosupport universal service. The amount that we contribute to the federaluniversal service subsidy will be based on our share of specified definedtelecommunications end-user revenues.The order established significant discounts to be provided to eligible schoolsand libraries for all telecommunications services, internal connections andInternet access. It also established support for rural health care providers sothat they may pay rates comparable to those that urban health care providers payfor similar services. The FCC estimates that program-year 2001 costs to befunded out of the Universal Service Fund will total approximately $1.35 billion.The fund administrator, on the basis of their interstate end-user revenues,assesses local and long distance carriers' contributions to the education andhealth care funds. The 2001 quarterly contribution factor is $0.066827. We begancontributing to the new funds in 1998 and are allowed to recover ourcontributions through increased interstate charges.Local Regulation. We may be required to obtain local permits for street openingand construction permits to install and expand fiber optic networks. Localzoning authorities often regulate our use of towers for microwave and othertelecommunications sites. We also are subject to general regulations concerningbuilding codes and local licensing. The 1996 Telecom Act requires that feescharged to telecommunications carriers be applied in a competitively neutralmanner, but there can be no assurance that ILECs and others with whom we will becompeting will bear costs similar to those we will bear in this regard.Other Laws and Regulations. Although the foregoing discussion provides anoverview of the major regulatory issues that confront our business, thisdiscussion does not attempt to describe all current and proposed federal, stateand local rules and initiatives affecting the telecommunications industry. Otherfederal and state laws and regulations are currently the subject of judicialproceedings and proposed additional legislation. In addition, some of the FCC'srules implementing the 1996 Telecom Act will be subject to further judicialreview and could 41be altered or vacated by courts in the future. We cannot predict the ultimateoutcome of any such further proceedings or legislation.Cable ServicesThe following is a summary of federal laws and regulations materially affectingthe growth and operation of the cable services industry and a description ofcertain state and local laws affecting our cable services business.General. The FCC, some state governments and most local governments extensivelyregulate the operation of a cable system. We are subject to federal and stateregulation as a cable television operator pursuant to the 1934 Cable Act, the1984 Cable Act and the 1992 Cable Act, as amended by the 1996 Telecom Act. The1992 Cable Act significantly expanded the scope of cable television regulation on an industry-wide basis by imposing rate regulation, carriage requirements forlocal broadcast stations, customer service obligations and other requirements.The 1992 Cable Act and the FCC's rules implementing that Act generally haveincreased the administrative and operational expenses and in certain instancesrequired rate reductions for cable television systems and have resulted inadditional regulatory oversight by the FCC 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.The FCC has the authority to enforce its regulations through the imposition ofsubstantial fines, the issuance of cease and desist orders and/or the impositionof other administrative sanctions, such as the revocation of FCC licenses neededto operate certain transmission facilities used in connection with cableoperations. The 1996 Telecom Act removed barriers to competition in the cabletelevision market as well as the local telephone market. Among other things, italso reduced the scope of cable rate regulation and encourages additionalcompetition in the video programming industry by allowing local telephonecompanies to provide video programming in their own telephone service areas.The 1996 Telecom Act required the FCC to undertake a number of rulemakings.Moreover, Congress and the FCC have frequently revisited the subject of cableregulation. Future legislative and regulatory changes could adversely affect ouroperations, and there have been calls in Congress and at the FCC to maintain oreven tighten cable regulation in the absence of widespread effectivecompetition.Subscriber Rates. 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, which limited the ability ofcable companies to increase subscriber fees. Most cable communications systemsare now subject to rate regulation by local officials for basic cable service,which typically contains local broadcast stations and public, educational, andgovernment access channels. Such local regulation is subject to the oversight ofthe FCC, which has prescribed detailed criteria for such rate regulation. Beforea local franchising authority begins basic service rate regulation, it mustcertify to the FCC that it will follow applicable federal rules. Many localfranchising authorities have voluntarily declined to exercise their authority toregulate basic service rates. Local franchising authorities also have primaryresponsibility for regulating cable equipment rates. Under federal law, chargesfor various types of cable equipment must be unbundled from each other and frommonthly charges for programming services. The 1992 Cable Act permits communitiesto certify and regulate rates at any time, so that it is possible thatlocalities served by our systems may choose to certify and regulate basic ratesin the future.The 1992 Cable Act also requires the FCC to resolve complaints about rates forCPS tiers (other than programming offered on a per channel or per program basis,which programming is not subject to rate regulation) and to reduce any suchrates found to be unreasonable. The 1996 Telecom Act eliminates the right ofindividuals to file CPS tier rate complaints with the FCC and requires the FCCto issue a final order within 90 days after receipt of 42CPS tier rate complaints filed by any franchising authority. The 1992 Cable Actlimits the ability of cable television systems to raise rates for basic andcertain cable programming services (collectively, the "Regulated Services").Under the 1996 Telecom Act, the FCC's authority to regulate CPS tier ratessunset on March 31, 1999. The FCC has taken the position that it will stilladjudicate pending cable programming service tier complaints but will strictlylimit its review, and possible refund orders, to the time period predating thesunset date. The elimination of cable programming service tier regulationaffords us greater pricing flexibility.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 rebuttable presumption of an industry-wide 11.25% after tax rate of return on an operator'sallowable rate base. Cost-of-service regulation is a traditional form of rateregulation, under which a company is allowed to recover its costs of providingthe regulated service, plus a reasonable profit. Franchising authorities areempowered to regulate the rates charged for monthly basic service, foradditional outlets and for the installation, lease and sale of equipment used bysubscribers to receive the basic cable service tier, such as converter boxes andremote control units. The FCC's rules require franchising authorities toregulate these rates on the basis of actual cost plus a reasonable profit, asdefined by the FCC. Cable operators required to reduce rates may also berequired to refund overcharges with interest. The FCC has also adoptedcomprehensive and restrictive regulations allowing operators to modify theirregulated rates on a quarterly or annual basis using various methodologies thataccount for changes in the number of regulated channels, inflation and increasesin certain external costs, such as franchise and other governmental fees,copyright and retransmission consent fees, taxes, programming fees andfranchise-related obligations. We cannot predict whether the FCC will modifythese "going forward" regulations in the future.Rate regulation of non-basic cable programming service tiers ended after March31, 1999. The 1996 Telecom Act also modifies the uniform rate provision of the1992 Cable Act by prohibiting regulation of non-predatory bulk discount ratesoffered to subscribers in commercial and residential developments and permitsregulated equipment rates to be computed by aggregating costs of broadcategories 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 ofour systems do not have the technological capability to offer programming in themanner required by the statute and thus currently are exempt from complying withthe requirement.Cable Entry Into Telecommunications. The 1996 Telecom Act creates a morefavorable environment for us to provide telecommunications services beyondtraditional video delivery. It provides that no state or local laws orregulations may prohibit or have the effect of prohibiting any entity fromproviding any interstate or intrastate telecommunications service. A cableoperator is authorized under the 1996 Telecom Act to provide telecommunicationsservices without obtaining a separate local franchise. States are authorized,however, to impose "competitively neutral" requirements regarding universalservice, public safety and welfare, service quality, and consumer protection.State and local governments also retain their authority to manage the publicrights-of-way and may require reasonable, competitively neutral compensation formanagement of the public rights-of-way when cable operators providetelecommunications service. 43Internet Service. Although there is at present no significant federal regulationof cable system delivery of Internet services, and the FCC has issued severalreports finding no immediate need to impose such regulation, this situation maychange as cable systems expand their broadband delivery of Internet services. Inparticular, proposals have been advanced at the FCC and Congress that wouldrequire cable operators to provide access to unaffiliated Internet serviceproviders and online service providers. The FCC recently rejected a petition bycertain Internet service providers attempting to use existing modes of accessthat are commercially leased to gain access to cable system delivery. Somestates and local franchising authorities are considering the imposition ofmandatory Internet access requirements as part of cable franchise renewals ortransfers and a few local jurisdictions have adopted these requirements. TheFederal Trade Commission and the FCC recently imposed certain "open-access"requirements on Time Warner and AOL in connection with their merger, but thoserequirements are not applicable to other cable operators.In June 2000, the Federal Court of Appeals for the Ninth Circuit rejected anattempt by the City of Portland, Oregon to impose mandatory Internet accessrequirements on the local cable operator. In reversing a contrary ruling by the lower court, the Ninth Circuit court held that Internet service was not a cableservice, and therefore could not be subject to local cable franchising. At thesame time, the Court suggested that at least the transport component ofbroadband Internet service could be subject to regulation as a"telecommunications" service. Although regulation of this form oftelecommunications service would presumably be reserved for the FCC (which hasso far resisted requests for active regulation), some states may argue that theyare entitled to impose "open-access" requirements pursuant to their authorityover intrastate telecommunications. In addition, some local governments mayargue that a cable operator must secure a local telecommunications franchisebefore providing Internet service.In response to the Ninth Circuit decision, the FCC has initiated a newproceeding to determine what regulatory treatment, if any, should be accorded tocable modem service and the cable modem platform used in providing this service.More specifically, the Notice seeks comment on the parameters the Commissionshould use in determining the appropriate level of access to cable networks forthe provision of high-speed data services. The Ninth Circuit decision is theleading case on cable-delivered Internet service at this point, but the FederalDistrict Court for the Eastern District of Virginia reached a similar result ina May 2000 ruling, concluding that broadband Internet service was a cableservice, but that multiple provisions of the Telecommunications Act preemptedlocal regulation. A Federal district court in Florida recently addressed asimilar "open-access" requirement in a local franchise and struck down therequirement as unconstitutional. There are other instances where "open-access"requirements have been imposed and judicial challenges are pending.If regulators are allowed to impose Internet access requirements on cableoperators, it could burden the capacity of cable systems and complicate our ownplans for providing expanded Internet access services. These access obligationscould adversely impact our profitability and discourage system upgrades and theintroduction of new products and services.LEC 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. 44A federal appellate court overturned various parts of the FCC's open videorules, including the FCC's preemption of local franchising requirements for openvideo operators. The FCC has modified its open video rules to comply with thefederal court's decision. It is unclear what effect this ruling will have on theentities pursuing open video system operation.Although local exchange carriers and cable operators can now expand theirofferings across traditional service boundaries, the general prohibition remainson local exchange carrier buyouts of co-located cable systems. Co-located cablesystems are cable systems serving an overlapping territory. Cable operatorbuyouts of co-located local exchange carrier systems, and joint ventures betweencable operators and local exchange carriers in the same market are alsoprohibited. The 1996 Telecom Act provides a few limited exceptions to thisbuyout prohibition, including a carefully circumscribed "rural exemption." The1996 Telecom Act also provides the FCC with the limited authority to grantwaivers of the buyout prohibition.Ownership Limitations. Pursuant to the 1992 Cable Act, the FCC adopted rulesprescribing national subscriber limits. While a federal district court hasdeclared these limitations to be unconstitutional and delayed its enforcement,the FCC has reconsidered its cable ownership regulations and (i) reaffirmed its30% nationwide subscriber ownership limit, but maintained its voluntary stay onenforcement of that regulation pending further court action, (ii) reaffirmed its subscriber ownership information reporting requirements, and (iii) modified itsattribution rules that identify when the ownership or management by us or thirdparties of other communications businesses, including cable systems, televisionbroadcast stations and local telephone companies, may be imputed to us forpurposes of determining our compliance with the FCC's ownership restrictions.Also pending on appeal is a challenge to the statutory and FCC regulatorylimitations on the number of channels that can be occupied on a cable system bya video programmer in which a cable operator has an attributable ownershipinterest. We do not expect the outcome of these judicial and regulatoryproceedings or the impact of any ownership restrictions to have a materialimpact on our business and operations.The 1996 Telecom Act generally prohibits us from owning or operating a SMATV orwireless cable system in any area where we provide franchised cable service. Wemay, however, acquire and operate SMATV systems in our franchised service areasif the programming and other services provided to SMATV subscribers are offeredaccording to the terms and conditions of our franchise agreement.The 1996 Telecom Act eliminated the statutory prohibition on the commonownership, operation or control of a cable system and a television broadcaststation in the same market. While the FCC has eliminated its regulations thatprecluded the cross-ownership of a national broadcasting network and a cablesystem, it has not yet completed its review of other regulations that prohibitthe common ownership of other broadcasting interests and cable systems in thesame geographical areas.Pursuant to the 1992 Cable Act, the FCC adopted rules precluding a cable systemfrom devoting more than 40% of its activated channel capacity to the carriage ofaffiliated national video program services. Also pursuant to the 1992 Cable Act,the FCC has adopted rules that preclude any cable operator from serving morethan 30% of all U.S. domestic multichannel video subscribers, including cableand direct broadcast satellite subscribers. The D.C. District Court of Appealsupheld this statutory restriction, and the FCC has now ruled that AT&T mustdivest certain properties to come into compliance. The FCC's implementation ofownership restrictions is currently subject to judicial review.The FCC recently voted to suspend the timetable for AT&T to reduce its 42percent share of the cable market to below the 30 percent cap which was requiredas a condition of the agency's approval of AT&T's acquisition of MediaOne Group.The U.S. Court of Appeals for the District of Columbia ruled that the 30 percentcap was arbitrary and unconstitutional. As a result, the FCC ordered that boththe interim March 20, 2001 deadline and the final compliance deadline of May 19,2001 are suspended pending further order of the FCC. The suspension 45gives the FCC an opportunity to determine the relationship, if any, between thecourt's decisions on the ownership rules, imposed to promote competition in thecable industry, and conditions on AT&T.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. Broadcast signal carriage is the transmission of broadcasttelevision signals over a cable system to cable customers. A cable systemgenerally is required to devote up to one-third of its activated channelcapacity for the carriage of local commercial television stations whetherpursuant to the mandatory carriage or retransmission consent requirements of the1992 Cable Act. Local non-commercial television stations are also givenmandatory carriage rights; however, such stations are not given the option tonegotiate retransmission consent for the carriage of their signals by cablesystems. Additionally, cable systems are required to obtain retransmissionconsent for all distant commercial television stations (except for commercialsatellite-delivered independent "superstations" such as WGN), commercial radiostations and certain low-power television stations carried by such systems.Must carry requests can dilute the appeal of a cable system's programmingofferings because a cable system with limited channel capacity may be requiredto forego carriage of popular channels in favor of less popular broadcaststations electing must carry. Retransmission consent demands may requiresubstantial payments or other concessions. The FCC tentatively decided against imposition of dual digital and analog mustcarry in a January 2001 ruling. The ruling resolved a number of technical andlegal matters, and clarifies that a digital-only TV station, commercial ornon-commercial, can immediately assert its right to carriage on a local cablesystem. The FCC also said that a TV station that returns its analog spectrum andconverts to digital operations must be carried by local cable systems. At thesame time, however, it initiated further fact gathering that ultimately couldlead to a reconsideration of the tentative conclusion.We are unable to predict the outcome of this proceeding or the impact any newcarriage requirements might have on the operations of our cable systems.Designated Access Channels. The Communications Act permits local franchisingauthorities to require cable operators to set aside certain channels for public,educational and governmental access programming. The 1984 Cable Act alsorequires cable systems to designate a portion of their channel capacity, up to15% in some cases, for commercial leased access by unaffiliated third parties toprovide programming that may compete with services offered by the cableoperator. The FCC has adopted rules regulating the terms, conditions and maximumrates a cable operator may charge for commercial leased access use. The FCCrecently rejected a request that unaffiliated Internet service providers befound eligible for commercial leased access.Access to Programming. To spur the development of independent cable programmersand competition to incumbent cable operators, the 1992 Cable Act imposedrestrictions on the dealings between cable operators and cable programmers. Ofspecial significance from a competitive business posture, the 1992 Cable Actprecludes video programmers affiliated with cable companies from favoring theircable operators over new competitors and requires such programmers to sell theirprogramming to other multichannel video distributors. This provision limits theability of vertically integrated cable programmers to offer exclusiveprogramming arrangements to cable companies. This prohibition is scheduled toexpire in October 2002, unless the FCC determines that an extension is necessaryto protect competition and diversity. There also has been interest expressed infurther restricting the marketing practices of cable programmers, includingsubjecting programmers who are not affiliated with cable operators to all of theexisting program access requirements, and subjecting terrestrially deliveredprogramming to the program access requirements. Terrestrially deliveredprogramming is programming delivered other than by satellite. Pursuant to theSatellite Home Viewer Improvement Act, the FCC has adopted regulations governing 46retransmission consent negotiations between broadcasters and all multichannelvideo programming distributors, including cable and DBS.Inside Wiring; Subscriber Access. In an order issued in 1997, the FCCestablished rules that require an incumbent cable operator upon expiration of amultiple dwelling unit service contract to sell, abandon, or remove "home run"wiring that was installed by the cable operator in a multiple dwelling unitbuilding. These inside wiring rules are expected to assist building owners intheir attempts to replace existing cable operators with new programmingproviders who are willing to pay the building owner a higher fee, where such afee is permissible. The FCC has also proposed abrogating all exclusive multipledwelling unit service agreements held by incumbent operators, but allowing suchcontracts when held by new entrants. In another proceeding, the FCC haspreempted restrictions on the deployment of private antennas on rental propertywithin the exclusive use of a tenant, such as balconies and patios. This FCCruling may limit the extent to which we along with multiple dwelling unit ownersmay enforce certain aspects of multiple dwelling unit agreements which otherwiseprohibit, for example, placement of digital broadcast satellite receiverantennae in multiple dwelling unit areas under the exclusive occupancy of arenter. These developments may make it even more difficult for us to provideservice in multiple dwelling unit complexes.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 andcollocated MMDS or SMATV systems. The FCC has relaxed its restrictions onownership of SMATV systems to permit a cable operator to acquire SMATV systemsin the operator's existing franchise area so long as the programming servicesprovided through the SMATV system are offered according to the terms andconditions of the cable operator's local franchise agreement. The 1996 TelecomAct provides that the cable/SMATV and cable/MMDS cross-ownership rules do notapply in any franchise area where the operator faces "effective competition" asdefined 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 obtainmodification 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. We cannot predict theultimate resolution of these matters. The 1996 Telecom Act generally prohibitsfranchising authorities from (i) imposing requirements in the cable franchisingprocess that require, prohibit or restrict the provision of telecommunicationsservices by an operator, (ii) imposing franchise fees on revenues derived by theoperator from providing telecommunications services over its cable system, or(iii) restricting an operator's use of any type of subscriber equipment ortransmission 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 that 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 47renewed for cable operators that have provided satisfactory services and havecomplied with the terms of their franchises. We believe that we have generallymet the terms of our franchises and have provided quality levels of service. Weanticipate that our future franchise renewal prospects generally will befavorable.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.Pole Attachment. The Communications Act requires the FCC to regulate the rates,terms and conditions imposed by public utilities for cable systems' use ofutility 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.The FCC has concluded that, in the absence of state regulation, it hasjurisdiction to determine whether utility companies have justified their demandfor additional rental fees and that the Communications Act does not permitdisparate rates based on the type of service provided over the equipmentattached to the utility's pole. The FCC's existing pole attachment rate formula,which may be modified by a pending rulemaking, governs charges for utilities forattachments by cable operators providing only cable services. The 1996 TelecomAct and the FCC's implementing regulations modify the current pole attachmentprovisions of the Communications Act by immediately permitting certain providersof telecommunications services to rely upon the protections of the current law and by requiring that utilities provide cable systems and telecommunicationscarriers with nondiscriminatory access to any pole, conduit or right-of-waycontrolled by the utility. The FCC's new rate formula, effective in 2001, will govern the maximum ratecertain utilities may charge for attachments to their poles and conduit bycompanies providing telecommunications services, including cable operators.Several parties have requested the FCC to reconsider its new regulations andseveral parties have challenged the new rules in court. A federal appellatecourt recently upheld the constitutionality of the statutory provision thatrequires utilities provide cable systems and telecommunications carriers withnondiscriminatory access to any pole, conduit or right-of-way controlled by theutility.The favorable pole attachment rates afforded cable operators under federal lawcan be gradually increased by utility companies owning the poles, beginning in2001, if the operator provides telecommunications service, as well as cableservice, over its plant. The FCC clarified that a cable operator's favorablepole rates are not endangered by the provision of Internet access, but a recentdecision by the 11th Circuit Court of Appeals disagreed and suggested thatInternet traffic is neither cable service nor telecommunications service andmight leave cable attachments that carry Internet traffic ineligible for PoleAttachment Act protections. This decision could lead to substantial increases inpole attachment rates. The cable industry sought review by the United StatesSupreme Court, which is now reviewing the decision, and the Eleventh Circuitmandate has been stayed pending Supreme Court action.We are unable to predict the outcome of the legal challenge to the FCC'sregulations or the ultimate impact any revised FCC rate formula or any new poleattachment rate regulations might have on our business and operations.Copyright. Cable television systems are subject to federal copyright licensingcovering carriage of television and radio broadcast signals. In exchange forfiling certain reports and contributing a percentage of their revenues to afederal copyright royalty pool, that varies depending on the size of the system,the number of distant broadcast television signals carried, and the location ofthe cable system, cable operators can obtain blanket permission to retransmitcopyrighted material included in broadcast signals. The U.S. copyright officerecently adopted an 48industry agreement providing for a modest increase in the copyright royaltyrates. The possible modification or elimination of this compulsory copyrightlicense is the subject of continuing legislative review and could adverselyaffect our ability to obtain desired broadcast programming. We cannot predictthe outcome of this legislative activity. Copyright clearances for nonbroadcastprogramming services are arranged through private negotiations.Cable operators distribute locally originated programming and advertising thatuse music controlled by the two principal major music performing rightsorganizations, the American Society of Composers, Authors and Publishers andBroadcast Music, Inc. The cable industry has had a long series of negotiationsand adjudications with both organizations. A prior voluntarily negotiatedagreement with Broadcast Music has now expired, and is subject to furtherproceedings. The governing rate court recently set retroactive and prospectivecable industry rates for American Society of Composers music based on thepreviously negotiated Broadcast Music rate. Although we cannot predict theultimate outcome of these industry proceedings or the amount of any license feeswe may be required to pay for past and future use of association-controlledmusic, we do not believe such license fees will be significant to our businessand operations.Other Statutory and FCC Provisions. The 1992 Cable Act requires cable operatorsto block fully both the video and audio portion of sexually explicit or indecentprogramming on channels that are primarily dedicated to sexually orientedprogramming or alternatively to carry such programming only at "safe harbor"time periods currently defined by the FCC as the hours between 10 p. m. to 6 a.m. A three-judge federal district court determined that this provision wasunconstitutional. The United States Supreme Court is currently reviewing thelower court's ruling. The Communications Act also includes provisions, amongothers, concerning horizontal and vertical ownership of cable systems, customerservice, subscriber privacy, marketing practices, equal employment opportunity,regulation of technical standards and equipment compatibility. The FCC has various rulemaking proceedings pending that will implement the 1996Telecom Act; it also has adopted regulations implementing various provisions ofthe 1992 Cable Act and the 1996 Telecom Act that are the subject of petitionsrequesting reconsideration of various aspects of its rulemaking proceedings. TheFCC has the authority to enforce its regulations through the imposition ofsubstantial fines, the issuance of cease and desist orders and/or the impositionof other administrative sanctions, such as the revocation of FCC licenses neededto operate certain transmission facilities often used in connection with cableoperations.Other Regulations of the FCC. In addition to the FCC regulations noted above,there are other regulations of the FCC covering such areas as the following. - Equal employment opportunity - Subscriber privacy - Programming practices, including, among other things - Syndicated program exclusivity, which is a FCC rule which requires a cable system to delete particular programming offered by a distant broadcast signal carried on the system which duplicates the programming for which a local broadcast station has secured exclusive distribution rights - Network program nonduplication - Local sports blackouts - Indecent programming - Lottery programming - Political programming - Sponsorship identification - Children's programming advertisements - Closed captioning - Registration of cable systems and facilities licensing - Maintenance of various records and public inspection files 49 - Aeronautical frequency usage - Lockbox availability - Antenna structure notification - Tower marking and lighting - Consumer protection and customer service standards - Technical standards - Consumer electronics equipment compatibility - Emergency alert systemsThe FCC recently ruled that cable customers must be allowed to purchase cableconverters from third parties and established a multi-year phase-in during whichsecurity functions, which would remain in the operator's exclusive control,would be unbundled from basic converter functions, which could then be satisfiedby third party vendors. The first phase implementation date was July 1, 2000.Compliance was technically and operationally difficult in our locations, so weand several other cable operators filed a request at the FCC that therequirement be waived in those systems. The request resulted in a temporarydeferral of the compliance deadline for those systems.The FCC recently initiated an inquiry to determine whether the cable industry'sfuture provision of interactive services should be subject to regulationsensuring equal access and competition among service vendors. The inquiry, whichgrew out of the Commission's review of the AOL-Time Warner merger, is in itsearliest stages, but is yet another expression of regulatory concern regardingcontrol over cable capacity.The FCC has ongoing rulemaking proceedings that may change its existing rules orlead to new regulations. We are unable to predict the impact that any furtherFCC rule changes may have on our business and operations. Other bills andadministrative proposals pertaining to cable communications have previously beenintroduced in Congress or have been considered by other governmental bodies overthe past several years. It is probable that Congress and other governmentalbodies will make further attempts to regulate cable communications services.State and Local Regulation. Because our cable communications systems use localstreets and rights-of-way, our systems are subject to state and localregulation. Cable communications systems generally are operated pursuant tofranchises, permits or licenses granted by a municipality or other state orlocal government entity. Federal law prohibits local franchising authorities from granting exclusive franchises or from unreasonably refusing to awardadditional franchises. Franchises generally are granted for fixed terms and inmany cases are terminable if the franchisee fails to comply with materialprovisions. The terms and conditions of franchises vary materially fromjurisdiction 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. The1996 Telecom Act provides that franchising fees are limited to an operator'scable-related revenues and do not apply to revenues that a cable operatorderives from providing new telecommunications services.Internet OperationsThe following is a summary of federal laws, regulations and tariffs, and adescription of certain state and local laws pertaining to our Internetoperations.General. With significant growth in Internet activity and commerce over the pastseveral years the FCC and other regulatory bodies have been challenged todevelop new models that allow them to achieve the public policy goals ofcompetition and universal service. Many aspects of regulation and coordinationof Internet activities and 50traffic are evolving and are facing unclear regulatory futures. Changes inregulations in the future will have a significant impact on ISPs, Internetcommerce 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. Internet Governance and Standards. There is no one entity or organization thatgoverns the Internet. Each facilities-based network provider that isinterconnected with the global Internet controls operational aspects of theirown network. Certain functions, such as domain name routing and the definitionof the TCP/IP protocol, are coordinated by an array of quasi-governmental,intergovernmental, and non-governmental bodies. The United States government, inmany cases, has handed over responsibilities to these bodies through contractualor 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. The Internet Engineering TaskForce ("IETF"), an open international body mostly comprised of volunteers, isprimarily responsible for developing Internet standards and protocols. The workof the IETF is coordinated by the Internet Engineering Steering Group, and theInternet Architecture Board, which are affiliated with ISOC. The InternetAssigned Numbers Authority handles Internet addressing matters under a contractbetween the Department of Defense and the Information Sciences Institute at theUniversity of Southern California. 51The 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.1996 Telecom Act. The 1996 Telecom Act provides little direct guidance as towhether the FCC has authority to regulate Internet-based services. Section 223concerns access by minors to obscene, harassing, and indecent material over theInternet and other interactive computer networks, and sections 254, 706, and 714address mechanisms to promote the availability of advanced telecommunicationsservices, possibly including Internet access. 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.FCC Regulations. The FCC has not attempted to regulate the companies thatprovide the software and hardware for Internet telephony, or the accessproviders that transmit their data, as common carriers or telecommunicationsservice providers. In March 1996, America's Carriers TelecommunicationAssociation ("ACTA"), a trade association primarily comprised of small andmedium-size interexchange carriers, filed a petition with the FCC asking the FCCto regulate Internet telephony. ACTA argues that providers of software thatenables real-time voice communications over the Internet should be treated ascommon carriers and subject to the regulatory requirements of Title II. The FCChas sought comment on ACTA's request. Other countries are considering similarissues.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, rather 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. 52Internet 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 was created when theFCC established the access charge system in 1983. Thus, when ISPs purchase linesfrom LECs, the ISPs buy those lines under the same tariffs that any businesscustomer would use -- typically voice grade measured business lines or23-channel ISDN primary rate interface (PRI). Although these services generallyinvolve a per-minute usage charge in addition to a monthly fee, the usage chargeis assessed only for outbound calls. ISPs, however, exclusively use these linesto receive calls from their customers, and thus effectively pay flat monthlyrates. By contrast, IXCs that interconnect with LECs are considered carriers,and thus are required to pay interstate access charges for the services theypurchase. Most of the access charges that carriers pay are usage-sensitive inboth directions. Thus, IXCs are assessed per-minute charges for both originatingand terminating calls. The FCC concluded in the Local Competition Order that therate levels of access charges appear to significantly exceed the incrementalcost of providing these services. The FCC in December 1996 launched acomprehensive proceeding to reform access charges in a manner consistent witheconomic efficiency and the development of local competition.State and Local Regulations. The revenue effects of Internet usage today dependto a significant extent on the structure of state and local tariffs. Internetusage generates less revenue for LECs in states and jurisdictions where flatlocal service rates have been set low, with compensating revenues in the form ofper-minute intrastate toll charges. Because ISPs only receive local calls, theydo not incur these usage charges. By contrast, in states and jurisdictions whereflat charges make up a higher percentage of LEC revenues, ISPs will have a lesssignificant revenue effect. ISP usage is also affected by the relative pricingof services such as ISDN Primary Rate Interface (PRI), frame relay, andfractional T-1 connections, which are alternatives to analog business lines.Prices for these services, and the price difference on a per-voice-channel basisbetween the options available to ISPs, vary widely across different states andjurisdictions. In many cases, tariffs for these and other data services arebased on assumptions that do not reflect the realities of the Internet accessmarket today. The scope of local calling areas also affects the architecture ofInternet access services. In states and jurisdictions with larger unmeasuredlocal calling areas, ISPs need fewer POPs in order to serve the same customersthrough a local call.We are presently unable to determine what the impact of potential Internetregulatory actions and decisions will be on our liquidity, results of operationsand cash flows.Financial Information about our Foreign and Domestic Operations and Export SalesAlthough we have several agreements to help originate and terminateinternational toll traffic, we do not have foreign operations or export sales.We conduct our operations throughout the western contiguous United States,Alaska and Hawaii and believe that any subdivision of our operations intodistinct geographic areas would not be meaningful. Revenues associated withinternational toll traffic were $3.8 million, $5.5 million and $7.0 million forthe years ended December 31, 2000, 1999, and 1998, respectively.SeasonalityOur long-distance revenues have historically been highest in the summer monthsas a result of temporary population increases attributable to tourism andincreased seasonal economic activity such as construction, commercial fishing,and oil and gas activities. Our cable television revenues, on the other hand, are higher in the winter months because consumers tend to watch more television,and spend more time at home, during these months. Our local service and Internetoperations are not expected to exhibit significant seasonality, with theexception of SchoolAccess(TM) Internet services that are reduced during thesummer months. Our ability to implement construction projects is also reducedduring the winter months because of cold temperatures, snow and short daylighthours.Customer-Sponsored ResearchWe have not expended material amounts during the last three fiscal years oncustomer-sponsored research activities. 53Backlog of Orders and InventoryAs of December 31, 2000 and 1999, our long-distance services segment had abacklog of equipment sales and private line orders of approximately $1,570,000and $830,000, respectively. Approximately $1.0 million of the 2000 backlogrepresents recurring monthly charges for private line and telemedicine services.The increase in backlog as of December 31, 2000 can be attributed to acombination of increased equipment sales activity at the end of the fourthquarter in 2000 as compared to 1999 and increased private line circuit orderspending at December 31, 2000 as compared to 1999. Many of our customers delayedequipment orders so that their systems would be stable at the turn of thecentury, resulting in reduced sales activity and order backlog at December 31,1999. We expect that all of the equipment sales and private line orders inbacklog at the end of 2000 will be delivered during 2001.We entered into an agreement effective July 1999 for a $19.5 million sale offiber capacity that was completed in January 2001 (see note 14 to theConsolidated Financial Statements included in Part II of this Report for moreinformation).Geographic Concentration and Alaska EconomyWe offer voice and data telecommunication and video services to customersprimarily throughout Alaska. As a result of this geographic concentration,growth of our business and our operations depend upon economic conditions inAlaska. The economy of Alaska is dependent upon the natural resource industries,and in particular oil production, as well as investment earnings, tourism,government, and United States military spending. Any deterioration in thesemarkets could have an adverse impact on us. Oil revenues are now the thirdlargest source of state revenues, following investment income and federal funds.You should see Part II, Item 7 Management's Discussion and Analysis of FinancialCondition and Results of Operations for more information about the effect ofgeographic concentration and the Alaska Economy on us.EmployeesWe employed 1,092 persons as of March 14, 2001, and are not parties to unioncontracts with our employees. We believe our future success will depend upon ourcontinued ability to attract and retain highly skilled and qualified employees.We believe that relations with our employees are satisfactory.OtherNo material portion of our businesses is subject to renegotiation of profits ortermination of contracts at the election of the federal government.Item 2. PropertiesGeneralOur properties do not lend themselves to description by character or location ofprincipal units. Our investment in property, plant and equipment in ourconsolidated operations consisted of the following at December 31: 54 2000 1999 ------ ------ Telephone distribution systems 58.0% 64.5% Cable television distribution systems 21.1% 23.1% Support equipment 8.1% 10.2% Property and equipment under capital leases 10.0% 0.7% Construction in progress 1.4% 0.7% Transportation equipment 0.8% 0.5% Land and buildings 0.6% 0.3% -------------------- Total 100.0% 100.0% ====================These properties are divided among our operating segments at December 31, 2000as follows: long-distance services, 58.3%; cable services, 22.5%; local accessservices, 6.5%; Internet services, 4.9%; and other, 7.8%.These properties consist primarily of switching equipment, satellite earthstations, fiber-optic networks, microwave radio and cable and wire facilities,cable head-end equipment, coaxial distribution networks, routers, servers,transportation equipment, computer equipment and general office equipment.Substantially all of our properties secure our Senior Holdings Loan and FiberFacility. You should see note 4 to the Notes to Consolidated FinancialStatements included in Part II of this Report for further discussion.Our construction in progress totaled $8.1 million at December 31, 2000,consisting of telecommunications, Internet and support systems projects thatwere incomplete at December 31, 2000. Our construction in progress totaled $2.9million at December 31, 1999, consisting of telecommunications, cable andInternet projects that were incomplete at December 31, 1999.Central office equipment, buildings, furniture and fixtures and certainoperating and other equipment are insured under a blanket property insuranceprogram. This program provides substantial limits of coverage against "allrisks" of loss including fire, windstorm, flood, earthquake and other perils notspecifically excluded by the terms of the policies. We currently self-insure allof our cable and fiber optic outside plant against casualty losses.Long-Distance ServicesWe operate a modern, competitive telecommunications network employing the latestdigital transmission technology based upon fiber optic and digital microwavefacilities within and between Anchorage, Fairbanks and Juneau. Our networkincludes digital fiber optic cables linking Alaska to the contiguous 48 statesand providing access to other carriers' networks for communications around theworld. We use satellite transmission to remote areas of Alaska and for certaininterstate and intrastate traffic.Our long-distance services segment owns properties and facilities includingsatellite earth stations, and distribution, transportation and office equipment.Additionally, in December 1992 we acquired access to capacity on an underseafiber optic cable from Seward, Alaska to Pacific City, Oregon. We completedconstruction of an additional fiber optic cable facility linking Alaska toSeattle, Washington in February 1999, which is owned subject to an outstandingmortgage.We entered into a purchase and lease-purchase option agreement in August 1995for the acquisition of satellite transponders on the PanAmSat Galaxy XRsatellite to meet our long-term satellite capacity requirements. We operate thesatellite pursuant to a long-term capital lease arrangement with a leasingcompany. The purchase and lease-purchase option agreement provided for theinterim lease of transponder capacity on the PanAmSat Galaxy IX satellitethrough the delivery of the purchased transponders on Galaxy XR in March 2000. 55We lease our long-distance services industry segment's executive, corporate andadministrative facilities in Anchorage, Fairbanks and Juneau, Alaska. Ouroperating, executive, corporate and administrative properties are in goodcondition. We consider our properties suitable and adequate for our presentneeds and they are being fully utilized.Cable ServicesThe Cable Systems serve 31 communities and areas in Alaska including Anchorage,Fairbanks and Juneau, the state's three largest urban areas. As of December 31,2000 the Cable Systems consisted of approximately 1,851 miles of installed cableplant having between 300 to 550 MHz of channel capacity. Our principal physicalassets consist of a cable television distribution plant and equipment, includingsignal receiving, encoding and decoding devices, headend reception facilities,distribution systems and customer drop equipment for each of our cabletelevision systems. Our cable television plant and related equipment are generally attached toutility poles under pole rental agreements with local public utilities andtelephone companies, and in certain locations are buried in underground ducts ortrenches. We own or lease real property for signal reception sites and businessoffices in many of the communities served by our systems and for our principalexecutive offices.We own the receiving and distribution equipment of each system. In order to keeppace with technological advances, we are maintaining, periodically upgrading andrebuilding the physical components of our cable communications systems. Suchproperties are in good condition. We own all of our service vehicles. Weconsider our properties suitable and adequate for our present and anticipatedfuture needs.Local Access ServicesWe operate a modern, competitive local access telecommunications networkemploying the latest digital transmission technology based upon fiber opticfacilities within Anchorage. Our outside plant consists of connecting lines(aerial, underground and buried cable) not on customers' premises, the majorityof which is on or under public roads, highways or streets, while the remainderis on or under private property. Central office equipment primarily consists ofdigital electronic switching equipment and circuit equipment. Operatingequipment consists of motor vehicles and other equipment.Substantially all of our local access services' central office equipment,administrative and business offices, and customer service centers are in leasedfacilities. Such properties are in good condition. We consider our propertiessuitable and adequate for our present and anticipated future needs.Internet ServicesWe operate a modern, competitive Internet network employing the latest availabletechnology. We provide access to the Internet using a platform that includesmany of the latest advancements in technology. The physical platform isconcentrated in Anchorage and is extended into many remote areas of the state.Our Internet platform includes a trunk connecting the Anchorage POP to Internetaccess points in Seattle through multiple, diversely routed upstream Internetnetworks, and various other routers, servers and support equipment.We lease our Internet services industry segment's operating facilities, locatedprimarily in Anchorage. Such properties are in good condition. We consider ourproperties suitable and adequate for our present and anticipated future needs.Capital ExpendituresCapital expenditures consist primarily of (a) gross additions to property, plantand equipment having an estimated service life of one year or more, plus theincidental costs of preparing the asset for its intended use, and (b) grossadditions to capitalized software. 56The total investment in property, plant and equipment has increased from $178.2million at January 1, 1996 to $507.9 million at December 31, 2000, includingconstruction in progress and not including deductions of accumulateddepreciation. Significant additions to property, plant and equipment will berequired in the future to meet the growing demand for communications, Internetand entertainment services and to continually modernize and improve suchservices to meet competitive demands.Our capital expenditures for 1996 through 2000 were as follows (in millions): 1996 $ 38.6 1997 $ 64.6 1998 $149.0 1999 $ 36.6 2000 $ 48.9We project capital expenditures of approximately $45 to $51 million for 2001,consisting of $25 to $27 million for long-distance services, $10 to $11 millionfor cable services, $4 to $5 million for local access services, $5 to $6 millionfor Internet services, and $1 to $2 million for wireless services. A majority ofthe expenditures will expand, enhance and modernize our current networks,facilities and operating systems, and will develop wireless and otherbusinesses. During 2000, we funded our normal business capital requirements substantiallythrough internal sources and, to the extent necessary, from external financingsources. We expect expenditures for 2001 to be financed in the same manner.InsuranceWe have insurance to cover risks incurred in the ordinary course of business,including general liability, property coverage, business interruption andworkers' compensation insurance in amounts typical of similar operators in ourindustry and with reputable insurance providers. As is typical in the cableindustry, we do not insure our outside plant. We believe our insurance coverageis adequate.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. We are parties to various claims and pendinglitigation as part of the normal course of business. We are also involved inseveral administrative proceedings and filings with the FCC, Department of Laborand state regulatory authorities. In the opinion of management, the nature anddisposition of these matters are considered routine and arising in the ordinarycourse of business which management believes, even if resolved unfavorably tous, would not have a materially adverse affect on our business or financialposition, results of operations or liquidity.Item 4. Submission of Matters to a Vote of Security HoldersNo matters were submitted during the fourth quarter of 2000 to a vote ofsecurity holders, through the solicitation of proxies or otherwise 57 Part IIItem 5. Market for the Registrant's Common Equity and Related StockholderMattersMarket Information for Common StockShares of GCI's Class A common stock are traded on the Nasdaq National Markettier of The Nasdaq Stock Market under the symbol GNCMA. Shares of GCI's Class Bcommon stock are traded on the Over-the-Counter market. Each share of Class Bcommon stock is convertible, at the option of the holder, into one share ofClass A common stock. The following table sets forth the high and low salesprice for the above-mentioned common stock for the periods indicated. Marketprice data were obtained from the Nasdaq Stock Market quotation system. 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 1999: First Quarter 5 1/4 4 5 1/4 4 Second Quarter 8 4 8 4 Third Quarter 7 4 3/4 7 4 3/4 Fourth Quarter 6 1/4 3 3/4 6 1/4 3 3/4 2000: First Quarter 7 7/8 4 7 7/8 4 Second Quarter 5 7/8 4 3/8 5 7/8 4 3/8 Third Quarter 8 1/8 4 5/8 8 1/8 4 5/8 Fourth Quarter 8 4 7/8 8 4 7/8HoldersAs of December 31, 2000 there were 1,819 holders of record of GCI's Class Acommon stock and 530 holders of record of GCI's Class B common stock (amounts donot include the number of shareholders whose shares are held of record bybrokers, but do include the brokerage house as one shareholder).DividendsGCI and GCI, Inc. have never paid cash dividends on their common stock and haveno present intention of doing so. Payment of cash dividends in the future, ifany, will be determined by GCI's Board of Directors in light of our earnings,financial condition and other relevant considerations. Our existing bank loan agreements contain provisions that prohibit payment of dividends, other thanstock dividends (you should see note 4 to the Consolidated Financial Statementsincluded in Part II of this Report for more information).Stock Transfer Agent and RegistrarMellon Investor Services LLC is our stock transfer agent and registrar.Item 6. Selected Financial DataThe following table presents selected historical information relating tofinancial condition and results of operations over the past five years. 58 Years ended December 31, ------------------------------------------------------- 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- (Amounts in thousands except per share amounts) Revenues (1) $292,605 279,179 246,795 223,809 164,894 Net earnings (loss) before income taxes, extraordinary item and cumulative effect of a change in accounting principle (2) $(21,649) (14,866) (10,920) (2,235) 12,690 Loss on early extinguishment of debt, net of income tax benefit of $180 $ 0 0 0 521 0 Cumulative effect of a change in accounting principal, net of income tax benefit of $245 $ 0 344 0 0 0 Net earnings (loss) (13,234) (9,527) (6,797) (2,183) 7,462 Basic net earnings (loss) per common share $ (0.29) (0.21) (0.14) (0.05) 0.28 Diluted net earnings (loss) per common share $ (0.29) (0.21) (0.14) (0.05) 0.27 Total assets (3) $679,007 643,151 649,445 545,302 447,335 Long-term debt, including current portion (3) $334,400 339,400 351,657 250,084 223,242 Obligations under capital leases, including current portion (5) $ 48,696 1,674 2,186 1,188 746 Total stockholders' equity (4) $183,480 192,548 200,007 204,439 149,554 Dividends declared per Common share (6) $ 0.00 0.00 0.00 0.00 0.00 --------------------- 1 The 1997 revenue increase is primarily attributed to reporting 12 months of cable television service revenues as compared to two months reported in 1996. 2 Our net losses in 2000, 1999, 1998 and 1997 are primarily attributed to additional depreciation, amortization and interest expense resulting from the cable company acquisitions in October 1996. Net losses in 1999, 1998 and 1997 are also attributed to startup losses from our entry into local access services and Internet services markets. Net losses in 2000 are also attributed to additional interest expense resulting from our capital lease of satellite transponders in 2000 as further described in footnote 5 below. 3 Increases in assets and long-term debt in 1998 as compared to 1997 result primarily from our construction of a fiber-optic system connecting points in Alaska with Seattle Washington as further described in note 8 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 our equity offering in August 1997. 5 We entered into a capital lease with a leasing company in March 2000 for the use of satellite transponders, as further described in note 12 to the accompanying Notes to Consolidated Financial Statements included in Part II of this Report. 6 We have never paid a cash dividend on our common stock and do not anticipate paying dividends in the foreseeable future. We intend to retain our earnings, if any, for the development of our business. Payment of cash dividends in the future, if any, will be determined by the board of directors in light of our earnings, financial condition, credit agreements and other relevant considerations. Our existing bank loan agreements contain provisions that prohibit payment of dividends, other than stock dividends, as further described in note 4 to the Notes to Consolidated Financial Statements included in Part II of this Report. 59Item 7. Management's Discussion and Analysis of Financial Condition and Resultsof OperationsIn the following discussion, General Communication, Inc. and its direct andindirect subsidiaries are referred to as "we," "us" and "our."The following discussion and analysis should be read in conjunction with ourConsolidated Financial Statements and the notes thereto. See - CautionaryStatement Regarding Forward-Looking Statements.OverviewWe have experienced significant growth in recent years through strategic acquisitions, deploying new business lines, and expansion of our existingbusinesses. We have historically met our cash needs for operations andmaintenance capital expenditures through our cash flows from operatingactivities. Cash requirements for acquisitions and other capital expenditureshave been provided largely through our financing activities.Long-Distance ServicesDuring 2000 long-distance services revenue represented 62.4% of consolidatedrevenues. Our provision of interstate and intrastate long-distance services toresidential, commercial and governmental customers and to other common carriers(principally WorldCom and Sprint), and provision of private line and leaseddedicated capacity services accounted for 96.7% of our total long-distanceservices revenues during 2000. Factors that have the greatest impact onyear-to-year changes in long-distance services revenues include the rate perminute charged to customers and usage volumes, usually expressed as minutes ofuse.Revenues from private line and other data services sales increased 31.6% to$29.0 million during 2000 as compared to 1999 due primarily to our increasedsystem capacity and increasing demand for our data services by Internet serviceproviders ("ISP"), commercial and governmental customers, and others.We introduced a broadband product offering to hospitals and health clinics in2000, supplementing broadband revenues derived from our SchoolAccess(TM)offering to rural school districts. Total broadband revenues increased 98.8% to$8.6 million in 2000.Our long-distance cost of sales and services has consisted principally of directcosts of providing services, including local access charges paid to LECs fororiginating and terminating long-distance calls in Alaska, and fees paid toother long-distance carriers to carry calls terminating in areas not served byour network (principally the lower 49 states, most of which calls are carriedover WorldCom's network, and international locations, which calls are carriedprincipally over Sprint's network). During 2000, local access charges accountedfor 68.7% of long-distance cost of sales and services, fees paid to otherlong-distance carriers represented 23.6%, satellite transponder lease andundersea fiber maintenance costs represented 6.5%, and other costs represented1.2% of long-distance cost of sales and services.Our long-distance selling, general, and administrative expenses have consistedof operating and engineering, customer service, sales and communications,management information systems, general and administrative, and legal andregulatory expenses. Most of these expenses consist of salaries, wages andbenefits of personnel and certain other indirect costs (such as rent, travel,utilities, insurance and property taxes). A significant portion of long-distanceselling, general, and administrative expenses, 39.0% during 2000, representsoperating and engineering costs.Long-distance services face significant competition from AT&T Alascom, Inc.,long-distance resellers, and from local telephone companies that have enteredthe long-distance market. The total number of active long-distance residential,commercial and small business customers decreased 2.4% to 88,700 at December 31,2000 as compared to December 31, 1999 primarily due to a competitor's offeringallowing customers to place unlimited 60intrastate and interstate calls for a flat monthly fee. We believe our approachto developing, pricing, and providing long-distance services and bundlingdifferent business segment services will continue to allow us to be competitivein providing those services.Revenues derived from other common carriers increased 16.9% to $71.8 million in2000 as compared to 1999. The increase is due to a 22.6% increase to 682.5million minutes carried for other common carriers offset by a change in the mixof wholesale minutes carried for such customers, which decreased the averagerate charged by 4.7%. In conjunction with the purchase of Kanas (see note 14 tothe accompanying Notes to Consolidated Financial Statements included in Part IIof this Report) we negotiated a contract amendment with WorldCom in March 2001.The amendment extends the contract term for five years to March 2006 and reducesthe rate to be charged by us for certain WorldCom traffic over the extended termof the contract. The Sprint contract was also amended in March 2001 extendingits term two years to March 2004. The amendment reduces the rate to be chargedby us for certain Sprint traffic over the extended term of the contract. Other common carrier traffic routed to us for termination in Alaska is largelydependent on traffic routed to WorldCom and Sprint by their customers. Pricingpressures, new program offerings and market consolidation continue to evolve inthe markets served by WorldCom and Sprint. If, as a result, their traffic isreduced, or if their competitors' costs to terminate or originate traffic inAlaska are reduced, our traffic will also likely be reduced, and our pricing maybe reduced to respond to competitive pressures. We are unable to predict theeffect on us of such changes, however given the materiality of other commoncarrier revenues to us; a significant reduction in traffic or pricing could havea material adverse effect on our financial position, results of operations andliquidity.Cable ServicesDuring 2000, cable television revenues represented 23.2% of consolidatedrevenues. The cable systems serve 31 communities and areas in Alaska, includingthe state's three largest population centers, Anchorage, Fairbanks and Juneau.In October 2000 we announced we had agreed to acquire the assets of G.C.Cablevision, Inc., with over 900 subscribers in Fairbanks and North Pole,Alaska. The transaction closed in March 2001 following regulatory approvals.We generate cable services revenues from four primary sources: (1) programmingservices, including monthly basic or premium subscriptions and pay-per-viewmovies or other one-time events, such as sporting events; (2) equipment rentalsor installation; (3) advertising sales; and (4) cable modem services (sharedwith our Internet services segment). During 2000 programming services generated82.1% of total cable services revenues, equipment rental and installation feesaccounted for 9.4% of such revenues, advertising sales accounted for 4.0% ofsuch revenues, cable modem services accounted for 3.5% of such revenues, andother services accounted for the remaining 1.0% of total cable servicesrevenues. The primary factors that contribute to year-to-year changes in cableservices revenues are average monthly subscription and pay-per-view rates, themix among basic, premium and pay-per-view services and digital and analogservices, the average number of cable television and cable modem subscribersduring a given reporting period, and revenues generated from new productofferings.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 and rental expense.During 2000 programming and copyright expenses represented 45.2% of total cablecost of sales and selling, general and administrative expenses, and general andadministrative costs represented 48.6% of such total. Marketing and advertisingcosts represented approximately 6.2% of such total expenses.Cable services face competition from alternative methods of receiving anddistributing television signals and from other sources of news, information andentertainment. We believe our cable television services will con- 61tinue to be competitive by 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.Local Access ServicesWe generate local access services revenues from three primary sources: (1)business and residential basic dial tone services; (2) business private line andspecial access services; and (3) business and residential features and othercharges, including voice mail, caller ID, distinctive ring, inside wiring andsubscriber line charges. Effective March 1999 we transitioned to the "bill andkeep" cost settlement method for termination of traffic on our facilities and onother's facilities. Local exchange services revenues totaled $20.2 millionrepresenting 6.9% of consolidated revenues in 2000. The primary factors thatcontribute to year-to-year changes in local access services revenues are theaverage number of business and residential subscribers to our services during agiven reporting period and the average monthly rates charged for non-trafficsensitive services.Local access cost of sales represented approximately 46.6% of total local accessservices cost of sales and selling, general and administrative expenses during2000. General and administrative and customer service costs represented approximately 42.1% of such total expenses, marketing and advertising costsrepresented approximately 7.8% of such total expenses, and operating andengineering expenses represented approximately 3.5% of such total expenses.Our local access services segment faces significant competition in Anchoragefrom Alaska Communications Systems, Inc. ("ACS") and AT&T Alascom, Inc. Webelieve our approach to developing, pricing, and providing local access servicesand bundling different business segment services will allow us to be competitivein providing those services.Internet ServicesWe began offering Internet services in several markets in Alaska during 1998. Wegenerate Internet services revenues from three primary sources: (1) accessproduct services, including commercial DIAS, ISP DIAS, and retail dial-upservice revenues; (2) network management services; and (3) cable modem services(a portion of cable modem revenue is recognized by the cable services segment).Internet services segment revenues totaled $8.4 million representing 2.9% oftotal revenues in 2000. The primary factors that contribute to year-to-yearchanges in Internet services revenues are the average number of subscribers toour services during a given reporting period, the average monthly subscriptionrates, and the number and type of additional premium features selected.Operating and general and administrative expenses represented approximately49.1% of total Internet services cost of sales and selling, general andadministrative expenses during 2000. Internet cost of sales representedapproximately 37.6% of such total expenses and marketing and advertisingrepresented approximately 13.3% of such total expenses.Marketing campaigns continue to be deployed featuring bundled residential andcommercial Internet products. Additional bandwidth was made available to ourInternet segment resulting from completion of our Alaska United undersea fiberoptic cable project in 1999. Our Internet offerings are coupled with ourlong-distance and local access services offerings and provide free basicInternet services or discounted premium Internet services if certainlong-distance or local access services plans are selected. Value-added premiumInternet features are available for additional charges.We compete with a number of Internet service providers in our markets. Webelieve our approach to developing, pricing, and providing Internet serviceswill allow us to be competitive in providing those services. 62Other Services, Other Expenses and Net LossTelecommunications services revenues reported in the Other segment as describedin note 9 to the accompanying consolidated financial statements includecorporate network management contracts, telecommunications equipment sales andservice, management services for Kanas Telecom, Inc., a company that owns andoperates a fiber optic cable system constructed along the trans-Alaska oilpipeline corridor extending from Prudhoe Bay to Valdez, Alaska, and othermiscellaneous revenues (including revenues from cellular resale services, fromprepaid and debit calling card sales, and installation and leasing of customer'svery small aperture terminal ("VSAT") equipment).Other services segment revenues represented 4.6% of total revenues in 2000 andincluded network solutions and outsourcing revenues totaling $9.2 million,communications equipment sales totaling $1.9 million and cellular resale andother revenues totaling $2.3 million.During the second quarter of 1999 we completed a $19.5 million sale of long-haulcapacity in our Alaska United undersea fiber optic cable system ("fiber capacitysale") in a cash transaction. The sale included both capacity within Alaska, andbetween Alaska and the lower 49 states. We entered into an agreement effectiveJuly 1999 for a second $19.5 million sale of fiber capacity which was completedin January 2001.We have invested approximately $1.9 million in our PCS license at December 31,2000. We incurred expenditures totaling $560,000 deploying fixed wirelessservice in the Anchorage area in 2000 and expect to incur approximately $460,000in additional expenditures during 2001.Depreciation, amortization and net interest expense on a consolidated basisincreased $16.8 million in 2000 as compared to 1999 resulting primarily fromadditional depreciation on 1999 and 2000 capital expenditures, increased interest rates on variable rate debt, additional average outstanding capitallease obligation balances, a $2.0 million charge to interest expense towrite-off previously capitalized interest expense, and $1.7 million ofadditional depreciation in 2000 resulting from a change in the estimatedremaining lives of assets that will be replaced in the future. In 1999 interestexpense was offset in part by one month of capitalized construction periodinterest attributed to the Alaska United undersea fiber optic cable system andwe charged to interest expense $470,000 of deferred financing costs resultingfrom a Holdings Loan Facilities amendment that reduced our borrowing capacity.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(1) ----------------------- ------------------- 2000 1999 vs. vs. 2000 1999 1998 1999 1998 ---- ---- ---- ---- ---- Statement of Operations Data: Revenues: Long-distance services 62.4% 58.8% 65.5% 11.4% 1.4% Cable services 23.2% 21.9% 23.3% 11.0% 6.1% Local access services 6.9% 5.6% 4.0% 30.0% 56.9% Internet services 2.9% 1.7% 1.0% 75.6% 182.5% Other services 4.6% 12.0% 6.2% (60.2%) 112.8% ------------------------------------------------------------------ Total revenues 100.0% 100.0% 100.0% 4.8% 13.1% 63 Year Ended December 31, Percentage Change(1) ----------------------- ------------------- 2000 1999 vs. vs. 2000 1999 1998 1999 1998 ---- ---- ---- ---- ---- Cost of sales and services 40.9% 43.9% 47.0% (2.2%) 5.5% Selling, general and administrative expenses 35.8% 35.2% 36.4% 6.8% 9.4% Depreciation and amortization 17.8% 15.3% 13.0% 21.8% 33.2% ------------------------------------------------------------------ Operating income 5.5% 5.6% 3.6% 1.6% 78.1% Net loss before income taxes and cumulative change in an accounting principle (7.4%) (5.3%) (4.4%) 45.6% 36.1% Net loss before cumulative change in an accounting principle (4.5%) (3.3%) (2.8%) 44.1% 35.1% Net loss (4.5%) (3.4%) (2.8%) 38.9% 40.2%Other Operating Data (2):Cable services operating income (3) 21.5% 24.4% 22.0% (1.8%) 17.7%Local services operating loss (4) 4.9% (14.3%) (73.2%) (144.8%) (69.4%)Internet services operating loss (5) (136.4%) (204.5%) (228.8%) 17.0% 152.4% -------------------------- (1)Percentage change in underlying data. (2)Includes customer service, marketing and advertising costs. (3)Computed as a percentage of total cable services revenues. (4)Computed as a percentage of total local services revenues. (5)Computed as a percentage of total Internet services revenues.Year Ended December 31, 2000 ("2000") Compared To Year Ended December 31, 1999 ("1999").RevenuesTotal revenues increased 4.8% from $279.2 million in 1999 to $292.6 million in2000. Excluding the undersea fiber optic cable capacity sale in 1999 (seebelow), total revenues increased 12.7% in 2000.Long-distance revenues from residential, commercial, governmental, and othercommon carrier customers increased 11.4% to $182.7 million in 2000. Thelong-distance revenue increase in 2000 was largely due to the following: - An increase of 14.4% in total minutes of use to 1,035.4 million minutes, - An increase of 31.6% in private line and private network transmission services revenues to $29.0 million in 2000 due to an increased number of customers, - An increase of 16.9% in revenues from other common carriers (principally WorldCom and Sprint) to $71.8 million in 2000, and - An increase of 98.8% to $8.6 million in 2000 revenues from our SchoolAccess(TM) offering to rural school districts and a new offering to rural hospitals and health clinics. Our SchoolAccess(TM) product was provided to 155 schools at December 31, 2000, a 25% increase from 1999.Long-distance revenue increases were offset by the following: - A decrease of 2.3% in the number of active residential, small business and commercial customers billed from 90,800 at December 31, 1999 to 88,700 at December 31, 2000 primarily due to a competitor's offering allowing customers to place unlimited intrastate and interstate calls for a flat monthly fee, and - A 10.3% decrease in our average rate per minute on long-distance traffic from $0.136 per minute in 1999 to $0.122 per minute in 2000 attributed to our promotion of and customers' enrollment in calling plans offering discounted rates and length of service rebates, such plans being prompted in part by our primary 64 long-distance competitor, AT&T Alascom, reducing its rates, entry of LECs into long-distance markets served by us, and to a change in the mix of wholesale minutes carried for other common carriers.Cable revenues increased 11.0% to $67.9 million in 2000. Programming servicesrevenues increased 6.6% to $55.7 million in 2000 resulting from an increase ofapproximately 3,600 basic subscribers served to approximately 120,400 andincreased pay-per-view and premium service revenues. New facility constructionefforts in 2000 resulted in approximately 3,400 additional homes passed whichcontributed to additional subscribers and revenues in 2000. Programming servicesrevenue per average basic subscriber per month increased $0.12, or 0.3%. Digitalsubscribers increased 131.7% to 13,500 at December 31, 2000. The cable segment'sshare of cable modem revenue (offered through our Internet services segment)increased $2.0 million to $2.4 million in 2000 after the introduction of suchservices in the first quarter of 1999.Local access services revenues increased 30.0% in 2000 to $20.2 million. AtDecember 31, 2000 approximately 62,000 lines were in service and approximately800 additional lines were awaiting connection as compared to approximately45,000 lines in service and approximately 750 additional lines awaitingconnection at December 31, 1999.Internet services revenues increased 75.6% to $8.4 million in 2000 primarily dueto growth in the average number of customers served. We had approximately 62,600active residential, commercial and small business retail dial-up Internetsubscribers at December 31, 2000 as compared to approximately 48,000 at December31, 1999. We had approximately 16,000 active residential, commercial and smallbusiness retail cable modem subscribers at December 31, 2000 as compared toapproximately 5,700 at December 31, 1999.The decrease in other services revenues from $33.6 million in 1999 to $13.4million in 2000 is primarily due to the $19.5 million fiber capacity sale in1999 as previously disclosed.Cost of Sales and ServicesCost of sales and services totaled $119.7 million in 2000 and $122.5 million in1999. As a percentage of total revenues, cost of sales and services decreasedfrom 43.9% in 1999 to 40.9% in 2000.Long-distance cost of sales and services decreased from $81.0 million in 1999 to$76.6 million in 2000. Long-distance cost of sales as a percentage oflong-distance revenues decreased from 49.4% in 1999 to 41.9% in 2000 primarilydue to the effect of reassigning traffic carried by satellite transponders andfiber optic cable from leased to owned capacity and reductions in access costsdue to distribution and termination of our traffic on our own local servicesnetwork instead of paying other carriers to distribute and terminate ourtraffic. Offsetting the 2000 decrease as compared to 1999 is a decrease in theaverage rate per minute billed to customers without a comparable decrease inaccess charges paid by us. We expect increased cost savings as traffic carriedon our own facilities continues to grow.Cable cost of sales and services as a percentage of cable revenues, which isless as a percentage of revenues than are long-distance, local access andInternet services cost of sales and services, increased from 25.3% in 1999 to 26.3% in 2000. Cable services rate increases did not keep pace with increases inprogramming and copyright costs in 2000. Programming costs increased for most ofour cable services offerings, and we incurred additional costs on newprogramming introduced in 1999 and 2000.Local access services cost of sales and services as a percentage of local accessservices revenues increased from 50.8% in 1999 to 53.3% in 2000 primarily due tothe fluctuations in cost of sales and services as a percentage of revenuesinherent in this segment as it develops.Internet services cost of sales and services increased $1.2 million to $4.4million from 1999 to 2000. Internet services costs of sales as a percentage ofInternet services revenues totaled 65.7% and 52.1% in 1999 and 2000, 65respectively. The Internet services costs of sales decrease as a percentage ofInternet services revenues is primarily due to a $2.6 million increase inInternet's portion of cable modem revenue which generally have higher marginsthan do other Internet products. As Internet revenues have increased, economiesof scale and more efficient network utilization have also resulted in reducedInternet cost of sales and services as a percentage of Internet revenues.Selling, General and Administrative ExpensesSelling, general and administrative expenses increased 6.8% to $104.9 million in2000. Selling, general and administrative expenses, as a percentage of totalrevenues, increased from 35.2% in 1999 to 35.8% in 2000.Depreciation and AmortizationDepreciation and amortization expense increased 21.8% to $52.0 million in 2000.The increase is attributable to our $36.6 million investment in equipment andfacilities placed into service during 1999 for which a full year of depreciationwas recorded during the year ended December 31, 2000, the acquisition of asatellite transponder asset (see note 12 included in Part II, Item 8,Consolidated Financial Statements and Supplementary Data) for which depreciationbegan in 2000 and the $48.9 million investment in other equipment and facilitiesduring 2000 for which a partial year of depreciation was recorded during 2000,and a charge of $1.7 million in 2000 resulting from a change in the estimatedremaining lives of assets that will be replaced in the future.Interest Expense, NetInterest expense, net of interest income, increased 24.6% to $38.1 million in2000. This increase resulted primarily from increases in our average outstandingindebtedness resulting primarily from the capital lease of satellite transpondercapacity, higher interest rates on our variable rate debt, and a charge of $2.0million to interest expense in 2000 to write-off previously capitalized interestexpense. The increase was partially offset by principal payments of $11.2million in 2000. In 1999 interest expense was offset in part by one month ofcapitalized construction period interest attributed to the Alaska Unitedundersea fiber optic cable system and we charged to interest expense $470,000 ofdeferred financing costs resulting from a Holdings Loan Facilities amendmentthat reduced our borrowing capacity.Income Tax BenefitIncome tax benefit increased from $5.7 million in 1999 to $8.4 million in 2000due to an increased net loss before income taxes in 2000 as compared to 1999.Our effective income tax rate increased from 38.2% in 1999 to 38.9% in 2000 dueto the increased net loss and the proportional amount of items that arenondeductible for income tax purposes.At December 31, 2000, we have (1) tax net operating loss carryforwards ofapproximately $103.6 million that will begin expiring in 2008 if not utilized,and (2) alternative minimum tax credit carryforwards of approximately $2.5million available to offset regular income taxes payable in future years. Ourutilization of remaining net operating loss carryforwards is subject to certainlimitations pursuant to Internal Revenue Code section 382.Tax benefits associated with recorded deferred tax assets are considered to bemore likely than not realizable through future reversals of existing taxabletemporary differences and future taxable income exclusive of reversing temporarydifferences and carryforwards. The amount of deferred tax asset consideredrealizable, however, could be reduced in the near term if estimates of futuretaxable income during the carryforward period are reduced. We estimate that oureffective income tax rate for financial statement purposes will be approximately 38% in 2001. 66Year Ended December 31, 1999 ("1999") Compared to Year Ended December 31, 1998("1998")RevenuesTotal revenues increased 13.1% from $246.8 million in 1998 to $279.2 million in1999. Long-distance revenues from residential, commercial, governmental, andother common carrier customers increased 1.4% to $164.0 million in 1999. Theincrease in long-distance revenues was due to the following: - An increase in the number of active residential, small business and commercial customers billed from 82,000 at December 31, 1998 to 90,800 at December 31, 1999, - An increase of 14.4% in total minutes of use to 905.0 million minutes, - An increase of 13.4% in private line and private network transmission services revenues to $22.0 million in 1999 due to an increased number of customers and - New revenues in 1999 totaling $4.8 million from the lease of three DS3 circuits on Alaska United facilities within Alaska, and between Alaska and the lower 49 states and maintenance charges related to the portion of fiber capacity purchased by ACS.The increase in long-distance revenue was offset by a 19.0% reduction in ouraverage rate per minute on long-distance traffic from $0.168 per minute in 1998to $0.136 per minute in 1999. The decrease in rates resulted from our promotionof and customers' enrollment in calling plans offering discounted rates andlength of service rebates, such plans being prompted in part by our primarylong-distance competitor, AT&T Alascom, reducing its rates, and the entry ofLECs into long-distance markets served by us. Changes in wholesale product mixand reduced rates on other common carrier traffic (principally WorldCom andSprint) offset other common carrier minutes growth of 24.9% resulting in a 0.3%increase in revenues to $61.5 million in 1999. Common carrier minute growth wasattributable, in part, to a new category of wholesale minutes carried on ournetwork.Cable revenues increased 6.1% to $61.1 million in 1999. Programming servicesrevenues increased 7.5% to $52.3 million in 1999 resulting from an increase ofapproximately 4,800 basic subscribers served by us to approximately 116,800, anincrease of $1.31 in average gross revenue per average basic subscriber permonth and increased pay-per-view and premium service revenues. New facilityconstruction efforts in the summer of 1999 resulted in approximately 2,800additional homes passed which contributed to additional subscribers and revenuesin 1999. Other factors include the launch of digital cable services in late 1998with an associated marketing and sales effort starting in July 1999 and theintroduction of a customer offering requiring a year commitment in exchange fora discounted price that reduced customer churn. Equipment rental andinstallation revenues increased 18.9% to $5.4 million in 1999 due to an increasein subscribers to our digital service and associated converters that are billedat premium rates.Local access services revenues increased 56.9% to $15.5 million in 1999.Approximately 45,000 lines were in service and 750 additional lines wereawaiting connection at December 31, 1999.Internet services revenues increased 182.5% to $4.8 million in 1999. We hadapproximately 48,000 active residential, commercial and small business retaildial-up Internet subscribers at December 31, 1999 as compared to approximately7,200 at February 9, 1999. We had approximately 5,700 active residential,commercial and small business retail cable modem subscribers at December 31,1999 after launching this service offering in the second quarter of 1999.Other services revenues increased 112.8% to $33.6 million in 1999. The 1999increase was largely due to the fiber capacity sale as previously described.Cost of Sales and ServicesCost of sales and services totaled $116.1 million in 1998 and $122.5 million in1999. As a percentage of total revenues, cost of sales and services decreasedfrom 47.0% in 1998 to 43.9% in 1999. The decrease in cost of 67 sales and services as a percentage of revenues is primarily attributed to theimpact of the fiber capacity sale and changes in our product mix due tocontinuing development of new product lines and growth of existing product lines(local access services, data services and Internet). The overall marginimprovement was partially offset by increased cable services cost of sales as apercentage of cable services revenues. Cable cost of sales increased more thancable revenues increased in 1999.Long-distance cost of sales and services increased from $79.3 million in 1998 to$81.0 million in 1999. Long-distance cost of sales as a percentage oflong-distance revenues increased from 49.0% in 1998 to 49.4% in 1999 primarilydue to a decrease in the average rate per minute billed to customers without acomparable decrease in access charges paid by us, and a non-recurring refundreceived in the second quarter of 1998 totaling approximately $1.1 million froma local exchange carrier in respect of its earnings that exceeded regulatoryrequirements. Offsetting the 1999 increase as compared to 1998 are reductions inaccess costs due to our distribution and termination of our traffic on our ownlocal services network instead of paying other carriers to distribute andterminate our traffic.Cable cost of sales and services as a percentage of revenues, which is less as apercentage of revenues than are long-distance, local access and Internetservices cost of sales and services, increased from 23.3% in 1998 to 25.3% in1999. Cable services rate increases did not keep pace with increases inprogramming and copyright costs in 1999. Programming costs increased on most ofour cable services offerings, and we incurred additional costs on newprogramming introduced in 1998 and 1999.Local access services cost of sales and services totaled 50.8% and 61.7% as apercentage of 1999 and 1998 local access services revenues, respectively.Internet services cost of sales and services totaled 65.7% and 200.2% as apercentage of the 1999 and 1998 Internet services revenues, respectively. Ourlocal access operations commenced in 1997 and Internet services operationscommenced in 1998.The decrease in 1998 and 1999 other services cost of sales and services as apercentage of other services revenue from 87.4% to 44.5%, respectively, isprimarily due to the fiber capacity sale as previously described.Selling, General and Administrative ExpensesSelling, general and administrative expenses increased 9.4% to $98.3 million in1999. The 1999 increase resulted from: - Increased costs associated with operations and maintenance of the Alaska United fiber optic cable system that was placed into service in early February 1999. 1999 costs totaled $3.6 million as compared to $1.1 million in 1998. - Internet services operating, engineering, sales, customer service and administrative cost increases, from $715,000 in 1998 as compared to $5.3 million in 1999. We gradually introduced our Internet services through the third quarter of 1998 and began aggressive advertising efforts in the fourth quarter of 1998. Increased costs were necessary to provide the operations, engineering, customer service and support infrastructure necessary to accommodate expected growth in our Internet services customer base. - Increased allowance for doubtful accounts receivable. - Accrual of a Company-wide success-sharing bonus totaling $1.6 million in 1999. Success sharing is a bonus paid to all employees when our earnings before interest, depreciation, amortization and taxes reach new highs. - A reduction in long-distance services capitalized labor due to completion of the fiber optic cable system construction effort.Partially offsetting these increases were a $1.1 million reduction in cableservice's general and administrative costs and a $1.0 million reduction inlong-distance marketing and sales costs in 1999 as compared to 1998. 68Selling, general and administrative expenses, as a percentage of total revenues,decreased from 36.4% in 1998 to 35.2% in 1999 primarily as a result ofsignificant revenues derived from the fiber capacity sale without aproportionate increase in selling, general and administrative expenses.Depreciation and AmortizationDepreciation and amortization expense increased 33.2% to $42.7 million in 1999. The increase is attributable to our $58.4 million investment in equipment andfacilities placed into service during 1998 for which a full year of depreciationwas recorded during 1999, the Alaska United undersea fiber optic cable systemplaced into service in the first quarter of 1999 for which 11 months ofdepreciation was recorded during 1999, and the $36.6 million investment inequipment and facilities during 1999 for which a partial year of depreciationwas recorded in 1999.Interest Expense, NetInterest expense, net of interest income, increased 54.9% to $30.6 million in1999. This increase resulted primarily from increases in our average outstandingindebtedness resulting primarily from construction of new long-distance andInternet facilities, expansion and upgrades of cable television facilities,investment in local access services equipment and facilities, and slightlyhigher interest rates on outstanding indebtedness. During 1998 interest expensewas offset in part by capitalized construction period interest. The amount ofinterest capitalized in 1999 decreased significantly due to the completion ofthe Alaska United undersea fiber optic cable system in early February 1999. Wecharged to interest expense $470,000 of deferred financing costs in the secondquarter of 1999 resulting from the amendment to the Holdings Loan Facilitiesthat reduced our borrowing capacity (see Liquidity and Capital Resources).Income Tax BenefitIncome tax benefit increased from $4.1 million in 1998 to $5.7 million in 1999due to an increased net loss before income taxes and cumulative effect of achange in accounting principle in 1999 as compared to 1998. Our effective incometax rate increased from 37.8% in 1998 to 38.2% in 1999 due to the proportionalamount of items that are nondeductible for income tax purposes.Fluctuations In Quarterly Results Of OperationsThe following chart provides selected unaudited statement of operations datafrom our quarterly results of operations during 2000 and 1999. (Amounts in thousands, except per share amounts) ------------------------------------------------------------- First Second Third Fourth Total Quarter Quarter Quarter Quarter Year ------------------------------------------------------------- 2000 ---- Revenues: Long-distance services $ 43,620 44,855 48,185 46,016 182,676 Cable services $ 15,930 16,660 16,708 18,600 67,898 Local access services $ 4,520 4,789 5,236 5,660 20,205 Internet services $ 1,713 2,018 2,188 2,506 8,425 Other services $ 2,494 3,104 3,589 4,214 13,401 ------------------------------------------------------------- Total revenues $ 68,277 71,426 75,906 76,996 292,605 Operating income $ 877 3,550 5,610 5,966 16,003 Net loss before income taxes $ (8,962) (5,665) (3,954) (3,068) (21,649) Net loss $ (5,498) (3,526) (2,352) (1,858) (13,234) Basic and diluted net loss per common share $ (0.12) (0.08) (0.05) (0.04) (0.29) 69 (Amounts in thousands, except per share amounts) ------------------------------------------------------------- First Second Third Fourth Total Quarter Quarter Quarter Quarter Year ------------------------------------------------------------- 1999 ---- Revenues: Long-distance services $ 38,469 40,697 43,276 41,601 164,043 Cable services $ 15,062 14,909 15,218 15,957 61,146 Local access services $ 3,714 3,764 3,845 4,220 15,543 Internet services $ 1,042 1,109 1,151 1,497 4,799 Other services $ 3,051 23,180 3,850 3,567 33,648 ------------------------------------------------------------- Total revenues $ 61,338 83,659 67,340 66,842 279,179 Operating income (loss) $ (368) 12,655 1,908 1,555 15,750 Net income (loss) before income taxes and cumulative effect of a change in accounting principle $ (7,328) 4,495 (5,702) (6,331) (14,866) Net income (loss) before cumulative effect of a change in accounting principle $ (4,521) 2,491 (3,537) (3,616) (9,183) Net income (loss) $ (4,865) 2,491 (3,537) (3,616) (9,527) Basic and diluted net income (loss) per common share: Net income (loss) before cumulative effect of a change in accounting principle (1) $ (0.09) 0.04 (0.08) (0.08) (0.20) Cumulative effect of a change in accounting principle $ (0.01) --- --- --- (0.01) ------------------------------------------------------------- Net income (loss) (1) $ (0.10) 0.04 (0.08) (0.08) (0.21) ============================================================= 1 Due to rounding, the sum of quarterly loss per common share amounts may not agree to year-to-date loss per common share amounts.RevenuesTotal revenues for the quarter ended December 31, 2000 ("fourth quarter") were$77.0 million, representing a 1.4% increase from $75.9 million for the quarterended September 30, 2000 ("third quarter"). The fourth quarter increase resultedfrom a 11.3% increase in cable services revenue to $18.6 million in fourthquarter primarily resulting from an increase of approximately 2,100 basicsubscribers served to 120,400 and increased pay-per-view and premium servicerevenues. The fourth quarter increase was offset by a decrease in long-distancerevenues of 4.5% to $46.0 million resulting primarily from the following: - Revenues from other common carriers decreased 8.4% to $18.0 million due to a 14.5% decrease in southbound minutes carried for other common carriers. The decrease in southbound minutes is largely due to seasonality. - Long distance minutes decreased 8.4% to 252.3 million minutes, due to a 13.5% decrease in OCC minutes (principally WorldCom and Sprint) to 160.2 million minutes offset by a 2.2% increase in non-OCC minutes of traffic carried to 92.0 million minutes.The long-distance revenue decreases described above were partially offset by an18.3% increase in private line revenues to $8.8 million. The long-distanceaverage rate per minute was $.121 in the third and fourth quarters.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 and Internet access services arenot expected to exhibit significant seasonality. Our ability to implementconstruction projects is also hampered during the winter months because of coldtemperatures, snow and short daylight hours. 70Cost Of Sales and ServicesCost of sales and services increased from $29.9 million in the third quarter to$30.5 million in the fourth quarter. As a percentage of revenues, third andfourth quarter cost of sales and services totaled 39.6% and 39.5%, respectively.Selling, General and Administrative ExpensesSelling, general and administrative expenses increased $400,000 in the fourthquarter as compared to the third quarter. As a percentage of revenues, fourthquarter selling, general and administrative expenses were 35.7% as compared to35.6% for the third quarter.Net lossWe reported a net loss of $1.9 million for the fourth quarter as compared to anet loss of $2.4 million for the third quarter.Liquidity and Capital ResourcesCash flows from operating activities totaled $41.4 million in 2000 as comparedto $33.3 million in 1999, net of changes in the components of working capital.Other sources of cash during 2000 include the refund of a $9.1 million depositpursuant to a capital lease transaction, long-term borrowings of $5.0 millionand $1.7 million in proceeds from common stock issuances. Our expenditures forproperty and equipment, including construction in progress, totaled $48.9million in 2000. Other uses of cash during 2000 included repayment of $11.2million of long-term borrowings and capital lease obligations, purchases of $1.6million of property held for sale, and payment of approximately $3.0 million ofcosts incurred by Kanas Telecom, Inc. (see note 11 included in Part II, Item 8,Consolidated Financial Statements and Supplementary Data).Receivables increased $3.5 million from December 31, 1999 to December 31, 2000primarily due to an increase in OCC trade receivables.Working capital totaled $10.6 million at December 31, 2000, a $12.1 million decrease from working capital of $22.7 million as of December 31, 1999. Thedecrease in working capital is primarily attributed to our use of current assetsto purchase long-term capital assets and repay long-term debt.The Holdings $150,000,000 and $50,000,000 credit facilities mature June 30, 2005and bear interest at either Libor plus 1.00% to 2.50%, depending on the leverageratio of Holdings and certain of its subsidiaries, or at the greater of theprime rate or the federal funds effective rate (as defined) plus 0.05%, in eachcase plus an additional 0.00% to 1.375%, depending on the leverage ratio ofHoldings and certain of its subsidiaries. $82.7 million and $87.7 million weredrawn on the credit facilities as of December 31, 2000 and 1999, respectively.At December 31, 2000 $102.3 million of the credit facilities were available tous for our operating and capital requirements.On April 13, 1999, we amended the Holdings credit facilities. Pursuant to theFinancial Accounting Standards Board Emerging Issues Task Force Issue 98-14,"Debtor's Accounting for Changes in Line-of-Credit or Revolving DebtArrangements," we recorded as additional interest expense $470,000 of deferredfinancing costs in the second quarter of 1999 associated with reduced borrowingcapacity resulting from the amendment. In connection with the April 1999amendment, we agreed to pay all fees and expenses of our lenders, including anamendment fee of 0.25% of the aggregate commitment, totaling $530,000.On October 25, 2000 we further amended the Holdings credit facilities. Theseamendments are contingent upon closing the acquisition of a controlling interestin Kanas Telecom, Inc. (see note 11 included in Part II, Item 8, ConsolidatedFinancial Statements and Supplementary Data) and contain, among other things,provisions for 71payment of a one-time amendment fee of $192,500, changes in certain financialcovenants and ratios, and a limit of $70 million for 2001 capital expenditures(excluding capital expenditures by certain subsidiaries).Holding's credit facilities and GCI, Inc.'s senior notes contain restrictions onour operations and activities, including requirements that we comply withcertain financial covenants and financial ratios. Under the amended Holding'scredit facility, Holdings may not permit the ratio of senior debt to annualizedoperating cash flow (as defined) of Holdings and certain of its subsidiaries toexceed 2.50 to 1.0 from October 1, 2000 to December 31, 2000, total debt toannualized cash flow to exceed 5.50 times, and annualized operating cash flow tointerest expense to be less than 2.0 to 1.0 from April 1, 2000 and thereafter.Certain of the foregoing ratios decrease in specified increments during the lifeof the credit facility. The credit facility requires Holdings to maintain aratio of annualized operating cash flow to debt service of Holdings and certainof its subsidiaries of at least 1.25 to 1.0, and annualized operating cash flowto fixed charges of at least 1.0 to 1.0 effective January 1, 2002 (which adjuststo 1.05 to 1.0 in April, 2003 and thereafter). The senior notes impose arequirement that the leverage ratio of GCI, Inc. and certain of its subsidiariesnot exceed 6.0 to 1.0 on an incurrence basis, subject to the ability of GCI,Inc. and certain of its subsidiaries to incur specified permitted indebtednesswithout regard to such ratios.Upon the effectiveness of the October 25, 2000 and March 23, 2001 amendments,Holdings may not permit the ratio of senior debt to annualized operating cashflow (as defined) of Holdings and certain of its subsidiaries to exceed 2.50 to1.0 from October 1, 2000 to September 30, 2003 and must maintain a ratio ofannualized operating cash flow to fixed charges of at least 1.0 to 1.0 effectiveJanuary 1, 2002 (which adjusts to 1.05 to 1.0 in April, 2003 and thereafter).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. At December 31, 2000 and 1999$71.7 million was borrowed under the facility. The Fiber Facility is a 10-yearterm loan that is interest only for the first 5 years. The facility can beextended an additional two years at any time between the second and fifthanniversary of closing the facility if we can demonstrate projected revenuesfrom certain capacity commitments will be sufficient to pay all operating costs,interest, and principal installments based on the extended maturity. The FiberFacility bears interest at either Libor plus 3.0%, or at the lender's prime rateplus 1.75%. The interest rate will decline to Libor plus 2.5%-2.75%, or, at ouroption, the lender's prime rate plus 1.25%-1.5% after the project completiondate and when the loan balance is $60 million or less. 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. Allof Alaska United's assets, as well as a pledge of the partnership interests'owning Alaska United, collateralize the Fiber Facility.We expect to use approximately one-half of the Alaska United system capacity inaddition to our existing owned and leased facilities to carry our own traffic.One of our large commercial customers signed agreements in 1999 for the lease ofthree DS3 circuits on Alaska United facilities within Alaska, and between Alaskaand the lower 48 states. The lease agreements provide for three-year terms, withrenewal options for additional terms. In 2000 we signed additional agreementswith WorldCom for the lease of two DS3 circuits between Alaska and the lower 48states. The lease agreements provide for five-year terms. In the second quarterof 1999 we completed a sale of capacity in our Alaska United system in a $19.5million cash transaction. The sale included both capacity within Alaska, andbetween Alaska and the lower 48 states. An agreement executed in July 1999 for asecond $19.5 million sale of fiber capacity was completed in January 2001. Wecontinue to pursue opportunities for sale or lease of additional capacity on oursystem.We entered into a purchase and lease-purchase option agreement in August 1995for the acquisition of satellite transponders to meet our long-term satellitecapacity requirements. The satellite was successfully launched in January 2000and delivered to us on March 5, 2000. In March 2000 we agreed to finance thesatellite transpond- 72ers pursuant to a long-term capital lease arrangement with a leasing company. AtDecember 31, 2000 $47.6 million was financed under this capital lease. The baseterm of the lease is one year from the closing date with the option for eightone-year lease term renewals. The capital lease includes certain covenantsrequiring maintenance of specific levels of operating cash flow to indebtednessand limitations on additional indebtedness.Our expenditures for property and equipment, including construction in progress,totaled $48.9 million and $36.6 million during 2000 and 1999, respectively.Planned capital expenditures over the next five years include those necessaryfor continued expansion of our long-distance, local exchange and Internetfacilities, continuing development of our PCS network and upgrades to our cabletelevision plant.We issued 20,000 shares of convertible redeemable accreting preferred stock("Preferred Stock") on April 30, 1999. Proceeds totaling $20 million (beforepayment of expenses) were used for general corporate purposes, to repayoutstanding indebtedness, and to provide additional liquidity. Prior to thefour-year anniversary following closing, dividends are payable semi-annually atthe rate of 8.5%, plus accrued but unpaid dividends, at our option, in cash orin additional fully-paid shares of Preferred Stock. Dividends earned after thefour-year anniversary of closing are payable semi-annually in cash only.Dividends of $2,677,000 have been accrued at December 31, 2000 and will be paidin additional fully paid shares of Preferred Stock. Additional dividendstotaling $332,000, or $14.00 per share, are accrued at December 31, 2000 and thedetermination of whether they will be paid in cash or additional fully-paidshares of Preferred Stock will be made at the next semi-annual payment date.Mandatory redemption is required 12 years from the date of closing.The long-distance, local access, cable, Internet and wireless servicesindustries are experiencing increasing competition and rapid technologicalchanges. Our future results of operations will be affected by our ability toreact to changes in the competitive environment and by our ability to fund andimplement new technologies. We are unable to determine how competition,technological changes and our net operating losses will affect our ability toobtain financing.We believe that we will be able to meet our current and long-term liquidity andcapital requirements, including fixed charges and Preferred Stock dividends,through our cash flows from operating activities, existing cash, cashequivalents, short-term investments, credit facilities, and other externalfinancing and equity sources. Should cash flows be insufficient to supportadditional borrowings, such investment in capital expenditures will likely bereduced. New Accounting StandardSFAS No. 133In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,"Accounting for Derivative Instruments and Hedging Activities". Among otherprovisions, SFAS No. 133, as amended by SFAS No. 138, "Accounting for CertainDerivative Instruments and Certain Hedging Activities and Amendment of SFAS No.133", requires that entities recognize all derivatives as either assets orliabilities in the statement of financial position and measure those instrumentsat fair value. Gains and losses resulting from changes in the fair values ofthose derivatives would be accounted for depending on the use of the derivativeand whether it qualifies for hedge accounting. Special accounting for qualifyinghedges allows a derivative's gains and losses to offset related results on thehedged item in the income statement, and requires that a company must formallydocument, designate and assess the effectiveness of transactions that receivehedge accounting. The effective date of this standard was delayed via theissuance of SFAS No. 137. The effective date for SFAS No. 133 is now for fiscalyears beginning after June 15, 2000, though earlier adoption is encouraged andretroactive application is prohibited. This means that we must adopt thestandard no later than January 1, 2001. In January 2001, we entered into an interest rate swap agreement that converts$50 million of the $180 million 9.75% fixed rate bonds to variable rate debtbased on Libor plus a margin. This transaction will be accounted for as a fairvalue hedge and accordingly the fair value of the swap and the $50 million ofbonds will be reflected 73on the balance sheet. We do not believe implementation of SFAS No. 133 will havea significant effect on our results of operationsGeographic Concentration and The Alaska EconomyWe offer voice and data telecommunication and video services to customersprimarily throughout Alaska. As a result of this geographic concentration,growth of our business and of our operations depends upon economic conditions inAlaska. The economy of Alaska is dependent upon the natural resource industries,and in particular oil production, as well as investment earnings, tourism,government, and United States military spending. Any deterioration in thesemarkets could have an adverse impact on us. In fiscal 2000 oil revenues were thethird largest source of state revenues, following investment income and federalfunding. Alaska's investment earnings will supply 35% of the state's projectedrevenues in fiscal 2001, with oil revenues and federal funding comprising 34%and 17%, respectively, of the total. Much of the investment income and all ofthe federal funding is restricted or dedicated for specific purposes, however,leaving oil revenues as the primary funding source of general operatingexpenditures.The volume of oil transported by the TransAlaska Oil Pipeline System ("TAPS")over the past 20 years has been as high as 2.0 million barrels per day in fiscal1988. Production has been declining over the last several years and averaged 1.0million barrels per day in fiscal 2000. The two largest producers of oil inAlaska (the primary users of the TAPS) 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. The state now forecasts atemporary reversal of the production rate decline and a slight increase in theproduction rate in 2002. This forecasted increase is attributed to newdevelopments at the Alpine field, satellite fields in Prudhoe Bay, Kuparuk andother satellite fields, plus Northstar, Fiord, Liberty and further developmentof viscous or heavy oil. The Alaska Department of Revenue estimates thatproduction from proven reserves will comprise 3.8% of Alaska's total oilproduction in fiscal 2001, rising to 13.3% of the total in fiscal 2002 and thenclimbing to 25.3% in fiscal 2008.Market prices for North Slope oil averaged $12.70 in fiscal 1999, well below theaverage price used by the state to budget its oil related revenues. The priceshave since increased to a 10-year high of $35.62 on September 19, 2000, with afiscal 2000 average price per barrel of $30.10. The closing price per barrel was$24.01 on March 16, 2001.In December 2000 the state forecasted the price for North Slope crude oil toaverage $30.17 per barrel based on the average price per barrel of $30.24 during the last six months of 2000, futures market prices through June 30, 2001, andoil industry expectations that prices will begin to increase as winter weatherdrives up demand and as political concerns in the Middle East continue to worryoil buyers. Oil prices are forecasted to decline to $24.28 in fiscal 2002,$22.06 in fiscal 2003, and just above $17.00 over the following few years.Recent higher prices are largely due to a low inventory. The Organization ofPetroleum Exporting Countries ("OPEC") increased production by 3.5 millionbarrels per day in January 2000 and increased production another 500,000 barrelsper day in October 2000. At its January 17, 2001 meeting OPEC agreed to decreaseproduction quotas by 1.5 million barrels per day effective February 1, 2001.OPEC announced in March 2001 its intention to decrease production by anadditional 4% or approximately 1 million barrels per day to halt the recentdecrease in oil prices. Iraq has withheld crude oil from the market sinceDecember 2000 because of a pricing dispute with the United Nations. The impactof OPEC's production decreases could be diminished if Iraq resumes its 2.8million barrels a day production. History suggests that market forces lead tolower prices when oil sells for more than $20 per barrel. Weather and politicalupheaval in the Middle East can also have a dramatic effect on crude oil demandand supply. The production policy of OPEC and its ability to continue to act inconcert represents a key uncertainty in the state's revenue forecast. 74The state of Alaska maintains the Constitutional Budget Reserve Fund that isintended to fund budgetary shortfalls. If the state's current projections arerealized, the Constitutional Budget Reserve Fund will be depleted in 2006. Ifthe fund is depleted, aggressive state action will be necessary to increaserevenues and reduce spending in order to balance the budget. The Governor of thestate of Alaska and the Alaska Legislature continue to pursue cost cutting andrevenue enhancing measures.Tourism, air cargo, and service sectors have helped offset the prevailingpattern of oil industry downsizing that has occurred during much of the lastseveral years. $1.8 billion of federal money is expected to be distributed tothe State of Alaska for highways and other federally supported projects infiscal 2001.Should new discoveries or developments not materialize or the price of oilreturn to its prior depressed levels, the long term trend of continued declinein oil production from the Prudhoe Bay field area is inevitable with acorresponding adverse impact on the economy of the state, in general, and ondemand for telecommunications and cable television services, and, therefore, onus, in particular.The recent increase in residential and commercial natural gas prices andshortages in California, in particular, have resulted in a renewed effort toallow exploration and development in the Arctic National Wildlife Refuge.Additionally, deploying a natural gas pipeline from Alaska's North Slope to thelower 48 states has been proposed to supplement natural gas supplies. Theeconomic viability of a natural gas pipeline improves as the price of naturalgas increases and as demand intensifies. Either project could have a significantpositive impact on the state of Alaska's revenues and the Alaska economy.We have, since our entry into the telecommunication marketplace, aggressivelymarketed our services to seek a larger share of the available market. Thecustomer base in Alaska is limited, however, with a population of approximately627,000 people. 42% of the State's population is located in the Municipality ofAnchorage, 13% is located in the Fairbanks North Star Borough, and 5% is locatedin the City and Borough of Juneau. The rest are spread out over the vast reachesof Alaska. 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.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 a reduced level of royalties. We are notable to predict the effect of changes in the price and production volumes ofNorth Slope oil on Alaska's economy or on us.SeasonalityOur long-distance revenues have historically been highest in the summer monthsas a result of temporary population increases attributable to tourism andincreased seasonal economic activity such as construction, commercial fishing, and oil and gas activities. Our cable television revenues, on the other hand,are higher in the winter months because consumers tend to watch more television,and spend more time at home, during these months. Our local service and Internetoperations are not expected to exhibit significant seasonality, with theexception of SchoolAccess(TM) Internet services that are reduced during thesummer months. Our ability to implement construction projects is also reducedduring the winter months because of cold temperatures, snow and short daylighthours.Year 2000 CostsWe did not defer any critical information technology projects because of ourYear 2000 program efforts. At December 31, 2000 we have no remaining incrementalremediation costs. 75Regulatory DevelopmentsYou should see Part I, Item 1 Business, Regulation, Franchise Authorizations andTariffs for more information about regulatory developments affecting us.InflationWe do not believe that inflation has a significant effect on our operations.Item 7A. Quantitative and Qualitative Disclosures About Market RiskWe are exposed to various types of market risk in the normal course of business,including the impact of interest rate changes. We do not hold derivatives fortrading purposes.Our Senior Holdings Loan carries interest rate risk. Amounts borrowed under thisAgreement bear interest at either Libor plus 1.0% to 2.5%, depending on theleverage ratio of Holdings and certain of its subsidiaries, or at the greater ofthe prime rate or the federal funds effective rate (as defined) plus 0.05%, ineach case plus an additional 0.0% to 1.375%, depending on the leverage ratio ofHoldings and certain of its subsidiaries. Should the Libor rate, the lenders'base rate or the leverage ratios change, our interest expense will increase ordecrease accordingly. As of December 31, 2000, we have borrowed $82.7 millionsubject to interest rate risk. On this amount, a 1% increase in the interestrate would cost us $827,000 in additional gross interest cost on an annualizedbasis.On January 3, 2001 we entered into an interest rate swap agreement to convert$50 million in 9.75% fixed rate debt to a variable interest rate equal to the 90day Libor rate plus 334 basis points (see note 14 included in Part II, Item 8,Consolidated Financial Statements and Supplementary Data for more information).The swap agreement carries interest rate risk. Should the Libor rate change, ourinterest expense will increase or decrease accordingly. A 1% change in thevariable interest rate will change the annualized benefit of the swap by$500,000. As of March 28, 2001, the interest rate spread between the fixed andswapped variable rate is 1.51%, an annualized reduction in interest expense ofapproximately $755,000.Our Fiber Facility carries interest rate risk. Amounts borrowed under thisAgreement bear interest at either Libor plus 3.0%, or at our choice, thelender's prime rate plus 1.75%. The interest rate will decline to Libor plus2.5%-2.75%, or at our choice, the lender's prime rate plus 1.25%-1.5% after theproject completion date and when the loan balance is $60,000,000 or less. Shouldthe Libor rate, the lenders' base rate or the leverage ratios change, ourinterest expense will increase or decrease accordingly. As of December 31, 2000,we have borrowed $71.7 million subject to interest rate risk. On this amount, a1% increase in the interest rate would cost us $717,000 in additional grossinterest cost on an annualized basis.Our Satellite Transponder Capital Lease carries interest rate risk. Amountsborrowed under this Agreement bear interest at Libor plus 3.25%. Should theLibor rate change, our interest expense will increase or decrease accordingly.As of December 31, 2000, we have borrowed $47.6 million subject to interest raterisk. On this amount, a 1% increase in the interest rate would cost us $476,000in additional gross interest cost on an annualized basis.Item 8. Consolidated Financial Statements and Supplementary DataOur consolidated financial statements are filed under this Item, beginning onPage 78. The financial statement schedules required under Regulation S-X are filed pursuant to Item 14 of this Report.Item 9. Changes In and Disagreements With Accountants on Accounting andFinancial Disclosure.None. 76 Part IIIIncorporated herein by reference from our Proxy Statement for our 2001 AnnualShareholders' meeting. 77 INDEPENDENT AUDITORS' REPORTThe Board of Directors and StockholdersGeneral Communication, Inc.:We have audited the accompanying consolidated balance sheets of GeneralCommunication, Inc. and Subsidiaries as of December 31, 2000 and 1999, and therelated consolidated statements of operations, stockholders' equity and cashflows for each of the years in the three-year period ended December 31, 2000.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 auditing standards generally acceptedin the United States of America. Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable 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, 2000 and 1999, and theresults of their operations and their cash flows for each of the years in thethree-year period ended December 31, 2000 in conformity with accountingprinciples generally accepted in the United States of America. /s/ KPMG LLPAnchorage, AlaskaMarch 7, 2001, except for note 13, which is dated as of March 23, 2001 78 GENERAL COMMUNICATION, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, ASSETS 2000 1999--------------------------------------------------------------------------------- ----------- ----------- (Amounts in thousands) Current assets: Cash and cash equivalents $ 5,962 13,734 ----------- ----------- Receivables: Trade 49,872 48,145 Employee 378 269 ----------- ----------- 50,250 48,414 Less allowance for doubtful receivables 2,864 2,833 ----------- ----------- Net receivables 47,386 45,581 ----------- ----------- Refundable deposit --- 9,100 Prepaid and other current assets 2,505 2,224 Deferred income taxes, net 3,221 2,972 Inventories 5,717 3,754 Property held for sale 10,877 --- Notes receivable with related parties 241 449 ----------- ----------- Total current assets 75,909 77,814 ----------- -----------Property and equipment in service, at cost: Land and buildings 3,051 1,199 Telephony distribution systems 294,300 269,117 Cable television distribution systems 106,953 96,620 Support equipment 40,831 42,576 Transportation equipment 3,867 2,259 Property and equipment under capital leases 50,771 2,819 ----------- ----------- 499,773 414,590 Less accumulated depreciation 151,971 111,828 ----------- ----------- Net property and equipment in service 347,802 302,762 Construction in progress 8,097 2,898 ----------- ----------- Net property and equipment 355,899 305,660 ----------- -----------Cable franchise agreements, net of amortization of $21,509,000 and $16,347,000 at December 31, 2000 and 1999, respectively 184,983 190,145Goodwill, net of amortization of $5,952,000 and $4,563,000 at December 31, 2000 and 1999, respectively 40,002 41,391Other intangible assets, net of amortization of $729,000 and $313,000 at December 31, 2000 and 1999, respectively 3,936 4,433Property held for sale 1,550 10,877Deferred loan and senior notes costs, net of amortization of $4,166,000 and $2,849,000 at December 31, 2000 and 1999, respectively 8,402 8,863Notes receivable with related parties 3,235 2,067Other assets, at cost, net of amortization of $63,000 and $3,409,000 at December 31, 2000 and 1999, respectively 5,091 1,901 ----------- ----------- Total other assets 247,199 259,677 ----------- ----------- Total assets $ 679,007 643,151 =========== ===========See accompanying notes to consolidated financial statements. 79 (Continued) GENERAL COMMUNICATION, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued) December 31, LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999--------------------------------------------------------------------------------- ----------- ----------- (Amounts in thousands) Current liabilities: Current maturities of obligations under capital leases $ 1,600 574 Accounts payable 29,094 25,321 Accrued interest 9,256 7,985 Accrued payroll and payroll related obligations 10,385 8,601 Deferred revenue 10,351 8,173 Accrued liabilities 4,134 3,152 Subscriber deposits and other current liabilities 488 1,314 ----------- ----------- Total current liabilities 65,308 55,120 Long-term debt, excluding current maturities 334,400 339,400Obligations under capital leases, excluding current maturities 46,882 747Obligations under capital leases due to related party, excluding current maturities 214 353Deferred income taxes, net of deferred income tax benefit 22,057 30,861Other liabilities 4,077 4,210 ----------- ----------- Total liabilities 472,938 430,691 ----------- -----------Preferred stock. $1,000 par value, authorized 1,000,000 shares; issued and outstanding 20,000 shares at December 31, 2000 and 1999; convertible into Class A common stock at $5.55 per share of Class A common stock, redemption price at December 31, 2000 and 1999 of $1,014 and $1,058, respectively; $2,677,000 and $1,158,000 dividends accrued, pending stock issuance at December 31, 2000 and 1999, respectively 22,589 19,912 ----------- -----------Stockholders' equity: Common stock (no par): Class A. Authorized 100,000,000 shares; issued and outstanding 48,642,870 and 46,869,671 shares at December 31, 2000 and 1999, respectively 182,706 176,740 Class B. Authorized 10,000,000 shares; issued and outstanding 3,904,038 and 4,048,480 shares at December 31, 2000 and 1999, respectively; convertible on a share-per-share basis into Class A common stock 3,299 3,422 Less cost of 357,958 and 347,958 Class A common shares held in treasury at December 31, 2000 and 1999, respectively (1,659) (1,607) Paid-in capital 7,368 6,343 Notes receivable with related parties issued upon stock option exercise (2,976) (2,167) Retained earnings (deficit) (5,258) 9,817 ----------- ----------- Total stockholders' equity 183,480 192,548 ----------- ----------- Commitments and contingencies Total liabilities and stockholders' equity $ 679,007 643,151 =========== ===========See accompanying notes to consolidated financial statements. 80 GENERAL COMMUNICATION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Years ended December 31, 2000, 1999 and 1998 2000 1999 1998 ------------- ------------ ------------- (Amounts in thousands except per share amounts) Revenues $ 292,605 279,179 246,795Cost of sales and services 119,712 122,467 116,073Selling, general and administrative expenses 104,918 98,282 89,833Depreciation and amortization expense 51,972 42,680 32,045 ------------- ------------ ------------- Operating income 16,003 15,750 8,844 ------------- ------------ -------------Interest expense 38,845 31,237 20,679Interest income 702 621 915 ------------- ------------ ------------- Interest expense, net 38,143 30,616 19,764Gain on sale of property and equipment 491 --- --- ------------- ------------ ------------- Net loss before income taxes and cumulative effect of a change in accounting principle (21,649) (14,866) (10,920)Income tax benefit (8,415) (5,683) (4,123) ------------- ------------ ------------- Net loss before cumulative effect of a change in accounting principle (13,234) (9,183) (6,797) Cumulative effect of a change in accounting principle, net of income tax benefit of $245 --- 344 --- ------------- ------------ ------------- Net loss $ (13,234) (9,527) (6,797) ============= ============ =============Basic and diluted net loss per common share: Loss before cumulative effect of a change in accounting principle $ (0.29) (0.20) (0.14) Cumulative effect of a change in accounting principle 0.00 (0.01) 0.00 ------------- ------------ ------------- Net loss $ (0.29) (0.21) (0.14) ============= ============ =============See accompanying notes to consolidated financial statements. 81 GENERAL COMMUNICATION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY years ended December 31, 2000, 1999 and 1998 Notes Class A Receivable Class A Class B Shares Issued to Retained Common Common Held in Paid-in Related Earnings(Amounts in thousands) Stock Stock Treasury Capital Parties (Deficit) -------------------------------------------------------------------- Balances at December 31, 1997 $170,322 3,432 (1,039) 4,425 --- 27,299Net loss --- --- --- --- --- (6,797)Tax effect of excess stock compensation expense for tax purposes over amounts recognized for financial reporting purposes --- --- --- 157 --- ---Purchase of treasury stock --- --- (568) --- --- ---Shares issued under stock option plan and notes issued upon stock option exercise 827 --- --- 319 (637) ---Shares issued to Employee Stock Purchase Plan 1,574 --- --- --- --- ---Warrants issued --- --- --- 708 --- ---Stock offering issuance costs (15) --- --- --- --- --- --------------------------------------------------------------------Balances at December 31, 1998 172,708 3,432 (1,607) 5,609 (637) 20,502Net loss --- --- --- --- --- (9,527)Tax effect of excess stock compensation expense for tax purposes over amounts recognized for financial reporting purposes --- --- --- 211 --- ---Class B shares converted to Class A 10 (10) --- --- --- ---Shares issued under stock option plan and notes issued upon stock option exercise 1,595 --- --- 431 (1,389) ---Shares issued under officer stock option agreement and note issued upon stock option exercise 38 --- --- --- (141) ---Shares issued to Employee Stock Purchase Plan 1,770 --- --- --- --- ---Warrants issued --- --- --- 92 --- ---Shares issued upon acquisition of customer base 619 --- --- --- --- ---Preferred stock dividends --- --- --- --- --- (1,158) --------------------------------------------------------------------Balances at December 31, 1999 176,740 3,422 (1,607) 6,343 (2,167) 9,817Net loss --- --- --- --- --- (13,234)Tax effect of excess stock compensation expense for tax purposes over amounts recognized for financial reporting purposes --- --- --- 640 --- ---Class B shares converted to Class A 123 (123) --- --- --- ---Shares issued and issuable under stock option plan and notes issued upon stock option exercises 1,213 --- --- 385 (809) ---Shares issued upon warrant exercise 1,381 --- --- --- --- ---Shares issued to Employee Stock Purchase Plan 3,249 --- --- --- --- ---Purchase of treasury stock --- --- (52) --- --- ---Preferred stock dividends --- --- --- --- --- (1,841) --------------------------------------------------------------------Balances at December 31, 2000 $182,706 3,299 (1,659) 7,368 (2,976) (5,258) ====================================================================See accompanying notes to consolidated financial statements. 82 GENERAL COMMUNICATION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS years ended December 31, 2000, 1999 and 1998 2000 1999 1998 ------------- ------------- ------------ (Amounts in thousands) Cash flows from operating activities: Net loss $ (13,234) (9,527) (6,797) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 51,972 42,680 32,045 Amortization charged to selling, general and administrative expense 554 1,770 1,147 Deferred income tax benefit (8,415) (5,928) (744) Deferred compensation and compensatory stock options 982 675 376 Non-cash cost of sales --- 3,703 --- Bad debt expense (recovery), net of write-offs 983 1,946 (183) Employee Stock Purchase Plan expense funded with General Communication, Inc. Class A common stock issued and issuable 2,773 2,448 2,278 Write-off of capitalized interest 1,955 --- --- Write-off of unamortized start-up costs --- 589 --- Write-off of deferred debt issuance costs upon modification of Senior Holdings Loan --- 472 --- Warrants issued --- 42 --- Gain on sale of property and equipment (491) --- --- Other noncash income and expense items 356 (114) 154 Change in operating assets and liabilities 3,942 (5,413) (5,347) ------------- ------------- ------------ Net cash provided by operating activities 41,377 33,343 22,929 ------------- ------------- ------------Cash flows from investing activities: Purchases of property and equipment, including construction period interest (48,896) (36,573) (148,973) Proceeds from sale of property and equipment 802 --- --- Restricted cash investment --- --- 39,406 Refund of deposit pursuant to capital lease transaction 9,100 --- --- Purchase of property held for sale (1,550) --- --- Purchases of other assets and intangible assets (2,957) (1,236) (4,287) Notes receivable issued to related parties (971) (952) (1,715) Payments received on notes receivable with related parties 455 653 1,769 ------------- ------------- ------------ Net cash used in investing activities (44,017) (38,108) (113,800) ------------- ------------- ------------Cash flows from financing activities: Long-term borrowings - bank debt 5,000 13,776 103,224 Repayments of long-term borrowings and capital lease obligations (11,151) (26,620) (2,017) Proceeds from preferred stock issuance --- 20,000 --- Proceeds from common stock issuance 1,706 103 190 Payment of debt and stock issuance costs (635) (768) (1,706) Proceeds from warrant issuance --- --- 708 Purchase of treasury stock (52) --- (568) ------------- ------------- ------------ Net cash provided by (used in) financing activities (5,132) 6,491 99,831 ------------- ------------- ------------ Net increase (decrease) in cash and cash equivalents (7,772) 1,726 8,960 Cash and cash equivalents at beginning of year 13,734 12,008 3,048 ------------- ------------- ------------ Cash and cash equivalents at end of year $ 5,962 13,734 12,008 ============= ============= ============See accompanying notes to consolidated financial statements. 83 GENERAL COMMUNICATION, INC. Notes to Consolidated Financial Statements(l) Business and Summary of Significant Accounting Principles In the following discussion, General Communication, Inc. and its direct and indirect subsidiaries are referred to as "we," "us" and "our." (a) Business General Communication, Inc. ("GCI"), an Alaska corporation, was incorporated in 1979. We offer the following services: - Long-distance telephone service between Anchorage, Fairbanks, Juneau, and other communities in Alaska and the remaining United States and foreign countries - Cable television services throughout Alaska - Facilities-based competitive local access services in Anchorage, Alaska - Internet access services o Termination of traffic in Alaska for certain common carriers - Private line services o Managed services to certain commercial customers - Sales and service of dedicated communications systems and related equipment - Private network point-to-point data and voice transmission services between Alaska and the western contiguous United States - Lease capacity on two undersea fiber optic cables used in the transmission of interstate and intrastate private line, switched message long-distance and Internet services between Alaska and the remaining United States and foreign countries (b) Principles of Consolidation The consolidated financial statements include the accounts of GCI, GCI's wholly-owned subsidiary GCI, Inc., GCI, Inc.'s wholly-owned subsidiary GCI Holdings, Inc., GCI Holdings, Inc.'s wholly-owned subsidiaries GCI Communication Corp., GCI Cable, Inc. and GCI Transport Co., Inc., GCI Transport Co., Inc.'s wholly-owned subsidiaries GCI Satellite Co., Inc., 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 ("Alaska United"). GCI Communication Services, Inc. and its wholly owned subsidiary GCI Leasing Co. were merged into GCI Communication Corp. effective January 1, 2000. GCI Cable/Fairbanks, Inc. and GCI Cable/Juneau, Inc. were merged into GCI Cable, Inc. effective January 1, 2000. (c) Net Loss Per Common Share Net loss used to calculate basic and diluted net loss per common share is increased by preferred stock dividends of $1,841,000 and $1,158,000 for the years ended December 31, 2000 and 1999, respectively. Shares used to calculate net loss per common share consist of the following (amounts in thousands): 2000 1999 1998 ----------- ---------- ----------- Weighted average common shares outstanding 51,444 50,326 49,186 =========== ========== =========== 84 (Continued) GENERAL COMMUNICATION, INC. Notes to Consolidated Financial Statements Common equivalent shares outstanding which are anti-dilutive for purposes of calculating the net loss per common share for the years ended December 31, 2000, 1999 and 1998 and are not included in the diluted net loss per share calculation consist of the following (amounts in thousands): 2000 1999 1998 ----------- ---------- ----------- Common equivalent shares outstanding 527 587 521 =========== ========== =========== Weighted average shares associated with outstanding stock options for the years ended December 31, 2000, 1999 and 1998 which have been excluded from the diluted loss per share calculations because the options' exercise price was greater than the average market price of the common shares consist of the following (amounts in thousands): 2000 1999 1998 ----------- ---------- ----------- Weighted average shares associated with outstanding stock options 2,231 2,182 2,071 =========== ========== =========== (d) Preferred and Common Stock Following is the statement of preferred and common stock at December 31, 2000, 1999 and 1998 (shares, in thousands): Preferred Common Stock Stock Class A Class B ------------- ---------------------------- Balances at December 31, 1997 --- 45,279 4,063 Class B shares converted to Class A --- 2 (2) Shares issued under stock option plan --- 315 --- Shares issued to Employee Stock Purchase Plan --- 299 --- ------------- -------------- ------------- Balances at December 31, 1998 --- 45,895 4,061 Class B shares converted to Class A --- 13 (13) Shares issued under stock option plan --- 417 --- Shares issued under officer stock option agreements --- 50 --- Shares issued to Employee Stock Purchase Plan --- 395 --- Shares issued upon acquisition of customer base --- 100 --- Shares issued under Preferred Stock Agreement 20 --- --- ------------- -------------- ------------- Balances at December 31, 1999 20 46,870 4,048 Class B shares converted to Class A --- 144 (144) Shares issued under stock option plan --- 513 --- Shares issued and issuable to Employee Stock Purchase Plan --- 691 --- Warrant exercise --- 425 --- ------------- -------------- ------------- Balances at December 31, 2000 20 48,643 3,904 ============= ============== ============= 85 (Continued) GENERAL COMMUNICATION, INC. Notes to Consolidated Financial Statements (e) Cash and Cash Equivalents Cash equivalents consist of short-term, highly liquid investments that are readily convertible into cash. (f) Inventories Inventory of merchandise for resale and parts is stated at the lower of cost or market. Cost is determined using the average cost method. (g) Property and Equipment Property and equipment is stated at cost. Construction costs of facilities are capitalized. Equipment financed under capital leases is recorded at the lower of fair market value or the present value of future minimum lease payments. Construction in progress represents distribution systems and support equipment not placed in service on December 31, 2000; management intends to place this equipment in service during 2001. Depreciation is computed on a straight-line basis based upon the shorter of the estimated useful lives of the assets or the lease term, if applicable, in the following ranges: Asset Category Asset Lives ----------------------------------------------------- -------------- Telephony distribution systems 12-20 years Cable television distribution systems 10 years Support equipment 3-5 years Transportation equipment 5-10 years Property and equipment under capital leases 5-12 years Repairs and maintenance are charged to expense as incurred. Expenditures for major renewals and betterments are capitalized. Gains or losses are recognized at the time of ordinary retirements, sales or other dispositions of property. (h) 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 that 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 10 to 40 years. The cost of the PCS license and related financing costs were capitalized as an intangible asset. The associated assets were placed into service during 2000 and the recorded cost of the license and related financing costs are being amortized over a 40-year period using the straight-line method. (i) 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. Through January 1999 (the end of the construction period of the undersea fiber optic cable) issuance costs were partially amortized to Construction in Progress (see note 8). Commencing February 1999 (the month the fiber optic cable was placed in service) the 86 (Continued) GENERAL COMMUNICATION, INC. Notes to Consolidated Financial Statements issuance costs are being fully amortized to amortization expense. (j) Other Assets Other assets are recorded at cost and are amortized on a straight-line basis over periods of 2-15 years. (k) Revenue from Services and Products Revenues generated from long-distance and managed 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. Technical services 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 billed in advance and are recognized as the associated service is provided. Other revenues are recognized when the service is provided. (l) Research and Development and Advertising Expense We expense advertising and research and development costs as incurred. Advertising expenses were approximately $3,438,000, $4,574,000 and $5,028,000 for the years ended December 31, 2000, 1999 and 1998, respectively. We had no research and development costs for the years ended December 31, 2000, 1999 and 1998. (m) Interest Expense Interest costs incurred during the construction period of significant capital projects are capitalized. Interest costs capitalized totaled $1,260,000, and $7,764,000 during the years ended December 31, 1999 and 1998. No interest was capitalized during the year ended December 31, 2000. (n) Cumulative Effect of a Change in Accounting Principle The American Institute of Certified Public Accountants issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities", which 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. A one-time expense of $344,000 (net of income tax benefit of $245,000) associated with the write-off of unamortized start-up costs was recognized in the first quarter of 1999 upon adoption of SOP 98-5. (o) 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. (p) Stock Option Plan We account for our 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 is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. We have adopted SFAS 123, "Accounting for Stock-Based Compensation", ("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 87 (Continued) GENERAL COMMUNICATION, INC. Notes to Consolidated Financial Statements 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. We have elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS 123. (q) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (r) Concentrations of Credit Risk Financial instruments that potentially subject us to concentrations of credit risk are primarily cash and cash equivalents and accounts receivable. Excess cash is invested in high quality short-term liquid money instruments issued by highly rated financial institutions. At December 31, 2000 and 1999, substantially all of our cash and cash equivalents were invested in short-term liquid money instruments. Our customers are located primarily throughout Alaska. As a result of this geographic concentration, our growth and operations depend upon economic conditions in Alaska. The economy of Alaska is dependent upon the natural resources industries, and in particular oil production, as well as tourism, government, and United States military spending. Though limited to one geographical area, the concentration of credit risk with respect to our receivables is minimized due to the large number of customers, individually small balances, short payment terms and deposit requirements for certain product lines. (s) 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. (t) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," 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. (u) Year 2000 Costs We charged incremental Year 2000 assessment and remediation costs to expense as incurred. (v) Reclassifications Reclassifications have been made to the 1999 financial statements to make them comparable with the 2000 presentation. 88 (Continued) GENERAL COMMUNICATION, INC. Notes to Consolidated Financial Statements(2) Consolidated Statements of Cash Flows Supplemental Disclosures Changes in operating assets and liabilities consist of (amounts in thousands): Year ended December 31, 2000 1999 1998 ------------ ------------ ------------- Increase in accounts receivable $ (3,451) (5,783) (9,054) Decrease in income tax receivable --- 1,965 490 (Increase) decrease in prepaid and other current assets (390) (235) 388 (Increase) decrease in inventories (1,963) (767) 286 Increase (decrease) in accounts payable 3,773 (2,229) 2,585 Increase (decrease) in accrued liabilities 982 (95) (1,914) Increase in accrued payroll and payroll related obligations 2,260 1,368 171 Decrease in accrued income taxes --- --- (111) Increase in deferred revenue 2,178 1,802 1,128 Increase (decrease) in accrued interest 1,271 (87) 423 Increase (decrease) in subscriber deposits and other current liabilities (826) (944) 274 Increase (decrease) in components of other long-term liabilities 108 (408) (13) ------------ ------------ ------------- $ 3,942 (5,413) (5,347) ============ ============ ============= We paid no income taxes during the years ended December 31, 2000, 1999 and 1998. Net income tax refunds received totaled $0, $1,965,000 and $4,243,000 during the years ended December 31, 2000, 1999 and 1998, respectively. We paid interest totaling approximately $36,223,000, $32,900,000 and $29,630,000 during the years ended December 31, 2000, 1999 and 1998, respectively. We recorded $640,000, $211,000 and $157,000 during the years ended December 31, 2000, 1999 and 1998, 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 years ended December 31, 2000, 1999 and 1998 we funded the employer matching portion of Employee Stock Purchase Plan contributions by issuing or committing to issue GCI Class A common stock valued at $2,773,000, $2,448,000 and $2,278,000, respectively. We financed the purchase of satellite transponder capacity pursuant to a long-term capital lease arrangement with a leasing company during the year ended December 31, 2000 at a cost of $48.2 million (see note 12). 89 (Continued) GENERAL COMMUNICATION, INC. Notes to Consolidated Financial Statements (3) Notes Receivable with Related Parties Notes receivable with related parties consist of the following (amounts in thousands): December 31, 2000 1999 ------------- -------------- Notes receivable from officers bearing interest up to 9.0% or at the rate paid by us on our senior indebtedness, unsecured and secured by personal residences, a life insurance policy and GCI common stock, due through December 31, 2004 $ 5,456 3,349 Notes receivable from other related parties bearing interest up to 9.0% or at the rate paid by us on our senior indebtedness, unsecured and secured by property and equipment, due through February 1, 2004 212 942 Interest receivable 784 392 ------------- -------------- Total notes receivable with related parties 6,452 4,683 Less notes receivable with related parties issued upon stock option exercise, classified as a component of stockholders' equity 2,976 2,167 Less current portion, including current interest receivable 241 449 ------------- -------------- Long-term portion, including long-term interest receivable $ 3,235 2,067 ============= ============== (4) Long-term Debt Long-term debt consists of the following (amounts in thousands): December 31, 2000 1999 ------------- -------------- Senior Notes (a) $ 180,000 180,000 Senior Holdings Loan (b) 82,700 87,700 Fiber Facility (c) 71,700 71,700 ------------- -------------- Long-term debt, excluding current maturities $ 334,400 339,400 ============= ============== (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 $6,496,000 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 notes, liens on property, and asset sales (excluding sales of Alaska United assets). GCI, Inc. was in compliance with all covenants during the year ending 2000. The Senior Notes are unsecured obligations. 90 (Continued) GENERAL COMMUNICATION, INC. Notes to Consolidated Financial Statements Net proceeds from the 1997 stock and Senior Note offerings and initial draws on the Senior Holdings Loan (see note 4(b)) facilities were used to repay borrowings outstanding under our then existing credit facilities and to provide initial funding for construction of the Alaska United undersea fiber optic cable system (see notes 4(c) and 8). (b) The GCI Holdings, Inc., $150,000,000 and $50,000,000 credit facilities ("Senior Holdings Loan") mature on June 30, 2005. The Senior Holdings Loan facilities were amended in April 1999 (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 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. We are 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 $570,000, $533,000 and $512,000 during the years ended December 31, 2000, 1999 and 1998, respectively. On April 13, 1999, we amended our Holdings credit facilities. The amended facilities limited capital expenditures to $35 million in 2000 (excluding a carryforward of unused capacity from 1999) with no limits thereafter (excluding capital expenditures by certain subsidiaries and the capital lease of the satellite transponder asset (see note 12)). During the years ended December 31, 2000 and 1999 our capital expenditures net of amounts paid for the capital lease of the satellite transponder asset and the Alaska United fiber optic cable system were $48.9 million and $25.4 million, respectively. Pursuant to the Financial Accounting Standards Board Emerging Issues Task Force Issue 98-14, "Debtor's Accounting for Changes in Line-of-Credit or Revolving Debt Arrangements," we recorded as additional interest expense $472,000 of deferred financing costs in the second quarter of 1999 associated with reduced borrowing capacity resulting from the amendment. On October 25, 2000 we further amended the Holdings credit facilities. These amendments are contingent upon closing the acquisition of a controlling interest in Kanas Telecom, Inc. (see note 11) and contain, among other things, provisions for payment of a one-time amendment fee of $192,500, changes in certain financial covenants and ratios and a limit of $70 million for 2001 capital expenditures (excluding capital expenditures by certain subsidiaries). Upon the acquisition of Kanas Telecom, Inc. and the enactment of this amendment, Holdings may not permit the ratio of senior debt to annualized operating cash flow (as defined) of Holdings and certain of its subsidiaries to exceed 2.50 to 1.0 from October 1, 2000 to September 30, 2003 and the ratio of annualized operating cash flow to fixed charges must equal at least 1.0 to 1.0 effective January 1, 2002 (which adjusts to 1.05 to 1.0 in April, 2003 and thereafter). $19 million from the Preferred Stock issuance proceeds (see note 6) were used to reduce outstanding indebtedness under the Senior Holdings Loan. 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: 91 (Continued) GENERAL COMMUNICATION, INC. Notes to Consolidated Financial Statements Percentage of Reduction of Outstanding Date Range of Quarterly Payments Facilities -------------------------------------------------------------- January 1, 2001 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. Holdings was in compliance with all Senior Holdings Loan facilities covenants during the year ended December 31, 2000. Substantially all of Holdings' assets as well as a pledge of Holdings' stock by GCI, Inc. collateralize the Senior Holdings Loan facilities. $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 our provision of telecommunications services within the State of Alaska. In connection with the initial funding and amendments of the Senior Holdings Loan facilities, Holdings paid bank fees and other expenses in 1997, 1998 and 1999 of approximately $3,263,000 that are being amortized to amortization expense over the life of the agreement. (c) 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. The Fiber Facility is a 10-year term loan that is interest only for the first 5 years. The facility can be extended an additional two years at any time between the second and fifth anniversary of closing the facility if we can demonstrate projected revenues from certain capacity commitments will be sufficient to pay all operating costs, interest, and principal installments based on the extended maturity. The Fiber Facility bears interest at either Libor plus 3.0%, or at the lender's prime rate plus 1.75%. The interest rate will decline to Libor plus 2.5%-2.75%, or, at our option, the lender's prime rate plus 1.25%-1.5% when the loan balance is $60 million or less. 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. Alaska United was in compliance with all covenants during the year ended 2000. 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 $2,183,000 that are being amortized over the life of the agreement. Through January 1999 (the end of the construction period of the undersea fiber optic cable system) bank fees and costs 92 (Continued) GENERAL COMMUNICATION, INC. Notes to Consolidated Financial Statements were amortized to Construction in Progress. Commencing February 1999 (the month the fiber optic cable was placed in service) the bank fees and costs are being amortized to amortization expense. (d) On December 31, 1992, we 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 system linking Seward, Alaska and Pacific City, Oregon. Concurrently, we leased the capacity under a ten-year all events, take or pay, contract with WorldCom, who subleased the capacity back to us. The obligation was fully paid and the lease and sublease were cancelled at December 31, 1999. As of December 31, 2000 maturities of long-term debt were as follows (amounts in thousands): Years ending December 31, 2001 $ --- 2002 --- 2003 21,786 2004 48,036 2005 55,735 2006 and thereafter 208,843 ----------- $ 334,400 ===========(5) Income Taxes Total income tax benefit was allocated as follows (amounts in thousands): Years ended December 31, 2000 1999 1998 ------------ ----------- ---------- Net loss from continuing operations $ (8,415) (5,928) (4,123) Cumulative effect of a change in accounting principle --- 245 --- ------------ ----------- ---------- (8,415) (5,683) (4,123) Tax effect of excess stock compensation expense for tax purposes over amounts recognized for financial reporting purposes in Stockholders' Equity (640) (211) (157) ------------ ----------- ---------- $ (9,055) (5,894) (4,280) ============ =========== ========== Income tax benefit consists of the following (amounts in thousands): Years ended December 31, 2000 1999 1998 ------------ ---------- ----------- Current tax benefit: Federal taxes $ --- --- (2,858) State taxes --- --- (521) ------------ ---------- ----------- Total current tax benefit --- --- (3,379) ------------ ---------- ----------- 93 (Continued) GENERAL COMMUNICATION, INC. Notes to Consolidated Financial Statements Years ended December 31, 2000 1999 1998 ------------ ---------- ----------- Deferred tax benefit: Federal taxes (6,494) (4,807) (629) State taxes (1,921) (876) (115) ------------ ---------- ----------- Total deferred tax benefit (8,415) (5,683) (744) ------------ ---------- ----------- Total tax benefit $ (8,415) (5,683) (4,123) ============ ========== =========== Total income tax benefit differed from the "expected" income tax benefit determined by applying the statutory federal income tax rate of 34% as follows (amounts in thousands): Years ended December 31, 2000 1999 1998 ------------ ---------- ----------- "Expected" statutory tax benefit $ (7,361) (5,054) (3,713) State income taxes, net of federal benefit (1,268) (649) (594) Income tax effect of goodwill amortization, nondeductible expenditures and other items, net 399 469 441 Other (185) (449) (257) ------------ ---------- ----------- $ (8,415) (5,683) (4,123) ============ ========== =========== The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2000 and 1999 are presented below (amounts in thousands): December 31, 2000 1999 -------------- ------------- Current deferred tax assets: Accounts receivable, principally due to allowance for doubtful accounts $ 539 715 Compensated absences, accrued for financial reporting purposes 1,305 1,154 Inventory expense for financial reporting purposes in excess of amounts recognized for tax purposes 892 634 Workers compensation and self insurance health reserves, principally due to accrual for financial reporting purposes 341 327 Other 144 142 -------------- ------------- Total current deferred tax assets $ 3,221 2,972 ============== ============= 94 (Continued) GENERAL COMMUNICATION, INC. Notes to Consolidated Financial Statements December 31, 2000 1999 -------------- ------------- Long-term deferred tax assets: Net operating loss carryforwards $ 51,052 35,486 Alternative minimum tax credits 2,502 2,502 Lease expense for financial reporting purposes in excess of amounts recognized for tax purposes 857 --- Deferred compensation expense for financial reporting purposes in excess of amounts recognized for tax purposes 979 973 Employee stock option compensation expense for financial reporting purposes in excess of (less than) amounts recognized for tax purposes (579) 47 Sweepstakes award in excess of amounts recognized for tax purposes 193 197 Other 397 555 -------------- ------------- Total long-term deferred tax assets 55,401 39,760 -------------- ------------- Long-term deferred tax liabilities: Plant and equipment, principally due to differences in depreciation 67,108 62,007 Amortizable assets 9,017 6,889 Costs recognized for tax purposes in excess of amounts recognized for book purposes 1,319 1,319 Other 14 406 -------------- ------------- Total gross long-term deferred tax liabilities 77,458 70,621 -------------- ------------- Net combined long-term deferred tax liabilities $ 22,057 30,861 ============== ============= In conjunction with the 1996 Cable Companies acquisition, we incurred a net deferred income tax liability of $24.4 million and acquired net operating losses totaling $57.6 million. We determined that approximately $20 million of the acquired net operating losses would not be utilized for income tax purposes, and elected with our December 31, 1996 income tax returns to forego utilization of such acquired losses under Internal Revenue Code section 1.1502-32(b)(4). Deferred tax assets were not recorded associated with the foregone losses and, accordingly, no valuation allowance was provided. At December 31, 2000, we have (1) tax net operating loss carryforwards of approximately $103.6 million that will begin expiring in 2008 if not utilized, and (2) alternative minimum tax credit carryforwards of approximately $2.5 million available to offset regular income taxes payable in future years. Our utilization of remaining acquired net operating loss carryforwards is subject to annual limitations pursuant to Internal Revenue Code section 382 which could reduce or defer the utilization of these losses. Tax benefits associated with recorded deferred tax assets are considered to be more likely than not realizable through future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards, and tax planning strategies. 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. 95 (Continued) GENERAL COMMUNICATION, INC. Notes to Consolidated Financial Statements(6) Redeemable Preferred Stock We issued 20,000 shares of convertible redeemable accreting preferred stock ("Preferred Stock") on April 30, 1999. Proceeds totaling $20 million (before payment of expenses) were used for general corporate purposes, to repay outstanding indebtedness, and to provide additional liquidity. Prior to the four-year anniversary following closing, dividends are payable semi-annually at the rate of 8.5%, plus accrued but unpaid dividends, at our option, in cash or in additional fully-paid shares of Preferred Stock. Dividends earned after the four-year anniversary of closing are payable semi-annually in cash only. Dividends of $2,677,000 and $1,158,000 were accrued at December 31, 2000 and 1999, respectively, and will be paid in additional fully paid shares of Preferred Stock. Additional dividends totaling $322,000, or $14.00 per share, are accrued at December 31, 2000 and the determination of whether they will be paid in cash or additional fully-paid shares of Preferred Stock will be made at the next semi-annual payment date. Mandatory redemption is required 12 years from the date of closing.(7) 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. WorldCom owns a total of 8,251,509 shares of GCI's Class A common stock that represents approximately 17 and 18 percent of the issued and outstanding shares at December 31, 2000 and 1999, respectively. WorldCom owns a total of 1,275,791 shares of GCI's Class B common stock that represents approximately 33 and 32 percent of the issued and outstanding shares at December 31, 2000 and 1999, respectively. Stock Option Plan In December 1986, GCI adopted a Stock Option Plan (the "Option Plan") in order to provide a special incentive to our officers, non-employee directors, and employees by offering them an opportunity to acquire an equity interest in GCI. The Option Plan, as amended in 1999, provides for the grant of options for a maximum of 8,700,000 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 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 our employee, non-employee director, or a consultant or advisor working on our behalf. 96 (Continued) GENERAL COMMUNICATION, INC. Notes to Consolidated Financial Statements Information for the years 1998, 1999 and 2000 with respect to the Option Plan follows: Weighted Average Range of Exercise Shares Exercise Price Prices ------------- --------------- ------------------ Outstanding at December 31, 1997 3,370,900 $4.39 $0.01-$7.63 Granted 1,145,034 $6.40 $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 4,070,334 $4.95 $0.01-$7.63 Granted 865,796 $4.57 $3.25-$6.00 Exercised (416,365) $3.83 $0.01-$6.00 Forfeited (165,050) $6.03 $0.01-$7.63 ------------- Outstanding at December 31, 1999 4,354,715 $4.94 $0.01-$7.63 Granted 1,970,599 $5.96 $3.00-$7.50 Exercised (513,289) $2.37 $0.01-$6.50 Forfeited (398,460) $5.18 $0.01-$7.63 ------------- Outstanding at December 31, 2000 5,413,565 $5.54 ============= Available for grant at December 31, 2000 1,390,357 ============= Stock Options Not Pursuant to a Plan In June 1989, an officer was granted options to acquire 100,000 GCI 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, and options to acquire the remaining 50,000 shares were exercised in 1999 prior to their expiration. Stock Warrants Not Pursuant to a Plan We 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 provided 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 was exercised in 2000. We entered into a warrant agreement in exchange for services in December 1998 with certain of our legal counsel which provides for the purchase of 16,667 shares of GCI Class A common stock, vesting in December 1999, with an exercise price of $3.00 per share, and expiring December 2003. We entered into a warrant agreement in exchange for services in June 1999 with certain of our legal counsel which provides for the purchase of 25,000 shares of GCI Class A common stock, vesting through December 2001, with an exercise price of $3.00 per share, and expiring December 2003. SFAS 123 Disclosures Our stock options and warrants expire at various dates through November 2010. At December 31, 2000, 1999 and 1998, the weighted-average remaining contractual lives of options outstanding were 6.88, 6.14 and 6.54 years, respectively. 97 (Continued) GENERAL COMMUNICATION, INC. Notes to Consolidated Financial Statements At December 31, 2000, 1999 and 1998, the number of exercisable shares under option was 2,350,334, 2,509,756 and 2,252,130, respectively, and the weighted-average exercise price of those options was $4.78, $3.91 and $3.45, respectively. The per share weighted-average fair value of stock options granted during 2000 was $4.07 per share for compensatory and $2.71 for non-compensatory options; for 1999 was $4.14 per share for compensatory and $2.85 for non-compensatory options; and for 1998 was $4.08 per share for compensatory and 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: 2000 - risk-free interest rate of 4.987%, volatility of 0.6203 and an expected life of 5.82 years; 1999 - risk-free interest rate of 6.66%, volatility of 0.6455 and an expected life of 5.7 years; and 1998 - risk-free interest rate of 4.75%, volatility of 0.6951 and an expected life of 5.7 years. Summary information about our stock options and warrants outstanding at December 31, 2000: Options and Warrants Outstanding Options and Warrants Exercisable ----------------------------------------------------------------------- -------------------------------------- Weighted Average Number Remaining Weighted Number Range of Exercise outstanding as Contractual Average Exercisable as Weighted Average Prices of 12/31/00 Life Exercise Price of 12/31/00 Exercise Price ----------------------------------------------------------------------- -------------------------------------- $0.01-$0.01 40,820 6.92 $0.01 26,980 $0.01 $3.00-$3.00 613,667 1.53 $3.00 605,333 $3.00 $3.25-$4.00 989,485 6.31 $3.65 664,466 $3.80 $4.50-$5.00 386,450 8.75 $4.97 77,490 $4.87 $6.00-$6.00 651,450 7.57 $6.00 287,500 $6.00 $6.50-$6.50 1,572,900 8.66 $6.50 169,000 $6.50 $6.63-$6.94 80,000 7.08 $6.80 28,000 $6.83 $7.00-$7.00 626,000 6.23 $7.00 373,565 $7.00 $7.25-$7.50 451,000 7.51 $7.39 91,000 $7.50 $7.63-$7.63 45,000 6.83 $7.63 27,000 $7.63 ------------------------------------------------- -------------------------------------- $0.01-$7.63 5,456,772 6.88 $5.52 2,350,334 $4.78 ================================================= ====================================== Had compensation cost for our 2000, 1999 and 1998 grants for stock-based compensation plans been determined consistent with SFAS 123, our net loss and net loss per common share would approximate the pro forma amounts below (in thousands except per share data): As Reported Pro Forma ----------------- ----------------- 2000: Net loss $(13,234) $(15,646) Basic and diluted net loss per common share $ (0.29) $ (0.34) 1999: Net loss $ (9,527) $(11,714) Basic and diluted net loss per common share $ (0.21) $ (0.26) 1998: Net loss $ (6,797) $ (8,697) Basic and diluted net loss per common share $ (0.14) $ (0.18) 98 (Continued) GENERAL COMMUNICATION, INC. Notes to Consolidated Financial Statements Pro forma net loss reflects options granted in 1996 through 2000. 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, 1996 is not considered. Class A Common Shares Held in Treasury In 1998 we acquired a total of 145,000 additional shares of GCI Class A common stock for approximately $568,000 to fund deferred compensation agreements for three of our officers. In 2000 we acquired a total of 10,000 shares of GCI Class A common stock for approximately $52,000 to fund deferred compensation agreements for an officer. Employee Stock Purchase Plan In December 1986, we 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 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 $10,500 in 2000; 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. We may match employee salary reductions and after tax contributions in any amount, elected by GCI's Board 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, WorldCom common stock, AT&T common stock or various mutual funds. TCI common stock was previously offered to employees as an investment choice however TCI's merger with AT&T in March 1999 resulted in the conversion of TCI shares of common stock into AT&T shares of common stock. Employee contributions invested in GCI common stock receive up to 100% matching, as determined by GCI's Board 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 each year, in GCI common stock. Our matching contributions allocated to participant accounts totaled approximately $2,773,000, $2,448,000 and $2,278,000 for the years ended December 31, 2000, 1999, and 1998, 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, 1999 and 2000 we funded our employer-matching contributions through the issuance of new shares of GCI common stock rather than market purchases. We expect to purchase such shares on the open market in 2001. Effective July 1, 2000, we transferred all of the Plan assets to Merrill, Lynch, Pierce, Fenner and Smith, Incorporated who became the Plan's new recordkeeper and trustee. (8) Fiber Optic Cable System In early February 1999 we completed construction of our fiber optic cable system with commercial services commencing at that time. The cities of Anchorage, Juneau and Seattle are connected via a subsea route. Subsea and terrestrial connections extended the fiber optic cable to Fairbanks via Whittier and Valdez. The total system cost was approximately $125 million, portions of which were allocated to current Property 99 (Continued) GENERAL COMMUNICATION, INC. Notes to Consolidated Financial Statements Held for Sale in 2000 in connection with the future fiber capacity sale (see note 12) and to Cost of Sales and non-current Property Held for Sale in 1999 in connection with the 1999 sale of fiber capacity.(9) Industry Segments Data Our 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. We have four reportable segments as follows: Long-distance services. We offer a full range of common-carrier long-distance services to commercial, government, other telecommunications companies and residential customers, through our networks of fiber optic cables, digital microwave, and fixed and transportable satellite earth stations and our SchoolAccess(TM) offering to rural school districts and a similar offering to rural hospitals and health clinics. Cable services. We provide cable television services to residential, commercial and government users in the State of Alaska. Our cable systems serve 31 communities and areas in Alaska, including the state's three largest urban areas, Anchorage, Fairbanks and Juneau. Cable plant upgrades in 2000, 1999 and 1998 enabled us to offer digital cable television services in Anchorage and Fairbanks and retail cable modem service (through our Internet services segment) in Anchorage, Fairbanks, Juneau and Valdez complementing our existing service offerings. We plan to expand our product offerings as plant upgrades are completed in other communities in Alaska. Local access services. We offer facilities based competitive local exchange services in Anchorage and plan to provide similar competitive local exchange services in Fairbanks and Juneau during 2001, and perhaps 2002. Internet services. We began offering wholesale and retail Internet services in 1998. Deploying our undersea fiber optic cable has allowed us to offer enhanced services with high-bandwidth requirements. Included in the "Other" segment in the tables that follow are our managed services, product sales, cellular telephone services, and management services for Kanas Telecom, Inc., a company that owns and operates a fiber optic cable system constructed along the trans-Alaska oil pipeline corridor extending from Prudhoe Bay to Valdez, Alaska. None of these business units have ever met the quantitative thresholds for determining reportable segments. Also included in the Other segment in 1999 is a $19.5 million sale of undersea fiber optic cable system capacity, and corporate related expenses including marketing, customer service, management information systems, accounting, legal and regulatory, human resources and other general and administrative expenses. We evaluate performance and allocate resources based on (1) earnings or loss from operations before depreciation, amortization, net interest expense and income taxes, and (2) operating income or loss. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies in note 1. Intersegment sales are recorded at cost plus an agreed upon intercompany profit. We earn all revenues through sales of services and products within the United States of America. All of our long-lived assets are located within the United States of America. 100 (Continued) GENERAL COMMUNICATION, INC. Notes to Consolidated Financial Statements Summarized financial information for our reportable segments for the years ended December 31, 2000, 1999 and 1998 follows (amounts in thousands): Long- Local Distance Cable Access Internet Services Services Services Services Other Total ----------------------------------------------------------------------- 2000 Revenues: Intersegment $ 15,750 1,493 6,675 3,173 123 27,214 External 182,676 67,898 20,205 8,425 13,401 292,605 ----------------------------------------------------------------------- Total revenues 198,426 69,391 26,880 11,598 13,524 319,819 ----------------------------------------------------------------------- Cost of sales and services: Intersegment 13,554 --- 1,401 11,692 123 26,770 External 76,568 17,821 10,768 4,389 10,166 119,712 ----------------------------------------------------------------------- Total cost of sales and services 90,122 17,821 12,169 16,081 10,289 146,482 ----------------------------------------------------------------------- Contribution: Intersegment 2,196 1,493 5,274 (8,519) --- 444 External 106,108 50,077 9,437 4,036 3,235 172,893 ----------------------------------------------------------------------- Total contribution 108,304 51,570 14,711 (4,483) 3,235 173,337 Selling, general and administrative expenses 31,139 17,997 9,343 5,090 41,349 104,918 ----------------------------------------------------------------------- Earnings (loss) from operations before depreciation, amortization, net interest expense, income taxes and cumulative effect of a change in accounting principle 77,165 33,573 5,368 (9,573) (38,114) 68,419 Depreciation and amortization 20,817 18,942 4,375 1,915 5,923 51,972 ----------------------------------------------------------------------- Operating income (loss) $ 56,348 14,631 993 (11,488) (44,037) 16,447 ======================================================================= Total assets $257,913 304,094 24,827 22,768 69,405 679,007 ======================================================================= Capital expenditures $ 15,577 11,661 3,430 7,902 10,326 48,896 ======================================================================= 1999 Revenues: Intersegment $ 5,243 1,942 3,937 207 --- 11,329 External 164,043 61,146 15,543 4,799 33,648 279,179 ----------------------------------------------------------------------- Total revenues 169,286 63,088 19,480 5,006 33,648 290,508 ----------------------------------------------------------------------- Cost of sales and services: Intersegment 3,430 --- 1,255 6,094 --- 10,779 External 80,970 15,478 7,892 3,151 14,976 122,467 ----------------------------------------------------------------------- Total cost of sales and services 84,400 15,478 9,147 9,245 14,976 133,246 ----------------------------------------------------------------------- Contribution: Intersegment 1,813 1,942 2,682 (5,887) --- 550 External 83,073 45,668 7,651 1,648 18,672 156,712 ----------------------------------------------------------------------- Total contribution 84,886 47,610 10,333 (4,239) 18,672 157,262 Selling, general and administrative expenses 22,872 15,092 9,269 4,448 46,601 98,282 ----------------------------------------------------------------------- 101 (Continued) GENERAL COMMUNICATION, INC. Notes to Consolidated Financial Statements Long- Local Distance Cable Access Internet Services Services Services Services Other Total ----------------------------------------------------------------------- Earnings (loss) from operations before depreciation, amortization, net interest expense, income taxes and cumulative effect of a change in accounting principle 62,014 32,518 1,064 (8,687) (27,929) 58,980 Depreciation and amortization 16,270 17,626 3,281 1,128 4,375 42,680 ----------------------------------------------------------------------- Operating income (loss) $ 45,744 14,892 (2,217) (9,815) (32,304) 16,300 ======================================================================= Total assets $223,941 310,421 28,364 16,176 64,249 643,151 ======================================================================= Capital expenditures $ 17,626 7,186 3,207 5,991 2,563 36,573 ======================================================================= 1998 Revenues: Intersegment $ 891 1,330 1,284 --- --- 3,505 External 161,733 57,640 9,908 1,699 15,815 246,795 ----------------------------------------------------------------------- Total revenues 162,624 58,970 11,192 1,699 15,815 250,300 ----------------------------------------------------------------------- Cost of sales and services: Intersegment 1,284 --- 1,254 902 --- 3,440 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 4,304 13,828 119,513 ----------------------------------------------------------------------- Contribution: Intersegment (393) 1,330 30 (902) --- 65 External 82,410 44,233 3,795 (1,703) 1,987 130,722 ----------------------------------------------------------------------- Total contribution 82,017 45,563 3,825 (2,605) 1,987 130,787 Selling, general and administrative expenses 21,019 15,630 8,477 782 43,925 89,833 ----------------------------------------------------------------------- Earnings (loss) from operations before depreciation, amortization, net interest expense and income taxes 60,998 29,933 (4,652) (3,387) (41,938) 40,954 Depreciation and amortization 6,976 17,281 2,597 501 4,690 32,045 ----------------------------------------------------------------------- Operating income (loss) $ 54,022 12,652 (7,249) (3,888) (46,628) 8,909 ======================================================================= Total assets $236,310 320,305 31,062 11,952 49,816 649,445 ======================================================================= Capital expenditures $110,177 20,727 8,104 3,836 6,129 148,973 ======================================================================= ----------------- 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 (amounts in thousands): Years ended December 31, 2000 1999 1998 --------------- --------------- ------------ Total segment revenues $ 319,819 290,508 250,300 Less intersegment revenues eliminated in consolidation 27,214 11,329 3,505 --------------- --------------- ------------ Consolidated revenues $ 292,605 279,179 246,795 =============== =============== ============ 102 (Continued) GENERAL COMMUNICATION, INC. Notes to Consolidated Financial Statements A reconciliation of total segment earnings from operations before depreciation, amortization, net interest expense, income taxes and cumulative effect of a change in accounting principle to consolidated net loss before income taxes and cumulative effect of a change in accounting principle follows (amounts in thousands): Years ended December 31, 2000 1999 1998 -------------- ---------------- ------------ Total segment earnings from operations before depreciation, amortization, net interest expense, income taxes and cumulative effect of a change in accounting principle $ 68,419 58,980 40,954 Less intersegment contribution eliminated in consolidation 444 550 65 -------------- ---------------- ------------ Consolidated earnings from operations before depreciation, amortization, net interest expense, income taxes and cumulativeeffect of a change in accounting principle 67,975 58,430 40,889 Less depreciation and amortization expense 51,972 42,680 32,045 -------------- ---------------- ------------ Consolidated operating income 16,003 15,750 8,844 Less interest expense, net 38,143 30,616 19,764 Plus gain on sale of property and equipment 491 --- --- -------------- ---------------- ------------ Consolidated net loss before income taxes and cumulative effect of a change in accounting principle $ (21,649) (14,866) (10,920) ============== ================ ============ A reconciliation of total segment operating income to consolidated net loss before income taxes and cumulative effect of a change in accounting principle follows (amounts in thousands): Years ended December 31, 2000 1999 1998 --------------- --------------- ------------ Total segment operating income $ 16,447 16,300 8,909 Less intersegment contribution eliminated in consolidation 444 550 65 --------------- --------------- ------------ Consolidated operating income 16,003 15,750 8,844 Less interest expense, net 38,143 30,616 19,764 Plus gain on sale of property and equipment 491 --- --- --------------- --------------- ------------ Consolidated net loss before income taxes and cumulative effect of a change in accounting principle $ (21,649) (14,866) (10,920) =============== =============== ============ We provide long-distance services to WorldCom (see note 11) and Sprint, major customers. We earned revenues from Sprint, net of discounts, included in the long-distance segment, totaling approximately $28,672,000 for the year ended December 31, 1998. As a percentage of total revenues, Sprint revenues totaled 11.6% for the year ended December 31, 1998. Sprint was not a major customer for segment disclosure purposes for the years ended December 31, 2000 and 1999. 103 (Continued) GENERAL COMMUNICATION, INC. Notes to Consolidated Financial Statements(10) Fair Value of Financial Instruments The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties. The carrying amounts and estimated fair values of our financial instruments at December 31, 2000 and 1999 follows (amounts in thousands): 2000 1999 ------------------------- ------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------------------------- ------------------------- Short-term assets $ 53,589 53,589 68,864 68,864 Notes receivable $ 3,235 3,235 2,067 2,067 Short-term liabilities $ 40,438 40,438 35,194 35,194 Long-term debt and capital lease obligations $ 381,496 396,976 340,500 356,214 The following methods and assumptions were used to estimate fair values: Short-term assets: The fair values of cash and cash equivalents, net receivables, notes receivable and refundable deposit approximate their carrying values due to the short-term nature of these financial instruments. Notes receivable: The carrying value of notes receivable is estimated to approximate fair values. Although there are no quoted market prices available for these instruments, the fair value estimates were based on the change in interest rates and risk related interest rate spreads since the notes origination dates. Short-term liabilities: The fair values of current maturities of long-term debt and capital lease obligations, accounts payable, accrued interest, and subscriber deposits approximate their carrying value due to the short-term nature of these financial instruments. Long-term debt and capital lease obligations: The fair value of long-term debt is based primarily on discounting the future cash flows of each instrument at rates currently offered to us for similar debt instruments of comparable maturities by our bankers. (11) Related Party Transactions We earned revenues from WorldCom, a major shareholder of GCI (see note 7), net of discounts, of approximately $53,065,000, $43,676,000 and $39,473,000 for the years ended December 31, 2000, 1999 and 1998, respectively. As a percentage of total revenues, WorldCom revenues totaled 18.1%, 15.6% and 16.0% for the years ended December 31, 2000, 1999 and 1998, respectively. Amounts receivable, net of accounts payable, from WorldCom totaled $10,453,000 and $9,111,000 at December 31, 2000 and 1999, respectively. We paid WorldCom for distribution of our traffic in the lower 49 states amounts totaling approximately $11,201,000, $10,623,000 and $12,639,000 for the years ended December 31, 2000, 1999 and 1998, respectively. We entered into a long-term capital lease agreement in 1991 with the wife of our president for property occupied by us. We guarantee the lease. 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 $18,400 effective October 2001. If the owner sells the premises prior to the end of the tenth year of the lease, the owner will rebate to us 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 us the greater of one-half of the appreciated 104 (Continued) GENERAL COMMUNICATION, INC. Notes to Consolidated Financial Statements 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") was a party to a Management Agreement with PMLP that began in 1996. We mutually agreed to terminate the agreement in 2000. In connection with the agreement, GCI Cable received services valued at approximately $239,000, $334,000 and $752,000 including reimbursable expenses for the periods ended December 31, 2000, 1999 and 1998, respectively. We provide management services to Kanas Telecom, Inc. ("Kanas"), a company that owns and operates a fiber optic cable system constructed along the trans-Alaska oil pipeline corridor, extending from Prudhoe Bay to Valdez, Alaska. Subsequent to December 31, 2000 we agreed to acquire an 85% controlling interest in Kanas (see note 14). During the year ended December 31, 2000 we earned revenues of approximately $690,000 for management services and long-distance services provided to Kanas. We paid approximately $744,000 to Kanas for the lease and maintenance of one DS3 of fiber optic cable capacity during the year ended December 31, 2000. We advanced approximately $3.0 million to Kanas in 2000 to partially fund its operations. Accounts receivable from Kanas were approximately $3.7 million at December 31, 2000 and are classified as Other Assets. In January 2001 we entered into an aircraft operating lease agreement with a company owned by the Company's president. The lease is month-to-month, may be terminated at any time upon one hundred and twenty days written notice, and contains a monthly lease rate of $40,000. Upon signing the lease the lessor was granted an option to purchase 250,000 shares of GCI Class A common stock at $6.50 per share. At January 22, 2001 83,333 shares under the option agreement are exercisable, the remaining 166,667 shares become exercisable at a rate of approximately 11,000 per month beginning February 22, 2001. We paid a deposit of $1.5 million in connection with the lease. The deposit will be repaid to us upon the earlier of (1) thirty-six months from the initial date of the lease, (2) six months after the agreement terminates, or (3) nine months after the date of a termination notice. (12) Commitments and Contingencies Leases Operating Leases as Lessee. We lease business offices, have entered into site lease agreements and use satellite transponder capacity and certain equipment pursuant to operating lease arrangements. Rental costs under such arrangements amounted to approximately $8,152,000, $13,678,000 and $11, 609,000 for the years ended December 31, 2000, 1999 and 1998, respectively. Satellite Transponder Capacity Capital Lease We entered into a purchase and lease-purchase option agreement in August 1995 for the acquisition of satellite transponders to meet our long-term satellite capacity requirements. The satellite was successfully launched in January 2000 and delivered to us on March 5, 2000. In March 2000 we agreed to finance the satellite transponders pursuant to a capital lease arrangement with a leasing company. The base term of the lease is one year from the closing date with the option for eight one-year lease term renewals. The capital lease includes certain covenants requiring maintenance of specific levels of operating cash flow to indebtedness and limitations on additional indebtedness. We began operating the satellite transponders on April 1, 2000. The satellite transponders are recorded at a cost of $48.2 million and will be depreciated over nine years with a remaining residual value of $14.3 million. At December 31, 2000 $47.6 million was financed under this capital lease. 105 (Continued) GENERAL COMMUNICATION, INC. Notes to Consolidated Financial Statements A summary of future minimum lease payments for all leases as of December 31, 2000 follows (amounts in thousands): Years ending December 31: Operating Capital ------------ ------------- 2001 $ 6,738 6,956 2002 4,485 6,771 2003 3,958 6,673 2004 2,352 8,632 2005 1,856 10,426 2006 and thereafter 8,322 29,363 ------------ ------------- Total minimum lease payments $ 27,711 68,821 ============ Less amount representing interest (20,125) Less current maturities of obligations under capital leases (1,600) ------------- Subtotal - long-term obligations under capital leases 47,096 Less long-term obligations under capital leases due to related party, excluding current maturities (214) ------------- Long-term obligations under capital leases, excluding related party, excluding current maturities $ 46,882 ============= The leases generally provide that we pay the taxes, insurance and maintenance expenses related to the leased assets. We expect that in the normal course of business leases that expire will be renewed or replaced by leases on other properties. Operating Leases as Lessor. In 1999 we signed agreements with a large commercial customer for the lease of three DS3 circuits on Alaska United facilities within Alaska, and between Alaska and the lower 48 states. The lease agreements are for three years with renewal options. In 2000 we signed additional agreements with WorldCom (see note 11) for the lease of two DS3 circuits within Alaska, and between Alaska and the lower 48 states. The lease agreements are for five years. A summary of minimum future operating lease rentals follows (amounts in thousands): Years ending December 31, 2001 $ 8,526 2002 4,903 2003 3,984 2004 3,984 2005 3,984 -------- Total minimum lease rentals $ 25,381 ======== Deferred Compensation Plan During 1995, we adopted a non-qualified, unfunded deferred compensation plan to provide a means by which certain employees may elect to defer receipt of designated percentages or amounts of their compensation and to provide a means for certain other deferrals of compensation. We may, at our discretion, contribute matching deferrals equal to the rate of matching selected by us. Participants immediately vest in all elective deferrals and all income and gain attributable thereto. Matching contributions and all income and gain attributable thereto vest over a six-year period. Participants may elect to be paid in either a single 106 (Continued) GENERAL COMMUNICATION, INC. Notes to Consolidated Financial Statements lump sum payment or annual installments over a period not to exceed 10 years. Vested balances are payable upon termination of employment, unforeseen emergencies, death and total disability. Participants are general creditors of us with respect to deferred compensation plan benefits. Compensation deferred pursuant to the plan totaled approximately $0, $60,000 and $117,000 for the years ended December 31, 2000, 1999 and 1998, respectively. Self-Insurance We are self-insured for losses and liabilities related primarily to health and welfare claims up to predetermined amounts above which third party insurance applies. A reserve of $660,000 and $600,000 was recorded at December 31, 2000 and 1999, respectively, to cover estimated reported losses, estimated unreported losses based on past experience modified for current trends, and estimated expenses for investigating and settling claims. Actual losses will vary from the recorded reserve. While we use what we believe is pertinent information and factors in determining the amount of reserves, future additions to the reserves may be necessary due to changes in the information and factors used. Litigation and Disputes We are involved in various lawsuits, billing disputes, 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, we do not expect at this time the resolution of them to have a material adverse effect on our financial position, results of operations or liquidity. Cable Service Rate Reregulation Effective March 31, 1999, the rates for cable programming services (service tiers above basic service) are no longer regulated. This regulation ended pursuant to provisions of the Telecommunications Act of 1996 and the regulations adopted pursuant thereto by the FCC. Federal law still permits regulation of basic service rates. However, Alaska law provides that cable television service is exempt from regulation by the RCA unless 25% of a system's subscribers request such regulation by filing a petition with the RCA. At December 31, 2000, only the Juneau system is subject to RCA regulation of its basic service rates. No petition requesting regulation has been filed for any other system. (The Juneau system serves 8.0% of our total basic service subscribers at December 31, 2000.) On July 27, 2000 the RCA approved in full a requested rate increase for the Juneau system, which was effective October 1, 2000. Asset Purchase We signed an agreement with G.C. Cablevision, Inc. of Fairbanks, Alaska on October 10, 2000 to acquire its assets and customer base. G.C. Cablevision, Inc. will receive 238,199 unregistered shares of GCI Class A common stock with a future payment in additional shares contingent upon certain conditions. The transaction closed as of March 31, 2001 following regulatory approvals. The GCI common stock was issued effective March 31, 2001.(13) Amended Credit Facilities The GCI Holdings, Inc. $150 million and $50 million credit facilities were amended March 23, 2001. The amendments provide that Holdings must maintain a ratio of annualized operating cash flow to fixed charges of at least 1.0 to 1.0 effective January 1, 2002 (which adjusts to 1.05 to 1.0 in April 2003 and thereafter). 107 (Continued) GENERAL COMMUNICATION, INC. Notes to Consolidated Financial Statements(14) Subsequent Events Acquisition We have agreed to acquire from WorldCom, a related party (see note 11), its 85% controlling interest in Kanas, (see note 11), which owns the 800-mile fiber optic cable system that extends from Prudhoe Bay, Alaska to Valdez, Alaska via Fairbanks. Under terms of the agreement, we will issue to WorldCom shares of a new series of GCI Class C preferred stock valued at $10 million. The stock will be convertible at $12 per share into GCI Class A common stock. The new series will be non-voting and pays a 6% per annum quarterly cash dividend. The corporation owning the fiber optic system will be operated as GCI Fiber Communication Co. We expect regulatory approval of this acquisition during the second quarter of 2001. We have agreed to manage the operations of Kanas and to fund its operations and working capital requirements prior to closing. The acquisition is contingent upon certain conditions precedent to closing. Kanas has entered into an interim services agreement with Alyeska Pipeline Service Company ("Alyeska Pipeline") to provide certain voice, video and data services to support operations of the Trans Alaska Pipeline System that is operated by Alyeska Pipeline. A fifteen-year agreement has been drafted and has been submitted to each company's Board of Directors for approval. The interim agreement provides for provisional services during this review process. Fiber Capacity Sale We entered into an agreement effective July 1999 for a second $19.5 million sale of fiber capacity that was completed in January 2001. Costs associated with the capacity have been classified as current and non-current Property Held for Sale in the accompanying consolidated financial statements at December 31, 2000 and 1999, respectively. Interest Rate Swap On January 3, 2001 we entered into an interest rate swap agreement to convert $50 million in 9.75% fixed rate debt to a variable interest rate equal to the 90 day Libor rate plus 334 basis points. The differential to be paid or received is recorded as an increase or decrease in interest expense in the consolidated statements of operations in the period in which it is recognized. The agreement extends through August 1, 2007 and is cancelable at the option of the counterparty beginning August 1, 2002. We are exposed to credit losses from counterparty nonperformance, but do not anticipate any losses from our agreement. 108 (Continued) GENERAL COMMUNICATION, INC. Notes to Consolidated Financial Statements (15) Supplementary Financial Data The following is a summary of unaudited quarterly results of operations for the years ended December 31, 2000 and 1999 (amounts in thousands, except per share amounts): First Second Third Fourth Total Quarter Quarter Quarter Quarter Year ------------ ----------- ------------ ----------- ------------ 2000 Total revenues $ 68,277 71,426 75,906 76,996 292,605 Net loss $ (5,498) (3,526) (2,352) (1,858) (13,234) Basic and diluted net loss per common share $ (0.12) (0.08) (0.05) (0.04) (0.29) 1999 Total revenues $ 61,338 83,659 67,340 66,842 279,179 Net earnings (loss) $ (4,865) 2,491 (3,537) (3,616) (9,527) Basic and diluted net earnings (loss) per common share: Net earnings (loss) before cumulative effect of a change in accounting principle (1) $ (0.09) 0.04 (0.08) (0.08) (0.20) Cumulative effect of a change in accounting principle $ (0.01) --- --- --- (0.01) ------------ ----------- ------------ ----------- ------------ Net earnings (loss) (1) $ (0.10) 0.04 (0.08) (0.08) (0.21) ============ =========== ============ =========== ============ ----------------- 1 Due to rounding, the sum of quarterly loss per common share amounts may not agree to year-to-date loss per common share amounts. 109 Part IVItem 14. Exhibits, Consolidated Financial Statement Schedules, and Reports on Form 8-K(a)(l) Consolidated Financial Statements Page No. -------- Included in Part II of this Report: Independent Auditor's Report 78 Consolidated Balance Sheets, December 31, 2000 and 1999 79 -- 80 Consolidated Statements of Operations, Years ended December 31, 2000, 1999 and 1998 81 Consolidated Statements of Stockholders' Equity, Years ended December 31, 2000, 1999 and 1998 82 Consolidated Statements of Cash Flows, Years ended December 31, 2000, 1999 and 1998 83 Notes to Consolidated Financial Statements 84 -- 109(a)(2) Consolidated Financial Statement Schedules Included in Part IV of this Report: Independent Auditors' Report 116 Schedule VIII - Valuation and Qualifying Accounts, Years ended December 31, 2000, 1999 and 1998 117 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. 110(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 December 18, 2000 * 3.2 Amended and Restated Bylaws of the Company dated January 28, 2000 (28) 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, Strid, Behnke, and Lewkowski (3) 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) 10.13 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) 10.19 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) 10.21 Transponder Purchase Agreement for Galaxy X between Hughes Communications Galaxy, Inc. and GCI Communication Corp. (11) 10.23 Management Agreement, between Prime II Management, L.P., and GCI Cable, Inc., dated October 31, 1996 (12) 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) 111 Exhibit No. Description ---------------------------------------------------------------------------------------------------------------- 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) 10.36 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) 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 112 Exhibit No. Description ---------------------------------------------------------------------------------------------------------------- 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) 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 (25) 10.72 Consent and First Amendment to Credit Agreements dated November 14, 1997 (26) 10.73 Second Amendment to $200,000,000 Amended and Restated Credit Agreement (26) 10.74 Second Amendment to $50,000,000 Amended and Restated Credit Agreement (26) 10.75 Third Amendment to $200,000,000 Amended and Restated Credit Agreement (26) 10.76 Third Amendment to $50,000,000 Amended and Restated Credit Agreement (26) 10.77 General Communication, Inc. Preferred Stock Purchase Agreement (26) 10.78 Qualified Employee Stock Purchase Plan of General Communication, Inc., as amended and restated January 01, 2000 (28) 10.79 Statement of Stock Designation (Series B) (26) 10.80 Fourth Amendment to Contract for Alaska Access Services between General Communication, Inc. and its wholly owned subsidiary GCI Communication Corp., and MCI WorldCom. (27) 10.81 Fifth Amendment to Contract for Alaska Access Services between General Communication, Inc. and its wholly owned subsidiary GCI Communication Corp., and Sprint Communications Company L.P. (27) 10.82 Lease Intended for Security between GCI Satellite Co., Inc. and General Electric Capital Corporation (29) 113 Exhibit No. Description ---------------------------------------------------------------------------------------------------------------- 10.83 Fourth Amendment to $50,000,000 Amended and Restated Credit Agreements * 10.84 Fourth Amendment to $200,000,000 Amended and Restated Credit Agreement * 10.85 Fifth Amendment to $50,000,000 Amended and Restated Credit Agreements * 10.86 Fifth Amendment to $200,000,000 Amended and Restated Credit Agreement * 10.87 Sixth Amendment to $50,000,000 Amended and Restated Credit Agreements * 10.88 Sixth Amendment to $200,000,000 Amended and Restated Credit Agreements * 21.1 Subsidiaries of the Registrant * 23.1 Consent of KPMG LLP (Accountant for Company) * 99 Additional Exhibits: 99.1 The Articles of Incorporation of GCI Communication Corp. (2) 99.2 The Bylaws of GCI Communication Corp. (2) 99.7 The Bylaws of GCI Cable, Inc. (14) 99.8 The Articles of Incorporation of GCI Cable, Inc. (14) 99.15 The Bylaws 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 Bylaws of GCI Transport, Inc. (23) 99.20 The Articles of Incorporation of GCI Transport, Inc. (23) 99.21 The Bylaws of Fiber Hold Co., Inc. (23) 99.22 The Articles of Incorporation of Fiber Hold Co., Inc. (23) 99.23 The Bylaws of GCI Fiber Co., Inc. (23) 99.24 The Articles of Incorporation of GCI Fiber Co., Inc. (23) 99.25 The Bylaws of GCI Satellite Co., Inc. (23) 99.26 The Articles of Incorporation of GCI Satellite Co., Inc. (23) 99.27 The Partnership Agreement of Alaska United Fiber System (23) ------------------------- * Filed herewith. 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. 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. 114 Exhibit No. Description ---------------------------------------------------------------------------------------------------------------- 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. 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 by reference to The Company's Form S-3 Registration Statement (File No. 333-28001) dated May 29, 1997. 19 Incorporated by reference to The Company's Amendment No. 1 to Form S-3/A Registration Statement (File No. 333-28001) dated July 8, 1997. 20 Incorporated by reference to The Company's Amendment No. 2 to Form S-3/A Registration Statement (File No. 333-28001) dated July 21, 1997. 21 Incorporated by reference to The Company's Amendment No. 3 to Form S-3/A Registration Statement (File No. 333-28001) dated July 22, 1997. 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. 25 Incorporated by reference to The Company's Annual Report on Form 10-K for the year ended December 31, 1998. 26 Incorporated by reference to The Company's Quarterly Report on Form 10-Q for the period ended March 31, 1999. 27 Incorporated by reference to The Company's Quarterly Report on Form 10-Q for the period ended June 30, 1999. 28 Incorporated by reference to The Company's Annual Report on Form 10-K for the year ended December 31, 1999. 29 Incorporated by reference to The Company's Quarterly Report on Form 10-Q for the period ended June 30, 2000.(c) Reports on Form 8-K None. 115 INDEPENDENT AUDITORS' REPORTThe Board of Directors and StockholdersGeneral Communication, Inc.:Under date of March 7, 2001, we reported on the consolidated balance sheets ofGeneral Communication, Inc. and Subsidiaries ("Company") as of December 31, 2000and 1999 and the related consolidated statements of operations, stockholders'equity and cash flows for each of the years in the three-year period endedDecember 31, 2000, which are included in the Company's 2000 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 2000 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 LLP Anchorage, AlaskaMarch 30, 2001 116Schedule VIII GENERAL COMMUNICATION, INC. AND SUBSIDIARIES Valuation and Qualifying Accounts Years ended December 31, 2000, 1999 and 1998 Additions Deductions ---------------------- ------------------------ Balance at Charged to Write-offs Balance beginning profit and net of at end of Description of year loss Other recoveries year------------------------------------------------------- ------------- ------------ --------- ------------- ----------- (Amounts in thousands) Allowance for doubtful receivables, year ended: December 31, 2000 $ 2,833 5,546 --- 5,515 2,864 ============= ============ ========= ============= =========== December 31, 1999 $ 887 4,224 --- 2,278 2,833 ============= ============ ========= ============= =========== December 31, 1998 $ 1,070 2,795 --- 2,978 887 ============= ============ ========= ============= =========== 117 SIGNATURESPursuant 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, President (Chief Executive Officer)Date: March 23, 2001Pursuant 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-------------------------------------- ------------------------------------------ ------------------- Chairman of Board and DirectorCarter F. Page/s/ Ronald A. Duncan President and Director March 23, 2001Ronald A. Duncan (Principal Executive Officer)/s/ Robert M. Walp Vice Chairman of Board and Director March 23, 2001Robert M. Walp/s/ Ronald R. Beaumont Director March 28, 2001Ronald R. Beaumont DirectorStephen M. Brett/s/ Donne F. Fisher Director March 23, 2001Donne F. Fisher/s/ William P. Glasgow Director March 23, 2001William P. Glasgow/s/ Paul S. Lattanzio Director March 23, 2001Paul S. Lattanzio /s/ Stephen R. Mooney Director March 23, 2001Stephen R. Mooney/s/ James M. Schneider Director March 23, 2001James M. Schneider/s/ John M. Lowber Senior Vice President, Chief Financial March 23, 2001John M. Lowber Officer, Secretary and Treasurer (Principal Financial Officer)/s/ Alfred J. Walker Vice President, Chief Accounting March 23, 2001Alfred J. Walker Officer (Principal Accounting Officer) 118 Exhibit 3.1 RESTATED ARTICLES OF INCORPORATION OF GENERAL COMMUNICATION, INC. The following are the Restated Articles of Incorporation of GeneralCommunication, Inc., adopted by the Board of Directors of that corporation by aunanimous vote at a meeting held on November 27, 2000, and are executed by thatcorporation through its president and its secretary and verified by itssecretary. These Restated Articles of Incorporation correctly set forth, withoutchange, all of the operative provisions of the Articles of Incorporation asamended up to that time, and these Restated Articles of Incorporation supersedethe original Articles of Incorporation and all amendments to them. ARTICLE I The name of the corporation is General Communication, Inc.("Corporation"). ARTICLE II The duration of this Corporation shall be perpetual. ARTICLE III The Corporation is organized for the purposes of transacting any andall lawful business for which corporations may be incorporated under the AlaskaCorporations Code (AS 10.06). ARTICLE IV (a) The total number of shares of stock which the Corporation shallhave authority to issue is one hundred eleven million shares divided into thefollowing classes: (i) One hundred million shares of Class A Common Stock;RESTATED ARTICLES OF INCORPORATION (2001) Page 1 (ii) Ten million shares of Class B Common Stock; and (iii) One million shares of Preferred Stock. (b) Each share of Class A Common Stock shall be identical in allrespects with the Class B Common Stock, except that each holder of Class ACommon Stock shall be entitled to one vote for each share of such stock held,and each holder of Class B Common Stock shall be entitled to ten votes for eachshare of such stock held. (c) The Board of Directors is authorized, subject to the provisions ofthis Article IV, to provide for the issuance of Preferred Stock from time totime in one or more series, specifying the number of shares initiallyconstituting the series, with such distinctive serial designations, rights,preferences and limitations of the shares of each such series, including but notlimited to terms and conditions under which the shares may be redeemed, in wholeor in part, as the Board of Directors shall establish. The board is furtherauthorized to increase or decrease, but not below the number of shares thenoutstanding, the number of shares of a series after the issuance of shares ofthat series. (d) Notwithstanding the fixing of the number of shares constituting aparticular series upon the issuance thereof, the Board of Directors may, at anytime thereafter, authorize the issuance of additional shares of the same seriesor may reduce the number of shares constituting such series, provided that suchnumber shall not be reduced to less than the number of shares of such seriesthen issued and outstanding. (e) Except as may be determined by the Board of Directors of theCorporation pursuant to paragraph (c) of this Article IV with respect to thePreferred Stock, and except as otherwise expressly required by the laws of thestate of Alaska, as then in effect, the holders of the Class A Common Stock andthe holders of the Class B Common Stock shall vote with the holders of votingshares of the Preferred Stock, if any, as one class with respect to the electionof directors and with respect to all other matters to be voted on bystockholders of the Corporation. (f) Except as otherwise expressly required by law, any and all rights,titles, interests and claims in or to any dividends declared by the Corporationwhether in cash, stock or otherwise, which are unclaimed by the shareholderentitled thereto for a period of six years after the close of business on thepayment date, shall be and be deemed to be extinguished and abandoned; and suchunclaimed dividends in the possession of the Corporation, its transfer agents orother agents or depositories, shall at such time become the absolute property ofthe Corporation, free and clear of any and all claims of any person whatsoever. (g) Each share of Class B Common Stock shall be convertible, at theoption of the holder thereof, into one share of Class A Common Stock. Toexercise the conversion option, a holder of Class B shares must deliver thecertificate or certificates representing the shares of Class B Common Stock tobe converted, duly endorsed in RESTATED ARTICLES OF INCORPORATION (2001) Page 2blank, to the Secretary of the Corporation, and at the same time, notify theSecretary in writing of such holder's desire to so convert and instruct theSecretary as to the number of shares he or she wishes converted. Upon receipt bythe Secretary of the foregoing certificates and instructions, the Corporationshall cause to be issued to the holder of the Class B Common Stock one share ofClass A Common Stock for each share of Class B Common Stock requested to beconverted, issuing and delivering to such holder certificates for shares ofClass A Common Stock issued upon such conversion and all shares of Class BCommon Stock remaining unconverted, if any, represented by such certificates. Anumber of shares of Class A Common Stock equal to the number of shares of ClassB Common Stock outstanding shall, from time to time, be set aside and reservedfor issuance upon conversion of Class B Common Stock. Class A Common Stock shallnot be convertible into Class B Common Stock. (h) At each election for directors, every shareholder entitled to voteat such election will have the right to vote in person or by proxy, the numberof shares owned by that shareholder for as many persons as there are directorsto be elected and for whose election that shareholder has a right to vote, andsuch a shareholder will not be allowed to cumulate that shareholder's votes. (i) The Corporation will have the power to redeem and otherwise buyback a portion or all of any or all classes or series of shares of its stock asallowed by law, including AS 10.06.325, and as the Board of Directors, in itssole discretion, will deem advisable. ARTICLE V (a) The governing body of this Corporation shall be a Board ofDirectors. The number of directors shall be determined in the manner provided inthe Bylaws of the Corporation; provided, however, that the number of directorsshall not be less than three nor more than twelve. (b) Upon the establishment of the Board of Directors of theCorporation as having three or more members ("Class Date"), that board will bedivided into three classes: Class I, Class II and Class III. Each such classwill consist, as nearly as possible, of one-third of the whole number of theBoard of Directors. Directors in office on the Class Date will be divided amongsuch classes and in such manner, consistent with the provisions of this ArticleV, as the Board of Directors may determine by resolution. The initial Class Idirectors so determined shall serve until the next annual meeting ofstockholders of the Corporation following such date. The initial Class IIdirectors so determined shall serve until the second annual meeting ofstockholders of the Corporation following such date. The initial Class IIIdirectors so determined shall serve until the third annual meeting ofstockholders of the Corporation following such date. In the case of each suchclass, such RESTATED ARTICLES OF INCORPORATION (2001) Page 3directors shall serve, subject to their earlier death, resignation or removal inaccordance with these Articles of Incorporation, the Bylaws of the Corporationand the laws of the State of Alaska, until their respective successors shall beelected and shall qualify. At each annual meeting of stockholders after the dateof such filing, the directors chosen to succeed those whose terms shall haveexpired shall be elected to hold office for a term to expire at the thirdsucceeding annual meeting of stockholders after their election and, subject totheir earlier death, resignation or removal in accordance with these Articles ofIncorporation, the Bylaws of the Corporation and the laws of the State ofAlaska, until their respective successors shall be elected and shall qualify. Ifthe number of directors is changed, any increase or decrease shall beapportioned among such classes so as to maintain all classes as equal in numberas possible, and any additional director elected to any class shall hold officefor a term which shall coincide with the terms of the other directors in suchclass. Any vacancy occurring on the Board of Directors caused by death,resignation, removal or otherwise, and any newly created directorship resultingfrom an increase in the number of directors on that Board, may be filled by thedirectors then in office, although such directors are less than a quorum, or bythe sole remaining director. Each director chosen to fill a vacancy or newlycreated directorship shall hold office until the next election of the class forwhich such director shall have been chosen and, subject to that director'searlier death, resignation or removal in accordance with these Articles ofIncorporation, the Bylaws of the Corporation and the laws of the State ofAlaska, until that director's successor shall be duly elected and shall qualify. (c) The Corporation shall have the power to issue and sell any stock,in exchange for such consideration (whether cash, services, assets or stock ofor any interest in any business, or any other property, real or personal,whatsoever) as the Board of Directors, in its sole discretion, shall deemadvisable. Any stock so issued or sold by the Corporation shall be deemed fullypaid and non-assessable. ARTICLE VI The capital stock of this Corporation shall not be assessable. Itshall be issued as fully paid, and the private property of the stockholdersshall not be liable for the debts, obligations or liabilities of thisCorporation. ARTICLE VII No shareholder of the Corporation shall have any preemptive right tosubscribe for, purchase or receive, or to be offered the opportunity tosubscribe for, purchase or receive, any part of any shares of stock of theCorporation of any class, whether now or hereafter authorized and whetherunissued shares or not, at any time issued or sold by the Corporation, or anypart of any options, warrants, rights, bonds, RESTATED ARTICLES OF INCORPORATION (2001) Page 4debentures or other evidences of indebtedness or any other securities of theCorporation convertible into, exchangeable or exercisable for, or otherwiseentitling the holder thereof to purchase or receive, any such shares. Any andall of such shares, options, warrants, rights, bonds, debentures or otherevidences of indebtedness or other securities of the Corporation convertibleinto, exchangeable or exercisable for, or otherwise entitling the holder thereofto purchase or receive, any such shares may be issued and disposed of by theBoard of Directors on such terms and for such consideration, so far as may bepermitted by applicable law, and to such person or persons, as the Board ofDirectors in its absolute discretion may deem advisable. ARTICLE VIII The Corporation shall indemnify, to the full extent permitted by, andin the manner permissible under, the laws of the State of Alaska and any otherapplicable laws, any person made or threatened to be made a party to an actionor proceeding, whether criminal, civil, administrative or investigative, other than an action by or in the right of the Corporation, by reason of the fact thatthe person is or was a director, officer, employee or agent of this Corporationor is or was serving at the request of the Corporation as a director or officer,employee or agent of another corporation, partnership, joint venture, trust, orother enterprise. The foregoing provisions of this Article VIII will be deemedto be a contract between this Corporation and each director and officer whoserves in such capacity at any time while this Article VIII is in effect, andany repeal or modification of this Article VIII shall not affect any rights orobligations then existing with respect to any statement of facts then ortheretofore existing or any action, suit or proceeding theretofore or thereafterbrought based in whole or in part upon any such statement of facts. Theforegoing rights of indemnification shall not be deemed exclusive of any otherrights to which any director or officer or his legal representative may beentitled apart from the provisions of this Article VIII. ARTICLE IX As of the date of these Restated Articles of Incorporation, theCorporation had no alien affiliates. ARTICLE X Only the Board of Directors is expressly authorized and empowered toadopt, alter, amend or repeal any provision or all of the Bylaws of thisCorporation, to the exclusion of the outstanding shares of the Corporation.RESTATED ARTICLES OF INCORPORATION (2001) Page 5 ARTICLE XI By the affirmative vote of at least 75% of the directors, the Board ofDirectors may designate an Executive Committee, all of whose members shall bedirectors, to manage and operate the affairs of the Corporation or particularproperties or enterprises of the Corporation. Subject to limitations provided bythe laws of the State of Alaska, said committee shall have the power to performor authorize any act that could be done or accomplished by the majority actionof all the directors of the Corporation. The Board of Directors may byresolution establish other committees than an Executive Committee and shallspecify with particularity the powers and duties of any such committees. ARTICLE XII Notwithstanding the Corporation's incorporation prior to the effectivedate of the Alaska Corporations Code, the Corporation elects to be governed bythe provisions of the Alaska Corporations Code not otherwise applicable to itbecause the Corporation existed at the effective date of that code and, inparticular, the voting provisions of AS 10.06.504 - 10.06.506 of that codepertaining to the procedure to amend articles of incorporation and class votingon amendments to those articles.RESTATED ARTICLES OF INCORPORATION (2001) Page 6 IN WITNESS WHEREOF, the Corporation through its corporate officershereby executes these Restated Articles of Incorporation of GeneralCommunication, Inc. on this 27th day of November, 2001. GENERAL COMMUNICATION, INC. By: /s/ Ronald A. Duncan President By: /s/ John M. Lowber Secretary [ S E A L ] STATE OF ALASKA ) ) ss.THIRD JUDICIAL DISTRICT ) BEFORE ME, the undersigned authority, personally appeared JOHN M.LOWBER, who, first by me being duly sworn, deposes and states that he is thesecretary of General Communication, Inc., that he has read the above andforegoing RESTATED ARTICLES OF INCORPORATION OF GENERAL COMMUNICATION, INC. andknows the contents therein; and that each and all of said facts and matters aretrue and correct to the best of his information and belief. /s/ John M. Lowber SUBSCRIBED AND SWORN to before me this 27th day of November, 2001. /s/ Notary Public in and for Alaska My Commission Expires: 1/17/01 RESTATED ARTICLES OF INCORPORATION (2001) Page 7 FOURTH AMENDMENT TO $50,000,000 AMENDED AND RESTATED CREDIT AGREEMENT FOURTH AMENDMENT TO $50,000,000 AMENDED AND RESTATED CREDIT AGREEMENT(this "Amendment") is dated as of the 18th day of January, 2000 and entered intoamong GCI HOLDINGS, INC., an Alaskan corporation (herein, together with itssuccessors and assigns, called the "Borrower"), the Lenders (as defined in theCredit Agreement as defined below), BANK OF AMERICA, N.A. (formerly NationsBank,N.A.), as Administrative Agent for itself and the Lenders (the "AdministrativeAgent"), CREDIT LYONNAIS NEW YORK BRANCH, as Documentation Agent and TDSECURITIES (USA), INC. as Syndication Agent. WITNESSETH: WHEREAS, the Borrower, the Lenders and the Administrative Agent enteredinto a $50,000,000 Amended and Restated Credit Agreement, dated November 14,1997, as amended by that certain Consent and First Amendment, dated January 27,1998, by that certain Second Amendment to Amended and Restated Credit Agreementdated as of July 3, 1998, and by that certain Third Amendment to Amended andRestated Credit Agreement dated as of April 13, 1999 (as amended and as furtheramended, restated or otherwise modified from time to time, the "CreditAgreement") and a $200,000,000 Amended and Restated Credit Agreement, dated asof November 14, 1997 (as amended by that certain Consent and First Amendment,dated January 27, 1998, by that certain Second Amendment to Amended and RestatedCredit Agreement dated as of July 3, 1998 , and by that certain Third Amendmentto Amended and Restated Credit Agreement dated as of April 13, 1999, and asfurther amended, restated or otherwise modified from time to time, the"Revolver/Term Credit Agreement"); WHEREAS, the Borrower has requested that, among other things, certainfinancial covenants of the Credit Agreement be amended; WHEREAS, the Lenders, the Administrative Agent and the Borrower haveagreed to modify the Credit Agreement upon the terms and conditions set forthbelow; NOW, THEREFORE, for valuable consideration hereby acknowledged, theBorrower, the Lenders and the Administrative Agent agree as follows: SECTION 1. Definitions. (a) Definitions, Generally. Unless specifically defined or redefined below, capitalized terms used herein shall have the meanings ascribed thereto in the Credit Agreement. -1- (b) Definition of "MCI". The definition of "MCI" in alphabetical order in Article I of the Credit Agreement shall be deleted in its entirety and the following definition substituted in its stead: "MCI" means MCI WORLDCOM, Inc. SECTION 2. Amendment to Section 7.01(b). Section 7.01(b) in Article VIIof the Credit Agreement is hereby amended and restated in its entirety asfollows: (b) Senior Leverage Ratio. At all times during the term hereof, the Senior Leverage Ratio shall not be greater during the following time periods than the ratio set forth opposite such time periods: Time Period Maximum Ratio From the Closing Date through March 31, 1999 3.50 to 1.00 April 1, 1999 through December 31, 1999 3.00 to 1.00 January 1, 2000 through September 30, 2000 2.75 to 1.00 October 1, 2000 through December 31, 2000 2.50 to 1.00 January 1, 2001 and thereafter 2.00 to 1.00 SECTION 3. Amendment to Section 7.09(v). Section 7.09(v) in Article VIIof the Credit Agreement is hereby amended and restated in its entirety asfollows: (v) loans and advances by Parents, the Borrower or a Restricted Subsidiary to employees of Parents, the Borrower or a Restricted Subsidiary made in ordinary course of business and consistent with past practice of Parents, the Borrower or such Restricted Subsidiary, as the case may be, provided, that such loans and advances made in cash do not exceed in the aggregate $4,000,000 at any one time outstanding; SECTION 4. Amendment to Section 7.10(c). Section 7.10(c) in Article VIIof the Credit Agreement is hereby amended and restated in its entirety asfollows: (c) Investments in advances or loans in the ordinary course of business to officers and employees, provided that the aggregate amount of all such Investments made in cash do not exceed in the aggregate $4,000,000 outstanding at any one time, SECTION 5. Waivers and Consents. (a) Waiver of Breach of Section 7.18(b) of the Credit Agreement. The Administrative Agent and the Lenders hereby waive any Default or Event of Default arising solely as a result of the breach by the Borrower of Section 7.18(b) of the Credit Agreement with respect to the execution of that certain First Amendment to the Galaxy X Transponder Purchase Agreement, dated as of the 12th day of August, 1999, by and between PANAMSAT Corporation and General Communications Corp. -2- (b) Consent with respect to Section 7.18(b) of the Credit Agreement. The Administrative Agent and the Lenders hereby consent to the execution of that certain Second Amendment to the Galaxy X Transponder Purchase Agreement, by and between PANAMSAT Corporation and General Communications Corp., such Second Amendment to be in substantially similar form to that draft of such Second Amendment attached to that certain letter from GCI to Mr. Derrick Bell, Bank of America, dated November 22, 1999. SECTION 6. Conditions Precedent. This Fourth Amendment shall not beeffective until the Administrative Agent shall have determined in its solediscretion that all proceedings of the Borrower taken in connection with thisFourth Amendment and the transactions contemplated hereby shall be satisfactoryin form and substance to the Administrative Agent and the Borrower has satisfiedthe following conditions: (a) the Borrower shall have delivered to the Administrative Agent a loan certificate of the Borrower certifying (i) as to the accuracy of its representations and warranties set forth in Article V of the Credit Agreement, as amended by this Fourth Amendment and the other Loan Papers, (ii) that there exists no Default or Event of Default, and the execution, delivery and performance of this Fourth Amendment will not cause a Default or Event of Default, except those Defaults and Events of Default specifically waived hereby, (iii) as to resolutions authorizing the Borrower to execute, deliver and perform this Fourth Amendment and all Loan Papers and other documents and instruments delivered or executed in connection with this Fourth Amendment, (iv) that it has complied with all agreements and conditions to be complied with by it under the Credit Agreement, the other Loan Papers and this Fourth Amendment by the date hereof and (v) that it has received all consents, amendments and waivers from all Persons necessary or required, if any, to (A) enter into this Amendment or (B) effectuate the amendments set forth above, including, without limitation, under the Indenture and related documentation and under the AUSP Credit Agreement and related documentation; (b) the Borrower shall have delivered to the Administrative Agent and Lenders legal opinions from counsel to the Borrower and its Restricted Subsidiaries regarding this Fourth Amendment and such other matters as reasonably requested by Special Counsel, including, without limitation, opinions regarding the waivers, consents and amendments in connection with the Indenture and AUSP Credit Agreement, and the related agreements; and (c) the Borrower shall have delivered such other documents, instruments, and certificates, in form and substance satisfactory to the Administrative Agent, as the Administrative Agent shall deem necessary or appropriate in connection with this Fourth Amendment and the transactions contemplated hereby. SECTION 7. Representations and Warranties. The Borrower represents andwarrants to the Lenders and the Administrative Agent that (a) this FourthAmendment constitutes its legal, valid, and binding obligation, enforceable inaccordance with the terms hereof (subject as to enforcement -3-of remedies to any applicable bankruptcy, reorganization, moratorium, or otherlaws or principles of equity affecting the enforcement of creditors' rightsgenerally), (b) there exists no Default or Event of Default under the CreditAgreement, (c) its representations and warranties set forth in the CreditAgreement and other Loan Papers are true and correct on the date hereof, (d) ithas complied with all agreements and conditions to be complied with by it underthe Credit Agreement and the other Loan Papers by the date hereof, and (e) theCredit Agreement, as amended hereby, and the other Loan Papers remain in fullforce and effect. SECTION 8. Entire Agreement; Ratification. THE CREDIT AGREEMENT AND THELOAN PAPERS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BECONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTOF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.EXCEPT AS MODIFIED OR SUPPLEMENTED HEREBY, THE CREDIT AGREEMENT, THE OTHER LOANPAPERS AND ALL OTHER DOCUMENTS AND AGREEMENTS EXECUTED IN CONNECTION THEREWITHSHALL CONTINUE IN FULL FORCE AND EFFECT. SECTION 9. Counterparts. This Fourth Amendment may be executed in anynumber of counterparts, all of which taken together shall constitute one and thesame instrument. In making proof hereof, it shall not be necessary to produce oraccount for any counterpart other than one signed by the party against whichenforcement is sought. SECTION 10. GOVERNING LAW. THIS FOURTH AMENDMENT SHALL BE CONSTRUED INACCORDANCE WITH THE INTERNAL LAWS (AND NOT THE LAW OF CONFLICTS) OF THE STATE OFTEXAS, BUT GIVING EFFECT TO FEDERAL LAWS. SECTION 11. CONSENT TO JURISDICTION. THE BORROWER HEREBY IRREVOCABLYSUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR TEXASSTATE COURT SITTING IN DALLAS IN ANY ACTION OR PROCEEDING ARISING OUT OF ORRELATING TO ANY LOAN PAPERS AND THE BORROWER IRREVOCABLY AGREES THAT ALL CLAIMSIN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCHCOURT AND IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TOTHE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THATSUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE RIGHT OF THEADMINISTRATIVE AGENT OR ANY LENDER TO BRING PROCEEDINGS AGAINST THE BORROWER INTHE COURTS OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY THE BORROWERAGAINST THE ADMINISTRATIVE AGENT OR ANY LENDER OR ANY AFFILIATE OF THEADMINISTRATIVE AGENT OR ANY LENDER INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTERIN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN PAPER SHALL BEBROUGHT ONLY IN A COURT IN DALLAS, TEXAS. -4- SECTION 12. WAIVER OF JURY TRIAL. THE BORROWER, THE ADMINISTRATIVEAGENT AND EACH LENDER HEREBY WAIVES TRIAL BY JURY IN ANY JUDICIAL PROCEEDINGINVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT,CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITHANY LOAN PAPER OR THE RELATIONSHIP ESTABLISHED THEREUNDER.================================================================================ THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.================================================================================ -5- IN WITNESS WHEREOF, this Fourth Amendment to Amended and RestatedCredit Agreement is executed as of the date first set forth above. GCI HOLDINGS, INC. /s/ By: John M. Lowber Its: Secretary/Treasurer BANK OF AMERICA, N.A., (formerly NationsBank, N.A.), Individually as a Lender and as Administrative Agent /s/ By: Derrick C. Bell Its: Vice President CREDIT LYONNAIS NEW YORK BRANCH, as Documentation Agent and Individually as a Lender /s/ By: Mark D. Thorsheim Its: Vice President TD SECURITIES (USA), INC., as Syndication Agent /s/ By: Michael J. Bandzierz Its: Managing Director -6- TORONTO DOMINION (TEXAS), INC., Individually as a Lender /s/ By: Anne C. Favoriti Its: Vice President COBANK, ACB, Individually as a Lender /s/ By: Teresa L. Fountain Its: Assistant Corporate Secretary By: Its: BANQUE PARIBAS, Individually as a Lender /s/ By: Ernie V. Sibal Its: Assistant Vice President /s/ By: Thomas G. Brandt Its: Managing Director GENERAL ELECTRIC CAPITAL CORPORATION, Individually as a Lender /s/ By: Mark F. Mylon Its: Manager-Operations -7- UNION BANK OF CALIFORNIA, N.A., Individually as a Lender By: Craig R. Cuppru Its: Associate Vice President BANK OF HAWAII, Individually as a Lender /s/ By: Luke Yeh Its: Assistant Vice President THE BANK OF NEW YORK, Individually as a Lender /s/ By: Gerry Granovsky Its: Vice President -8- FLEET NATIONAL BANK, Individually as a Lender /s/ By: Daniel M. Kortick Its: Director THE FUJI BANK, LIMITED, LOS ANGELES AGENCY, Individually as a Lender /s/ By: Masahito Fukuda Its: Senior Vice President NATIONAL BANK OF ALASKA, Individually as a Lender /s/ By: Patricia Jelley Benz Its: Vice President -9- ALLFIRST BANK, Individually as a Lender /s/ By: Christopher L. Smith Its: Vice President -10- FOURTH AMENDMENT TO $200,000,000 AMENDED AND RESTATED CREDIT AGREEMENT FOURTH AMENDMENT TO $200,000,000 AMENDED AND RESTATED CREDIT AGREEMENT(this "Amendment") is dated as of the 18th day of January, 2000 and entered intoamong GCI HOLDINGS, INC., an Alaskan corporation (herein, together with itssuccessors and assigns, called the "Borrower"), the Lenders (as defined in theCredit Agreement as defined below), BANK OF AMERICA, N.A. (formerly NationsBank,N.A.), as Administrative Agent for itself and the Lenders (the "AdministrativeAgent"), CREDIT LYONNAIS NEW YORK BRANCH, as Documentation Agent and TDSECURITIES (USA), INC. as Syndication Agent. WITNESSETH: WHEREAS, the Borrower, the Lenders and the Administrative Agent enteredinto a $200,000,000 Amended and Restated Credit Agreement, dated November 14,1997, as amended by that certain Consent and First Amendment, dated January 27,1998, by that certain Second Amendment to Amended and Restated Credit Agreementdated as of July 3, 1998, and by that certain Third Amendment to Amended andRestated Credit Agreement dated as of April 13, 1999 (as amended and as furtheramended, restated or otherwise modified from time to time, the "CreditAgreement") and a $50,000,000 Amended and Restated Credit Agreement, dated as ofNovember 14, 1997 (as amended by that certain Consent and First Amendment, datedJanuary 27, 1998, by that certain Second Amendment to Amended and RestatedCredit Agreement dated as of July 3, 1998 , and by that certain Third Amendmentto Amended and Restated Credit Agreement dated as of April 13, 1999, and asfurther amended, restated or otherwise modified from time to time, the"Revolver/Term Credit Agreement"); WHEREAS, the Borrower has requested that, among other things, certainfinancial covenants of the Credit Agreement be amended; WHEREAS, the Lenders, the Administrative Agent and the Borrower haveagreed to modify the Credit Agreement upon the terms and conditions set forthbelow; NOW, THEREFORE, for valuable consideration hereby acknowledged, theBorrower, the Lenders and the Administrative Agent agree as follows: SECTION 1. Definitions. (a) Definitions, Generally. Unless specifically defined or redefined below, capitalized terms used herein shall have the meanings ascribed thereto in the Credit Agreement. -1- (b) Definition of "MCI". The definition of "MCI" in alphabetical order in Article I of the Credit Agreement shall be deleted in its entirety and the following definition substituted in its stead: "MCI" means MCI WORLDCOM, Inc. SECTION 2. Amendment to Section 7.01(b). Section 7.01(b) in Article VIIof the Credit Agreement is hereby amended and restated in its entirety asfollows: (b) Senior Leverage Ratio. At all times during the term hereof, the Senior Leverage Ratio shall not be greater during the following time periods than the ratio set forth opposite such time periods: Time Period Maximum Ratio From the Closing Date through March 31, 1999 3.50 to 1.00 April 1, 1999 through December 31, 1999 3.00 to 1.00 January 1, 2000 through September 30, 2000 2.75 to 1.00 October 1, 2000 through December 31, 2000 2.50 to 1.00 January 1, 2001 and thereafter 2.00 to 1.00 SECTION 3. Amendment to Section 7.09(v). Section 7.09(v) in Article VIIof the Credit Agreement is hereby amended and restated in its entirety asfollows: (v) loans and advances by Parents, the Borrower or a Restricted Subsidiary to employees of Parents, the Borrower or a Restricted Subsidiary made in ordinary course of business and consistent with past practice of Parents, the Borrower or such Restricted Subsidiary, as the case may be, provided, that such loans and advances made in cash do not exceed in the aggregate $4,000,000 at any one time outstanding; SECTION 4. Amendment to Section 7.10(c). Section 7.10(c) in Article VIIof the Credit Agreement is hereby amended and restated in its entirety asfollows: (c) Investments in advances or loans in the ordinary course of business to officers and employees, provided that the aggregate amount of all such Investments made in cash do not exceed in the aggregate $4,000,000 outstanding at any one time, SECTION 5. Waivers and Consents. (a) Waiver of Breach of Section 7.18(b) of the Credit Agreement. The Administrative Agent and the Lenders hereby waive any Default or Event of Default arising solely as a result of the breach by the Borrower of Section 7.18(b) of the Credit Agreement with respect to the execution of that certain First Amendment to the Galaxy X Transponder Purchase Agreement, dated as of the 12th day of August, 1999, by and between PANAMSAT Corporation and General Communications Corp. -2- (b) Consent with respect to Section 7.18(b) of the Credit Agreement. The Administrative Agent and the Lenders hereby consent to the execution of that certain Second Amendment to the Galaxy X Transponder Purchase Agreement, by and between PANAMSAT Corporation and General Communications Corp., such Second Amendment to be in substantially similar form to that draft of such Second Amendment attached to that certain letter from GCI to Mr. Derrick Bell, Bank of America, dated November 22, 1999. SECTION 6. Conditions Precedent. This Fourth Amendment shall not beeffective until the Administrative Agent shall have determined in its solediscretion that all proceedings of the Borrower taken in connection with thisFourth Amendment and the transactions contemplated hereby shall be satisfactoryin form and substance to the Administrative Agent and the Borrower has satisfiedthe following conditions: (a) the Borrower shall have delivered to the Administrative Agent a loan certificate of the Borrower certifying (i) as to the accuracy of its representations and warranties set forth in Article V of the Credit Agreement, as amended by this Fourth Amendment and the other Loan Papers, (ii) that there exists no Default or Event of Default, and the execution, delivery and performance of this Fourth Amendment will not cause a Default or Event of Default, except those Defaults and Events of Default specifically waived hereby, (iii) as to resolutions authorizing the Borrower to execute, deliver and perform this Fourth Amendment and all Loan Papers and other documents and instruments delivered or executed in connection with this Fourth Amendment, (iv) that it has complied with all agreements and conditions to be complied with by it under the Credit Agreement, the other Loan Papers and this Fourth Amendment by the date hereof and (v) that it has received all consents, amendments and waivers from all Persons necessary or required, if any, to (A) enter into this Amendment or (B) effectuate the amendments set forth above, including, without limitation, under the Indenture and related documentation and under the AUSP Credit Agreement and related documentation; (b) the Borrower shall have delivered to the Administrative Agent and Lenders legal opinions from counsel to the Borrower and its Restricted Subsidiaries regarding this Fourth Amendment and such other matters as reasonably requested by Special Counsel, including, without limitation, opinions regarding the waivers, consents and amendments in connection with the Indenture and AUSP Credit Agreement, and the related agreements; and (c) the Borrower shall have delivered such other documents, instruments, and certificates, in form and substance satisfactory to the Administrative Agent, as the Administrative Agent shall deem necessary or appropriate in connection with this Fourth Amendment and the transactions contemplated hereby. SECTION 7. Representations and Warranties. The Borrower represents andwarrants to the Lenders and the Administrative Agent that (a) this FourthAmendment constitutes its legal, valid, and binding obligation, enforceable inaccordance with the terms hereof (subject as to enforcement -3-of remedies to any applicable bankruptcy, reorganization, moratorium, or otherlaws or principles of equity affecting the enforcement of creditors' rightsgenerally), (b) there exists no Default or Event of Default under the CreditAgreement, (c) its representations and warranties set forth in the CreditAgreement and other Loan Papers are true and correct on the date hereof, (d) ithas complied with all agreements and conditions to be complied with by it underthe Credit Agreement and the other Loan Papers by the date hereof, and (e) theCredit Agreement, as amended hereby, and the other Loan Papers remain in fullforce and effect. SECTION 8. Entire Agreement; Ratification. THE CREDIT AGREEMENT AND THELOAN PAPERS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BECONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTOF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.EXCEPT AS MODIFIED OR SUPPLEMENTED HEREBY, THE CREDIT AGREEMENT, THE OTHER LOANPAPERS AND ALL OTHER DOCUMENTS AND AGREEMENTS EXECUTED IN CONNECTION THEREWITHSHALL CONTINUE IN FULL FORCE AND EFFECT. SECTION 9. Counterparts. This Fourth Amendment may be executed in anynumber of counterparts, all of which taken together shall constitute one and thesame instrument. In making proof hereof, it shall not be necessary to produce oraccount for any counterpart other than one signed by the party against whichenforcement is sought. SECTION 10. GOVERNING LAW. THIS FOURTH AMENDMENT SHALL BE CONSTRUED INACCORDANCE WITH THE INTERNAL LAWS (AND NOT THE LAW OF CONFLICTS) OF THE STATE OFTEXAS, BUT GIVING EFFECT TO FEDERAL LAWS. SECTION 11. CONSENT TO JURISDICTION. THE BORROWER HEREBY IRREVOCABLYSUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR TEXASSTATE COURT SITTING IN DALLAS IN ANY ACTION OR PROCEEDING ARISING OUT OF ORRELATING TO ANY LOAN PAPERS AND THE BORROWER IRREVOCABLY AGREES THAT ALL CLAIMSIN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCHCOURT AND IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TOTHE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THATSUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE RIGHT OF THEADMINISTRATIVE AGENT OR ANY LENDER TO BRING PROCEEDINGS AGAINST THE BORROWER INTHE COURTS OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY THE BORROWERAGAINST THE ADMINISTRATIVE AGENT OR ANY LENDER OR ANY AFFILIATE OF THEADMINISTRATIVE AGENT OR ANY LENDER INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTERIN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN PAPER SHALL BEBROUGHT ONLY IN A COURT IN DALLAS, TEXAS. -4- SECTION 12. WAIVER OF JURY TRIAL. THE BORROWER, THE ADMINISTRATIVEAGENT AND EACH LENDER HEREBY WAIVES TRIAL BY JURY IN ANY JUDICIAL PROCEEDINGINVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT,CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITHANY LOAN PAPER OR THE RELATIONSHIP ESTABLISHED THEREUNDER.================================================================================ THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.================================================================================ -5- IN WITNESS WHEREOF, this Fourth Amendment to Amended and RestatedCredit Agreement is executed as of the date first set forth above. GCI HOLDINGS, INC. /s/ By: John M. Lowber Its: Secretary/Treasurer BANK OF AMERICA, N.A., (formerly NationsBank, N.A.), Individually as a Lender and as Administrative Agent /s/ By: Derrick C. Bell Its: Vice President CREDIT LYONNAIS NEW YORK BRANCH, as Documentation Agent and Individually as a Lender /s/ By: Mark D. Thorsheim Its: Vice President TD SECURITIES (USA), INC., as Syndication Agent /s/ By: Michael J. Bandzierz Its: Managing Director -6- TORONTO DOMINION (TEXAS), INC., Individually as a Lender /s/ By: Anne C. Favoriti Its: Vice President COBANK, ACB, Individually as a Lender /s/ By: Teresa L. Fountain Its: Assistant Corporate Secretary By: Its: BANQUE PARIBAS, Individually as a Lender /s/ By: Ernie V. Sibal Its: Assistant Vice President /s/ By: Thomas G. Brandt Its: Managing Director GENERAL ELECTRIC CAPITAL CORPORATION, Individually as a Lender /s/ By: Mark F. Mylon Its: Manager-Operations -7- UNION BANK OF CALIFORNIA, N.A., Individually as a Lender By: Craig R. Cuppru Its: Associate Vice President BANK OF HAWAII, Individually as a Lender /s/ By: Luke Yeh Its: Assistant Vice President THE BANK OF NEW YORK, Individually as a Lender /s/ By: Gerry Granovsky Its: Vice President -8- FLEET NATIONAL BANK, Individually as a Lender /s/ By: Daniel M. Kortick Its: Director THE FUJI BANK, LIMITED, LOS ANGELES AGENCY, Individually as a Lender /s/ By: Masahito Fukuda Its: Senior Vice President NATIONAL BANK OF ALASKA, Individually as a Lender /s/ By: Patricia Jelley Benz Its: Vice President -9- ALLFIRST BANK, Individually as a Lender /s/ By: Christopher L. Smith Its: Vice President -10- FIFTH AMENDMENT TO $50,000,000 AMENDED AND RESTATED CREDIT AGREEMENT FIFTH AMENDMENT TO $50,000,000 AMENDED AND RESTATED CREDIT AGREEMENT(this "Amendment") is dated as of the 25th day of October, 2000 and entered intoamong GCI HOLDINGS, INC., an Alaskan corporation (herein, together with itssuccessors and assigns, called the "Borrower"), the Lenders (as defined in theCredit Agreement as defined below), BANK OF AMERICA, N.A. (formerly NationsBank,N.A.), as Administrative Agent for itself and the Lenders (the "AdministrativeAgent"), CREDIT LYONNAIS NEW YORK BRANCH, as Documentation Agent and TDSECURITIES (USA), INC. as Syndication Agent. WITNESSETH: WHEREAS, the Borrower, the Lenders and the Administrative Agent enteredinto a $50,000,000 Amended and Restated Credit Agreement, dated November 14,1997, as amended by that certain Consent and First Amendment, dated January 27,1998, by that certain Second Amendment to Amended and Restated Credit Agreementdated as of July 3, 1998, by that certain Third Amendment to Amended andRestated Credit Agreement dated as of April 13, 1999 and by that certain FourthAmendment to Amended and Restated Credit Agreement dated as of January 18, 2000(as amended and as further amended, restated or otherwise modified from time totime, the "Credit Agreement") and a $200,000,000 Amended and Restated CreditAgreement, dated as of November 14, 1997 (as amended by that certain Consent andFirst Amendment, dated January 27, 1998, by that certain Second Amendment toAmended and Restated Credit Agreement dated as of July 3, 1998 , by that certainThird Amendment to Amended and Restated Credit Agreement dated as of April 13,1999, and by that certain Fourth Amendment to Amended and Restated CreditAgreement dated as of January 18, 2000, and as further amended, restated orotherwise modified from time to time, the "$200MM Credit Facility"); WHEREAS, the Borrower has requested that, among other things, certainfinancial covenants of the Credit Agreement be amended; WHEREAS, the Lenders, the Administrative Agent and the Borrower haveagreed to modify the Credit Agreement upon the terms and conditions set forthbelow; NOW, THEREFORE, for valuable consideration hereby acknowledged, theBorrower, the Lenders and the Administrative Agent agree as follows: SECTION 1. Definitions. (a) Definitions, Generally. Unless specifically defined or redefined below, capitalized terms used herein shall have the meanings ascribed thereto in the Credit Agreement. (b) Addition of definition of "Kanas". The definition of "Kanas" shall be added to Article I of the Credit Agreement in alphabetical order as follows: "Kanas" means Kanas Telecom, Inc., an Alaska corporation. (c) Addition of definition of "Kanas Closing". The definition of "Kanas Closing" shall be added to Article I of the Credit Agreement in alphabetical order as follows: "Kanas Closing" means the consummation of the acquisition by GCI (and the subsequent equity contribution to the Borrower) of (a) the Kanas Notes and (b) not less than 85% of the Capital Stock of Kanas, in each case in accordance with the terms and provisions of Section 7.10(j) hereof. (d) Addition of definition of "Kanas Notes". The definition of "Kanas Notes" shall be added to Article I of the Credit Agreement in alphabetical order as follows: "Kanas Notes" means those certain promissory notes in the original principal amounts of $85,400,000, dated November 1, 1996, and $896,575.17 dated December 17, 1999, respectively, both payable by Kanas originally to Credit Lyonnais, New York Branch as purchased by, and assigned to, MCI, as further purchased by, and assigned to, GCI, and as further contributed and assigned to the Borrower in accordance with the provisions of Section 7.10 hereof. SECTION 2. Effective immediately upon the Kanas Closing, Section7.01(b) in Article VII of the Credit Agreementshall be amended and restated inits entirety as follows (it being understood that if the Kanas Closing neveroccurs, Section 7.01(b) of the Credit Agreement shall not be amended hereby): (b) Senior Leverage Ratio. At all times during the term hereof, the Senior Leverage Ratio shall not be greater during the following time periods than the ratio set forth opposite such time periods: Time Period Maximum Ratio ----------- ------------- From the Closing Date through March 31, 1999 3.50 to 1.00 April 1, 1999 through December 31, 1999 3.00 to 1.00 -2- January 1, 2000 through September 30, 2000 2.75 to 1.00 October 1, 2000 thru September 30, 2003 2.50 to 1.00 October 1, 2003 and thereafter 2.00 to 1.00 SECTION 3. Amendment to Section 7.01(e). Effective immediately upon theKanas Closing, Section 7.01(e) in Article VII of the Credit Agreement shall beamended and restated in its entirety as follows (it being understood that if theKanas Closing never occurs, Section 7.01(e) of the Credit Agreement shall not beamended hereby): (e) Fixed Charges Coverage Ratio. Commencing January 1, 2002, and at all times thereafter during the term hereof, the Fixed Charges Coverage Ratio shall not be less during the following time periods than the ratio set forth opposite such time periods: Time Period Minimum Ratio ----------- ------------- From January 1, 2002 through March 31, 2003 1.00 to 1.00 April 1, 2003 and thereafter 1.05 to 1.00 SECTION 4. Amendment to Section 7.01(f). Effective immediately upon theKanas Closing,] Section 7.01(f) in Article VII of the Credit Agreement shall beamended and restated in its entirety as follows (it being understood that if theKanas Closing never occurs, Section 7.01(f) of the Credit Agreement shall not beamended hereby): (f) Capital Expenditures. Capital Expenditures (not including any Galaxy X Transponder (as defined in the definition of Operating Cash Flow) purchases) paid or incurred by the Borrower and the Restricted Subsidiaries shall not exceed, in the aggregate, the following amounts during the following years, provided that, any unused portion for any such year may be used during the following fiscal year only (but not thereafter): Fiscal Year Maximum Amount ----------- -------------- 1998 $90,000,000 1999 $35,000,000 2000 $35,000,000 2001 $70,000,000 January 1, 2002 and thereafter Not Applicable In addition, Capital Expenditures for the purpose of purchasing satellite transponders may be made, provided no Default or Event of Default exists or would result -3- therefrom in the aggregate amount throughout the term of this Agreement of $45,000,000 (excluding the Galaxy X Transponder down payment of $9,100,000). SECTION 5. Amendment to Section 7.06. Section 7.06 in Article VII ofthe Credit Agreement is amended and restated in its entirety as follows: 7.06. Distributions and Restricted Payments. The Borrower shall not, and shall not permit the Parents or any Restricted Subsidiary to, make any Restricted Payments, other than any Restricted Payment in the form of a Distribution made by any Restricted Subsidiary to any other Restricted Subsidiary or to the Borrower, and other than (a) so long as (i) there exists no Default or Event of Default both before and after giving effect to any such Restricted Payment, (ii) the Total Leverage Ratio is less than 5.00 to 1.00 both before and after giving effect to any such Restricted Payment and (iii) the date of such Restricted Payment is after September 30, 2000, Restricted Payments made exclusively out of Excess Cash Flow up to a maximum amount of the difference between $15,000,000 in the aggregate over the term of this Agreement, minus the aggregate amount of Investments made in accordance with the terms of Section 7.10(e) hereof over the term of this Agreement, (b) so long as there exists no Default or Event of Default both before and after giving effect to any such Restricted Payment, the Borrower may make Restricted Payments in the form of Distributions to GCII in an amount not in excess of cash income Taxes attributable to income from the Borrower and its Restricted Subsidiaries (and GCII may make Restricted Payments in such amounts in the form of Distributions to GCI), and scheduled cash interest payments required to be paid by GCII under the Senior Notes, and GCII may make Restricted Payments in the form of (and not in excess of) scheduled cash interest payments required to be paid by GCII under the Senior Notes, provided that, the Lenders agree that in no event shall the opening phrase of this subsection (b) prohibit the payment of any such Distribution by the Borrower or payment of interest by GCII on the Senior Notes for more than 180 consecutive days in any consecutive 360-day period, unless there exists an Event of Default under Section 8.01(a) hereof (whether by acceleration or otherwise), (c) so long as there exists no Default or Event of Default both before and after giving effect to the payment thereof, payment of Management Fees and amounts due under the Transponder Purchase Agreement for Galaxy X referred to in Section 7.18 hereof, (d) so long as there exists no Default or Event of Default both before and after giving effect to any such Restricted Payment, the Borrower or any other GCI Entity (i) may make Restricted Payments on Funded Debt incurred in accordance with the terms of Sections 7.02(b)(but with respect to the Senior Notes, only payments of cash interest which accrues thereon), 7.02(d), 7.02(f)(i), and 7.02(g) hereof, and (ii) may make payments of income Taxes, and (e) after the Kanas Closing, so long as there exists no Default or Event of Default both before and after giving effect to the payment thereof, GCI may make payments and distributions annually in an aggregate amount not to exceed $600,000 a year, to the holders of its Series C 6% Preferred Stock, provided that such -4- payments and distributions permitted to be paid under this subsection (e) may only be made out of the aggregate cash proceeds actually received by GCI after January 1, 2000 from the exercise of stock options and stock warrants. SECTION 6. Amendment to Section 7.10. Section 7.10 in Article VII ofthe Credit Agreement is amended and restated in its entirety as follows: 7.10. Loans and Investments. The Borrower shall not, and shall not permit any of the other GCI Entities to, make any loan, advance, extension of credit or capital contribution to, or make or have any Investment in, any Person, or make any commitment to make any such extension of credit or Investment, or make any acquisition, except (a) Investments on the Closing Date constituting a $50,000,000 capital contribution to AUSP and other Investments existing on the date hereof and contemplated by the terms of this Agreement, each as shown on Schedule 5.13 hereto, (b) Investments in Cash Equivalents, (c) Investments in advances or loans in the ordinary course of business to officers and employees, provided that the aggregate amount of all such Investments made in cash do not exceed in the aggregate $4,000,000 outstanding at any one time, (d) Investments in accounts receivable arising in the ordinary course of business, (e) so long as (i) there exists no Default or Event of Default, both before and after giving effect to the making of such Investments, (ii) the Total Leverage Ratio is less than 5.00 to 1.00 both before and after giving effect to any such Investment and (iii) the date of such Investment is after September 30, 2000, Investments made exclusively out of Excess Cash Flow up to a maximum amount of the difference between $15,000,000 in the aggregate over the term of this Agreement, minus the aggregate amount of Restricted Payments made in accordance with the terms of Section 7.06(a) hereof over the term of this Agreement, (f) loans, advances, extensions of credit or capital contributions to, or among, Restricted Subsidiaries and to GCI Transport Co., Inc. and its Subsidiaries in connection with the assignment or other transfer to GCI Transport Co., Inc. or its Subsidiaries of the $9,100,000 deposit made in connection with the Transponder Purchase Agreement for Galaxy X referred to in Section 7.18 hereof (provided the Borrower provides the Administrative Agent with a Pro Forma Compliance Certificate evidencing no Default or Event of Default both before and after the assignment), (g) so long as there exists no Default or Event of Default both before and after giving effect to the making of each such Investment, Investments constituting loans and/or advances to AUSP in accordance with the terms of the Keepwell Agreement and the Completion Guaranty as may be evidenced by the Intercompany Notes (collaterally assigned to the Administrative Agent on a first Lien basis), which Investments in an aggregate amount over the term of this Agreement do not exceed $73,000,000, (h) investments in Participation Certificates of CoBank to the extent required pursuant to Section 6.16, (i) so long as (A) there is no Default or Event of Default both before and after giving effect to such Investment or acquisition, (B) for any such acquisition or Investment by the Borrower for which payment is made by issuance of -5- Capital Stock of the Borrower for 95% or more of the purchase price, such acquisition or Investment must be in a Person that has four full fiscal quarters historical positive cash flow, (C) if the Capital Stock or assets to be acquired are in a related business in which the Borrower is not currently in, the Borrower provides the Lenders with pro forma projections for such related business, (D) all such Investments and acquisitions are in existing markets of the Borrower and its Restricted Subsidiaries, and (E) all such assets and Properties, including Capital Stock, purchased by the Borrower or any Restricted Subsidiary of the Borrower, shall be subject to first and prior perfected Liens (except for Permitted Liens) in favor of the Administrative Agent and the Lenders securing the Obligations in form and substance substantially identical to the existing collateral documentation, Investments of Capital Stock or acquisitions of assets of Persons engaged in the Borrower's existing lines of business or businesses related thereto not in excess of $5,000,000 in the aggregate for the cash portion for all such Investments or acquisitions, provided that, such $5,000,000 cash portion amount may be increased to $20,000,000 in the aggregate, if the Total Leverage Ratio is less than 5.00 to 1.00 both before and after giving effect to any such Investment or acquisition and (j) so long as (A) there is no Default or Event of Default both before and after giving effect to such Investment or acquisition, (B) GCI acquires not less than 85% of the Capital Stock of Kanas and 100% of the Kanas Notes, (C) the Kanas Notes and all Capital Stock of Kanas owned by GCI, the Borrower or any other GCI Entity from time to time is immediately upon acquisition thereof pledged and collaterally assigned to secure the Obligations pursuant to a pledge agreement and/or collateral assignment in form substantially similar to those pledge agreements executed previously by the GCI Entities, and the Kanas Notes and such Capital Stock of Kanas are immediately delivered to the Administrative Agent together with stock powers and other items reasonably requested by the Administrative Agent to secure the Obligations, (D) Kanas shall have entered into a lease agreement with Alyeska Pipeline service company on terms and conditions, and pursuant to documentation, satisfactory to the Administrative Agent, (E) the aggregate purchase price for such Capital Stock and Kanas Notes does not exceed $10,000,000, and such purchase price is paid exclusively by newly issued 6% Series C Preferred Stock of GCI on terms and conditions acceptable to the Administrative Agent and which such terms do not violate the terms of Section 7.19 hereof,or any other provision of this Agreement and the other Loan Papers, (F) Kanas becomes a Restricted Subsidiary hereunder immediately upon the acquisition of such Capital Stock and is in compliance with all terms and provisions of this Agreement and the Loan Papers immediately upon the acquisition by GCI of the Capital Stock of Kanas, (G) the Administrative Agent has received all other documentation, information and agreements relating to Kanas and the Kanas Notes, and the purchase of the Capital Stock of Kanas and the Kanas Notes, (H) the Administrative Agent has received projections after giving effect to the purchase of the Capital Stock of Kanas and the Kanas Notes demonstrating pro forma compliance with the financial covenants contained in this Agreement throughout the term of this Agreement, (I) GCI promptly after the purchase by it of the Capital Stock -6- of Kanas and the Kanas Notes contributes such Capital Stock and Kanas Notes to the Borrower as common equity, (J) the Capital Stock of Kanas and the Kanas Notes are acquired free and clear of all Liens (except Liens of the Lenders securing the Obligations imposed in accordance with subsection (K) below and Section 2.15 hereof), and (K) Kanas executes a Guaranty of the Obligations in form and substance similar to the existing guaranties executed by the other Restricted Subsidiaries, and otherwise complies fully with the terms of Section 2.15 hereof once acquired, and (L) the Borrower shall have delivered to the Administrative Agent and Lenders legal opinions from counsel to the Borrower and its Restricted Subsidiaries regarding the acquisition of the Capital Stock of Kanas, the acquisition of the Kanas Notes and such other matters as reasonably requested by Special Counsel, including, without limitation, opinions regarding the waivers, consents and amendments in connection with the Indenture and AUSP Credit Agreement, and the related agreements, GCI may acquire the Capital Stock of Kanas and the Kanas Notes and contribute them to the Borrower. SECTION 7. Amendment to Section 7.12. Section 7.12 in Article VII ofthe Credit Agreement is amended and restated in its entirety as follows: 7.12. Issuance of Partnership Interest and Capital Stock; Amendment of Articles and By-Laws. Except in connection with the transactions consummated on or prior to the Closing Date, and except as permitted in Section 7.07 hereof, the Borrower shall not, and shall not permit any of the other GCI Entities (other than GCI) to, issue, sell or otherwise dispose of any Capital Stock in such Person, or any options or rights to acquire such partnership interest or capital stock not issued and outstanding on the Closing Date. The Borrower shall not amend its articles of organization or bylaws and the Borrower shall not permit any of the other GCI Entities (other thanGCI in connection with, or in contemplation of, the Kanas Closing) to amend its articles of organization or bylaws or partnership agreement, as applicable, except, so long as there exists no Default or Event of Default both prior to and after giving effect to such amendment, and after written notice to the Administrative Agent, the Borrower or any of the other GCI Entities may make (i) changes to comply with applicable Law and (ii) changes immaterial in nature. SECTION 8. Conditions Precedent. This Fifth Amendment shall not beeffective until the Administrative Agent shall have determined in its solediscretion that all proceedings of the Borrower taken in connection with thisFifth Amendment and the transactions contemplated hereby shall be satisfactoryin form and substance to the Administrative Agent and the Borrower has satisfiedthe following conditions: (a) the Borrower shall have delivered to the Administrative Agent a loan certificate of the Borrower certifying (i) as to the accuracy of its representations and warranties set forth in Article V of the Credit Agreement, as amended by this Fifth -7- Amendment and the other Loan Papers, (ii) that there exists no Default or Event of Default, and the execution, delivery and performance of this Fifth Amendment will not cause a Default or Event of Default, except those Defaults and Events of Default specifically waived hereby, (iii) as to resolutions authorizing the Borrower to execute, deliver and perform this Fifth Amendment and all Loan Papers and to execute and perform all transactions contemplated by this Fifth Amendment, and all other documents and instruments delivered or executed in connection with this Fifth Amendment, (iv) that it has complied with all agreements and conditions to be complied with by it under the Credit Agreement, the other Loan Papers and this Fifth Amendment by the date hereof and (v) that it has received all consents, amendments and waivers from all Persons necessary or required, if any, to (A) enter into this Amendment or (B) effectuate the amendments set forth above, including, without limitation, under the Indenture and related documentation and under the AUSP Credit Agreement and related documentation; (b) the Borrower shall have delivered to the Administrative Agent and Lenders legal opinions from counsel to the Borrower and its Restricted Subsidiaries regarding this Fifth Amendment and such other matters as reasonably requested by Special Counsel, including, without limitation, opinions regarding the waivers, consents and amendments in connection with the Indenture and AUSP Credit Agreement, and the related agreements; (c) the Borrower shall have delivered to the Administrative Agent all documentation relating to the acquisition of the Capital Stock of Kanas and the Kanas Notes; (d) the Borrower shall have paid to the Administrative Agent (i) for the account of all Lenders executing this Fifth Amendment in their Specified Percentages, an amendment fee equal to 10 basis points on $192,500,000, and (ii) for its sole account, reimbursement for all costs and expenses and all legal fees incurred by the Administrative Agent in connection with this Fifth Amendment or incurred otherwise on behalf of the Borrower; and (e) the Borrower and the Lenders shall have entered into a fifth amendment to the $200MM Credit Facility on terms substantially identical to the terms of this Fifth Amendment; and (f) the Borrower shall have delivered such other documents, instruments, and certificates, in form and substance satisfactory to the Administrative Agent, as the Administrative Agent shall deem necessary or appropriate in connection with this Fifth Amendment and the transactions contemplated hereby. SECTION 9. Representations and Warranties. The Borrower represents andwarrants to the Lenders and the Administrative Agent that (a) this FifthAmendment constitutes its legal, valid, and binding -8-obligation, enforceable in accordance with the terms hereof (subject as toenforcement of remedies to any applicable bankruptcy, reorganization,moratorium, or other laws or principles of equity affecting the enforcement ofcreditors' rights generally), (b) there exists no Default or Event of Defaultunder the Credit Agreement, (c) its representations and warranties set forth inthe Credit Agreement and other Loan Papers are true and correct on the datehereof, (d) it has complied with all agreements and conditions to be compliedwith by it under the Credit Agreement and the other Loan Papers by the datehereof, and (e) the Credit Agreement, as amended hereby, and the other LoanPapers remain in full force and effect. SECTION 10. Entire Agreement; Ratification. THE CREDIT AGREEMENT ANDTHE LOAN PAPERS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BECONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTOF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.EXCEPT AS MODIFIED OR SUPPLEMENTED HEREBY, THE CREDIT AGREEMENT, THE OTHER LOANPAPERS AND ALL OTHER DOCUMENTS AND AGREEMENTS EXECUTED IN CONNECTION THEREWITHSHALL CONTINUE IN FULL FORCE AND EFFECT. SECTION 11. Counterparts. This Fifth Amendment may be executed in anynumber of counterparts, all of which taken together shall constitute one and thesame instrument. In making proof hereof, it shall not be necessary to produce oraccount for any counterpart other than one signed by the party against whichenforcement is sought. SECTION 12. GOVERNING LAW . THIS FIFTH AMENDMENT SHALL BE CONSTRUED INACCORDANCE WITH THE INTERNAL LAWS (AND NOT THE LAW OF CONFLICTS) OF THE STATE OF TEXAS, BUT GIVING EFFECT TO FEDERAL LAWS. SECTION 13. CONSENT TO JURISDICTION . THE BORROWER HEREBY IRREVOCABLYSUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR TEXASSTATE COURT SITTING IN DALLAS IN ANY ACTION OR PROCEEDING ARISING OUT OF ORRELATING TO ANY LOAN PAPERS AND THE BORROWER IRREVOCABLY AGREES THAT ALL CLAIMSIN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCHCOURT AND IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TOTHE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THATSUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE RIGHT OF THEADMINISTRATIVE AGENT OR ANY LENDER TO BRING PROCEEDINGS AGAINST THE BORROWER INTHE COURTS OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY THE BORROWERAGAINST THE ADMINISTRATIVE AGENT OR ANY LENDER OR ANY AFFILIATE OF THEADMINISTRATIVE AGENT OR ANY LENDER INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTERIN ANY WAY ARISING OUT OF, RELATED TO, OR -9-CONNECTED WITH ANY LOAN PAPER SHALL BE BROUGHT ONLY IN A COURT IN DALLAS, TEXAS. SECTION 14. WAIVER OF JURY TRIAL . THE BORROWER, THE ADMINISTRATIVEAGENT AND EACH LENDER HEREBY WAIVES TRIAL BY JURY IN ANY JUDICIAL PROCEEDINGINVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT,CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITHANY LOAN PAPER OR THE RELATIONSHIP ESTABLISHED THEREUNDER.================================================================================ THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.================================================================================ -10- IN WITNESS WHEREOF, this Fifth Amendment to Amended and Restated CreditAgreement is executed as of the date first set forth above. GCI HOLDINGS, INC. /s/ By: John M. Lowber Its: Secretary/Treasurer -11- BANK OF AMERICA, N.A., (formerly NationsBank, N.A.), Individually as a Lender and as Administrative Agent /s/ By: Derrick Bell Its: Vice President -12- CREDIT LYONNAIS NEW YORK BRANCH, as Documentation Agent and Individually as a Lender /s/ By: Jeremy Horn Its: Vice President -13- TD SECURITIES (USA), INC., as Syndication Agent /s/ By: William J. Burke Its: Vice President -14- TORONTO DOMINION (TEXAS), INC., Individually as a Lender /s/ By: Azar S. Azarpour Its: Vice President -15- COBANK, ACB, Individually as a Lender /s/ By: Teresa L. Fountain Its: Assistant Corporate Secretary By: Its: -16- GENERAL ELECTRIC CAPITAL CORPORATION, Individually as a Lender /s/ By: Brian P. Ward Its: Manager-Operations -17- UNION BANK OF CALIFORNIA, N.A., Individually as a Lender /s/ By: Keith M. Wilson Its: Vice President -18- BANK OF HAWAII, Individually as a Lender /s/ By: Luke Yeh Its: Vice President -19- THE BANK OF NEW YORK, Individually as a Lender /s/ By: Gerry Granovsky Its: Vice President -20- BNP PARIBAS (successor by merger to PARIBAS and BANQUE NATIONALE DE PARIS), Individually as a Lender /s/ By: Serge Desrayaud Its: Media and Telecom Asset Management Company Head /s/ By: Gregg W. Bonardi Its: Vice President -21- CITY NATIONAL BANK, Individually as a Lender /s/ By: Patrick M. Drum Its: Vice President -22- FLEET NATIONAL BANK, Individually as a Lender /s/ By: Denis D. Hamboyan Its: Director -23- THE FUJI BANK, LIMITED, LOS ANGELES AGENCY, Individually as a Lender /s/ By: Shinzo Neshitate Its: Senior Vice President and Manager -24- THE SUMITOMO BANK, LIMITED, Individually as a Lender /s/ By: Suresh S. Tata Its: Senior Vice President -25- NATIONAL BANK OF ALASKA, Individually as a Lender /s/ By: Brent Ulmer Its: Vice President -26- ALLFIRST BANK, Individually as a Lender /s/ By: Michael C. Toomey Its: Vice President -27- FIFTH AMENDMENT TO $200,000,000 AMENDED AND RESTATED CREDIT AGREEMENT FIFTH AMENDMENT TO $200,000,000 AMENDED AND RESTATED CREDIT AGREEMENT(this "Amendment") is dated as of the 25th day of October, 2000 and entered intoamong GCI HOLDINGS, INC., an Alaskan corporation (herein, together with itssuccessors and assigns, called the "Borrower"), the Lenders (as defined in theCredit Agreement as defined below), BANK OF AMERICA, N.A. (formerly NationsBank,N.A.), as Administrative Agent for itself and the Lenders (the "AdministrativeAgent"), CREDIT LYONNAIS NEW YORK BRANCH, as Documentation Agent and TDSECURITIES (USA), INC. as Syndication Agent. WITNESSETH: WHEREAS, the Borrower, the Lenders and the Administrative Agent enteredinto a $200,000,000 Amended and Restated Credit Agreement, dated November 14,1997, as amended by that certain Consent and First Amendment, dated January 27,1998, by that certain Second Amendment to Amended and Restated Credit Agreementdated as of July 3, 1998, by that certain Third Amendment to Amended andRestated Credit Agreement dated as of April 13, 1999 and by that certain FourthAmendment to Amended and Restated Credit Agreement dated as of January 18, 2000(as amended and as further amended, restated or otherwise modified from time totime, the "Credit Agreement") and a $50,000,000 Amended and Restated CreditAgreement, dated as of November 14, 1997 (as amended by that certain Consent andFirst Amendment, dated January 27, 1998, by that certain Second Amendment toAmended and Restated Credit Agreement dated as of July 3, 1998 , by that certainThird Amendment to Amended and Restated Credit Agreement dated as of April 13,1999, and by that certain Fourth Amendment to Amended and Restated CreditAgreement dated as of January 18, 2000, and as further amended, restated orotherwise modified from time to time, the "$50MM Credit Facility"); WHEREAS, the Borrower has requested that, among other things, certainfinancial covenants of the Credit Agreement be amended; WHEREAS, the Lenders, the Administrative Agent and the Borrower haveagreed to modify the Credit Agreement upon the terms and conditions set forthbelow; NOW, THEREFORE, for valuable consideration hereby acknowledged, theBorrower, the Lenders and the Administrative Agent agree as follows: SECTION 1. Definitions. (a) Definitions, Generally. Unless specifically defined or redefined below, capitalized terms used herein shall have the meanings ascribed thereto in the Credit Agreement. (b) Addition of definition of "Kanas". The definition of "Kanas" shall be added to Article I of the Credit Agreement in alphabetical order as follows: "Kanas" means Kanas Telecom, Inc., an Alaska corporation. (c) Addition of definition of "Kanas Closing". The definition of "Kanas Closing" shall be added to Article I of the Credit Agreement in alphabetical order as follows: "Kanas Closing" means the consummation of the acquisition by GCI (and the subsequent equity contribution to the Borrower) of (a) the Kanas Notes and (b) not less than 85% of the Capital Stock of Kanas, in each case in accordance with the terms and provisions of Section 7.10(j) hereof. (d) Addition of definition of "Kanas Notes". The definition of "Kanas Notes" shall be added to Article I of the Credit Agreement in alphabetical order as follows: "Kanas Notes" means those certain promissory notes in the original principal amounts of $85,400,000, dated November 1, 1996, and $896,575.17 dated December 17, 1999, respectively, both payable by Kanas originally to Credit Lyonnais, New York Branch as purchased by, and assigned to, MCI, as further purchased by, and assigned to, GCI, and as further contributed and assigned to the Borrower in accordance with the provisions of Section 7.10 hereof. SECTION 2. Amendment to Section 7.01(b). Effective immediately upon theKanas Closing, Section 7.01(b) in Article VII of the Credit Agreement shall beamended and restated in its entirety as follows (it being understood that if theKanas Closing never occurs, Section 7.01(b) of the Credit Agreement shall not beamended hereby): (b) Senior Leverage Ratio. At all times during the term hereof, the Senior Leverage Ratio shall not be greater during the following time periods than the ratio set forth opposite such time periods: Time Period Maximum Ratio From the Closing Date through March 31, 1999 3.50 to 1.00 April 1, 1999 through December 31, 1999 3.00 to 1.00 January 1, 2000 through September 30, 2000 2.75 to 1.00 October 1, 2000 thru September 30, 2003 2.50 to 1.00 October 1, 2003 and thereafter 2.00 to 1.00 SECTION 3. Amendment to Section 7.01(e). Effective immediately upon theKanas Closing, Section 7.01(e) in Article VII of the Credit Agreement shall beamended and restated in its entirety -2-as follows (it being understood that if the Kanas Closing never occurs, Section7.01(e) of the Credit Agreement shall not be amended hereby): (e) Fixed Charges Coverage Ratio. Commencing January 1, 2002, and at all times thereafter during the term hereof, the Fixed Charges Coverage Ratio shall not be less during the following time periods than the ratio set forth opposite such time periods: Time Period Minimum Ratio ----------- ------------- From January 1, 2002 through March 31, 2003 1.00 to 1.00 April 1, 2003 and thereafter 1.05 to 1.00 SECTION 4. Amendment to Section 7.01(f). Effective immediately upon theKanas Closing, Section 7.01(f) in Article VII of the Credit Agreement shall beamended and restated in its entirety as follows (it being understood that if theKanas Closing never occurs, Section 7.01(f) of the Credit Agreement shall not beamended hereby): (f) Capital Expenditures. Capital Expenditures (not including any Galaxy X Transponder (as defined in the definition of Operating Cash Flow) purchases) paid or incurred by the Borrower and the Restricted Subsidiaries shall not exceed, in the aggregate, the following amounts during the following years, provided that, any unused portion for any such year may be used during the following fiscal year only (but not thereafter): Fiscal Year Maximum Amount ----------- -------------- 1998 $90,000,000 1999 $35,000,000 2000 $35,000,000 2001 $70,000,000 January 1, 2002 and thereafter Not Applicable In addition, Capital Expenditures for the purpose of purchasing satellite transponders may be made, provided no Default or Event of Default exists or would result therefrom in the aggregate amount throughout the term of this Agreement of $45,000,000 (excluding the Galaxy X Transponder down payment of $9,100,000). SECTION 5. Amendment to Section 7.06. Section 7.06 in Article VII of the Credit Agreement is amended and restated in its entirety as follows: 7.06. Distributions and Restricted Payments. The Borrower shall not, and shall not permit the Parents or any Restricted Subsidiary to, make any Restricted Payments, other than any Restricted Payment in the form of a Distribution made by any Restricted Subsidiary to any other Restricted Subsidiary or to the Borrower, and -3- other than (a) so long as (i) there exists no Default or Event of Default both before and after giving effect to any such Restricted Payment, (ii) the Total Leverage Ratio is less than 5.00 to 1.00 both before and after giving effect to any such Restricted Payment and (iii) the date of such Restricted Payment is after September 30, 2000, Restricted Payments made exclusively out of Excess Cash Flow up to a maximum amount of the difference between $15,000,000 in the aggregate over the term of this Agreement, minus the aggregate amount of Investments made in accordance with the terms of Section 7.10(e) hereof over the term of this Agreement, (b) so long as there exists no Default or Event of Default both before and after giving effect to any such Restricted Payment, the Borrower may make Restricted Payments in the form of Distributions to GCII in an amount not in excess of cash income Taxes attributable to income from the Borrower and its Restricted Subsidiaries (and GCII may make Restricted Payments in such amounts in the form of Distributions to GCI), and scheduled cash interest payments required to be paid by GCII under the Senior Notes, and GCII may make Restricted Payments in the form of (and not in excess of) scheduled cash interest payments required to be paid by GCII under the Senior Notes, provided that, the Lenders agree that in no event shall the opening phrase of this subsection (b) prohibit the payment of any such Distribution by the Borrower or payment of interest by GCII on the Senior Notes for more than 180 consecutive days in any consecutive 360-day period, unless there exists an Event of Default under Section 8.01(a) hereof (whether by acceleration or otherwise), (c) so long as there exists no Default or Event of Default both before and after giving effect to the payment thereof, payment of Management Fees and amounts due under the Transponder Purchase Agreement for Galaxy X referred to in Section 7.18 hereof, (d) so long as there exists no Default or Event of Default both before and after giving effect to any such Restricted Payment, the Borrower or any other GCI Entity (i) may make Restricted Payments on Funded Debt incurred in accordance with the terms of Sections 7.02(b)(but with respect to the Senior Notes, only payments of cash interest which accrues thereon), 7.02(d), 7.02(f)(i), and 7.02(g) hereof, and (ii) may make payments of income Taxes, and (e) after the Kanas Closing, so long as there exists no Default or Event of Default both before and after giving effect to the payment thereof, GCI may make payments and distributions annually in an aggregate amount not to exceed $600,000 a year, to the holders of its Series C 6% Preferred Stock, provided that such payments and distributions permitted to be paid under this subsection (e) may only be made out of the aggregate cash proceeds actually received by GCI after January 1, 2000 from the exercise of stock options and stock warrants. SECTION 6. Amendment to Section 7.10. Section 7.10 in Article VII ofthe Credit Agreement is amended and restated in its entirety as follows: 7.10. Loans and Investments. The Borrower shall not, and shall not permit any of the other GCI Entities to, make any loan, advance, extension of credit or capital contribution to, or make or have any Investment in, any Person, or make any commitment to make any such extension of credit or Investment, or make any acquisition, except (a) Investments on the Closing Date constituting a $50,000,000 -4- capital contribution to AUSP and other Investments existing on the date hereof and contemplated by the terms of this Agreement, each as shown on Schedule 5.13 hereto, (b) Investments in Cash Equivalents, (c) Investments in advances or loans in the ordinary course of business to officers and employees, provided that the aggregate amount of all such Investments made in cash do not exceed in the aggregate $4,000,000 outstanding at any one time, (d) Investments in accounts receivable arising in the ordinary course of business, (e) so long as (i) there exists no Default or Event of Default, both before and after giving effect to the making of such Investments, (ii) the Total Leverage Ratio is less than 5.00 to 1.00 both before and after giving effect to any such Investment and (iii) the date of such Investment is after September 30, 2000, Investments made exclusively out of Excess Cash Flow up to a maximum amount of the difference between $15,000,000 in the aggregate over the term of this Agreement, minus the aggregate amount of Restricted Payments made in accordance with the terms of Section 7.06(a) hereof over the term of this Agreement, (f) loans, advances, extensions of credit or capital contributions to, or among, Restricted Subsidiaries and to GCI Transport Co., Inc. and its Subsidiaries in connection with the assignment or other transfer to GCI Transport Co., Inc. or its Subsidiaries of the $9,100,000 deposit made in connection with the Transponder Purchase Agreement for Galaxy X referred to in Section 7.18 hereof (provided the Borrower provides the Administrative Agent with a Pro Forma Compliance Certificate evidencing no Default or Event of Default both before and after the assignment), (g) so long as there exists no Default or Event of Default both before and after giving effect to the making of each such Investment, Investments constituting loans and/or advances to AUSP in accordance with the terms of the Keepwell Agreement and the Completion Guaranty as may be evidenced by the Intercompany Notes (collaterally assigned to the Administrative Agent on a first Lien basis), which Investments in an aggregate amount over the term of this Agreement do not exceed $73,000,000, (h) investments in Participation Certificates of CoBank to the extent required pursuant to Section 6.16, (i) so long as (A) there is no Default or Event of Default both before and after giving effect to such Investment or acquisition, (B) for any such acquisition or Investment by the Borrower for which payment is made by issuance of Capital Stock of the Borrower for 95% or more of the purchase price, such acquisition or Investment must be in a Person that has four full fiscal quarters historical positive cash flow, (C) if the Capital Stock or assets to be acquired are in a related business in which the Borrower is not currently in, the Borrower provides the Lenders with pro forma projections for such related business, (D) all such Investments and acquisitions are in existing markets of the Borrower and its Restricted Subsidiaries, and (E) all such assets and Properties, including Capital Stock, purchased by the Borrower or any Restricted Subsidiary of the Borrower, shall be subject to first and prior perfected Liens (except for Permitted Liens) in favor of the Administrative Agent and the Lenders securing the Obligations in form and substance substantially identical to the existing collateral documentation, Investments of Capital Stock or acquisitions of assets of Persons engaged in the Borrower's existing lines of business or businesses related thereto not in excess of $5,000,000 in the aggregate for the cash portion for all such Investments or acquisitions, -5- provided that, such $5,000,000 cash portion amount may be increased to $20,000,000 in the aggregate, if the Total Leverage Ratio is less than 5.00 to 1.00 both before and after giving effect to any such Investment or acquisition and (j) so long as (A) there is no Default or Event of Default both before and after giving effect to such Investment or acquisition, (B) GCI acquires not less than 85% of the Capital Stock of Kanas and 100% of the Kanas Notes, (C) the Kanas Notes and all Capital Stock of Kanas owned by GCI, the Borrower or any other GCI Entity from time to time is immediately upon acquisition thereof pledged and collaterally assigned to secure the Obligations pursuant to a pledge agreement and/or collateral assignment in form substantially similar to those pledge agreements executed previously by the GCI Entities, and the Kanas Notes and such Capital Stock of Kanas are immediately delivered to the Administrative Agent together with stock powers and other items reasonably requested by the Administrative Agent to secure the Obligations, (D) Kanas shall have entered into a lease agreement with Alyeska Pipeline service company on terms and conditions, and pursuant to documentation, satisfactory to the Administrative Agent, (E) the aggregate purchase price for such Capital Stock and Kanas Notes does not exceed $10,000,000, and such purchase price is paid exclusively by newly issued 6% Series C Preferred Stock of GCI on terms and conditions acceptable to the Administrative Agent and which such terms do not violate the terms of Section 7.19 hereof or any other provision of this Agreement and the other Loan Papers, (F) Kanas becomes a Restricted Subsidiary hereunder immediately upon the acquisition of such Capital Stock and is in compliance with all terms and provisions of this Agreement and the Loan Papers immediately upon the acquisition by GCI of the Capital Stock of Kanas, (G) the Administrative Agent has received all other documentation, information and agreements relating to Kanas and the Kanas Notes, and the purchase of the Capital Stock of Kanas and the Kanas Notes, (H) the Administrative Agent has received projections after giving effect to the purchase of the Capital Stock of Kanas and the Kanas Notes demonstrating pro forma compliance with the financial covenants contained in this Agreement throughout the term of this Agreement, (I) GCI promptly after the purchase by it of the Capital Stock of Kanas and the Kanas Notes contributes such Capital Stock and Kanas Notes to the Borrower as common equity, (J) the Capital Stock of Kanas and the Kanas Notes are acquired free and clear of all Liens (except Liens of the Lenders securing the Obligations imposed in accordance with subsection (K) below and Section 2.15 hereof), (K) Kanas executes a Guaranty of the Obligations in form and substance similar to the existing guaranties executed by the other Restricted Subsidiaries, and otherwise complies fully with the terms of Section 2.15 hereof once acquired and (L) the Borrower shall have delivered to the Administrative Agent and Lenders legal opinions from counsel to the Borrower and its Restricted Subsidiaries regarding the acquisition of the Capital Stock of Kanas, the acquisition of the Kanas Notes and such other matters as reasonably requested by Special Counsel, including, without limitation, opinions regarding the waivers, consents and amendments in connection with the Indenture and AUSP Credit Agreement, and the related agreements, GCI may acquire the Capital Stock of Kanas and the Kanas Notes and contribute them to the Borrower. -6- SECTION 7. Amendment to Section 7.12. Section 7.12 in Article VII ofthe Credit Agreement is amended and restated in its entirety as follows: 7.12. Issuance of Partnership Interest and Capital Stock; Amendment of Articles and By-Laws. Except in connection with the transactions consummated on or prior to the Closing Date, and except as permitted in Section 7.07 hereof, the Borrower shall not, and shall not permit any of the other GCI Entities (other than GCI) to, issue, sell or otherwise dispose of any Capital Stock in such Person, or any options or rights to acquire such partnership interest or capital stock not issued and outstanding on the Closing Date. The Borrower shall not amend its articles of organization or bylaws and the Borrower shall not permit any of the other GCI Entities (other than GCI in connection with, or in contemplation of, the Kanas Closing) to amend its articles of organization or bylaws or partnership agreement, as applicable, except, so long as there exists no Default or Event of Default both prior to and after giving effect to such amendment, and after written notice to the Administrative Agent, the Borrower or any of the other GCI Entities may make (i) changes to comply with applicable Law and (ii) changes immaterial in nature. SECTION 8. Conditions Precedent. This Fifth Amendment shall not beeffective until the Administrative Agent shall have determined in its solediscretion that all proceedings of the Borrower taken in connection with thisFifth Amendment and the transactions contemplated hereby shall be satisfactoryin form and substance to the Administrative Agent and the Borrower has satisfiedthe following conditions: (a) the Borrower shall have delivered to the Administrative Agent a loan certificate of the Borrower certifying (i) as to the accuracy of its representations and warranties set forth in Article V of the Credit Agreement, as amended by this Fifth Amendment and the other Loan Papers, (ii) that there exists no Default or Event of Default, and the execution, delivery and performance of this Fifth Amendment will not cause a Default or Event of Default, except those Defaults and Events of Default specifically waived hereby, (iii) as to resolutions authorizing the Borrower to execute, deliver and perform this Fifth Amendment and all Loan Papers and to execute and perform all transactions contemplated by this Fifth Amendment, and all other documents and instruments delivered or executed in connection with this Fifth Amendment, (iv) that it has complied with all agreements and conditions to be complied with by it under the Credit Agreement, the other Loan Papers and this Fifth Amendment by the date hereof and (v) that it has received all consents, amendments and waivers from all Persons necessary or required, if any, to (A) enter into this Amendment or (B) effectuate the amendments set forth above, including, without limitation, under the Indenture and related documentation and under the AUSP Credit Agreement and related documentation; (b) the Borrower shall have delivered to the Administrative Agent and Lenders legal opinions from counsel to the Borrower and its Restricted Subsidiaries regarding this Fifth Amendment and such other matters as reasonably requested by -7- Special Counsel, including, without limitation, opinions regarding the waivers, consents and amendments in connection with the Indenture and AUSP Credit Agreement, and the related agreements; (c) the Borrower shall have delivered to the Administrative Agent all documentation relating to the acquisition of the Capital Stock of Kanas and the Kanas Notes; (d) the Borrower shall have paid to the Administrative Agent (i) for the account of all Lenders executing this Fifth Amendment in their Specified Percentages, an amendment fee equal to 10 basis points on $192,500,000, and (ii) for its sole account, reimbursement for all costs and expenses and all legal fees incurred by the Administrative Agent in connection with this Fifth Amendment or incurred otherwise on behalf of the Borrower; (e) the Borrower and the Lenders shall have entered into a fifth amendment to the $50MM Credit Facility on terms substantially identical to the terms of this Fifth Amendment; and (f) the Borrower shall have delivered such other documents, instruments, and certificates, in form and substance satisfactory to the Administrative Agent, as the Administrative Agent shall deem necessary or appropriate in connection with this Fifth Amendment and the transactions contemplated hereby. SECTION 9. Representations and Warranties. The Borrower represents andwarrants to the Lenders and the Administrative Agent that (a) this FifthAmendment constitutes its legal, valid, and binding obligation, enforceable inaccordance with the terms hereof (subject as to enforcement of remedies to anyapplicable bankruptcy, reorganization, moratorium, or other laws or principlesof equity affecting the enforcement of creditors' rights generally), (b) thereexists no Default or Event of Default under the Credit Agreement, (c) itsrepresentations and warranties set forth in the Credit Agreement and other LoanPapers are true and correct on the date hereof, (d) it has complied with allagreements and conditions to be complied with by it under the Credit Agreementand the other Loan Papers by the date hereof, and (e) the Credit Agreement, asamended hereby, and the other Loan Papers remain in full force and effect. SECTION 10. Entire Agreement; Ratification. THE CREDIT AGREEMENT ANDTHE LOAN PAPERS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BECONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTOF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.EXCEPT AS MODIFIED OR SUPPLEMENTED HEREBY, THE CREDIT AGREEMENT, THE OTHER LOANPAPERS AND ALL OTHER DOCUMENTS AND AGREEMENTS EXECUTED IN CONNECTION THEREWITHSHALL CONTINUE IN FULL FORCE AND EFFECT. -8- SECTION 11. Counterparts. This Fifth Amendment may be executed in anynumber of counterparts, all of which taken together shall constitute one and thesame instrument. In making proof hereof, it shall not be necessary to produce oraccount for any counterpart other than one signed by the party against whichenforcement is sought. SECTION 12. GOVERNING LAW. THIS FIFTH AMENDMENT SHALL BE CONSTRUED INACCORDANCE WITH THE INTERNAL LAWS (AND NOT THE LAW OF CONFLICTS) OF THE STATE OFTEXAS, BUT GIVING EFFECT TO FEDERAL LAWS. SECTION 13. CONSENT TO JURISDICTION. THE BORROWER HEREBY IRREVOCABLYSUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR TEXASSTATE COURT SITTING IN DALLAS IN ANY ACTION OR PROCEEDING ARISING OUT OF ORRELATING TO ANY LOAN PAPERS AND THE BORROWER IRREVOCABLY AGREES THAT ALL CLAIMSIN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCHCOURT AND IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TOTHE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THATSUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE RIGHT OF THEADMINISTRATIVE AGENT OR ANY LENDER TO BRING PROCEEDINGS AGAINST THE BORROWER INTHE COURTS OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY THE BORROWERAGAINST THE ADMINISTRATIVE AGENT OR ANY LENDER OR ANY AFFILIATE OF THEADMINISTRATIVE AGENT OR ANY LENDER INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTERIN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN PAPER SHALL BEBROUGHT ONLY IN A COURT IN DALLAS, TEXAS. SECTION 14. WAIVER OF JURY TRIAL. THE BORROWER, THE ADMINISTRATIVEAGENT AND EACH LENDER HEREBY WAIVES TRIAL BY JURY IN ANY JUDICIAL PROCEEDINGINVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT,CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITHANY LOAN PAPER OR THE RELATIONSHIP ESTABLISHED THEREUNDER.================================================================================ THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.================================================================================ -9- IN WITNESS WHEREOF, this Fifth Amendment to Amended and Restated CreditAgreement is executed as of the date first set forth above. GCI HOLDINGS, INC. /s/ By: John M. Lowber Its: Secretary/Treasurer -10- BANK OF AMERICA, N.A., (formerly NationsBank, N.A.), Individually as a Lender and as Administrative Agent /s/ By: Derrick Bell Its: Vice President -11- CREDIT LYONNAIS NEW YORK BRANCH, as Documentation Agent and Individually as a Lender /s/ By: Jeremy Horn Its: Vice President -12- TD SECURITIES (USA), INC., as Syndication Agent /s/ By: William J. Burke Its: Vice President -13- TORONTO DOMINION (TEXAS), INC., Individually as a Lender /s/ By: Azar S. Azarpour Its: Vice President -14- COBANK, ACB, Individually as a Lender /s/ By: Teresa L. Fountain Its: Assistant Corporate Secretary By: Its: -15- GENERAL ELECTRIC CAPITAL CORPORATION, Individually as a Lender /s/ By: Brian P. Ward Its: Manager-Operations -16- UNION BANK OF CALIFORNIA, N.A., Individually as a Lender /s/ By: Keith M. Wilson Its: Vice President -17- BANK OF HAWAII, Individually as a Lender /s/ By: Luke Yeh Its: Vice President -18- THE BANK OF NEW YORK, Individually as a Lender /s/ By: Gerry Granovsky Its: Vice President -19- BNP PARIBAS (successor by merger to PARIBAS and BANQUE NATIONALE DE PARIS), Individually as a Lender /s/ By: Serge Desrayaud Its: Media and Telecom Asset Management Company Head /s/ By: Gregg W. Bonardi Its: Vice President -20- CITY NATIONAL BANK, Individually as a Lender /s/ By: Patrick M. Drum Its: Vice President -21- FLEET NATIONAL BANK, Individually as a Lender /s/ By: Denis D. Hamboyan Its: Director -22- THE FUJI BANK, LIMITED, LOS ANGELES AGENCY, Individually as a Lender /s/ By: Shinzo Neshitate Its: Senior Vice President and Manager -23- THE SUMITOMO BANK, LIMITED, Individually as a Lender /s/ By: Suresh S. Tata Its: Senior Vice President -24- NATIONAL BANK OF ALASKA, Individually as a Lender /s/ By: Brent Ulmer Its: Vice President -25- ALLFIRST BANK, Individually as a Lender /s/ By: Michael C. Toomey Its: Vice President -26- SIXTH AMENDMENT TO $50,000,000 AMENDED AND RESTATED CREDIT AGREEMENT SIXTH AMENDMENT TO $50,000,000 AMENDED AND RESTATED CREDIT AGREEMENT(this "Amendment") is dated as of the 23rd day of March, 2001 and entered intoamong GCI HOLDINGS, INC., an Alaskan corporation (herein, together with itssuccessors and assigns, called the "Borrower"), the Lenders (as defined in theCredit Agreement as defined below), BANK OF AMERICA, N.A. (formerly NationsBank,N.A.), as Administrative Agent for itself and the Lenders (the "AdministrativeAgent"), CREDIT LYONNAIS NEW YORK BRANCH, as Documentation Agent and TDSECURITIES (USA), INC. as Syndication Agent. WITNESSETH: WHEREAS, the Borrower, the Lenders and the Administrative Agent enteredinto a $50,000,000 Amended and Restated Credit Agreement, dated November 14,1997, as amended by that certain Consent and First Amendment, dated January 27,1998, by that certain Second Amendment to Amended and Restated Credit Agreementdated as of July 3, 1998, by that certain Third Amendment to Amended andRestated Credit Agreement dated as of April 13, 1999, and by that certain FifthAmendment to Amended and Restated Credit Agreement dated as of October 25, 2000(as amended and as further amended, restated or otherwise modified from time totime, the "Credit Agreement") and a $200,000,000 Amended and Restated CreditAgreement, dated as of November 14, 1997 (as amended by that certain Consent andFirst Amendment, dated January 27, 1998, by that certain Second Amendment toAmended and Restated Credit Agreement dated as of July 3, 1998 , by that certainThird Amendment to Amended and Restated Credit Agreement dated as of April 13,1999, by that certain Fourth Amendment to Amended and Restated Credit Agreementdated as of January 18, 2000, and by that certain Fifth Amendment to Amended andRestated Credit Agreement dated as of October 25, 2000, and as further amended,restated or otherwise modified from time to time, the "$200MM Credit Facility"); WHEREAS, the Borrower has requested that, among other things, certainfinancial covenants of the Credit Agreement be amended; WHEREAS, the Lenders, the Administrative Agent and the Borrower haveagreed to modify the Credit Agreement upon the terms and conditions set forthbelow; NOW, THEREFORE, for valuable consideration hereby acknowledged, theBorrower, the Lenders and the Administrative Agent agree as follows: SECTION 1. Definitions, Generally. Unless specifically defined orredefined below, capitalized terms used herein shall have the meanings ascribedthereto in the Credit Agreement. SECTION 2. Amendment to Section 7.01(e). Section 7.01(e) in Article VIIof the Credit Agreement shall be amended and restated in its entirety asfollows: (e) Fixed Charges Coverage Ratio. Commencing January 1, 2002, and at all times thereafter during the term hereof, the Fixed Charges Coverage Ratio shall not be less during the following time periods than the ratio set forth opposite such time periods: Time Period Minimum Ratio ----------- ------------- From January 1, 2002 through March 31, 2003 1.00 to 1.00 April 1, 2003 and thereafter 1.05 to 1.00 SECTION 3. Amendment to Section 7.01(f). Section 7.01(f) in Article VIIof the Credit Agreement shall be amended and restated in its entirety asfollows: (f) Capital Expenditures. Capital Expenditures (not including any Galaxy X Transponder (as defined in the definition of Operating Cash Flow) purchases) paid or incurred by the Borrower and the Restricted Subsidiaries shall not exceed, in the aggregate, the following amounts during the following years, provided that, any unused portion for any such year may be used during the following fiscal year only (but not thereafter): Fiscal Year Maximum Amount ----------- -------------- 1998 $90,000,000 1999 $35,000,000 2000 $35,000,000 2001 $60,000,000, provided that, if the Kanas Closing occurs during the year 2001, this limitation shall be increased by $10,000,000 to a maximum amount of $70,000,000 January 1, 2002 and thereafter Not Applicable In addition, Capital Expenditures for the purpose of purchasing satellite transponders may be made, provided no Default or Event of Default exists or would result therefrom in the aggregate amount throughout the term of this Agreement of $45,000,000 (excluding the Galaxy X Transponder down payment of $9,100,000). -2- SECTION 4. Conditions Precedent. This Sixth Amendment shall not beeffective until the Administrative Agent shall have determined in its solediscretion that all proceedings of the Borrower taken in connection with thisSixth Amendment and the transactions contemplated hereby shall be satisfactoryin form and substance to the Administrative Agent and the Borrower has satisfiedthe following conditions: (a) the Borrower shall have delivered to the Administrative Agent a loan certificate of the Borrower certifying (i) as to the accuracy of its representations and warranties set forth in Article V of the Credit Agreement, as amended by this Sixth Amendment and the other Loan Papers, (ii) that there exists no Default or Event of Default, and the execution, delivery and performance of this Sixth Amendment will not cause a Default or Event of Default, except those Defaults and Events of Default specifically waived hereby, (iii) as to resolutions authorizing the Borrower to execute, deliver and perform this Sixth Amendment and all Loan Papers and to execute and perform all transactions contemplated by this Sixth Amendment, and all other documents and instruments delivered or executed in connection with this Sixth Amendment, (iv) that it has complied with all agreements and conditions to be complied with by it under the Credit Agreement, the other Loan Papers and this Sixth Amendment by the date hereof and (v) that it has received all consents, amendments and waivers from all Persons necessary or required, if any, to (A) enter into this Amendment or (B) effectuate the amendments set forth above, including, without limitation, under the Indenture and related documentation and under the AUSP Credit Agreement and related documentation; (b) the Borrower shall have delivered to the Administrative Agent and Lenders legal opinions from counsel to the Borrower and its Restricted Subsidiaries regarding this Sixth Amendment and such other matters as reasonably requested by Special Counsel, including, without limitation, opinions regarding the waivers, consents and amendments in connection with the Indenture and AUSP Credit Agreement, and the related agreements; (c) the Borrower and the Lenders shall have entered into a sixth amendment to the $200MM Credit Facility on terms substantially identical to the terms of this Sixth Amendment; and (d) the Borrower shall have delivered such other documents, instruments, and certificates, in form and substance satisfactory to the Administrative Agent, as the Administrative Agent shall deem necessary or appropriate in connection with this Sixth Amendment and the transactions contemplated hereby. SECTION 5. Representations and Warranties. The Borrower represents andwarrants to the Lenders and the Administrative Agent that (a) this SixthAmendment constitutes its legal, valid, and binding obligation, enforceable inaccordance with the terms hereof (subject as to enforcement of -3-remedies to any applicable bankruptcy, reorganization, moratorium, or other lawsor principles of equity affecting the enforcement of creditors' rightsgenerally), (b) there exists no Default or Event of Default under the CreditAgreement, (c) its representations and warranties set forth in the CreditAgreement and other Loan Papers are true and correct on the date hereof, (d) ithas complied with all agreements and conditions to be complied with by it underthe Credit Agreement and the other Loan Papers by the date hereof, and (e) theCredit Agreement, as amended hereby, and the other Loan Papers remain in fullforce and effect. SECTION 6. Entire Agreement; Ratification. THE CREDIT AGREEMENT AND THELOAN PAPERS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BECONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTOF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.EXCEPT AS MODIFIED OR SUPPLEMENTED HEREBY, THE CREDIT AGREEMENT, THE OTHER LOANPAPERS AND ALL OTHER DOCUMENTS AND AGREEMENTS EXECUTED IN CONNECTION THEREWITHSHALL CONTINUE IN FULL FORCE AND EFFECT. SECTION 7. Counterparts. This Sixth Amendment may be executed in anynumber of counterparts, all of which taken together shall constitute one and thesame instrument. In making proof hereof, it shall not be necessary to produce oraccount for any counterpart other than one signed by the party against whichenforcement is sought. SECTION 8. GOVERNING LAW. THIS SIXTH AMENDMENT SHALL BE CONSTRUED INACCORDANCE WITH THE INTERNAL LAWS (AND NOT THE LAW OF CONFLICTS) OF THE STATE OFTEXAS, BUT GIVING EFFECT TO FEDERAL LAWS. SECTION 9. CONSENT TO JURISDICTION. THE BORROWER HEREBY IRREVOCABLYSUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR TEXASSTATE COURT SITTING IN DALLAS IN ANY ACTION OR PROCEEDING ARISING OUT OF ORRELATING TO ANY LOAN PAPERS AND THE BORROWER IRREVOCABLY AGREES THAT ALL CLAIMSIN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCHCOURT AND IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TOTHE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THATSUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE RIGHT OF THEADMINISTRATIVE AGENT OR ANY LENDER TO BRING PROCEEDINGS AGAINST THE BORROWER INTHE COURTS OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY THE BORROWERAGAINST THE ADMINISTRATIVE AGENT OR ANY LENDER OR ANY AFFILIATE OF THEADMINISTRATIVE AGENT OR ANY LENDER INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTERIN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN PAPER SHALL BEBROUGHT ONLY IN A COURT IN DALLAS, TEXAS. -4- SECTION 10. WAIVER OF JURY TRIAL. THE BORROWER, THE ADMINISTRATIVEAGENT AND EACH LENDER HEREBY WAIVES TRIAL BY JURY IN ANY JUDICIAL PROCEEDINGINVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT,CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITHANY LOAN PAPER OR THE RELATIONSHIP ESTABLISHED THEREUNDER.================================================================================ THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.================================================================================ -5- IN WITNESS WHEREOF, this Sixth Amendment to Amended and Restated CreditAgreement is executed as of the date first set forth above. GCI HOLDINGS, INC. /s/ By: John M. Lowber Its: Secretary/Treasurer -6- BANK OF AMERICA, N.A., (formerly NationsBank, N.A.), Individually as a Lender and as Administrative Agent /s/ By: Derrick Bell Its: Principal -7- CREDIT LYONNAIS NEW YORK BRANCH, as Documentation Agent and Individually as a Lender /s/ By: Jeremy Horn Its: Vice President -8- TD SECURITIES (USA), INC., as Syndication Agent /s/ By: William J. Burke Its: Vice President -9- TORONTO DOMINION (TEXAS), INC., Individually as a Lender By: Its: -10- COBANK, ACB, Individually as a Lender /s/ By: John McFarlane Its: Vice President By: Its: -11- GENERAL ELECTRIC CAPITAL CORPORATION, Individually as a Lender /s/ By: Brian P. Ward Its: Manager-Operations -12- UNION BANK OF CALIFORNIA, N.A., Individually as a Lender /s/ By: Craig R. Cuppru Its: Associate Vice President -13- BANK OF HAWAII, Individually as a Lender By: Its: -14- THE BANK OF NEW YORK, Individually as a Lender By: Its: -15- BNP PARIBAS (successor by merger to PARIBAS and BANQUE NATIONALE DE PARIS), Individually as a Lender By: Its: By: Its: -16- CITY NATIONAL BANK, Individually as a Lender /s/ By: Patrick M. Drum Its: Vice President -17- FLEET NATIONAL BANK, Individually as a Lender /s/ By: Denis D. Hamboyan Its: Director -18- THE FUJI BANK, LIMITED, LOS ANGELES AGENCY, Individually as a Lender By: Its: -19- THE SUMITOMO BANK, LIMITED, Individually as a Lender By: Its: -20- NATIONAL BANK OF ALASKA, Individually as a Lender /s/ By: Brent Ulmer Its: Vice President -21- ALLFIRST BANK, Individually as a Lender /s/ By: Michael C. Toomey Its: Vice President -22- SIXTH AMENDMENT TO $200,000,000 AMENDED AND RESTATED CREDIT AGREEMENT SIXTH AMENDMENT TO $200,000,000 AMENDED AND RESTATED CREDIT AGREEMENT(this "Amendment") is dated as of the 23rd day of March, 2001 and entered intoamong GCI HOLDINGS, INC., an Alaskan corporation (herein, together with itssuccessors and assigns, called the "Borrower"), the Lenders (as defined in theCredit Agreement as defined below), BANK OF AMERICA, N.A. (formerly NationsBank,N.A.), as Administrative Agent for itself and the Lenders (the "AdministrativeAgent"), CREDIT LYONNAIS NEW YORK BRANCH, as Documentation Agent and TDSECURITIES (USA), INC. as Syndication Agent. WITNESSETH: WHEREAS, the Borrower, the Lenders and the Administrative Agent enteredinto a $200,000,000 Amended and Restated Credit Agreement, dated November 14,1997, as amended by that certain Consent and First Amendment, dated January 27,1998, by that certain Second Amendment to Amended and Restated Credit Agreementdated as of July 3, 1998, by that certain Third Amendment to Amended andRestated Credit Agreement dated as of April 13, 1999, and by that certain FifthAmendment to Amended and Restated Credit Agreement dated as of October 25, 2000(as amended and as further amended, restated or otherwise modified from time totime, the "Credit Agreement") and a $50,000,000 Amended and Restated CreditAgreement, dated as of November 14, 1997 (as amended by that certain Consent andFirst Amendment, dated January 27, 1998, by that certain Second Amendment toAmended and Restated Credit Agreement dated as of July 3, 1998 , by that certainThird Amendment to Amended and Restated Credit Agreement dated as of April 13,1999, by that certain Fourth Amendment to Amended and Restated Credit Agreementdated as of January 18, 2000, and by that certain Fifth Amendment to Amended andRestated Credit Agreement dated as of October 25, 2000, and as further amended,restated or otherwise modified from time to time, the "$50MM Credit Facility"); WHEREAS, the Borrower has requested that, among other things, certainfinancial covenants of the Credit Agreement be amended; WHEREAS, the Lenders, the Administrative Agent and the Borrower haveagreed to modify the Credit Agreement upon the terms and conditions set forthbelow; NOW, THEREFORE, for valuable consideration hereby acknowledged, theBorrower, the Lenders and the Administrative Agent agree as follows: SECTION 1. Definitions, Generally. Unless specifically defined orredefined below, capitalized terms used herein shall have the meanings ascribedthereto in the Credit Agreement. SECTION 2. Amendment to Section 7.01(e). Section 7.01(e) in Article VIIof the Credit Agreement shall be amended and restated in its entirety asfollows: (e) Fixed Charges Coverage Ratio. Commencing January 1, 2002, and at all times thereafter during the term hereof, the Fixed Charges Coverage Ratio shall not be less during the following time periods than the ratio set forth opposite such time periods: Time Period Minimum Ratio ----------- ------------- From January 1, 2002 through March 31, 2003 1.00 to 1.00 April 1, 2003 and thereafter 1.05 to 1.00 SECTION 3. Amendment to Section 7.01(f). Section 7.01(f) in Article VIIof the Credit Agreement shall be amended and restated in its entirety asfollows: (f) Capital Expenditures. Capital Expenditures (not including any Galaxy X Transponder (as defined in the definition of Operating Cash Flow) purchases) paid or incurred by the Borrower and the Restricted Subsidiaries shall not exceed, in the aggregate, the following amounts during the following years, provided that, any unused portion for any such year may be used during the following fiscal year only (but not thereafter): Fiscal Year Maximum Amount ----------- -------------- 1998 $90,000,000 1999 $35,000,000 2000 $35,000,000 2001 $60,000,000, provided that, if the Kanas Closing occurs during the year 2001, this limitation shall be increased by $10,000,000 to a maximum amount of $70,000,000 January 1, 2002 and thereafter Not Applicable In addition, Capital Expenditures for the purpose of purchasing satellite transponders may be made, provided no Default or Event of Default exists or would result therefrom in the aggregate amount throughout the term of this Agreement of $45,000,000 (excluding the Galaxy X Transponder down payment of $9,100,000). -2- SECTION 4. Conditions Precedent. This Sixth Amendment shall not beeffective until the Administrative Agent shall have determined in its solediscretion that all proceedings of the Borrower taken in connection with thisSixth Amendment and the transactions contemplated hereby shall be satisfactoryin form and substance to the Administrative Agent and the Borrower has satisfiedthe following conditions: (a) the Borrower shall have delivered to the Administrative Agent a loan certificate of the Borrower certifying (i) as to the accuracy of its representations and warranties set forth in Article V of the Credit Agreement, as amended by this Sixth Amendment and the other Loan Papers, (ii) that there exists no Default or Event of Default, and the execution, delivery and performance of this Sixth Amendment will not cause a Default or Event of Default, except those Defaults and Events of Default specifically waived hereby, (iii) as to resolutions authorizing the Borrower to execute, deliver and perform this Sixth Amendment and all Loan Papers and to execute and perform all transactions contemplated by this Sixth Amendment, and all other documents and instruments delivered or executed in connection with this Sixth Amendment, (iv) that it has complied with all agreements and conditions to be complied with by it under the Credit Agreement, the other Loan Papers and this Sixth Amendment by the date hereof and (v) that it has received all consents, amendments and waivers from all Persons necessary or required, if any, to (A) enter into this Amendment or (B) effectuate the amendments set forth above, including, without limitation, under the Indenture and related documentation and under the AUSP Credit Agreement and related documentation; (b) the Borrower shall have delivered to the Administrative Agent and Lenders legal opinions from counsel to the Borrower and its Restricted Subsidiaries regarding this Sixth Amendment and such other matters as reasonably requested by Special Counsel, including, without limitation, opinions regarding the waivers, consents and amendments in connection with the Indenture and AUSP Credit Agreement, and the related agreements; (c) the Borrower and the Lenders shall have entered into a sixth amendment to the $50MM Credit Facility on terms substantially identical to the terms of this Sixth Amendment; and (d) the Borrower shall have delivered such other documents, instruments, and certificates, in form and substance satisfactory to the Administrative Agent, as the Administrative Agent shall deem necessary or appropriate in connection with this Sixth Amendment and the transactions contemplated hereby. SECTION 5. Representations and Warranties. The Borrower represents andwarrants to the Lenders and the Administrative Agent that (a) this SixthAmendment constitutes its legal, valid, and binding obligation, enforceable inaccordance with the terms hereof (subject as to enforcement of -3- remedies to any applicable bankruptcy, reorganization, moratorium, or other lawsor principles of equity affecting the enforcement of creditors' rightsgenerally), (b) there exists no Default or Event of Default under the CreditAgreement, (c) its representations and warranties set forth in the CreditAgreement and other Loan Papers are true and correct on the date hereof, (d) ithas complied with all agreements and conditions to be complied with by it underthe Credit Agreement and the other Loan Papers by the date hereof, and (e) theCredit Agreement, as amended hereby, and the other Loan Papers remain in fullforce and effect. SECTION 6. Entire Agreement; Ratification. THE CREDIT AGREEMENT AND THELOAN PAPERS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BECONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTOF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.EXCEPT AS MODIFIED OR SUPPLEMENTED HEREBY, THE CREDIT AGREEMENT, THE OTHER LOANPAPERS AND ALL OTHER DOCUMENTS AND AGREEMENTS EXECUTED IN CONNECTION THEREWITHSHALL CONTINUE IN FULL FORCE AND EFFECT. SECTION 7. Counterparts. This Sixth Amendment may be executed in anynumber of counterparts, all of which taken together shall constitute one and thesame instrument. In making proof hereof, it shall not be necessary to produce oraccount for any counterpart other than one signed by the party against whichenforcement is sought. SECTION 8. GOVERNING LAW. THIS SIXTH AMENDMENT SHALL BE CONSTRUED INACCORDANCE WITH THE INTERNAL LAWS (AND NOT THE LAW OF CONFLICTS) OF THE STATE OFTEXAS, BUT GIVING EFFECT TO FEDERAL LAWS. SECTION 9. CONSENT TO JURISDICTION. THE BORROWER HEREBY IRREVOCABLYSUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR TEXASSTATE COURT SITTING IN DALLAS IN ANY ACTION OR PROCEEDING ARISING OUT OF ORRELATING TO ANY LOAN PAPERS AND THE BORROWER IRREVOCABLY AGREES THAT ALL CLAIMSIN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCHCOURT AND IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TOTHE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THATSUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE RIGHT OF THEADMINISTRATIVE AGENT OR ANY LENDER TO BRING PROCEEDINGS AGAINST THE BORROWER INTHE COURTS OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY THE BORROWERAGAINST THE ADMINISTRATIVE AGENT OR ANY LENDER OR ANY AFFILIATE OF THEADMINISTRATIVE AGENT OR ANY LENDER INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTERIN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN PAPER SHALL BEBROUGHT ONLY IN A COURT IN DALLAS, TEXAS. -4- SECTION 10. WAIVER OF JURY TRIAL. THE BORROWER, THE ADMINISTRATIVEAGENT AND EACH LENDER HEREBY WAIVES TRIAL BY JURY IN ANY JUDICIAL PROCEEDINGINVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT,CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITHANY LOAN PAPER OR THE RELATIONSHIP ESTABLISHED THEREUNDER.================================================================================ THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.================================================================================ -5- IN WITNESS WHEREOF, this Sixth Amendment to Amended and Restated CreditAgreement is executed as of the date first set forth above. GCI HOLDINGS, INC. /s/ By: John M. Lowber Its: Secretary/Treasurer -6- BANK OF AMERICA, N.A., (formerly NationsBank, N.A.), Individually as a Lender and as Administrative Agent /s/ By: Derrick Bell Its: Principal -7- CREDIT LYONNAIS NEW YORK BRANCH, as Documentation Agent and Individually as a Lender /s/ By: Jeremy Horn Its: Vice President -8- TD SECURITIES (USA), INC., as Syndication Agent /s/ By: William J. Burke Its: Vice President -9- TORONTO DOMINION (TEXAS), INC., Individually as a Lender By: Its: -10- COBANK, ACB, Individually as a Lender /s/ By: John McFarlane Its: Vice President By: Its: -11- GENERAL ELECTRIC CAPITAL CORPORATION, Individually as a Lender /s/ By: Brian P. Ward Its: Manager-Operations -12- UNION BANK OF CALIFORNIA, N.A., Individually as a Lender /s/ By: Craig R. Cuppru Its: Associate Vice President -13- BANK OF HAWAII, Individually as a Lender By: Its: -14- THE BANK OF NEW YORK, Individually as a Lender By: Its: -15- BNP PARIBAS (successor by merger to PARIBAS and BANQUE NATIONALE DE PARIS), Individually as a Lender By: Its: By: Its: -16- CITY NATIONAL BANK, Individually as a Lender /s/ By: Patrick M. Drum Its: Vice President -17- FLEET NATIONAL BANK, Individually as a Lender /s/ By: Denis D. Hamboyan Its: Director -18- THE FUJI BANK, LIMITED, LOS ANGELES AGENCY, Individually as a Lender By: Its: -19- THE SUMITOMO BANK, LIMITED, Individually as a Lender By: Its: -20- NATIONAL BANK OF ALASKA, Individually as a Lender /s/ By: Brent Ulmer Its: Vice President -21- ALLFIRST BANK, Individually as a Lender /s/ By: Michael C. Toomey Its: Vice President -22- Exhibit 21.1 SUBSIDIARIES OF THE REGISTRANT Jurisdiction of Name Under Which Subsidiary Does Entity Organization Business------------------------------------------------ ------------------- --------------------------------------- Alaska United Fiber System Partnership Alaska Alaska United Fiber System Partnership, Alaska United Fiber System, Alaska UnitedGeneral Communication, Inc. (the Registrant) Alaska General Communication, Inc., GCIFiber Hold Co., Inc. Alaska Fiber Hold Co., Inc., Fiber Hold CompanyGCI Communication Corp. Alaska GCI, GCC, GCICC, GCI Communication Corp.GCI, Inc. Alaska GCI, GCI, Inc.GCI Cable, Inc. Alaska GCI Cable, GCI Cable, Inc.GCI Fiber Co., Inc. Alaska GCI Fiber Co., Inc., GCI Fiber CompanyGCI Holdings, Inc. Alaska GCI Holdings, Inc.GCI Satellite Co., Inc. Alaska GCI Satellite Co., Inc., GCI Satellite CompanyGCI Transport Co., Inc. Alaska GCI Transport Co., Inc., GCI Transport Company Exhibit 23.1The 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 7, 2001, relating to the consolidated balance sheets ofGeneral Communication, Inc. and Subsidiaries as of December 31, 2000 and 1999,and the related consolidated statements of operations, stockholders' equity andcash flows for each of the years in the three-year period ended December 31,2000, and the related schedule, which report appears in the December 31, 2000,annual report on Form 10-K of General Communication, Inc. /s/ KPMG LLPAnchorage, AlaskaMarch 30, 2001