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, 2001 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. [ ]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, 2002 was approximately$303,728,758. The number of shares outstanding of the registrant's common stock as of March 13, 2002, was: Class A common stock - 51,120,611 shares; and Class B common stock - 3,882,843 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 be held on June 6, 2002 are incorporated by reference into Part III of this report. 1 GENERAL COMMUNICATION, INC. 2001 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS Page ---- Glossary......................................................................................................3Cautionary Statement Regarding Forward-Looking Statements....................................................10Part I.......................................................................................................12 Item 1. Business......................................................................................12 Item 2. Properties....................................................................................59 Item 3. Legal Proceedings.............................................................................62 Item 4. Submissions of Matters to a Vote of Security Holders..........................................62 Part II......................................................................................................63 Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.....................63 Item 6. Selected Financial Data.......................................................................64 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....................................................................65 Item 7A. Quantitative and Qualitative Disclosures About Market Risk....................................82 Item 8. Consolidated Financial Statements and Supplementary Data......................................83 Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.....................................................................83Part III.....................................................................................................83Part IV.....................................................................................................124 Item 14. Exhibits, Consolidated Financial Statement Schedules, and Reports on Form 8-K................124 SIGNATURES..................................................................................................133This Annual Report on Form 10-K is for the year ending December 31, 2001. 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 providedlocal 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.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 ofour 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.Broadband -- A high-capacity communications circuit/path, usually implying aspeed greater than 256 kbps.CAP -- Competitive Access Provider -- A company that provides its customers withan alternative to the LEC for local transport of private line and special accesstelecommunications services.Central Offices -- The switching centers or central switching facilities of theLECs.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 or CLEC to connect its network to the LEC'scentral offices. Physical collocation occurs when a connecting carrier placesits network connection equipment inside the LEC's central offices. Virtualcollocation is an alternative to physical collocation pursuant to which the LECpermits a CAP or CLEC to connect its network to the LEC's central offices on comparable terms, even though the CAP's or CLEC's network connection equipmentis not physically located inside the central offices. 3The 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 satelliteparabolic dish less than one meter in diameter. There are currently fourcompanies licensed by the Commission to provide DBS service: DirecTV, EchoStar(marketed as the DISH Network), Dominion Video Satellite, Inc. (marketed as SkyAngel) and R/L DBS Company. Of these, DirecTV, EchoStar and Dominion currentlyprovide service.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.Digital -- A method of storing, processing and transmitting information throughthe use of distinct electronic or optical pulses that represent the binarydigits 0 and 1. Digital transmission and switching technologies employ asequence of these pulses to represent information as opposed to the continuouslyvariable analog signal. The precise digital numbers minimize distortion (such asgraininess or snow in the case of video transmission, or static or otherbackground distortion in the case of audio transmission).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.DOCSIS 1.1 -- Data-Over-Cable Service Interface Specification 1.1 -- An industry specification that provides for high-speed Internet service tiers, usingtechniques known as data fragmentation and quality of service. Under thisspecification, which is compatible with the existing DOCSIS 1.0 specification,cable operators can deliver high-speed Internet services simultaneously over thesame plant and in a path parallel to core video services. 4DSL - 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.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 ownedsubsidiary 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 andparty to The Company's Senior Holdings Loan.HSD -- Home Satellite Dish - see DBS.ILEC -- Incumbent Local Exchange Carrier -- with respect to an area, the LECthat -- (A) on the date of enactment of the Telecommunications Act of 1996,provided telephone exchange service in such area; and (B)(i) on such date ofenactment, was deemed to be a member of the exchange carrier associationpursuant to section 69.601(b) of the FCC's regulations (47 C.F.R. 69.601(b)); or(ii) is a person or entity that, on or after such date of enactment, became asuccessor or assign of a member described in clause (i).Interexchange -- Communication between two different LATAs or, in Alaska,between two different local exchange serving areas.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.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. 5Kanas -- Kanas Telecom, Inc. -- a 85% owned subsidiary of GCI Holdings, Inc., anAlaska corporation that was renamed in 2001 to GCI Fiber Communication Co.,Inc., or GFCC. GFCC owns and operates a fiber optic cable system constructedalong the trans-Alaska oil pipeline corridor extending from Prudhoe Bay toValdez, Alaska.LAN -- Local Area Network -- The interconnection of computers for sharing files,programs and various devices such as printers and high-speed modems. LANs mayinclude dedicated computers or file servers that provide a centralized source ofshared files and programs.LATA -- Local Access and Transport Area -- The approximately 200 geographicareas defined pursuant to the AT&T Divestiture Decree. The BOCs are generallyprohibited from providing long-distance service between the LATA in which theyprovide local exchange services, and any other LATA.LEC -- Local Exchange Carrier -- A company providing local telephone services.Each BOC is a LEC.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." The extremely high frequency used and the needfor point to multipoint transmissions limits the distance that a receiver can befrom a transmitter. This means that LMDS will be a "cellular" technology, basedon multiple, contiguous, or overlapping cells. LMDS is expected to providecustomers with multichannel video programming, telephony, video communications,and two-way data services. Incumbent LECs and cable companies may not obtain thein-region 1150 MHz license for three years. Within 10 years, licensees will berequired to provide 'substantial service' in their service regions.Local Exchange -- A geographic area generally determined by a PUC, in whichcalls generally are transmitted without toll charges to the calling or calledparty.Local Number Portability -- The ability of an end user to change Local ExchangeCarriers while retaining the same telephone number.Lower 48 States or Lower 48 -- refers to the 48 contiguous states south of orbelow Alaska.Lower 49 States or Lower 49 -- refers to Hawaii and the Lower 48 States.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. These eight channels make up the MMDS. Frequently, MDS and MMDS channels are used incombination with ITFS channels to provide video entertainment programming tosubscribers. 6MVPD -- Multi-channel Video Programming Distribution -- The distribution ofvideo programming over multiple platforms, such as cable and satellite.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, anywhere and anytime while on the move. The CellularTelecommunications Industry Association (CTIA) defines PCS as a "wide range ofwireless mobile technologies, chiefly cellular, paging, cordless, voice,personal communications networks, mobile data, wireless PBX, specialized mobileradio, and satellite-based systems." The FCC defines PCS as a "family of mobileor portable radio communications services that encompasses mobile and ancillaryfixed communications services to individuals and businesses and can beintegrated with a variety of competing networks."PBX -- Private Branch Exchange -- A customer premise communication switch usedto connect customer telephones (and related equipment) to LEC central officelines (trunks), and to switch internal calls within the customer's telephonesystem. Modern PBXs offer numerous software-controlled features such as callforwarding and call pickup. A PBX uses technology similar to that used by acentral office switch (on a smaller scale). (The acronym PBX originally stoodfor "Plug Board Exchange.")POP -- Point of Presence -- The physical access location interface between a LECand 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).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. 7SDN -- 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.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 Asynchronous Transfer Mode.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.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.UNE -- Unbundled Network Element -- A discrete piece part of a telephonenetwork. Unbundled network elements are the basic network functions, i.e., thepiece parts needed to provide a full range of telecommunications services. Theyare physical facilities as well as all the features, and capabilities providedby those facilities.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 backbone 8 that interconnects all of an organization's local networks with communicationstrunks that are designed to be appropriate for anticipated communication ratesand volumes between nodes.World Wide Web or Web -- A collection of computer systems supporting acommunications protocol that permits multi-media presentation of informationover the Internet.WorldCom -- WorldCom, Inc. -- owns approximately 18% of our common stock,presently has two representatives on our Board, and is one of our majorcustomers. 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. 9 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 ourfuture strategies, plans, objectives or goals and our beliefs of future eventsand of our future operating results, financial position and cash flows. In somecases, you can identify those so-called "forward-looking statements" by wordssuch as "may," "will," "should," "expects," "plans," "anticipates," "believes,""estimates," "predicts," "potential," "project," or "continue" or the negativeof those words and other comparable words. All forward-looking statementsinvolve known and unknown risks, uncertainties and other important factors thatmay cause our actual results, performance, achievements, plans and objectives todiffer materially from any future results, performance, achievements, plans andobjectives expressed or implied by these forward-looking statements. Inevaluating those statements, you should specifically consider various factors,including those outlined below. Those factors may cause our actual results todiffer materially from any of our forward-looking statements. For thesestatements, we claim the protection of the safe harbor for forward-looking statements provided by the Securities Reform Act. Such risks, uncertainties andother factors include but are not limited to those identified below and thosefurther described in Part I, Item 1. Factors That May Affect Our Business andFuture Results. - 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 telecommunication industries 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; - Competitor responses to our products and services and overall market acceptance of such products and services; - The outcome of our negotiations with incumbent local exchange carriers and state regulatory arbitrations and approvals with respect to interconnection agreements; - Our ability to purchase network elements or wholesale services from incumbent local exchange carriers at a price sufficient to permit the profitable offering of local telephone 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 telephone services expansion, Internet (consumer and business) services expansion and wireless services; - Start-up costs associated with entering new markets, including advertising and promotional efforts; - Risks relating to the operations of new systems and technologies and applications to support new initiatives; - Local conditions and obstacles; - The impact of oversupply of capacity resulting from excessive deployment of network capacity; - Uncertainties inherent in new business strategies, new product launches and development plans, including local telephone services, Internet services, wireless services, digital video services, cable modem services, DSL services, and transmission services and the offering of these services in geographic areas with which we are unfamiliar; - The risks associated with technological requirements, technology substitution and changes and other 10 technological developments; - Development and financing of telecommunication, local telephone, wireless, Internet and cable networks and services; - Future financial performance, including the availability, terms and deployment of capital; the impact of regulatory and competitive developments on capital outlays, and the ability to achieve cost savings and realize productivity improvements and the consequences of increased leverage; - Availability of qualified personnel; - 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; - Uncertainties in federal military spending levels and military base closures in markets in which we operate; - The ongoing global and domestic trend towards consolidation in the telecommunications industry, which trend may be the effect of making the competitors larger and better financed and afford these competitors with extensive resources and greater geographic reach, allowing them to compete more effectively; - Economic and other uncertainties arising from the terrorist attacks in America on September 11, 2001; and - Other risks detailed from time to time in our periodic reports filed with the Securities and Exchange Commission.You should not place undue reliance on any such forward-looking statements.Further, any forward-looking statement, and such risks, uncertainties and otherfactors speak, only as of the date on which it was originally made and weexpressly disclaim any obligation or undertaking to disseminate any updates orrevisions to any forward-looking statement to reflect any change in ourexpectations 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. New factors emerge from time to time, and it is not possiblefor us to predict what factors will arise or when. In addition, we cannot assessthe impact of each factor on our business or the extent to which any factor, orcombination of factors, may cause actual results to differ materially from thosecontained in any forward-looking statements. 11 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/, http://www.alaskaunited.com/,and http://www.gcisa.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 SegmentsWe 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 YearAcquisitionsWe finalized the acquisition of a cable system operator's assets in theFairbanks area in the first quarter of 2001, adding approximately 1,000subscribers to our network and an additional 2,000 homes passed.We acquired customers from a local ISP in the second quarter of 2001 that addedover 3,300 subscribers and about 150 domain names to our GCI.net domain.Effective June 30, 2001, we acquired from WorldCom an 85% controlling interest in the corporation owning the 800-mile fiber optic cable system that extendsfrom Prudhoe Bay, Alaska to Valdez, Alaska via Fairbanks. We issued to WorldComshares of a new series of Class C preferred stock valued at $10 million. SeeNote 1(e) included in Part II, Item 8, Consolidated Financial Statements andSupplementary Data. We are enhancing the system and have incorporated itsoperation into our operations control systems. We expect these enhancements toimprove our voice, Internet and data services in interior Alaska, as well asthird party vendors' services that utilize capacity on the fiber optic system.We entered into a fifteen year contract in July 2001 to provide communicationservices to a customer, including long distance service, voice and dedicateddata circuits, cable television and private broadcast services, Internet andtransparent local area network services. We entered into a second agreement inDecember 2001 to demonstrate our capabilities to support the customer's controlsystems communications. Such services support operations of the Trans-AlaskaPipeline System.Effective November 19, 2001 we acquired from Rogers Cable, Inc., for $19 millionin cash, 100% of the common stock of Rogers American Cablesystems, Inc., a cableTV provider in the Wasilla and Palmer, Alaska areas. The acquisition addedapproximately 7,000 subscribers to our network and an additional 10,000 homespassed. We 12plan to invest $4 to $5 million over the next two years to migratetechnical and billing functions onto our platform, upgrade the plant andimplement digital programming.Fiber Capacity SaleWe completed a $19.5 million sale of long-haul capacity in the Alaska Unitedundersea fiber optic cable system in a cash transaction in the first quarter of2001. The sale included both capacity within Alaska, and between Alaska and theLower 48 states. We used the proceeds from the fiber capacity sale to repay$11.7 million of the Fiber Facility debt and to fund capital expenditures andworking capital.Properties ExpansionWe began efforts in 2001 to connect Palmer and Wasilla, Alaska to our fiberoptic network in Anchorage. We completed the first phase of the project inFebruary 2002, connecting our network in Anchorage to our Wasilla Call Centerwith fiber optic cable facilities. The second phase will connect and expand ourfacilities to provide cable and entertainment services to the Palmer-Wasillaarea. We expect that work to be complete in 2002. Upon completion, we willprovide cable television programming content from our Anchorage head endfacility to Palmer and Wasilla.Cable Services ExpansionWe continued to upgrade and expand our cable infrastructure in 2001. Theseefforts increased the capacity and reliability of our systems, making possiblefurther deployment of two-way applications such as cable modems and digitalcable television programming, and provided capacity for additional program andservice offerings.We extended our digital cable service to the Juneau, Kenai and Soldotna, Alaskamarkets in 2001. Digital cable service allows us to use digital compression tosubstantially increase the capacity of our cable communications systems, improvepicture quality and provide CD quality audio. Digital cable subscriber counts inall locations totaled approximately 24,500 in 2001, an increase of 62.5% ascompared to 2000.Cable modem subscriber counts increased 64.5% in 2001 as compared to 2000.Approximately 86.2% of our cable customers are able to receive cable modemservice. Cable modems are deployed in approximately 11.2% of the homes passed byour cable systems in markets offering such service, which we believe is wellabove the national average. Cable modem services provide high-speed, dedicatedaccess to the Internet through our coaxial cable network.We launched video-on-demand service to certain of our Anchorage commercial customers and expect to provide this service to more customers in 2002. Thisservice passed 877 hotel rooms at December 31, 2001. During 2001 we launcheddigital special interest channels and residential pay per view in the Kenai andSoldotna markets, digital special interest channels in the Juneau market,advanced analog programming in the Sitka market, and added new channels inseveral other markets.We continue to evaluate technology and the feasibility of using our cable plantfor telephone services that will enable us to deliver local telephone accessservices on our own network. Testing and design is underway with regard toalternative equipment, cable plant, the method of powering the system andoperational support systems. Upgrades have been made to a node in our Anchorageplant to create a test platform for cable telephony.Local Access Services ExpansionWe had approximately 79,200 local access services lines in service in Anchorageand Fairbanks, Alaska at December 31, 2001, a 27.5% increase from December 31,2000. In late 2001 we began selling GCI local services in Juneau withconversions beginning in the first quarter of 2002. We continue to evaluateexpanded implementation of wireless local loop and cable telephony technologies. 13We filed a bona fide request with the ILEC, ACS of the Northland, Inc, in 2001to negotiate rates and services in order to provide competitive local accessservices in Nenana, Ft. Greely, North Pole, Delta Junction, Kenai, Soldotna,Ninilchik, Homer, Seldovia and Kodiak, Alaska. The request will be negotiated,and possibly arbitrated before the RCA under the terms of the 1996 Telecom Actand the RCA must approve our entry into these markets before we can providelocal access services. We are unable to predict when or if we will receive suchapprovals.You should see Part I, Item 1. Business, Narrative Description of our Business -Local Access Services, and Part I, Item 1. Regulation, Franchise Authorities andTariffs - Telecommunication Operations for more information.Internet and Broadband Services ExpansionWe provided Internet service to approximately 69,900 dial-up subscribers atDecember 31, 2001, a 11.8% increase from December 31, 2000. We provided serviceto approximately 26,500 cable modem subscribers at December 31, 2001, a 64.5%increase from December 31, 2000.Our SchoolAccess(TM) program was first deployed successfully in Alaska where weprovide satellite-delivered voice, video and data services to many of thestate's rural communities. More than 70,000 rural Alaska students are nowconnected to the Internet with SchoolAccess(TM). We provide e-mail service, acustom user interface, a help desk, onsite training, security, networkoptimization, network management, content filtering services and website hostingfor 216 schools in rural Alaska using SchoolAccess(TM), and provide Internetonly services to approximately 100 additional schools. We signed three-yearcontracts in 2001 with each of the 64 Alaska schools that re-bid theirSchoolAccess(TM) service.We signed agreements in April 2001 to deploy our SchoolAccess(TM) services tonine school districts comprising 22 schools in rural New Mexico and Arizona,serving more than 10,500 students. Service activation occurred in the thirdquarter of 2001. We began a SchoolAccess(TM) evaluation project in two ruralMontana schools in November 2001, and plan to further market ourSchoolAccess(TM) product in Montana and other suitable locations.We deployed high-speed broadband TeleHealth services in 2001 using an advancedsatellite network to 28 villages served by the Bristol Bay Health Corporation inthe Dillingham, Alaska area; eight villages for the Yukon-Kuskokwim HealthCorporation in the Bethel, Alaska area; 16 villages for the Norton Sound HealthCorporation in the Nome, Alaska area; and six villages in the Eastern Aleutianarea. At the end of 2001 we provided TeleHealth services to approximately 70western Alaska communities. This broadband service allows remote communities to access health specialists and others in Alaska and elsewhere for consultationand diagnostic services using a combination of video, voice and data services.We announced in 2001 our intent to provide Internet services to 152 Alaskacommunities that we currently serve by 2004. The estimated $15 million projectwill deliver high-speed Internet by cable modem, DSL and wireless technologies.A considerable expansion of facilities was made in 2001 to support cable modemInternet service launches in Valdez, Sitka, Nome and Seward, Alaska, and toprepare for the launches in Kenai and Soldotna, Alaska in January 2002. Weexpect to deploy cable modem service in Petersburg and Wrangell, Alaska by theend of the second quarter 2002; and Ketchikan, Bethel, Cordova, Homer, Kodiak,and Kotzebue, Alaska by the end of 2002. The Kenai and Soldotna launches werethe first U.S. deployment of a cable modem platform using the new DOCSIS 1.1standard. This new standard supports tiered levels of service, provides qualityof service measurement, and supports voice traffic over coaxial cable systems.We began providing 56 kilobit and high-speed Internet access services in thethird quarter of 2001 to 10 rural Alaska villages in the Northwest Arctic regionof Alaska. We deliver high-speed Internet services locally in the villagesthrough the ILEC's DSL service or our unlicensed 2.4 GHz band fixed wirelessservice. All long-haul transport is delivered through our satellite andassociated facilities. Before this agreement, villages in the Northwest Arcticarea did not have local access to Internet services. 14We 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 area economy.PCS and LMDS LicensesWe have invested approximately $1.96 million in our PCS license at December 31,2001. In June 2000 we began providing fixed wireless dial-tone services inAnchorage over our PCS system, meeting the FCC requirement to provide coverageof a commercial offering to at least one-third of our market population withinfive years of being licensed. We presently offer our fixed wireless service tocustomers that are not connected to the ILEC or our physical plant. We investedapproximately $275,000 in our LMDS license in 1998. LMDS licensees are requiredto provide 'substantial service' in their service regions within 10 years.Digital Cellular ServiceWe began offering digital cellular telephone service in 2001 in addition toanalog service. We are presently reselling cellular service to our customers.The LinkWe launched The Link product in 2001, an innovative service for professionals,business owners and others who cannot afford to miss a phone call, fax, e-mailor voice mail message. This convergent product gathers these incoming messagesinto a virtual mailbox. The Link users can use this virtual mailbox to stay intouch with clients, customers, family and more.Contract ExtensionsWe re-negotiated and signed a contract in 2001 with WorldCom for an additionalfive-year term, and in 2002 with Sprint for an initial five-year term. Thecontracts allow us to continue to carry all of their traffic to and from Alaska.We signed a five-year contract in 2001 allowing us to continue providingentertainment and other cable services to Elmendorf Air Force Base.State of Alaska ServicesThe State of Alaska announced in the fourth quarter of 2001 its intent to awarda contract for comprehensive telecom services to one of our competitorsbeginning in the second half of 2002. The contract award was subject to acompetitive bidding process that concluded in 2001. We estimate the we currentlyderive approximately $3 million in annual revenues from the State of Alaska forservices that will eventually be transitioned off of our network.Telephone Relay Service Contract The RCA notified us in the fourth quarter of 2001 that our bid to continue toprovide telephone relay services in Alaska was not successful. Such service wastransitioned to Sprint in early 2002. Sprint now provides this service throughits service centers in the Lower 48 states. We carry Sprint's traffic to andfrom Alaska and will continue to generate revenues associated with this trafficin our Long Distance segment. Affected employees have been transitioned tocustomer service positions. Loss of the telephone relay services contract willnot have a material impact on our liquidity, results of operations and cashflows.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 and business communications andentertainment services--including local telephone, long-distance and wirelesscommunications, cable television, consulting services, network and desktopcomputing outsourced services, and dial-up and broadband (cable modem, wirelessand DSL) Internet access services at a wide range of speeds--all under the GCIbrand name. 15We 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 becauseof the 1996 Telecom Act with the barriers to competition between long-distance,local exchange and cable providers being lowered. We believe our acquisition ofcable television systems and our development of local exchange service, Internetservices, broadband services, and wireless services leave us well positioned totake advantage of deregulated markets.We are one of Alaska's leading providers of telecommunication, Internet andcable television services and maintain a strong competitive position. There isactive competition in the sale of substantially all products and services weoffer.Competition in the Communications IndustryThere is substantial competition in the communications industry. The traditionaldividing lines between providers offering long-distance telephone service, localtelephone service, wireless telephone service, Internet services and videoservices are increasingly becoming blurred. Through mergers and various serviceintegration strategies, major providers, including us, are striving to provideintegrated communications service offerings within and across geographicmarkets.Alaska Voice, Video and Data MarketsWe estimate that the aggregate telecommunications, cable television, andInternet markets in Alaska generated revenues in 2001 of approximately $1.1billion. Of this amount, approximately $480 million was attributable tointerstate and intrastate long-distance service, $350 million was attributableto local exchange services, $88 million was attributed to cable television, and$182 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 geographically distant from the rest of the United States and isgenerally characterized by large geographical size and relatively small, densepopulation clusters (with the exception of population centers such as Anchorage,Fairbanks and 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 different from 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 thegeographic 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 Alaska, 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 optic facilities isexpected to allow continued expansion of business, government and educationalinfrastructure in Alaska. 16Long-Distance ServicesIndustryUntil the 1970s, AT&T had a virtual monopoly on long distance service in theUnited States. In the 1970s, competitors such as MCI (now WorldCom) and Sprintbegan to offer long distance service. With the gradual emergence of competition,basic rates dropped, calling surged, and AT&T's dominance declined. More than700 companies now offer long distance service. AT&T's 1984 toll revenues wereabout 90% of those reported by all long distance carriers. By 2000, AT&T'srevenues had declined to less than 40% of those reported by all long distancecarriers. The FCC's regulation of AT&T as a "dominant" carrier ended in 1995.The two largest market entrants, WorldCom and Sprint, have obtained a 32%combined market share through 2000.Because of this competition, the cost of long distance calling dropped from 32cents per minute in 1984 to 14 cents per minute in 1999. The average price of 14cents per minute represents a mix of international calling (an average of 56cents per minute) and domestic interstate calling (an average of 11 cents perminute). The decline in prices since 1984 is more than 70% after adjusting forthe impact of inflation.The FCC reports that more than twenty million households have been added to thenation's telephone system since November 1983. As of November 2000, 100.2million households had telephone service. The FCC reports that approximately 2%of all consumer expenditures are devoted to telephone service. This percentagehas remained relatively constant over the past 15 years, despite major changesin the telephone industry and in telephone usage. Average annual expenditures ontelephone service increased from $325 per household in 1980 to $849 in 1999.Since 1970, the FCC reports that over 90% of households and virtually allbusinesses have subscribed to telephone service. Line growth over time,averaging about 3% per year, has historically reflected growth in the populationand the economy. In recent years, the growth in lines has increased ashouseholds have added additional lines. The percentage of additional lines forhouseholds with telephone service has increased from approximately 3% in 1988 toabout 29% in 1999.The FCC reports that approximately $108 billion was derived from toll servicesin 2000. 99.1 million households had telephone services, an increase of 20million households since 1983. Approximately $33 billion is derived fromintrastate, $55 billion from interstate, and $20 billion from international tollservices. Interstate minutes of use quadrupled to 600 billion minutes from 1983,while long distance toll revenues increased 65%, from $60 billion in 1983 to $99billion. International telecommunications has become an increasingly important segment ofthe telecommunications market. The FCC reports that the number of calls madefrom the United States to other countries increased from 200 million in 1980 to5.2 billion in 1999. Americans spent about $14 billion on international calls in1999. On average, carriers billed 51 cents per minute for international calls in1999, a decline of more than 50% since 1980. Five markets, Canada, Mexico, theUnited Kingdom, Germany, and Japan, currently account for approximately 44% ofthe international calls billed in the United States.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.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.Liquidity concerns add to the telecommunication industry's ongoing pressuressuch as reduced demand for telephone lines and high-speed data services, lowper-minute rates for long-distance service, and a slowdown in 17the wireless telephone sector. The global telecommunications industry hasreportedly cut tens of thousands of jobs and has put billions of dollars ofspending on hold due to the economic slowdown occurring in markets across theworld. With the U.S. economy still weak, traditional telephone companies havebeen cutting earnings forecasts, jobs and capital spending plans which haspushed the makers of equipment that directs voice and data traffic to delay orabandon expansion plans.Global telecommunication industry stocks as a group dropped 27% in 2001 throughNovember and dropped 62% from a peak in March 2000, according to analysts frombrokerage firm Merrill Lynch & Co., Inc. The telecom industry's capital spendingforecasts project a decline in 2002 of from 10% to 25%. Analysts believe thatgrowth will return over time to the traditional range of 10% to 12% annually.Deteriorating conditions in the economy and in the telecommunications industryhave led to reorganizations, mergers and divestitures. AT&T and ComcastCorporation announced in December 2001 their agreement to combine AT&T Broadbandwith Comcast in a transaction that values AT&T Broadband at an aggregate valueof $72 billion (approximately $4,500 per subscriber). The resulting AT&T ComcastCorporation is expected to develop and deploy new broadband applications such asvideo-on-demand and interactive television. The transaction is expected to closeat the end of 2002, subject to regulatory review, approval by both companies'shareholders, and certain other conditions.AT&T also intends to proceed with other aspects of its previously announcedrestructuring, including the creation of a tracking stock for its consumerservices unit, which is expected to be fully distributed to AT&T shareholdersfollowing shareholder approval in mid-2002.WorldCom, also struggling with a declining stock price, created two separatelytraded tracking stocks: WorldCom Group which reflects the performance of itscore data, Internet, hosting and international businesses, and MCI Group, whichreflects the performance of its consumer, small business, wholesalelong-distance voice and dial-up Internet access operations.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.The U.S. House of Representatives in February 2002 adopted a measure that wouldallow LECs to offer long-distance data services without first opening theirnetworks to competitors as they must under the 1996 Telecommunications Act.Local telephone carriers argue that the measure would accelerate the deploymentof high-speed Internet service using DSL technology. These dominant carrierscompete with cable companies for high-speed Internet access customers. Analystsreport that cable operators have approximately 6.4 million subscribers comparedto 3.1 million DSL customers. The future of the measure in the U.S. Senate isuncertain.We believe that federal and state legislators and regulators will continue toinfluence the telecommunications industry in 2002. Consummation of mergersbetween and spin-offs from long-distance companies, local access servicescompanies, and cable television companies have occurred which blur thedistinction between product lines and competitors. Synergies developed throughmergers and acquisitions and obtaining end-to-end connectivity with customers isexpected to continue to drive long-run profitability and success in penetratingnew markets. Several mergers received final regulatory approval in 2001. The FCCapproved the AOL-Time Warner merger in January 2001, and WorldCom's merger withIntermedia Communications Inc. was completed in July 2001. 18GeneralWe 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, Alaska. Our facilities include aself-constructed and financed digital fiber optic cable and additional ownedcapacity on another undersea fiber optic cable, both linking Alaska to thenetworks of other carriers in the Lower 49 states. We use satellite transpondersto transmit voice and data traffic to remote areas of Alaska. Virtually allswitched services are computer controlled, digitally switched, andinterconnected by a packet switched 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 message telephone service and private lineand private network communication service between the major communities inAlaska, and the remaining United States and foreign countries. Our message tollservices include intrastate, interstate and international direct dial, toll-free800, 888, 877 and 866 services, GCI calling card, operator and enhancedconference calling, frame relay, SDN, ISDN technology based services, as well astermination of northbound toll service for WorldCom, Sprint and several largeresellers who do not have facilities of their own in Alaska. We also provideorigination of southbound calling card and toll-free 800, 888, 877 and 866 tollservices for WorldCom, Sprint, and other IXCs. We offer our message services tocommercial, residential, and government subscribers. Subscribers may generallycancel service at any time. Toll, private line, broadband and related services account for approximately 53.5%, 60.4% and 57.0% of our 2001, 2000 and 1999revenues, respectively. Broadband services include our SchoolAccess(TM) andRural Health initiatives. Private line and private network services utilizevoice and data transmission circuits, dedicated to particular subscribers, whichlink a device in 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 generally designed to be equal to or below those for comparable servicesprovided by our 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 digital privatelines, point-to-point and multipoint private network and small earth stationservices. Our Network Solutions sales and services revenue totaled $16.3million, $9.2 million and $5.7 million in the years ended December 31, 2001,2000 and 1999, respectively, or approximately 4.6%, 3.2% and 2.1% of totalrevenues, respectively. Presently, there are 18 competing companies in Alaskathat actively 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 based on "value added"support services rather than price competition. These services are blended withother transport products into unique customer solutions, including managedservices and outsourcing. 19FacilitiesOur telecommunication facilities include an undersea fiber optic cableconnecting Whittier, Valdez and Juneau, Alaska and Seattle, Washington, whichwas placed into service in February 1999. We also own a portion of a secondundersea fiber optic cable linking Alaska to the Lower 48 states. The fiberoptic cables allow us to carry our Anchorage, Eagle River, Wasilla, Palmer,Kenai Peninsula, Valdez, Whittier, Delta Junction, Prudhoe Bay, Glenallen,Fairbanks, Juneau, Ketchikan, and Sitka, Alaska traffic to and from thecontiguous Lower 48 states over terrestrial circuits, eliminating theone-quarter second delay associated with satellite circuits. We own otherterrestrial fiber optic cables to transport our traffic from Anchorage toWhittier and from Whittier to Deadhorse, Alaska, including connectivity tointermediate communities of Valdez, Glenallen, Delta Junction, and Fairbanks.Other facilities include major earth stations at Eagle River, Fairbanks, Juneau,Kodiak, Dutch Harbor, Barrow, Bethel, Nome, Dillingham, Kotzebue, King Salmon,Adak, and Cordova, all in Alaska, and at Issaquah, Washington, serving thecommunities in their vicinity. The Eagle River and Fairbanks earth stations arelinked by digital microwave facilities to distribution centers in Anchorage andFairbanks, respectively. We completed construction of a fiber optic cable systemfrom the Anchorage distribution center to the Eagle River central office in thesecond quarter of 2000. The Issaquah earth station is connected with the Seattledistribution center by means of diversely routed leased fiber optic cabletransmission systems, each having the capability to restore the other in theevent of failure. The Juneau earth station and distribution centers arecollocated. We also have digital microwave facilities serving the KenaiPeninsula 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 FCCapprovals waiving current prohibitions against construction of competitivefacilities in certain rural Alaska communities, allowing for deployment of DAMA technology in 56 sites in rural Alaska on a demonstration basis. In addition,over 80 VSAT facilities provide dedicated Internet access to rural publicschools throughout Alaska.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 digital host switch manufactured by Lucent Technologies isconnected with fiber to seven remote facilities that are co-located in theILEC's switching centers, to provide both local and long distance service. Ourextensive metropolitan area fiber network in Anchorage supports cabletelevision, Internet and telephony services. The Anchorage, Fairbanks, andJuneau facilities also include digital access cross-connect systems, frame relaydata switches, Internet platforms, and in Anchorage, a co-location facility forinterconnecting and hosting equipment for other carriers. We also maintain anoperator and customer service center in Wasilla, Alaska.In 2001 we constructed a new switching center in Fairbanks and installed a newLucent Technologies switch to enable the provisioning of local telephonyservices in the Fairbanks market. The existing Fairbanks long distance tollswitch was decommissioned in December 2001 after over 15 years of service.Essentially all toll traffic from Fairbanks is now routed to Anchorage. Thefirst ILEC collocation office was also constructed during 2001 to enable accessto a portion of the Fairbanks ILEC UNE loop facilities. Fairbanks UNE loopprovisioning began in early 2002. A second collocation office is currently underconstruction that we expect to complete in the second quarter of 2002.We also installed a new, similar Lucent Technologies switch in our Juneaudistribution center, also enabling local services to be launched in the Juneaumarket in early 2002. This new Juneau switch will replace the existing tollswitch in Juneau, which we expect to decommission in 2002 after over 15 years ofservice. One collocation office and a second adjacent collocation facility areunder construction at two of the Juneau ILEC central offices. We expect to placethese collocation facilities in service in 2002 enabling UNE loop access to aportion of the Juneau ILEC's loop facilities. 20We completed construction and placed into service in February 1999 a fiber opticcable system that interconnects Anchorage, Whittier, Valdez, Fairbanks,Deadhorse and Juneau, Alaska and Seattle Washington. We also own a portion of asecond undersea fiber optic cable that links Alaska with the Lower 48 states.The fiber optic cables allow us to carry our Anchorage, Eagle River, Wasilla,Palmer, Kenai Peninsula, Valdez, Whittier, Delta Junction, Prudhoe Bay,Glenallen, Fairbanks, Juneau, Ketchikan, and Sitka area traffic to and from theLower 48 states over terrestrial circuits, eliminating the one-quarter seconddelay associated with satellite circuits. Our preferred routing for this trafficis via undersea fiber optic cable, which makes available satellite capacity tocarry our rural interstate and intrastate traffic.We employ satellite transmission for rural intrastate and interstate traffic andcertain other major routes. We acquired satellite transponders on PanAmSatCorporation ("PanAmSat") Galaxy XR satellite in March 2000 to meet our long-termsatellite capacity requirements.In 2000 we began deploying a new packet data satellite transmission technologyfor the efficient transport of broadband data in support of our rural health andSchoolAccess(TM) initiatives. We continued to deploy and upgrade this networkduring 2001 and expect to further expand and upgrade this network during 2002.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 optic transmission technology is considered to be economically feasible in ruralAlaska in the foreseeable future.CustomersWe had approximately 87,900, 88,600 and 90,800 active Alaska message telephoneservice subscribers at December 31, 2001, 2000 and 1999, respectively.Approximately 12,200, 12,200 and 12,500 of these were business and governmentusers at December 31, 2001, 2000 and 1999, respectively, and the remainder wereresidential customers. Reductions in our residential, customer counts wereprimarily attributed to continuing competitive pressures in Anchorage and othermarkets we serve. Message telephone service revenues (excluding broadband,operator services and private line revenues) averaged approximately $11.3million per month during 2001.Equal access conversions have been completed in all communities we serve 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 message telephone service traffic.A summary of our switched message telephone service traffic (in minutes)follows: Interstate Minutes --------------------------------------- Combined Interstate Inter- and Inter- Intra- South- North- Calling national national State TotalFor Quarter ended bound (1) Bound Card Minutes Minutes Minutes Minutes---------------------------------------------------------------------------------------------------------------------- (Amounts in thousands) 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 ========================================================================================= 21 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 ========================================================================================= March 31, 2001 126,681 74,252 2,087 1,424 204,444 38,763 243,207 June 30, 2001 141,091 76,256 1,926 1,530 220,803 40,407 261,210 September 30, 2001 160,600 87,230 1,961 1,634 251,425 39,355 290,780 December 31, 2001 130,638 90,812 1,946 1,362 224,758 39,246 264,004 ----------------------------------------------------------------------------------------- Total 2001 559,010 328,550 7,920 5,950 901,430 157,771 1,059,201 ========================================================================================= -------------------------- (1) The 1999 and 2000 Interstate Southbound minutes include traffic carried from Washington to Oregon by us on behalf of an OCC customer. The 2001 Interstate Southbound minutes include traffic that originates and terminates in Washington by us on behalf of an OCC customer. All minutes data were taken from our internal billing statistics reports. ---------------------------We entered into a significant business relationship with MCI (now WorldCom) 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% (17.3% as ofDecember 31, 2001) of GCI's Common Stock and presently two representatives serveon the Board. In conjunction with the acquisition of certain cable televisioncompanies in 1996, MCI purchased an additional two million shares at a premiumto the then current market price for $13 million or $6.50 per share.WorldCom announced in November 2001 that it intended to sell slightly less thanone-half of its ownership of GCI Class A common stock. If the entire 4.5 millionshares being registered were sold, WorldCom's ownership would be reduced to9.2%. The shares were registered in February 2002 on behalf of WorldCom becauseof the exercise of its registration rights, however no underwriting isanticipated. WorldCom has requested this registration as part of its normalinvestment portfolio management process. We expect that WorldCom will retain itstwo boards seats on GCI's board of directors. 22Revenues attributed to WorldCom in 2001, 2000 and 1999 totaled $58.2 million,$53.1 million and $43.7 million, or 16.3%, 18.1% and 15.6% of total revenues,respectively. The contract was amended in March 2001 extending its term fiveyears to March 2006. The amendment reduces the rate to be charged by us forcertain 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 2001, 2000and 1999 of approximately $36.9 million, $25.4 million and $23.1 million, orapproximately 10.3%, 8.7% and 8.3% of total revenues, respectively. The contractwas amended in March 2002 extending its term five years to March 2007, with twoone-year automatic extensions thereafter. The amendment reduces the rate to becharged by us for certain traffic over the 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 2001. Sprint met the threshold forclassification as a major customer through 1998, and met the threshold again in2001.Other 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 the loss of one or both ofWorldCom or Sprint as customers, a material adverse change in our relationshipswith them or a material loss of or reduction in their long-distance customerswould have a material adverse effect on our financial condition and results ofoperations.We provide various services to BP Alaska, Wells Fargo Bank Alaska and AlyeskaPipeline Service Company. Although these customers do not meet thethreshold for classification as major customers, we do derive significantrevenues and gross profit from them. There are no other individual customers,the loss of which would have a material impact on our revenues or gross profit.We provided private line and private network communication products andservices, including SchoolAccess(TM) private line facilities, to approximately345 commercial and government customers in 2001. These products and services generated approximately 9.7%, 9.9% and 7.9% of total revenues during the yearsended December 31, 2001, 2000 and 1999, 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 and subject to constanttechnological change. Competition is based upon price and pricing plans, thetype of services offered, customer service, billing services, performance,perceived quality, reliability and availability. A number of our competitors aresubstantially larger than we are and have greater financial, technical andmarketing resources than we have.In the long-distance market, we compete against AT&T Alascom, ACS, the MatanuskaTelephone Association and certain smaller rural local telephone carrieraffiliates. There is also the possibility that new competitors will enter theAlaska market. In addition, wireless services continue to grow as an alternativeto wireline services as a means of reaching customers. 23Historically, we have competed in the long-distance market by offering discountsfrom rates charged by our competitors and by providing desirable packages ofservices. Discounts have been eroded in recent years due to lowering of pricesby AT&T Alascom and entry of other competitors into the long-distance markets weserve. In addition, our competitors have also begun to offer their own packagesof services. If competitors lower their rates further or develop more attractivepackages of services, we may be forced to reduce our rates or add additionalservices, which would have a material adverse effect on our revenues and netincome.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, ACS and other LECs entered the interstateand international long-distance market, and pursuant to RCA authorization,entered the intrastate long-distance market. ACS and other LECs generally leaseor buy long-haul capacity on long-distance carriers' facilities to provide theirinterstate and intrastate long-distance services.Another 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 opticfacilities, however the fiber system provides an alternative routing path for usin case of a major fiber outage in our systems. This carrier filed for Chapter11 bankruptcy in 2001 and it is likely to be sold or reorganized. We areparticipating in the auction process and have submitted various proposals, noneof which has been accepted to date.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 other resources. 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 limited wireless local access serviceson our own 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.We expect competition to increase because of the rapid development of newtechnologies, products and services. We cannot predict which of many possiblefuture technologies, products or services will be important to maintain ourcompetitive position or what expenditures will be required to develop andprovide these technologies, products or services. Our ability to competesuccessfully will depend on marketing and on our ability to anticipate andrespond to various competitive factors affecting the industry, including newservices that may be introduced, changes in consumer preferences, economicconditions and pricing strategies by competitors. To the extent we do not keeppace with technological advances or fail to timely respond to changes incompetitive factors in our industry and in our markets we could lose marketshare or experience a decline in our revenue and net income. Competitiveconditions create a risk of market share loss and the risk that customers shiftto less profitable lower margin services. Competitive pressures also createchallenges to our ability to grow new 24businesses or introduce new services successfully and execute on our businessplan. Each of our business segments also faces the risk of potential price cutsby our competitors that could materially adversely affect our market share andgross margins.Cable ServicesIndustryThe programmed video services industry includes traditional broadcasttelevision, cable television, wireless cable, and DBS systems. Technologyconvergence may also allow programmed video via the Internet but reluctance tochange the current delivery structure will likely continue to limit theavailability of programming in the near term. Cable television providers haveadded non-broadcast programming, utilized improved technology to increasechannel capacity and expanded service markets to include more densely populatedareas and those communities in which off-air reception is not problematic.Broadcast television stations including network affiliates and independentstations generally serve the urban centers. One or more local televisionstations may serve smaller communities. Rural communities may not receive localbroadcasting or have cable systems but may receive direct broadcast programmingvia a satellite dish.Advancements in technology, facility upgrades and plant expansions to enablemigration to digital programming are expected to continue to have a significantimpact on cable services in the future. We expect that changing federal, stateand local regulations, intense competition, and uncertain technologies andstandards will continue to challenge the industry.The National Cable and Telecommunications Association ("NCTA") reported thatdigital cable subscribers totaled 13.7 million through November 2001, anincrease of 41.2% as compared to 9.7 million in 2000. Industry analysts projectthat the number of digital video subscribers will continue to grow as cableplant upgrade efforts are completed and the cost of digital set-top technologydecreases.As a converged platform, cable is a viable competitive alternative outside itstraditional video space, not only in the broadband space as a competitor with technology such as DSL, but also in traditional telephony services. Thesedevelopments continue to move forward and will be enhanced as voice becomesanother application that is carried on data centric networks.Industry analysts believe high-speed access cable subscribers will grow from anestimated 7.2 million at the end of 2001 to 21.1 million at the end of 2005.During that same period, DSL connections are expected to increase from 4.7million to 15.4 million.Cable television still is the dominant technology for the delivery of videoprogramming to consumers in the MVPD marketplace, although its market sharecontinues to decline. As of June 2001, the FCC reports that 78% of MVPDsubscribers received their video programming from a franchised cable operator,compared to 80% as of June 2000. DirecTV and EchoStar are each among the tenlargest providers of multichannel video programming service.Between June 2000 and June 2001, the number of DBS subscribers grew from almost13 million households to about 16 million households, which is nearly two and ahalf times the cable subscriber growth rate. DBS subscribers now represent 18.2%of all MVPD subscribers. Continued DBS subscriber growth is expected with thepotential merger of DBS providers and the launching of local programming in allmarkets. See Part I, Item 1. Business, Regulation, Franchise Authorizations andTariffs - Cable Services for more information.The most significant convergence of service offerings over cable plant continuesto be the pairing of Internet service with other service offerings. Currently,the most popular way to access the Internet over cable is using a cable modemand personal computer. We are currently offering high-speed cable modem accessin Anchorage, Juneau, Fairbanks, Kenai, Soldotna, Nome, Sitka, Seward, NorthPole, Eielson Air Force Base, Fort Wainwright, Fort Richardson, Elmendorf AirForce Base, Palmer, Wasilla and Valdez. 25The cable industry is now expanding its competitive offerings to includebusiness and residential telephone services delivered over its fiber opticinfrastructure. Cable-delivered telephone service is a natural extension of anetwork already capable of delivering digital and broadband services andproducts. Once upgraded to two-way fiber optics, a cable system can offertelephone service over the same cable line that already carries digital video,high speed Internet, and other advanced services to consumers. At least nine ofthe nation's largest multiple system operators are reported to now offerresidential and/or commercial phone service in more than 45 markets, servingmore than one million customers.Cable companies have deployed circuit-switched technology to provide localservice, however future movement is expected toward voice over Internet protocol("VoIP"). Circuit-switched service requires large capital expenditures forswitching equipment in addition to facility upgrades. VoIP is more modular anddoes not require the large upfront cost needed to deploy circuit-switchedservice. VoIP is not only an incremental expense, it utilizes the data pathalready built, and is expected to allow for easy software changes and additionsto service packages, and innovative combinations of voice, data, and faxservices. Continuing questions about scalability and powering for lifelineservice need to be resolved before IP telephony can be marketed on a mass scale.The NCTA reports that cable-delivered residential telephone service subscriberstotaled 1.5 million through December 2001, with analysts projecting 15.4 millionsubscribers in 2005.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. In 2000 we installed a commercial versionof video-on-demand for the Anchorage hotel market and continue to evaluate thefeasibility of deploying this technology in the residential market. With thisservice, customers can access a wide selection of movies and other programmingat any time, with digital picture quality. 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 87%of all U.S. cable subscribers. Twenty-three system transactions occurred duringthe first six months of 2001 affecting over 4 million subscribers. The averagedollar value per subscriber totaled $3,656 as compared to $5,923 per subscriberfor transactions occurring in 2000.The FCC reported that estimated 2001 total cable industry revenue reached $44.0billion, an estimated 15.4% increase over 2000, and that revenue per subscriberper year reached approximately $637, or $53 per subscriber per month. Revenuegrowth in 2001 occurred primarily in advanced services (171% increase),pay-per-view (44% increase), and local advertising (13% increase) categories.Advanced services includes advanced analog, digital video, high-speed data,cable telephony, interactive services, and games.The FCC reports that the costs of acquiring video programming over the past twoyears has continued to escalate. Programming costs have increased by 13% to 15%over the past two years. Some services have increased by as much as 33%.Increased programming costs, especially higher sports license fees, systemupgrades and equipment cost increases resulted in higher cable rates forsubscribers. Industry cable rates increased approximately 5.7% in 2001.The NCTA reported that the number of basic cable subscribers continued to grow,reaching 72.9 million in 2001, an increase of 5.2% as compared to 2000. Thetotal number of subscribers to both cable and non-cable MVPDs continues toincrease. 88.3 million households subscribe to multichannel video programmingservices as of June 2001, up 4.6% over the 84.4 million households subscribingto MVPDs in June 2000. This subscriber growth accompanied a 2.7 percentage pointincrease in MVPDs' penetration of television households to 86.4% as of June2001. 26The NCTA reports that cable penetration as compared to homes passed was 69.2%.Our overall penetration of homes passed was 67.9% at December 31, 2001 withindividual systems ranging from 52.7% to 97.9%.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.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. Eight, six 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.See Part I, Item I, Business, Regulation, Franchise Authorizations and Tariffs -Cable Service for more information.GeneralWe are the largest operator of cable systems in Alaska, serving approximately132,000 residential, commercial and government basic subscribers. Our cabletelevision systems serve 33 communities and areas in Alaska, including thestate's three largest urban areas, Anchorage, Fairbanks, and Juneau. Ourstatewide cable systems consist of approximately 2,200 miles of installed cableplant having 330 to 550 MHz of channel capacity.Products Programming services offered to our cable television systems subscribers differby system (all information as of December 31, 2001).Anchorage system. The Anchorage system, which is located in the urban center forAlaska, is fully addressable and offers a basic analog service that includes 19channels and 2 additional analog tiers offering 32 and 6 channels. This systemalso carries digital service, offering enhanced picture and audio quality, over20 digital special interest channels, 50 channels of digital music, and over 50channels of premium and pay-per-view products. Pay TV services are availableeither individually or as part of a value package. Commercial subscribers suchas hospitals, hotels and motels are charged negotiated monthly service fees.Apartment and other multi-unit dwelling complexes receive basic service at anegotiated bulk rate.Fairbanks, Juneau, Kenai, and Soldotna systems. These systems offer a basicanalog service with 12 to 18 channels and an additional analog tier with 34 to43 channels. These systems also carry digital service, offering enhanced pictureand audio quality, over 19 special interest channels, 50 channels of digitalmusic, and over 50 channels of premium and pay-per-view products.Sitka System. This location offers an advanced analog service with a 15 channelbasic service, a 37 channel expanded basic service, five channels of premiumservice, four channels of pay-per-view and 32 music channels.Other systems. We own systems in the Alaska communities and areas of Bethel,Cordova, Homer, Ketchikan, Kodiak, Kotzebue, Palmer, Wasilla, Nome, Petersburg,Seward, Valdez, and Wrangell. These analog systems offer a basic service withnine to 15 channels and an expanded basic service with 35 to 49 channels.Several channels of premium service are also available in all systems. Musicservice is available in Ketchikan, Kodiak, Petersburg, Valdez and Wrangell.Pay-per-view is available in Homer, Ketchikan, Kodiak, Petersburg, Seward andWrangell. 27FacilitiesOur cable television businesses are located in Anchorage, Palmer, Wasilla,Bethel, Chugiak, Cordova, Douglas, Eagle River, Eielson AFB, Elmendorf AFB,Fairbanks, Fort Greely, Fort Richardson, Fort Wainwright, Homer, Juneau,Kachemak, Kenai, Ketchikan, Kodiak, Kodiak Coast Guard Air Station, Kotzebue,Mount Edgecombe, Nome, North Pole, Petersburg, Peters Creek, Saxman, Seward,Sitka, Soldotna, Ward Cove, and Wrangell Alaska. Our facilities include cableplant and head-end distribution equipment. Certain of our head-end distributioncenters are co-located with customer service, sales and administrative offices.CustomersOur cable systems passed approximately 192,000, 177,000 and 174,000 homes atDecember 31, 2001, 2000 and 1999, respectively, and served approximately132,000, 120,400 and 116,700 basic subscribers at December 31, 2001, 2000 and1999, respectively. Revenues derived from cable television services totaled$76.6 million, $67.9 million and $61.1 million in 2001, 2000 and 1999,respectively.CompetitionOur cable television systems face competition from alternative methods ofreceiving and distributing television signals, including DBS, wireless andprivate SMATV systems, and from other sources of news, information andentertainment such as off-air television broadcast programming, newspapers,movie theaters, live sporting events, interactive computer services, Internetservices and home video products, including videotape cassette and video disks.Our cable television systems also face competition from potential overbuilds ofour existing cable systems by other cable television operators and alternativemethods of receiving and distributing television signals. The extent to whichour cable television systems are competitive depend, in part, upon our abilityto provide quality programming and other services at competitive prices.We believe our greatest source of competition comes from the DBS industry. Two major companies, DirecTV and Echostar, who have recently announced theirintentions to merge, are currently offering nationwide high-power DBS services.In the past, due to the existing structure of satellite orbital slots, satellitetransmission power and lack of local signals, competition from DBS providers hasbeen limited.In the past, the majority of Alaska DBS subscribers were required to installlarger satellite dishes (generally three to six feet in diameter) because of theweaker satellite signals currently available in northern latitudes, particularlyin communities surrounding, and north of, Fairbanks. In addition, the satelliteshad a relatively low altitude above the horizon when viewed from Alaska, makingtheir signals subject to interference from mountains, buildings and otherstructures. Recent satellite placements provide Alaska and Hawaii residents witha DBS package that requires a smaller satellite dish (typically 18 inches);however, a second larger dish is required if the subscriber wants to receive achannel line-up similar to that provided by our cable systems. In addition tothe dish size and cost deterrents, DBS signals are subject to degradation fromatmospheric conditions such as rain and snow.We expect that the launch of new satellites, the pending DBS provider merger,the potential addition of local stations, and the changing nature of technologyand of the DBS business will result in greater satellite coverage andcompetition in Alaska.Several other cable operators provide cable service in Alaska. All of thesecompanies are relatively small, with the largest having fewer than 1,500subscribers. The extent to which our cable television systems are competitivedepends, in part, upon our ability to provide quality programming and otherservices at competitive prices.Competitive forces will be counteracted by offering expanded programming throughdigital services and by providing high-speed data services. Over the next twoyears, system upgrades are planned to make all systems reverse activated, thuscreating the necessary infrastructure to offer cable modem service. During thisperiod a digital platform will be established in the majority of our systems.These plant upgrades combined with local broadcast programming is expected toprovide an attractive product in comparison to competitive offerings. 28High-speed data access competition takes two primary forms: cable modem accessservice and DSL service. DSL service allows Internet access to subscribers atdata transmission speeds equal to cable modems over traditional telephone lines.Numerous companies, including telephone companies, have introduced DSL serviceand certain telephone companies are seeking to provide high-speed broadbandservices, including interactive online services, without regard to presentservice boundaries and other regulatory restrictions. Companies in the lower-49states, including telephone companies and ISP's, have asked local, state andfederal governments to mandate that cable communications systems operatorsprovide capacity on their cable infrastructure so that these companies andothers may deliver Internet services directly to customers over cablefacilities. The FCC determined in March 2002 that cable system operators willnot be required to provide such "open access" to others. See Part I, Item 1,Business, Regulation, Franchise Authorizations and Tariffs - Cable Services formore information.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 to bothconsumers 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 FCC has conducted spectrum auctions for licenses to provide PCS. PCS will enablelicense holders, including cable operators, to provide voice and data services.We own a statewide license to provide PCS services in Alaska.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.Advances 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.Local Access ServicesIndustryThe FCC reported that CLECs provided 17.3 million (or 9.0%) of the approximately192 million nationwide switched-access lines in service at the end of June 2001,compared to 14.9 million (or 7.7% of nationwide lines) at the end of 2000. Thisrepresents a 16% growth in CLEC market size during the first six months of 2001.The FCC further reported about 55% of reported CLEC switched access lines servemedium and large business, institutional, and government customers. By contrast,a reported 23% of ILEC local telephone lines served such customers. CLECsreported providing about one-third of switched access lines over their own localloop facilities. To serve the remainder, CLECs resell the services of othercarriers or use UNE loops that they lease from other carriers.Use of the Internet and expansion in the use of LANs and WANs continue togenerate an increased demand for access lines. In the home, the growing use ofcomputers, faxes, and the Internet led to increases in access lines and usage.The emergence of new services, including digital cellular, personalcommunications services, interactive 29TV, and video dial tone, has created opportunities for growth in local loopservices. These new services are fundamentally restructuring the competitivelocal loop services market.Emerging from the new competitive landscape are CLECs who offer Internet accessand 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 deployments in the US continue to expand using proprietary,circuit switched technology. The standardized, packet (IP) technology has notdeveloped as quickly as the industry projected in 2001, however, significantprogress has occurred. Hardware is now available that is DOCSIS 1.1 qualified,which provides quality of service necessary for voice services. We continue toprepare for the earliest possible deployment of a cable telephony solution thatmeets our needs and the needs of our customers. 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 - was test-marketed in the Anchoragearea. Initially conceived as AT&T's proprietary strategy for bypassing localphone carriers, industry analysts believe AT&T reconfigured it to primarilydeliver always-on high-speed Internet access at 512 kbps where the carrier lackscable system facilities in markets such as Anchorage. AT&T Wireless announced inOctober 2001 that it intended to close its fixed wireless operations, citing thehigh cost of expanding a business that does not fit into the company's corestrategy.GeneralOur local access services division entered the local services market inAnchorage in 1997, providing services to residential, commercial, and governmentusers. We can access approximately 92% of Anchorage area local loops from ourcollocated remote facilities and DLC installations.ProductsOur collocated remote facilities access the ILEC's unbundled network elementloops, allowing us to offer full featured, switched-based local service productsto both residential and commercial customers. In areas where we do not haveaccess to Anchorage ILEC loop facilities, we offer service using total serviceresale of the ILEC's local service.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 number 30FacilitiesIn Anchorage we utilize a Lucent Technologies host switching system (5ESS), havecollocated six remote facilities adjacent to or within the ILEC's localswitching offices to access unbundled loop network elements, and have installeda DLC system adjacent to a smaller, seventh ILEC wire center. Remote and DLCfacilities are interconnected to the host switch via our diversely routed fiberoptic links. Our expanded capacity at each of the remote facilities allows usaccess to approximately 186,000 Anchorage loops. Additionally, we provided ourown facilities-based services to over 9,500 of Anchorage's larger businesscustomers (those with more than 16 lines) through further expansion anddeployment of SONET fiber transmission facilities, leased and HDSL T-1facilities, and DLC facilities. We have similar facilities at remote switchingcenters in Fairbanks that allow us access to ILEC loops.CustomersWe had approximately 79,200, 62,100 and 45,100 active lines in service fromAnchorage and Fairbanks (beginning in 2001), Alaska subscribers to our localaccess services at December 31, 2001, 2000 and 1999, respectively. The 2001 linecount consists of approximately 38,300 residential access lines and 40,900business access lines, including 7,500 Internet service provider access lines.We ended 2001 with market share gains in all market segments. At December 31,2001 approximately 79,200 lines were in service as compared to approximately62,000 lines in service at December 31, 2000. In late 2001 we started sellingGCI local services in Juneau with conversions to our facilities beginning in the first quarter of 2002.Revenues derived from local access services in 2001, 2000 and 1999 totaled $25.2million, $20.2 million and $15.5 million, respectively, representingapproximately 7.1%, 6.9% and 5.6% of our total revenues in 2001, 2000 and 1999,respectively.CompetitionIn the local access services market the 1996 Telecom Act, judicial decisions,and state legislative and regulatory developments have increased the likelihoodthat barriers to local telephone competition will be substantially reduced orremoved. These initiatives include requirements that ILECs negotiate withentities, including us, to provide interconnection to the existing localtelephone network, to allow the purchase, at cost-based rates, of access tounbundled network elements, to establish dialing parity, to obtain access torights-of-way and to resell services offered by the incumbent local exchangecarrier.We have been able to obtain interconnection, access and related services fromthe local exchange carriers at rates that allow us to offer competitiveservices. However, if we are unable to continue to obtain these services andaccess at acceptable rates, our ability to offer local telephone services, andour revenues and net income, could be materially adversely affected. To date, wehave been successful in capturing a significant portion of the local telephonemarket in the locations where we are offering these services.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.In the local access services market, we compete against ACS, the incumbent localexchange carrier, in Anchorage, Juneau and Fairbanks. We also compete againstAT&T in the Anchorage service area. AT&T offers local exchange service only toresidential customers through total service resale. We have filed applicationswith regulatory agencies to provide local telephone service in other marketswhere ACS is the incumbent provider, and we may provide local telephone servicein other locations in the future where we would face other competitors. Weexpect further competition in the Anchorage, Fairbanks and Juneau marketplaces,as DSLnet has received certification for various markets. The Company expectscompetition in business customer telephone access, Internet access, DSL andprivate line markets. We believe our long-standing presence in Alaska and thestrength of our brand (as well as ACS's) will make competitive entry difficultfor new entrants. 31We continue to offer local exchange services to substantially all consumers inthe Anchorage and Fairbanks service areas, primarily through our own facilitiesand unbundled local loops leased from ACS.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.You should see Part I, Item 1. Business, Regulation, Franchise Authorizationsand Tariffs - Telecommunications Operations for more information.Internet ServicesIndustryThe Internet continues to expand at a significant rate, with the number of sitesalmost doubling over the last several years. Dial-up Internet access is the mostwidely used way to access the Internet. As of July 2001, the FCC reported that 58% of the U.S. population had Internet access at home. As of year-end 2000,84.6% of all Internet households were accessing the Internet using dial-upmodems. It is projected that telephone dial-up will remain the principal meansof accessing the Internet until about 2005, when it is expected that only 48% ofInternet households will use dial-up access, with the remaining 52% accessingthe Internet through broadband facilities.Industry analysts believe that broadband deployment will bring valuable newservices to consumers, stimulate economic activity, improve nationalproductivity, and advance many other objectives, such as improving education,and advancing economic opportunities. While cable modem access is the primarymeans of accessing the Internet over broadband networks, cable's share of thebroadband Internet access market continues to decrease. DSL is the mostsignificant broadband competitor to cable modem service. The NCTA reported thatcable modem subscribers totaled 6.4 million through November 2001, an increaseof 60% as compared to 4.0 million in 2000. 70 million homes were passed by cablemodem service in 2001. As of June 2001, cable modem service was available toapproximately 67.3 million homes, while DSL was available to an estimated 45million homes with approximately three million subscribers. Satellite andwireless technologies currently have eight percent of the market and are notexpected to increase market share over the next several years.According to J.P. Morgan, 73% of U.S. households have cable modem serviceavailable, and 45% of households have access to DSL. Combined, broadbandavailability is estimated to currently be approximately 85% however only 12% ofthese households have chosen to subscribe, leaving a large potential market forfuture broadband deployment.Analysts predict that the amount of Internet traffic will likely continue torise as fast as capacity allows for the foreseeable future. VoIP may have amajor impact on business and the entire telecommunications industry in thefuture. Industry analysts estimate that there will be more than 20 millioninstalled cable modem customers in North America by year-end 2004. Most Americanhouseholds still access the Internet using analog telephone dial-up modems atspeeds of less than 56 kbps.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. We were the first providerin Anchorage to offer commercially available DSL products.ProductsWe currently offer three types of Internet access for residential use: dial-up,fixed wireless and high-speed cable modem Internet access. Our residentialhigh-speed cable modem Internet service offers up to 1,544 kbps access 32speeds as compared with up to 56 kbps access through standard copper wiredial-up modem access. Our fixed wireless offers low speed 64 kbps and higherspeed 256 kbps versions. We provide free 24-hour customer service and technicalsupport via telephone or online. The entry-level cable modem service also offersfree data transfer up to five gigabytes per month and can be connected24-hours-a-day, 365-days-a-year, allowing for real-time information and e-mailaccess. Cable modems use our coaxial cable plant that provides cable televisionservice, instead of the traditional ILEC copper wire. Coaxial cable has a muchgreater carrying capacity than telephone wire and can be used to simultaneouslydeliver both cable television (analog or digital) and Internet access services.We also offer a low price upgrade to double the bandwidth of the entry-levelservice. In 2001, we saw a 22% take rate of this service, providing evidence ofthe continuing demand for higher speed access. Additional cable modem servicepackages tailored to both heavy residential and commercial Internet users arealso available.We currently offer several Internet service packages for commercial use: dial-up access, DSL, T1 and fractional T1 leased line, frame relay, multi-megabit andhigh-speed cable modem Internet access. Our business high-speed cable modemInternet service offers access speeds ranging from 256 kbps to 1,544 kbps, freemonthly data transfers of up to 25 gigabytes and free 24-hour customer serviceand technical support. Our DSL offering can support speeds of up to 768 kbpsover the same copper line used for phone service. Business services also includea personalized web page, domain name services, and e-mail addressing.We 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 Phillips 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, layer 2 gigabit switch fabrics for intercommunications and broadband services (cable modem and DSL), and access servers for dial-in users. 33 - SchoolAccess(TM) Internet service delivery to over 257 schools in rural Alaska and 22 schools in New Mexico and Arizona 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.Dedicated Internet access is delivered to a router located at the service point.Our Internet management platform constantly monitors this router; continual communication is maintained with all of the routers in the network. Theavailability and quality of service, as well as statistical information ontraffic loading, are continuously monitored for quality assurance. Themanagement platform has the capability to remotely access routers, permittingchanges in router configuration without the need to physically be at the servicepoint. This management platform allows us to offer outsourced network monitoringand management services to commercial businesses. Many of the largest commercialnetworks 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 worldwide and is theonly ISP in Alaska with such a designation. We operate and maintain what webelieve is the largest, most reliable, and highest performance Internet networkin the state of Alaska.CustomersWe had approximately 69,900, 62,500 and 48,300 active residential and commercialdial-up Internet subscribers at December 31, 2001, 2000 and 1999, respectively.We had approximately 26,500, 16,100 and 5,700 active residential and commercialcable modem Internet subscribers at December 31, 2001, 2000 and 1999,respectively. Revenues derived from Internet services totaled $12.0 million,$8.4 million and $4.8 million, in 2001, 2000 and 1999, respectively,representing approximately 3.4%, 2.9% and 1.7% of our total revenues in 2001,2000 and 1999, 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 highly competitive, rapidly evolving and subject toconstant technological change. Competition is based upon price and pricingplans, service packages, the types of services offered, the technologies used,customer service, billing services, perceived quality, reliability andavailability. As of December 31, 2001, we competed with more than five Alaskabased Internet providers, and competed with other domestic, non-Alaska basedproviders that provide national service coverage. Several of the providers havesubstantially greater financial, technical and marketing resources than we do.With respect to our high-speed cable modem service, ACS and other Alaskatelephone service providers are providing competitive high-speed DSL services.Direct broadcast satellite providers and others could provide wireless highspeed Internet service in competition with our high-speed cable modem services.Niche providers in the industry, both local and national, compete with certainof our Internet service products, such as web hosting, list services and email. 34Environmental 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 before 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 wetland regulation.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 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, Alaska Department of Natural Resources, and theAlaska Office of the Governor - Governmental Coordination. We are unaware of anyviolations of federal, state or local regulations or permits pertaining topreservation or protection of the environment.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 Necessityand Military FranchisesWe do not hold patents, franchises or concessions for telecommunicationsservices or local access services. We do hold registered service marks for theDigistar(TM) logo and letters GCI(TM), and for the terms SchoolAccess(TM), FreeFridays for Business(TM) and Unlimited Weekends(TM). The Communications Act of1934 gives the FCC the authority to license and regulate the use of theelectromagnetic spectrum for radio communication. We hold licenses through ourlong-distance services industry segment for our satellite and microwavetransmission facilities for provision of long-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. 35We 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 cable systems 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 using several radio-band frequencies licensed throughthe FCC. These certificates were transferred to us before October 31, 1996.Application for transfer of control of two certificates of public convenienceand necessity associated with the acquired GC Cablevision, Inc. assets and theRogers cable companies were approved in RCA orders in 2001. The certificateswere transferred to us following closing of the transactions.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 and legislation, their impact on the industries inwhich we operate, or their impact on us.Every two years, the FCC is required (1) to review its rules governingtelecommunications service providers and broadcast ownership, (2) to determinewhether economic competition has made those rules unnecessary in the publicinterest, and (3) to modify or repeal any such regulations. On September 18,2000, the FCC issued its Staff Report summarizing extensive review of the rulesand recommending that no further changes in the broadcast and crossownershiprules were warranted at that time. On December 29, 2000, the FCC adopted its1998 Biennial Review Regulatory Report and left ownership rules unchanged. Thisreport stated that the FCC would institute a proceeding on modification of thenewspaper/broadcast crossownership rule. That occurred on September 13, 2001, ina Notice of Proposed Rulemaking to consider the rule's fate. The next BiennialReview began in 2001.Telecommunications OperationsGeneral. 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.Military franchise requirements also affect our ability to providetelecommunications and cable television services to military bases.Our success in the local telephone market depends on our continued ability toobtain interconnection, access and related services on terms that are just andreasonable and that are based on the cost of providing these services. Our localtelephone services business faces the risk of the impact of implementing currentregulations and legislation, unfavorable changes in regulation or legislation,or the introduction of new regulations. Our ability to enter into the localtelephone market depends on our negotiation or arbitration with ILECs to allow 36interconnection to the carrier's existing local telephone network, to allow thepurchase, at cost-based rates, of access to unbundled network elements, toestablish dialing parity, to obtain access to rights-of-way and to resellservices offered by the local exchange carrier. We have in the past beensuccessful in these arbitration proceedings as to the material terms, includingprices and technical and competitive issues. Future arbitration proceedings withrespect to new or existing markets could result in a change in our cost ofserving these markets via ILEC facilities or via wholesale offerings.The Supreme Court of the United States has before it several cases relating to the provisions of the 1996 Telecom Act, including most notably the provisionsand FCC regulations dealing with the pricing of unbundled network elements. Theoutcome of these cases could also result in a change in our cost of serving newand existing markets via ILEC facilities or via wholesale offerings.The FCC, the courts of the state of Alaska, the Federal District Court of Alaskaand the Ninth Circuit Court of Appeals also have before them several appeals byone of our competitors relating to the interpretation by the RCA, of variousprovisions of the 1996 Telecom Act. These appeals include the provisions and FCCregulations dealing with the pricing of unbundled network elements, includingthe results of arbitration proceedings before the RCA and the decision of theRCA to remove an exemption from certain of its rules available to ACS known asthe "rural exemption." We have been largely successful in the appeals of thesearbitration proceedings as to the material terms, including prices and technicalissues, through the current stages. These appeals could also result in a changein our costs of serving new and existing markets via ILEC facilities or viawholesale offerings.We have recently qualified under FCC regulations as an "eligibletelecommunications carrier" ("ETC"), with respect to our provision of localtelephone service in Fairbanks and Juneau. ETCs are entitled to receive asubsidy paid by the Universal Service Fund. If we do not continue to qualify forthis status in Fairbanks and Juneau or if we do not qualify for this status inrural areas where we propose to offer new services, we would not receive thissubsidy and our net cost of providing local telephone services in these areascould be materially adversely impacted.We received approval from the RCA in February 1997 permitting us to providelocal access services throughout ACS's existing Anchorage service area, and inJuly 1999 permitting us to provide local access services in ACS's existingservice areas in Fairbanks, Juneau, Ft. Wainwright and Eielson Air Force Baseservice areas. We filed a bona fide request with the ILEC, ACS of the Northland,Inc., in 2001 to negotiate rates and services in order to provide competitivelocal access services in Nenana, Ft. Greely, North Pole, Delta Junction, Kenai,Soldotna, Ninilchik, Homer, Seldovia and Kodiak, Alaska. The request will benegotiated, and possibly arbitrated before the RCA under the terms of the 1996Telecom Act and the RCA must approve our entry into these markets before we canprovide local access services. We are unable to predict when or if we willreceive such approvals.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, we are regulated as a CLEC by theRCA. In addition, we will be subject to other regulatory requirements, includingcertain requirements imposed by the 1996 Telecom Act on all LECs, whichrequirements include permitting resale of LEC services, local 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. 371996 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 incumbent LECs to let new competitors into their business. Italso requires incumbent LECs to open up their networks to ensure that new marketentrants have a fair chance of competing. The bulk of the legislation is devotedto establishing the terms under which incumbent LECs must open up theirnetworks.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 to provide meaningful opportunities for competition. The CommonCarrier Bureau has also focused on review of applications by BOCs to providelong distance service as well as review of telecommunications company mergers.In addition, they continue to consider regulatory reforms that could occur ascompetition in the provision of telecommunications services develops.Enactment of the 1996 Telecom Act immediately affected local exchange servicemarkets by requiring states to authorize local exchange service competition.Competitors, including resellers, are able to market new bundled servicepackages to attract customers. Over the long term, the requirement thatincumbent LECs unbundle access to their networks may lead to increased pricecompetition. Local exchange service competition has not yet occurred in allmarkets on a national basis because interconnection arrangements are not yet inplace in many areas.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. 38A number of LECs, long-distance companies and others have appealed some or all of 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. Some BOCs have alsochallenged the 1996 Telecom Act restrictions on their entry into long-distancemarkets as unconstitutional. We are unable to predict the outcome of suchrulemakings or litigation or the effect (financial or otherwise) of the 1996Telecom Act and the rulemakings on us. The BOCs continue to challenge thesubstance of the FCC rules, arguing that the rules do not allow them to fullyrecover the money they spent 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, which entitles them to anexemption of certain material interconnection terms of the 1996 Telecom Act,until and unless such "rural exemption" is examined and not continued by theRCA. We requested that continuation of the rural exemption of the ACSsubsidiaries relating to the Fairbanks and Juneau markets be examined. InJanuary 1998, the APUC denied our request to terminate the rural exemption. Thebasis of the APUC's decision was primarily that various rulemaking proceedings(including universal service and access charge reform) must be completed beforethe exemption would be revoked. Those rulemaking proceedings have been largelycompleted.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 the existing monopoly providers. Among other things, theCourt instructed the APUC to correctly assign the burden of proof to the ILECsrather than us, as a requesting CLEC, and to decide on our requests to provideservice in Fairbanks and Juneau based on criteria established in the 1996Telecom Act. The Court stated "this must be accomplished cognizant of the intentof the 1996 Telecom Act to promote competition in the local market." The Courtremanded the case back to the APUC for proceedings leading to their ruling.On July 1, 1999, the APUC ruled that the rural exemptions from local competitionfor the ILECs operating in Juneau, Fairbanks and North Pole would not becontinued, which allowed us to negotiate for unbundled elements for theprovision of competitive local service. ACS requested reconsideration of thisdecision and on October 11, 1999, the RCA issued an order terminating ruralexemptions for the ILECs operating in the Fairbanks and Juneau markets. ACS hasappealed 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. ACS hassought review of these decisions.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 39whether the FCC or Congress may change the rules under which these services areoffered and, if such changes are made, the extent of the impact of such changeson 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 operations support systems. The FCC removed access to operatorand directory assistance service from the list of available unbundled networkelements. In addition, the FCC added to its list certain unbundled networkelements that were not at issue in 1996. These elements include subloops, orportions of loops, and dark fiber loops and transport. The FCC later requiredILECs to unbundle facilities used to provide DSL service. The FCC did notdecide, but sought additional information on, the question of whether carriersmay combine certain unbundled network elements to provide special accessservices to compete with those provided by the ILECs. The ability to obtainunbundled network elements is an important element of our local access servicesbusiness, and we believe that the FCC's actions in this area have generally beenpositive. However, we cannot predict the extent to which the existing rules willbe sustained in the face of additional legal action and the scope of the rulesthat are 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 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 pay for similar services. The FCC estimates that first quarter 2002 net costs to befunded out of the Universal Service Fund will total approximately $1.38 billion.The fund administrator, based on their interstate end-user revenues, assesseslocal and long distance carriers' contributions to the education and health carefunds. The second quarter 2002 40contribution factor is $0.072805. We contribute to the funds and are allowed torecover our contributions 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.Reciprocal Compensation. The FCC had determined that calls to ISPs within acaller's local calling area were non-local. To support this conclusion, the FCCfound that calls to ISPs are predominately interstate in nature because thecalls ultimately extend beyond the ISP to websites around the world. However, in2000 the D.C. Circuit Court rejected the FCC's analysis and found that the "merefact that the ISP originates further telecommunications does not imply that theoriginal telecommunication does not `terminate' at the ISP." Accordingly, theD.C. Circuit Court vacated and remanded the FCC's ISP-Bound Traffic Order.The FCC, in response by its April 27, 2001 Order on Remand and Report and Order,("ISP Remand Order"), explained why the reciprocal compensation requirements ofSection 251(b)(5) of the 1996 Telecom Act do not apply to ISP-bound traffic. TheFCC concluded that section 251(b)(5) is not limited solely to local traffic, butrather applies to all "telecommunications" traffic, except the categoriesspecifically enumerated in section 251(g). The FCC concluded that ISP-boundtraffic falls within one of the section 251(g) exceptions - "information access"- and is thus exempt from the section 251(b)(5) reciprocal compensationrequirements. In order to retain jurisdiction over ISP-bound traffic, the FCCalso found that such traffic is interstate in nature.The FCC in its ISP Remand Order established a new "hybrid" interim mechanism forintercarrier compensation of ISP-bound traffic that "serves to limit, if notend, the opportunity for regulatory arbitrage, while avoiding amarket-disruptive `flash-cut' to a pure bill and keep regime."The FCC also held that in cases where carriers are not exchanging trafficpursuant to interconnection agreements before the adoption of the ISP RemandOrder, such carriers would be required to exchange ISP-bound traffic on a billand keep basis during the interim period. However, the FCC stated that the ISPRemand Order "does not alter existing contractual obligations, except to theextent that parties are entitled to invoke contractual change-of-lawprovisions." Additionally, the FCC held that state commissions would no longerhave authority to address ISP-bound traffic issues.The FCC's actions are controversial with industry analysts predicting continuedlitigation over the status of ISP-bound traffic.Cable Services OperationsGeneral. The cable television industry is subject to extensive regulation atvarious levels, and many aspects of such regulation are currently the subject ofjudicial proceedings and administrative or legislative proposals. In particular,FCC regulations limit our ability to set and increase rates for our basic cabletelevision service package and for the provision of cable television-relatedequipment. The law permits certified local franchising authorities to orderrefunds of rates paid in the previous 12-month period determined to be in excessof the permitted reasonable rates. It is possible that rate reductions orrefunds of previously collected fees may be required of us in the future. Currently, pursuant to Alaska law, basic cable rates in Juneau are the onlyrates in Alaska subject to regulation by the local franchising authority, andthe rates in Juneau were reviewed and approved by the RCA in October 2000. Inaddition, the FCC has recently adopted rules that will require cable operatorsto carry the digital signals of broadcast television stations. However, the FCChas tentatively decided that cable operators should not be 41required to carry both the analog and digital services of broadcast televisionstations while broadcasters are transitioning from analog to digitaltransmission. Carrying both the analog and digital services of broadcasttelevision stations would consume additional cable capacity. As a result, arequirement to carry both analog and digital services of broadcast televisionstations could require the removal of popular programming services withmaterially adverse results for cable operators, including us. Should the FCCmandate dual carriage, we will carry the broadcast signals in both analog anddigital formats.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 localities served by oursystems may choose to certify and regulate basic rates in 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 FCC to issue a final order within 90 days after receipt of CPS tier rate complaintsfiled by any franchising authority. The 1992 Cable Act limits the ability ofcable television systems to raise rates for basic and certain cable programmingservices (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 period predating the sunsetdate. The elimination of cable programming service tier regulation affords usgreater pricing flexibility. 42FCC regulations govern rates that may be charged to subscribers for RegulatedServices. The FCC uses a benchmark methodology as the principal method ofregulating rates for Regulated Services. Cable operators are also permitted tojustify rates using a cost-of-service methodology, which contains a rebuttablepresumption of an industry-wide 11.25% rate of return on an operator's allowablerate base. Cost-of-service regulation is a traditional form of rate regulation,under which a company is allowed to recover its costs of providing the regulatedservice, plus a reasonable profit. Franchising authorities are empowered toregulate the rates charged for monthly basic service, for additional outlets andfor the installation, lease and sale of equipment used by subscribers to receivethe basic cable service tier, such as converter boxes and remote control units.The FCC's rules require franchising authorities to regulate these rates based onactual cost plus a reasonable profit, as defined by the FCC. Cable operatorsrequired to reduce rates may also be required to refund overcharges withinterest. The FCC has also adopted comprehensive and restrictive regulationsallowing operators to modify their regulated rates on a quarterly or annualbasis using various methodologies that account for changes in the number ofregulated channels, inflation and increases in certain external costs, such asfranchise and other governmental fees, copyright and retransmission consentfees, taxes, programming fees and franchise-related obligations. We cannotpredict whether the FCC will modify these "going forward" regulations in thefuture.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 public rights-of-way and may require reasonable, competitively neutral compensation formanagement of the public rights-of-way when cable operators providetelecommunications service.Cable System Delivery of Internet Service. Although there is at present nosignificant federal regulation of cable system delivery of Internet services,and the FCC has issued several reports finding no immediate need to impose suchregulation, this situation may change as cable systems expand their broadbanddelivery of Internet services. In particular, proposals have been advanced atthe FCC and Congress that would require cable operators to provide access tounaffiliated Internet service providers and online service providers. The FCCrejected a petition by certain Internet service providers attempting to useexisting modes of access that are commercially leased to gain access to cablesystem delivery. Some states and local franchising authorities are consideringthe imposition of mandatory Internet access requirements as part of cablefranchise renewals or transfers and a few local jurisdictions have adopted theserequirements. The Federal Trade Commission and the FCC recently imposed 43certain "open-access" requirements on Time Warner and AOL in connection withtheir merger, but those requirements are not applicable to other cableoperators.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 thelower 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 FCC 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 1996 Telecom Act preempted localregulation. A Federal district court in Florida recently addressed a similar"open-access" requirement in a local franchise and struck down the requirementas unconstitutional. There are other instances where "open-access" requirementshave been imposed and judicial challenges are pending.On March 14, 2002, the FCC took steps toward ensuring a light regulatory touchon broadband services delivered through the use of cable facilities (such as ourcable modem services). In a 3-1 vote, the FCC defined high-speed Internet overcable as an "information service" not subject to local cable-franchise fees,like cable service is, or any explicit requirements for "open access," astelecommunications service is. The "information service" designation for cablebroadband reportedly sends a strong signal that cable-Internet services will beable to continue to develop in a business environment that favors competitionover regulation and encourages new investment. The FCC traditionally hasn'tregulated information services. Industry analysts believe the policy ofregulatory restraint is particularly appropriate, given the strong competitionamong cable, satellite and digital-subscriber-line service via telephone lines. 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 affect 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. The 1996 Telecom Act generally prohibits us from owningor operating a SMATV or wireless cable system in any area where we providefranchised cable service. We may, however, acquire and operate SMATV systems inour franchised service areas if the programming and other services provided toSMATV subscribers are offered according to the terms and conditions of ourfranchise agreement.In February 2002, a U.S. appeals court set aside a FCC rule that bars a companyfrom owning television stations that reach more than 35% of U.S. homes. Athree-judge panel concluded the FCC's "decision to retain the rules wasarbitrary and capricious and contrary to law." The court overturned altogetheran FCC ban on a company owning a cable TV system in a market where it alsooperates a broadcast television station. This limitation was held on March 2,2001 to violate the First Amendment. The U.S. Court of Appeals for the Districtof Columbia Circuit ruled that the limit must either be justified by the FCC "asnot burdening substantially more speech than necessary," or rewritten by theFCC. In addition, the D.C. Circuit panel vacated on constitutional grounds theFCC rule limiting to 40% the number of channels on which a cable operator canoffer operator-affiliated programming.A petition for certiorari was filed with the U.S. Supreme Court asking forreview of the D.C. Circuit Court's ruling on the 30% cap but did not challengethe court's ruling striking down the 40% cap on the channels that a cableoperator may use to offer affiliated programmers. The FCC adopted a FurtherNotice of Proposed Rulemaking on September 13, 2001 concerning its horizontal(30% of national audience reach) and vertical (40% of channels showing operator-affiliated programming) limits and certain aspects of its attributionrules. Comments and reply comments were due on January 4, 2002, and February 4,2002, respectively.The FCC broadcast and cable crossownership rule prohibits anyone from having anattributable interest in both a cable system and a TV station if the TVstation's signals overlap any part of the service area of the cable system. TheAct eliminated the statutory prohibition of this type of crossownership, howeverCongress did not require the FCC to delete its rule, which remains intact. Inits 1998 Biennial Review Report adopted May 30, 2000 (1998 report), the FCCconcluded that the rule should be retained. Oral argument was held on September7, 2001; a court decision is pending.Similar to the broadcast and cable prohibition, the broadcast and newspapercrossownership rule bans common ownership of a radio or television station and adaily newspaper if certain conditions are met. Acquisition of a daily newspaperin conflict with this rule requires divestiture of one of the properties beforethe next license expiration date of the broadcast station, or in one year,whichever is later. In its 1998 Broadcast Ownership Biennial Review Reportadopted May 30, 2000, the FCC recommended a rulemaking to consider changes, butkept the rule in place. At its September 13, 2001 meeting, the FCC adopted aNotice of Proposed Rulemaking seeking comment on modification of itsnewspaper/broadcast crossownership rule and waiver policies. Comments were dueDecember 3, 2001, and reply comments were due January 7, 2002. 45Under the FCC's TV duopoly rule, no one may hold an attributable interest in twotelevision stations under certain circumstances. In December 2000, the FCCterminated its 1998 Biennial Review of the television duopoly rules and affirmedthe ban on owning a second television station in a market having fewer thaneight separately owned TV stations. On February 20, 2001, Sinclair BroadcastGroup filed a Petition for Review with the U.S. Court of Appeals for theDistrict of Columbia Circuit. Sinclair also sought a court stay of an FCCdecision ordering Sinclair to terminate local marketing agreements it hadentered after the November 5, 1996, start of an FCC rulemaking examining TVlocal marketing agreements. The Court granted the stay pending completion of theappeal. Sinclair filed its brief on the merits of the court appeal on August 20,2001. Oral arguments were scheduled for January 14, 2002. Other parties haveasked the FCC for similar relief; those requests are pending.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 or non-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.Satellite Home Viewer Improvement Act of 1999 ("SHVIA"). A major changeintroduced by the SHVIA was a "local into local" provision allowing satellitecarriers, for the first time, to retransmit the signals of local televisionstations by satellite back to viewers in their local markets. The intent was topromote multichannel video competition by removing the prohibition on satelliteretransmission of local signals, which cable operators already offered to theirsubscribers under the must-carry/retransmission consent scheme of regulationdescribed above.SHVIA applies a similar scheme to satellite carriage. Television stations haduntil July 1, 2001, to elect must-carry or retransmission consent on satellitecarriers in their markets. Beginning January 1, 2002, a satellite company thathas chosen to provide any local-into-local service in a market will be requiredto provide subscribers with the signals of all qualified television stationsassigned to that designated market area and that ask to be carried on thesatellite system. To qualify, stations must meet conditions such as providing,at station expense, a good-quality signal to the carrier's local receivefacility.On November 29, 2000, the FCC adopted rules governing satellite signal carriage.These rules bar carriers from charging subscribers more for must-carry stationsthan for stations that elect to be carried under retransmission consent. Rulesalso prevent carriers from requiring subscribers to purchase additionalequipment (e.g., a second dish) to receive stations that insist on carriage. TheFCC allowed satellite carriers to sell local stations to 46subscribers a la carte, rather than only as a package. But a satellite carrierthat carries at least one local station under the new local-into-local copyrightcompulsory license without which DBS operators would not carry the signals atall, contained in the SHVIA, must-carry all qualifying stations in the market;this is the carry one/carry all provision that is among those on appeal.FCC reconsideration of the rules was petitioned for by DirecTV and theAssociation of Local Television Stations, and supported and opposed by severalothers. In an Order on Reconsideration released September 5, 2001, theCommission affirmed its rules for the most part, but also clarified, on its ownmotion, important aspects of carrier obligations to implement station electionsof must-carry.Various court appeals have been consolidated in the Fourth Circuit, where oralargument was held September 25, 2001, focusing on carry one/carry all and a lacarte. The FCC, in its Reconsideration Order of September 5, 2001, addressedcomplaints by broadcasters that satellite carriers, particularly EchoStar, havenot complied with SHVIA must-carry implementation requirements, and ordered thecarriers to comply. That Order is subject to court appeal. In the 11th CircuitEchostar injunction case, the broadcast plaintiffs will provide new evidence ofnationwide noncompliance to the U.S. District Court in Miami. By statute and FCCrule, satellite carriage of eligible local stations must begin January 1, 2002.Designated Access Channels. The 1996 Telecom 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 percent in some cases, for commercial leased access by unaffiliated thirdparties to provide programming that may compete with services offered by thecable operator. The FCC has adopted rules regulating the terms, conditions andmaximum rates a cable operator may charge for commercial leased access use. TheFCC recently 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 governingretransmission 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 runwiring 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. 47These developments may make it even more difficult for us to provide service inmultiple dwelling unit complexes.Video Description. On July 21, 2000, the FCC ruled that top-25-market affiliatesof the four major national networks, and MVPDs having 50,000 or moresubscribers, must provide video descriptions to make television programs moreaccessible to people with visual impairments. Such broadcasters and MVPDs mustprovide, in prime time or children's programming, 50 hours per calendar quarterof video description. Other television stations and MVPDs must pass throughvideo descriptions contained in programs, and must add an aural tone crawl orscroll to local emergency messages. Video description, which is in addition toclosed captioning for the hearing impaired, includes voice descriptions of aprogram's visual elements inserted in audio pauses in the program. The FCCgenerally affirmed its video description rules on reconsideration on January 4,2001. On March 28, 2001, the Motion Picture Association of America, NAB and NCTAfiled a joint Petition for Review, and on April 2, 2001, the National Federationof the Blind filed a Petition for Review with the U.S. Court of Appeals for theDistrict of Columbia Circuit of the FCC's January 4, 2001, reconsiderationdecision. The requirements are being phased in while the appeals progress. Thecourt has yet to establish a schedule for briefs and oral argument in theappeals case.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 such jurisdictions. The 1992 Cable Act encourages competition with existing cablesystems by: - allowing municipalities to operate their own cable systems without franchises; - preventing franchising authorities from granting exclusive franchises or from unreasonably refusing to award additional franchises covering an existing cable system's service area; and - prohibiting (with limited exceptions) the common ownership of cable systems and collocated MMDS or SMATV systems.The FCC has relaxed its restrictions on ownership of SMATV systems to permit acable operator to acquire SMATV systems in the operator's existing franchisearea so long as the programming services provided through the SMATV system areoffered according to the terms and conditions of the cable operator's localfranchise agreement. The 1996 Telecom Act provides that the cable/SMATV andcable/MMDS cross-ownership rules do not apply in any franchise area where theoperator faces effective competition as defined by federal law.The Cable Acts also provide that in granting or renewing franchises, localauthorities may establish requirements for cable-related facilities andequipment, but not for video programming or information services other than inbroad categories. The Cable Acts limit the payment of franchise fees to 5percent of revenues derived from cable operations and permit the cable operatorto obtain modification of franchise requirements by the franchise authority orjudicial action if warranted by changed circumstances. A federal appellate courtheld that 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: - imposing requirements in the cable franchising process that require, prohibit or restrict the provision of telecommunications services by an operator; - imposing franchise fees on revenues derived by the operator from providing telecommunications services over its cable system; or - restricting an operator's use of any type of subscriber equipment or transmission technology.The 1984 Cable Act contains renewal procedures designed to protect incumbentfranchisees against arbitrary denials of renewal. The 1992 Cable Act madeseveral changes to the renewal process that could make it easier for 48a franchising authority to deny renewal. Moreover, even if the franchise isrenewed, the franchising authority may seek to impose new and more onerousrequirements such as significant upgrades in facilities and services orincreased franchise fees as a condition of renewal. Similarly, if a franchisingauthority's consent is required for the purchase or sale of a cable system orfranchise, such authority may attempt to impose more burdensome or onerousfranchise requirements in connection with a request for such consent.Historically, franchises have been renewed for cable operators that haveprovided satisfactory services and have complied with the terms of theirfranchises. We believe that we have generally met the terms of our franchisesand have provided quality levels of service. We anticipate that our futurefranchise renewal prospects generally will be favorable.Various courts have considered whether franchising authorities have the legalright to limit the number of franchises awarded within a community and to imposecertain substantive franchise requirements (e.g. access channels, universalservice and other technical requirements). These decisions have beeninconsistent and, until the US Supreme Court rules definitively on the scope ofcable operators' First Amendment protections, the legality of the franchisingprocess generally and of various specific franchise requirements is likely to be in a state of flux.Pole Attachment. The Communications Act requires the FCC to regulate the rates,terms and conditions imposed by public utilities for cable systems' use 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 1984 Cable Act by immediately permitting certain providers oftelecommunications services to rely upon the protections of the current law andby 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, governs the maximum rate certainutilities may charge for attachments to their poles and conduit by companiesproviding telecommunications services, including cable operators. Severalparties have requested the FCC to reconsider its new regulations and severalparties have challenged the new rules in court. A federal appellate court upheldthe constitutionality of the statutory provision that requires utilities providecable systems and telecommunications carriers with nondiscriminatory access toany pole, conduit or right-of-way controlled by the utility.The favorable pole attachment rates afforded cable operators under federal lawcan be gradually increased by utility companies owning the poles if the operatorprovides telecommunications service, as well as cable service, over its plant.The FCC clarified that a cable operator's favorable pole rates are notendangered by the provision of Internet access, but a decision by the 11thCircuit Court of Appeals disagreed and suggested that Internet traffic isneither cable service nor telecommunications service and might leave cableattachments that carry Internet traffic ineligible for Pole Attachment Actprotections. This decision could have lead to substantial increases in poleattachment rates. The cable industry sought review by the United States SupremeCourt, which issued an opinion reversing a decision from the United States Courtof Appeals for the Eleventh Circuit. The Eleventh Circuit court held thatcommingled services are not covered by the Pole Attachment Act; and the PoleAttachment Act does not grant the FCC authority to regulate wirelesscommunications.Shortly after the Eleventh Circuit, opinion was issued, the U.S. Supreme Courtgranted writ of certiorari and issued an order staying the Eleventh Circuit'sdecision pending further review. The U.S. Supreme Court reversed 49the Eleventh Circuit's ruling. While the Supreme Court's decision does not meanan end to arbitrations and litigation over similar issues, it does mean that theFCC's Pole Attachment rules remain in effect.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 officeadopted an industry agreement providing for an increase in the copyright royaltyrates. The possible modification or elimination of this compulsory copyrightlicense is the subject of continuing legislative review and could adversely affect 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 customer service, subscriber privacy, marketing practices,equal employment opportunity, regulation of technical standards and equipmentcompatibility.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. - 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 50 - Children's programming advertisements - Closed captioning - Registration of cable systems and facilities licensing - Maintenance of various records and public inspection files - Aeronautical frequency usage - Lockbox availability - Antenna structure notification - Tower marking and lighting - Emergency alert systems The FCC has 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. We intend to implementnecessary changes in 2002 to comply with these requirements.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 isanother indication of regulatory concern regarding control over cable capacity.Other bills and administrative proposals pertaining to cable communications havepreviously been introduced in Congress or have been considered by othergovernmental bodies over the past several years. It is possible that Congressand other governmental bodies will make further attempts to regulate cablecommunications 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 authoritiesfrom 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 OperationsGeneral. 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 traffic are evolving and are facing unclearregulatory futures. Changes in regulations and in the regulatory environment,including changes that affect communications costs or increase competition fromthe ILEC or other communications service providers, could adversely affect theprices at which we sell ISP 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 51away from burdening the Internet with regulation. ISPs and other companies inthe Internet industry have not been required to gain regulatory approval fortheir actions. The 1996 Telecom Act adopts such a position. The 1996 Act statesthat it is the policy of the United States "to preserve the vibrant andcompetitive free market that 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 final 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.The legal authority of any of these bodies is unclear. Most of the underlyingarchitecture of the Internet was developed under the auspices, directly orindirectly, of the United States government. The government has not, however,defined whether it retains authority over Internet management functions, orwhether these responsibilities have been delegated to the private sector. Thedegree to which any existing body can lay claim to representing "the Internetcommunity" is also unclear. Membership in the existing Internet governanceentities is drawn primarily from the research and technical communities. 521996 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 the Internet 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 it has the authority orthe obligation to exercise regulatory jurisdiction over specific Internet-basedactivities. The FCC may also decide whether to forebear from regulating certainInternet-based services. Forbearance allows the FCC to decline to adopt rulesthat would otherwise be required by statute. Under section 401 of the 1996Telecom Act, the FCC must forbear if regulation would not be necessary toprevent anticompetitive practices and to protect consumers, and forbearancewould be consistent with the public interest. Finally, the FCC could considerwhether to preempt state regulation of Internet services that would beinconsistent 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, ratherthan the radio spectrum. As a policy matter, however, a continuous, live,generally-available music broadcast over the Internet may appear similar to atraditional radio broadcast, and the same arguments may be made about streamingvideo applications. The FCC will need to consider the underlying policyprinciples that, in the language of the Act and in FCC decisions, have formedthe basis for regulation of the television and radio broadcast industries.The FCC does not regulate the prices charged by ISPs or Internet backboneproviders. However, the vast majority of users connect to the Internet overfacilities of existing telecommunications carriers. Those telecommunicationscarriers are subject to varying levels of regulation at both the federal and thestate level. Thus, regulatory decisions exercise a significant influence overthe economics of the Internet market. Economics is expected to drive thedevelopment of both the Internet and of other communications technologies.Internet access is understood to be an enhanced service under FCC rules;therefore, ISPs are treated as end users, rather than carriers, for purposes ofthe FCC's interstate access charge rules. This distinction 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. Although these services generally involve a per-minute usagecharge in addition to a monthly fee, the usage charge is assessed only foroutbound calls. ISPs, however, exclusively use these lines to receive calls fromtheir customers, and thus effectively pay flat monthly rates. By contrast, IXCsthat interconnect with LECs are considered carriers, and thus are required topay interstate access charges for the services they purchase. Most of the accesscharges that carriers pay are usage-sensitive in both directions. Thus, IXCs areassessed per-minute charges for both originating and 53terminating calls. The FCC concluded in their 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 PRI, frame relay, and fractional T-1 connections, whichare alternatives to analog business lines. Prices for these services, and theprice difference on a per-voice-channel basis between the options available toISPs, vary widely across different states and jurisdictions. In many cases,tariffs for these and other data services are based on assumptions that do notreflect the realities of the Internet access market today. The scope of localcalling areas also affects the architecture of Internet access services. Instates and jurisdictions with larger unmeasured local calling areas, ISPs needfewer POPs in order to serve the same customers through a local call.Court Decisions and Legislative Action. We believe major court decisions andlegislative action will shape the worldwide Internet in 2002 and beyond,including: - The continuing impact of the U.S. vs. Microsoft antitrust trial and settlement decisions. - Possible recognition that the FCC's 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. - The development of rating and filtering systems outside the United States.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 $4.4 million, $4.9 million and $5.5 million forthe years ended December 31, 2001, 2000 and 1999, respectively.SeasonalityOur long-distance revenues have historically been highest in the summer monthsbecause of temporary population increases attributable to tourism and increasedseasonal economic activity such as construction, commercial fishing, and oil and gas activities. Our cable television revenues, on the other hand, are higher inthe winter months because consumers tend to watch more television, and spendmore 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. 54Customer-Sponsored ResearchWe have not expended material amounts during the last three fiscal years oncustomer-sponsored research activities.Backlog of Orders and InventoryAs of December 31, 2001 and 2000, our long-distance services segment had abacklog of equipment sales and private line orders of approximately $535,000 and$1,570,000, respectively. Approximately $450,000 and $1.0 million of the 2001and 2000 backlogs represent recurring monthly charges for private line andtelemedicine services, respectively. The decrease in backlog as of December 31,2001 can be attributed to a combination of decreased private line circuit orderspending at December 31, 2001 as compared to 2000 and faster completion ofoutstanding sales orders at December 31, 2001 as compared to 2000. We expectthat all of the private line orders and equipment sales in backlog at the end of2001 will be delivered during 2002.Geographic Concentration and Alaska EconomyWe offer voice and data telecommunication and video services to customersprimarily throughout Alaska. Because of this geographic concentration, growth ofour business and our operations depend upon economic conditions in Alaska. Theeconomy of State of Alaska is dependent upon the natural resource industries,and in particular oil production, as well as investment earnings (includingearnings from the State of Alaska Permanent Fund), tourism, government, andUnited States military spending. Any deterioration in these markets could havean adverse impact on us. Oil revenues are now the second largest source of staterevenues, following funds from federal sources. You should see Part II, Item 7Management's Discussion and Analysis of Financial Condition and Results ofOperations for more information about the effect of geographic concentration andthe Alaska Economy on us.Factors That May Affect Our Business and Future ResultsOur substantial leverage will reduce cash flow from operations available to fundour business and may cause a decline in our credit rating and/or limit ourability to raise additional capital. We have substantial indebtedness. As ofDecember 31, 2001, we had total outstanding debt of $399 million. We plan toincur additional indebtedness in the future as we implement our business plan,subject to limitations imposed by our credit facility agreements. In connectionwith the execution of our business strategies, we are continuously evaluatingacquisition opportunities with respect to each of our business segments and wemay elect to finance acquisitions by incurring additional indebtedness. We mustuse a portion of our future cash flow from operations to pay the principal andinterest on our indebtedness, which will reduce the funds available for ouroperations, including capital investments and business expenses. This couldhinder our ability to adjust to changing market and economic conditions. If weincur significant additional indebtedness, our credit rating could be adverselyaffected. As a result, our borrowing costs would likely increase and our accessto capital may be adversely affected.Our credit facilities restrict our ability to incur additional indebtedness andmake capital expenditures, and contain certain other restrictions on ourbusiness operations. Our existing credit facilities restrict our and certain ofour subsidiaries' ability to incur additional indebtedness, make certain capitalexpenditures, pay dividends or make certain other restricted payments,consummate certain asset sales, enter into certain transactions with affiliatesand incur liens. These credit facilities also impose restrictions on the abilityof a subsidiary to pay dividends or make certain payments to us, merge or consolidate with any other person or sell, assign, transfer, lease, convey orotherwise dispose of all or substantially all of our assets. These creditfacilities also require that we maintain certain financial ratios. A breach ofany of these covenants could result in a default under the credit facilities.Our current business strategy includes the acquisition of additional assets andthe expansion of our existing businesses and service offerings. In addition, ourbusiness strategy may in the future be expanded to include activities outsidethe state of Alaska. It is likely that our current and future expansion andgrowth plans will require significant additional capital in excess of capitalgenerated from operations and will result in significant 55capital expenditures. If we are unable to negotiate modifications to theserestrictions, they could hinder our ability to follow through with expansion andgrowth plans.We have a history of operating losses. If we do not maintain profitability, wemay be unable to make capital expenditures necessary to implement our businessplan, meet our debt service requirements or otherwise conduct our business in aneffective and competitive manner. This would require us to divert cash fromother uses, which may not be possible or may detract from the growth of ourbusinesses. These events could limit our ability to increase our revenues andnet income or cause these amounts to decline.We depend on a small number of customers for a substantial portion of ourrevenue and business. As previously described (see Part I, Item 1. Business,Long Distance Services, Customers), services that we provide to WorldCom and toSprint contribute significantly to our total revenues. These two customers arefree to seek out long-distance communication services from our competitors uponexpiration of their contracts (in March 2006, in the case of WorldCom, and inMarch 2007, in the case of Sprint) or earlier upon a default or the occurrenceof certain events. These events are a force majeure event or a substantialchange in applicable law or regulation under the applicable contract.Mergers and acquisitions in the telecommunications industry are relativelycommon. If a change in control of WorldCom or Sprint were to occur, it would notpermit them to terminate their existing contracts with us, but could in thefuture result in the termination of or a material adverse change in ourrelationships with WorldCom or Sprint. In addition, WorldCom and Sprint's needfor our long-distance services depends directly upon their ability to obtain andretain their own long-distance customers and upon the needs of those customersfor long-distance services.The loss of one or both of WorldCom or Sprint as customers, a material adversechange in our relationships with them or a material loss of or reduction intheir long-distance customers would have a material adverse effect on ourfinancial condition and results of operations.We depend on a limited number of third-party vendors to supplytelecommunications equipment. We depend on a limited number of third-partyvendors to supply cable, Internet and telephony-related equipment. If ourproviders of this equipment are unable to timely supply the equipment necessaryto meet our needs or provide them at an acceptable cost, we may not be able tosatisfy demand for our services and competitors may fulfill this demand.Prolonged service interruptions could affect our business. We rely heavily onour network equipment, telecommunications providers, data and software, tosupport all of our functions. We rely on our networks and the networks of othersfor substantially all of our revenues. We are able to deliver services only tothe extent that we can protect our network systems against damage from power ortelecommunication failures, computer viruses, natural disasters, unauthorizedaccess and other disruptions. While we endeavor to provide for failures in thenetwork by providing back-up systems and procedures, we cannot guarantee thatthese back-up systems and procedures will operate satisfactorily in anemergency. Should we experience a prolonged failure, it could seriouslyjeopardize our ability to continue operations. In particular, should a significant service interruption occur, our ongoing customers may choose adifferent provider, and our reputation may be damaged, reducing ourattractiveness to new customers.To the extent that any disruption or security breach results in a loss or damageto our customers' data or applications, or inappropriate disclosure ofconfidential information, we may incur liability and suffer from adversepublicity. In addition, we may incur additional costs to remedy the damagecaused by these disruptions or security breaches.If a failure occurs in our undersea fiber optic cable, our ability toimmediately restore the entirety of our service may be limited. Ourtelecommunications facilities include an undersea fiber optic cable that carriesa large portion of our Internet voice and data traffic to and from thecontiguous Lower 48 states. We are currently 56seeking arrangements to obtain alternative telecommunications facilities asbackup facilities. If a failure of our undersea fiber optic facilities occursbefore we are able to secure adequate backup facilities, some of thetelecommunications services we offer to our customers could be interrupted,which could have a material impact on our business and results of operations.Our businesses are currently geographically concentrated in Alaska. We offer avariety of voice, video and data services to residential, commercial andgovernmental customers in the state of Alaska. Because of this geographicconcentration, our growth and operations depend in part upon economic conditionsin Alaska. We may not be able to continue to increase our market share of theexisting markets for our services and no assurance can be given that the Alaskaneconomy will continue to grow and increase the size of the markets we serve orincrease the demand for the services we offer. You should see Part II, Item 7,Management's Discussion and Analysis of Financial Condition and Results ofOperations for more information.Our best growth opportunities may be in geographic areas that differ from thoseof our existing businesses. We have achieved significant market penetration inthe state of Alaska for many of the services we offer. However, opportunitiesfor expanding our market geographically in the state of Alaska or attainingsignificant additional market penetration in the State of Alaska are limited. Asa result, the best opportunities for expanding our business may arise in othergeographic areas such as the contiguous Lower 48 states. There can be noassurance that we will find attractive opportunities to grow our businessesoutside the State of Alaska or that we will have the necessary expertise to takeadvantage of such opportunities. The Alaska voice, video and datatelecommunications markets are unique and distinct within the United States dueto Alaska's large geographical size and its distance from the rest of the UnitedStates. The expertise we have developed in operating our businesses in the Stateof Alaska may not provide us with the necessary expertise to successfully enterother geographic markets.We may fail to develop our wireless services. We offer wireless mobile servicesby reselling other providers' wireless mobile services. We offer wireless localtelephone services over our own facilities, and have purchased PCS and LMDSwireless broadband licenses in FCC auctions covering markets in Alaska. We havefewer subscribers to our wireless services than to our other service offerings.The geographic coverage of our wireless services is also smaller than thegeographic coverage of our other services. Some of our competitors offer orpropose to offer an integrated bundle of communications, entertainment andinformation services, including wireless services. If we are unable to expandand further develop our wireless services, we may not be able to meet the needsof customers who desire packaged services, and our competitors who offer thesesservices would have an advantage. This could result in the loss of market sharefor our other service offerings.Our efforts to develop cable telephony may be unsuccessful. An element of ourbusiness strategy is to develop voice telephone service utilizing our coaxial cable facilities. If we are able to develop this service, we will be able toutilize our own cable facilities to provide local access to our customers andavoid paying local loop charges to ILECs. In order to successfully develop andmarket this new service, we must integrate new technology with our existingfacilities. The viability of this service depends on the availability of theequipment necessary to provide the service at cost-effective prices. Thedevelopment and marketing of this service will require a substantial capitalinvestment. If we are unable to successfully develop and market voice telephoneservice, we will not be able to fully recover any capital investment we may makeand the margins on our local telephone services business will not improve.We do not have insurance to cover certain risks to which we are subject. We areself-insured for damage or loss to certain of our transmission facilities,including our buried, under sea, and above-ground transmission lines. If webecome subject to substantial uninsured liabilities due to damage or loss tosuch facilities, our financial results may be adversely affected.Economic and Security Impacts on Telecommunications. The recent economicrecession in the United States began with a decline in business capital spendingand investment. With the declining high-technology sector, 57businesses appear to have taken a more pessimistic view of the short-termeconomic future and have curtailed spending on equipment, software, real estate,inventories and other investments. The terrorist attacks on America on September11, 2001 and their aftermath worsened already deteriorating economic conditions.Recent economic indicators reflect an improving economy with a growing sense ofoptimism for an economic recovery.The telecommunications sector has been significantly impacted by the recenteconomic downturn. The American Stock Exchange's North AmericanTelecommunications Index through February 2002 has dropped 65% from the highreached in March 2000. Investors reportedly fear that carriers with high debtloads may face liquidity crises. The telecommunications sector has been affectedby such liquidity concerns, bankruptcy filings of Global Crossing Ltd. andMcLeodUSA Inc., and concerns about the possibility of improper accounting.Demand for some of our communications products and services could be adverselyaffected by this downturn in the United States economy as well as changes in theglobal economy. Unfavorable economic conditions resulting from the recenteconomic recession in the United States may cause our customers to reduce theirdemand for our communications products and services. To date we have notexperienced a reduction in demand for our products and services. However, if theeconomic conditions in the United States worsen or if a wider or global economicslowdown occurs, our results of operations and financial condition may beadversely affected.As our business has grown, we have become increasingly subject to adversechanges in general economic conditions and economic conditions in the State ofAlaska, which can result in reductions in capital expenditures by customers,longer sales cycles, deferral or delay of purchase commitments for products orservices and increased price competition. Although these factors have notmaterially affected us in recent years, if the current economic slowdowncontinues or worsens, these factors could adversely affect our business andresults of operations.With the terrorist events of September 11, the FCC and the communicationscommunity are determining their respective roles in ensuring homeland security.The FCC's principal objectives are reportedly to secure the U.S.'scommunications infrastructure and to enhance emergency response throughcommunications. Expected FCC actions include re-chartering the NetworkReliability and Interoperability Council ("NRIC"), consideration of a mediacounter-part to NRIC, working with other agencies to ensure network protection,reliability and redundancy, continuing efforts to solve remaining public safetyspectrum issues, continuing to work on interoperability restraints, continuingto address emergency 911 issues, and working with other agencies on wireless priority access that balances the need for government response and criticalneeds of subscribers.Potential sales of large amounts of our Class A common stock into the marketcould lower the market price of our Class A common stock. We registered forresale in February 2002 4.5 million shares of our Class A common stock owned byWorldCom, representing approximately 8.8% of our Class A common stockoutstanding as of December 31, 2001. Sales of a substantial number of shares ofClass A common stock, or the perception that such sales may occur, could causethe market price of Class A common stock to decline and impede our ability toraise capital through sales of Class A common stock or securities convertibleinto or exercisable for Class A common stock.A significant percentage of our voting securities are held by a small number ofshareholders and these shareholders can control stockholder decisions on veryimportant matters. As of December 31, 2001, prior to giving effect to the saleof the 4.5 million shares of Class A common stock as described above, WorldComowned approximately 17% and our executive officers and directors and theiraffiliates owned approximately 29% of our combined outstanding Class A and ClassB common stock, representing approximately 47% of the combined voting power ofthat stock (including outstanding series B preferred stock voting with Class Acommon stock on an as-converted basis). After giving effect to the sale of allof the shares offered for sale and registered in February 2002, WorldCom wouldstill own approximately 9% and our executive officers and directors and theiraffiliates would still own approximately 21% of such outstanding Class A andClass B common stock, representing approximately 42% of the combined votingpower of such stock. These shareholders can 58significantly influence if not control our management policy and all fundamentalcorporate actions, including mergers, substantial acquisitions and dispositions,and election of directors to the Board. This concentration of ownership may havethe effect of discouraging third parties from making bids for us, delaying orpreventing a change of control, or reducing premiums paid to our shareholdersfor their stock and could have an adverse effect on the market price of ourClass A common stock.It may be difficult for a third party to acquire us, even if doing so may bebeneficial to our shareholders. Certain provisions of our Restated Articles ofIncorporation may discourage, delay or prevent a change in control of ourcompany that a shareholder may consider favorable. These provisions include thefollowing: - authorizing our board of directors to issue preferred stock under terms developed by the board, which could increase the number of outstanding shares and thwart a takeover attempt; and - classifying our board of directors with staggered three-year terms, which may lengthen the time required to gain control of our board of directors.It is unlikely shareholders will receive a return on their shares through thepayment of a cash dividend. We have never declared or paid cash dividends on anyof our common stock and have no intention of doing so in the foreseeable future.As a result, it is unlikely that shareholders will receive a return on theirshares through the payment of cash dividends.EmployeesWe employed 1,162 persons as of March 1, 2002, 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: 2001 2000 ----------------------- Telephone distribution systems 57.5% 58.0% Cable television distribution systems 23.1% 21.1% Support equipment 7.9% 8.1% Property and equipment under capital leases 8.7% 10.0% Construction in progress 1.4% 1.4% Transportation equipment 0.9% 0.8% Land and buildings 0.5% 0.6% ----------------------- Total 100.0% 100.0% =======================These properties are divided among our operating segments at December 31, 2001as follows: long-distance services, 54.6%; cable services, 24.6%; local accessservices, 7.1%; Internet services, 5.4%; and all other, 8.3%.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 59properties secure our Senior Holdings Loan and Fiber Facility. You should seenote 5 to the Notes to Consolidated Financial Statements included in Part II ofthis Report for more information.Our construction in progress totaled $8.1 million at December 31, 2001,consisting of telecommunications, cable and Internet projects that wereincomplete at December 31, 2001. Our construction in progress also totaled $8.1million at December 31, 2000, consisting of telecommunications, Internet andsupport systems projects that were incomplete at December 31, 2000.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, Alaska. Ournetwork includes digital fiber optic cables linking Alaska to the contiguous 48states and providing access to other carriers' networks for communicationsaround the world. We use satellite transmission to remote areas of Alaska andfor certain interstate 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 use thesatellite transponders pursuant to a long-term capital lease arrangement with aleasing company. The purchase and lease-purchase option agreement provided forthe interim lease of transponder capacity on the PanAmSat Galaxy IX satellitethrough the delivery of the purchased transponders on Galaxy XR in March 2000. Effective June 30, 2001, we acquired, through the issuance of preferred stock, acontrolling interest in the corporation owning the 800-mile fiber optic cablesystem that extends from Prudhoe Bay, Alaska to Valdez, Alaska via Fairbanks.We 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 33 communities and areas in Alaska including Anchorage,Fairbanks and Juneau, the state's three largest urban areas. As of December 31,2001, the Cable Systems consisted of approximately 2,200 miles of installedcable plant having between 330 to 550 MHz of channel capacity. Our principalphysical assets consist of a cable television distribution plant and equipment,including signal receiving, encoding and decoding devices, headend receptionfacilities, distribution systems and customer drop equipment for each of ourcable television 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 60communications systems. Such properties are in good condition. We own all of ourservice vehicles. We consider our properties suitable and adequate for ourpresent and anticipated future needs.Local Access ServicesWe operate a modern, competitive local access telecommunications networkemploying the latest digital transmission technology based upon fiber opticfacilities within Anchorage and Fairbanks through 2001, and in Juneau beginningin 2002. Our outside plant consists of connecting lines (aerial, underground andburied cable), the majority of which is on or under public roads, highways orstreets, while the remainder is on or under private property. Central officeequipment primarily consists of digital electronic switching equipment andcircuit equipment. Operating equipment consists of motor vehicles and otherequipment.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 trunks connecting our Anchorage facilities toInternet access points in Seattle through multiple, diversely routed upstreamInternet networks, 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 Expenditures Capital 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.The total investment in property, plant and equipment has increased from $178.2million at January 1, 1997 to $582.8 million at December 31, 2001, 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 1997 through 2001 were as follows (in millions): 1997 $ 64.6 1998 $ 149.0 1999 $ 36.6 2000 $ 48.9 2001 $ 68.0We project capital expenditures of $50 million to $60 million for 2002. Amajority of the expenditures will expand, enhance and modernize our currentnetworks, facilities and operating systems, and will develop wireless and otherbusinesses. Additional capital expenditures will be incurred if we successfullyacquire backup or standby facilities. You should see note 12 to the accompanyingNotes to Consolidated Financial Statements included in Part II of this Reportfor more information. 61During 2001, we funded our normal business capital requirements substantiallythrough internal sources and, to the extent necessary, from external financingsources. We expect expenditures for 2002 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. Central office equipment,buildings, furniture and fixtures and certain operating and other equipment areinsured under a blanket property insurance program. This program providessubstantial limits of coverage against "all risks" of loss including fire,windstorm, flood, earthquake and other perils not specifically excluded by theterms of the policies. As is typical in the communications industry, we areself-insured for damage or loss to certain of our transmission facilities,including our buried, under sea, and above-ground transmission lines. We believeour insurance coverage is adequate, however if we become subject to substantialuninsured liabilities due to damage or loss to such facilities, our financialresults may be adversely affected.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. Submissions of Matters to a Vote of Security HoldersNo matters were submitted during the fourth quarter of 2001 to a vote of security holders, through the solicitation of proxies or otherwise. 62 Part IIItem 5. Market for the Registrant's Common Equity and Related Stockholder MattersMarket 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 in 2000, represent prices betweendealers, do not include retail markups, markdowns, or commissions, and do notnecessarily represent actual transactions. Class A Class B --------------------------------------------------------------- High Low High Low ---- --- ---- --- 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 7/8 2001: First Quarter 9.031 5.875 9.031 5.875 Second Quarter 12.150 8.250 12.150 8.250 Third Quarter 12.450 8.450 12.450 8.450 Fourth Quarter 12.320 8.250 12.320 8.250HoldersAs of December 31, 2001 there were 1,872 holders of record of GCI's Class Acommon stock and 482 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 loanagreements contain provisions that prohibit payment of dividends, other thanstock dividends (you should see note 5 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. 63Item 6. Selected Financial DataThe following table presents selected historical information relating tofinancial condition and results of operations over the past five years. Years ended December 31, ------------------------------------------------------- 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- (Amounts in thousands except per share amounts) Revenues (1), (2) $ 357,258 292,605 279,179 246,795 223,809 Net earnings (loss) before income taxees, extraordinary item and cumulative effect of a change in accounting principle (3) $ 8,659 (21,649) (14,866) (10,920) (2,235) Loss on early extinguishment of debt, net of income tax benefit of $180 $ 0 0 0 0 521 Cumulative effect of a change in accounting principal, net of income tax benefit of $245 $ 0 0 344 0 0 Net earnings (loss) $ 4,589 (13,234) (9,527) (6,797) (2,183) Basic net earnings (loss) per common share $ 0.05 (0.29) (0.21) (0.14) (0.05) Diluted net earnings (loss) per common share $ 0.05 (0.29) (0.21) (0.14) (0.05) Total assets (4) $ 734,679 679,007 643,151 649,445 545,302 Long-term debt, including current portion (4) $ 351,700 334,400 339,400 351,657 250,084 Obligations under capital leases, including current portion (5) $ 47,282 48,696 1,674 2,186 1,188 Total stockholders' equity $ 202,392 183,480 192,548 200,007 204,439 Dividends declared per Common share (6) $ 0.00 0.00 0.00 0.00 0.00 --------------------- (1) The 2001 revenue increase is partially attributed to a $19.5 million sale of fiber optic cable system capacity. (2) The 1999 revenue increase is partially attributed to a $19.5 million sale of fiber optic cable system capacity. (3) 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. (4) 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. (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 5 to the Notes to Consolidated Financial Statements included in Part II of this Report. 64Item 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."Management's Discussion and Analysis of Financial Condition and Results ofOperations discusses our consolidated financial statements, which have beenprepared in accordance with accounting principles generally accepted in theUnited States. The preparation of these financial statements requires us to makeestimates and assumptions that affect the reported amounts of assets andliabilities and the disclosure of contingent assets and liabilities at the dateof the financial statements and the reported amounts of revenues and expensesduring the reporting period. On an on-going basis, we evaluate our estimates andjudgments, including those related to unbilled revenues, allowance for doubtfulaccounts, depreciation and amortization periods, intangible assets, incometaxes, and contingencies and litigation. We base our estimates and judgments onhistorical experience and on various other factors that are believed to bereasonable under the circumstances, the results of which form the basis formaking judgments about the carrying values of assets and liabilities that arenot readily apparent from other sources. Actual results may differ from theseestimates under different assumptions or conditions. See also our CautionaryStatement Regarding Forward-Looking Statements.OverviewWe have experienced significant growth in recent years through strategicacquisitions, deploying new business lines and expansion of our existingbusinesses. We have historically met our cash needs for operations, regularcapital expenditures and maintenance capital expenditures through our cash flowsfrom operating activities. Cash requirements for significant acquisitions andmajor capital expenditures have been provided largely through our financingactivities.Long-Distance ServicesDuring 2001 long-distance services revenue represented 56.2% of consolidated revenues. Our provision of interstate and intrastate long-distance services toresidential, commercial and governmental customers and to other common carriers(principally WorldCom, a related party, and Sprint), and provision of privateline and leased dedicated capacity services accounted for 95.3% of our totallong-distance services revenues during 2001. Factors that have the greatestimpact on year-to-year changes in long-distance services revenues include therate per minute charged to customers, usage volumes expressed as minutes of use,and the number of private line and leased dedicated service products in use.Revenues from private line and other dedicated data services sales increased19.7% to $34.7 million during 2001 as compared to 2000 due primarily toincreasing demand for our data services by commercial and governmentalcustomers.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 82.7% to$15.7 million during 2001 as compared to 2000. SchoolAccess(TM) services to nineschool districts in Arizona and New Mexico began in July 2001.Our long-distance services cost of sales and services has consisted principallyof direct costs of providing services, including local access charges paid toLECs for originating and terminating long-distance calls in Alaska, and feespaid to other long-distance carriers to carry calls terminating in areas notserved by our network (principally the Lower 49 states, most of which calls arecarried over WorldCom's network, and international locations, which calls arecarried principally over Sprint's network). During 2001, local access chargesaccounted for 65.9% of long-distance services cost of sales and services, feespaid to other long-distance carriers represented 28.1%, satellite transponderlease and undersea fiber maintenance costs represented 3.5%, and other costsrepresented 2.5% of long-distance services cost of sales and services. 65Our long-distance services selling, general, and administrative expenses haveconsisted of operating and engineering, customer service, sales andcommunications, management information systems, general and administrative, andlegal and regulatory expenses. Most of these expenses consist of salaries, wagesand benefits of personnel and certain other indirect costs (such as rent,travel, utilities, insurance and property taxes). A significant portion oflong-distance services selling, general, and administrative expenses, 79.5%during 2001, represents operating 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. We believe our approach to developing, pricing, andproviding long-distance services and bundling different business segmentservices will continue to allow us to be competitive in providing thoseservices.Message telephone service revenues derived from other common carriers increased11.5% to $80.1 million during 2001 as compared to 2000. The average rate chargedother common carriers increased 6.5% during the same period due to thediscontinued carriage of certain low-margin wholesale minutes and total minutescarried for other common carriers increased 4.8%. In conjunction with ourpurchase of a controlling interest in Kanas (see note 3 to the accompanyingNotes to Consolidated Financial Statements) we negotiated a contract amendmentwith WorldCom in March 2001. The amendment extended the contract term to March2006 and reduced the rate charged by us for certain WorldCom traffic over theextended term of the contract. The Sprint contract was amended in March 2002extending its term to March 2007 with two one-year automatic extensions to March2009. The amendment reduced the rate to be charged by us for certain Sprinttraffic 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 in the 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 2001, cable television revenues represented 21.4% of consolidatedrevenues. The cable systems serve 31 communities and areas in Alaska, includingthe state's three largest population centers, Anchorage, Fairbanks and Juneau.On March 31, 2001 we acquired the assets and customer base of G.C. Cablevision,Inc. through the issuance of 238,199 unregistered shares of GCI Class A commonstock with a future payment in additional shares contingent upon certainconditions. This acquisition increased homes passed by 2,000 and addedapproximately 1,000 subscribers in Fairbanks and North Pole, Alaska.On November 19, 2001 we acquired all of the common stock of Rogers AmericanCablesystems, Inc. ("Rogers"), a cable television service provider in Palmer andWasilla, Alaska for approximately $19 million, of which $18.5 million was paidin 2001. This acquisition allowed our facilities to pass an additional 10,000homes and added approximately 7,000 subscribers.We generate cable services revenues from four primary sources: (1) digital andanalog programming services, including monthly basic or premium subscriptionsand pay-per-view movies or other one-time events, such as sporting events; (2)equipment rentals or installation; (3) advertising sales; and (4) cable modemservices (shared with our Internet services segment). During 2001 programmingservices generated 79.6% of total cable services revenues, equipment rental andinstallation fees accounted for 9.6% of such revenues, cable modem services 66accounted for 6.4% of such revenues, advertising sales accounted for 3.5% ofsuch revenues, and other services accounted for the remaining 0.9% of totalcable services revenues. The primary factors that contribute to year-to-yearchanges in cable services revenues are average monthly subscription andpay-per-view rates, the mix among basic, premium and pay-per-view services anddigital and analog services, the average number of cable television and cablemodem subscribers during a given reporting period, and revenues generated fromnew product offerings.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 continue to becompetitive by providing, at reasonable prices, a greater variety of programmingand other communication services than are available off-air or through otheralternative delivery sources and upon superior technical performance andcustomer 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. Local exchange services revenues totaled $25.2 millionin 2001 representing 7.1% of consolidated revenues. 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, the average monthly rates charged for non-trafficsensitive services and the number and type of additional premium featuresselected.Our local access services segment faces significant competition in Anchorage, Fairbanks, and Juneau from the ILEC ACS and AT&T Alascom, Inc. We beganmarketing efforts in the Juneau market in the fourth quarter of 2001 and beganprovisioning service in the first quarter of 2002. We believe our approach todeveloping, pricing, and providing local access services and bundling differentbusiness segment services will allow us to be competitive in providing thoseservices.Internet ServicesWe generate Internet services revenues from three primary sources: (1) accessproduct services, including commercial, Internet service provider, and retaildial-up access; (2) network management services; and (3) cable modem services (aportion of cable modem revenue is also recognized by our cable servicessegment). Internet services segment revenues totaled $12.0 million representing3.4% of total revenues in 2001. The primary factors that contribute toyear-to-year changes in Internet services revenues are the average number ofsubscribers to our services during a given reporting period, the average monthlysubscription rates, and the number and type of additional premium featuresselected.Marketing campaigns continue to be deployed targeting residential and commercialcustomers featuring bundled Internet products. Our Internet offerings arecoupled with our long-distance and local access services offerings and providefree basic Internet 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 servicesallows us to be competitive in providing those services.Other Services and Other ExpensesTelecommunications services revenues reported in the All Other category asdescribed in note 9 in the accompanying Notes to Consolidated FinancialStatements include sales of undersea fiber optic system capacity (see below),corporate network management contracts, telecommunications equipment sales andservice, management services for Kanas through June 30, 2001 (see note 3 in theaccompanying Notes to Consolidated Financial Statements), and othermiscellaneous revenues (including revenues from cellular resale services, 67prepaid and debit calling card sales, and installation and leasing of customer'svery small aperture terminal ("VSAT") equipment).Revenues included in the All Other category represented 12.0% of total revenuesin 2001 and included $19.5 million recognized from a fiber capacity sale,network solutions and outsourcing revenues totaling $19.0 million andcommunications equipment sales, cellular resale and other revenues totaling $4.3million. The fiber capacity sale was a cash transaction completed in January2001.Depreciation, amortization and net interest expense on a consolidated basisdecreased $2.1 million in 2001 as compared to 2000 resulting primarily fromdecreased interest rates in 2001 on our variable rate debt, the effect of aninterest rate swap agreement described below, and decreased average outstandinglong-term debt balances during the first six months of 2001. Partiallyoffsetting these decreases was an increase in our depreciation expense due toour $43.7 million investment in equipment and facilities placed into serviceduring 2000 for which a full year of depreciation was recorded during 2001, the$68.0 million investment in other equipment and facilities during 2001 for whicha partial year of depreciation was recorded during 2001, and an increase inaverage outstanding indebtedness in the last six months of 2001.As further described in note 1(l) to the accompanying Notes to ConsolidatedFinancial Statements: - Effective January 3, 2001, we entered into an interest rate swap agreement to convert $50 million of 9.75% fixed rate debt to a variable interest rate equal to the 90 day Libor rate plus 334 basis points. - Effective September 21, 2001, we entered into an interest rate swap agreement to convert $25 million of variable interest rate debt to 3.98% fixed rate debt plus applicable margin.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) ----------------------- ----------------- 2001 2000 vs. vs. 2001 2000 1999 2000 1999 ---- ---- ---- ---- ---- Statement of Operations Data: Revenues: Long-distance services 56.2% 62.4% 58.8% 9.9% 11.4% Cable services 21.4% 23.2% 21.9% 12.7% 11.0% Local access services 7.1% 6.9% 5.6% 24.9% 30.0% Internet services 3.3% 2.9% 1.7% 42.4% 75.6% Other services 12.0% 4.6% 12.0% 219.3% (60.2%) ------------------------------------------------------------------ Total revenues 100.0% 100.0% 100.0% 22.1% 4.8% Cost of sales and services 39.1% 40.9% 43.9% 16.8% (2.2%) Selling, general and administrative expenses 33.8% 35.8% 35.2% 15.2% 6.8% Depreciation and amortization 16.0% 17.8% 15.3% 9.8% 21.8% ------------------------------------------------------------------ Operating income 11.1% 5.5% 5.6% 147.3% 1.6% Net income (loss) before income taxes and cumulative change in an accounting principle 2.4% (7.4%) (5.3%) 140.0% (45.6%) Net income (loss) before cumulative change in an accounting principle 1.3% (4.5%) (3.3%) 134.7% (44.1%) Net income (loss) 1.3% (4.5%) (3.4%) 134.7% (38.9%) 68 Year Ended December 31, Percentage Change(1) ----------------------- ----------------- 2001 2000 vs. vs. 2001 2000 1999 2000 1999 ---- ---- ---- ---- ---- Other Operating Data (2):Long-distance services operating income (3) 34.8% 29.6% 26.8% 29.1% 23.3%Cable services operating income (4) 20.2% 19.3% 21.2% 17.9% 1.5%Local access services operating loss (5) (5.8%) (21.2%) (31.5%) 65.9% 12.6%Internet services operating loss (6) (11.9%) (35.2%) (81.9%) 55.2% 24.4%--------------------------(1)Percentage change in underlying data.(2)Includes customer service, marketing and advertising costs.(3)Computed as a percentage of total external long-distance services revenues.(4)Computed as a percentage of total external cable services revenues.(5)Computed as a percentage of total external local access services revenues.(6)Computed as a percentage of total external Internet services revenues.--------------------------Year Ended December 31, 2001 ("2001") Compared To Year Ended December 31, 2000 ("2000").RevenuesTotal revenues increased 22.1% from $292.6 million in 2000 to $357.3 million in2001. Excluding the fiber optic cable capacity sale in 2001 as described in note1(o) in the accompanying Notes to Consolidated Financial Statements, totalrevenues increased 15.4%.Long-distance services revenues from residential, commercial, governmental, andother common carrier customers increased 9.9% to $200.7 million in 2001. Theincrease was largely due to the following: - An increase of 19.7% in private line and private network transmission services revenues to $34.7 million in 2001 due to an increased number of leased circuits in service, - An increase of 11.5% in message telephone service revenues from other common carriers (principally WorldCom and Sprint) to $80.1 million in 2001, - An increase of 82.7% to $15.7 million in 2001 revenues from our - An increase of 82.7% to $15.7 million in 2001 revenues from our packaged telecommunications offering to rural hospitals and health clinics and our SchoolAccess(TM) offering to rural school districts. The increase is primarily due to an increase in circuits and services sold to rural hospitals and health clinics from 51 circuits at December 31, 2000 to 74 circuits at December 31, 2001, - An increase of 2.2% in total minutes of use to 1,059.2 million minutes primarily due to a 4.8% increase in wholesale minutes carried for other common carriers. After excluding certain low-margin wholesale minutes no longer carried for other common carriers, comparable total minutes over the prior year increased 13.5% and wholesale minutes carried for other common carriers increased 23.5% over the prior year, and - A 6.5% increase in the average rate per minute on minutes carried for other common carriers due to the discontinued carriage of certain low-margin wholesale minutes.Long-distance services revenue increases described above were partially offsetby a 3.3% decrease in our average rate per minute to $0.118 per minute in 2001attributed to our promotion of and customers' enrollment in calling plansoffering a certain number of minutes for a flat monthly fee.Cable services revenues increased 12.7% to $76.6 million in 2001. Programmingservices revenues increased 9.4% to $60.9 million in 2001 and average grossrevenue per average basic subscriber per month increased $0.35 or 0.7% in 2001resulting from the following: - Basic subscribers served increased approximately 11,600 to approximately 132,000 at December 31, 2001 as compared to December 31, 2000 (the 2001 increase includes approximately 1,000 basic subscribers 69 acquired from G.C. Cablevision, Inc. on March 31, 2001 and approximately 7,000 basic subscribers acquired from Rogers on November 19, 2001), - Rates charged to subscribers in most systems increased as of February 2001, - New facility construction efforts in 2001 and the acquisition of GC Cablevision, Inc. and Rogers subscribers resulted in approximately 14,800 additional homes passed, a 8.3% increase from 2000, and - Digital subscriber counts increased 81.8% to approximately 24,600 at December 31, 2001 as compared to December 31, 2000.The cable services segment's share of cable modem revenue (offered through ourInternet services segment) increased $2.5 million to $4.9 million in 2001.Local access services revenues increased 24.9% in 2001 to $25.2 million. AtDecember 31, 2001 approximately 79,200 lines were in service as compared toapproximately 62,000 lines in service at December 31, 2000.Internet services revenues increased 42.4% to $12.0 million in 2001 primarilydue to growth in the average number of customers served. We had approximately69,900 active residential, commercial and small business retail dial-up Internetsubscribers at December 31, 2001 as compared to approximately 62,600 at December31, 2000. We had approximately 26,500 active residential, commercial and smallbusiness retail cable modem subscribers at December 31, 2001 as compared toapproximately 16,000 at December 31, 2000. Approximately 850 cable modemsubscribers were acquired from Rogers on November 19, 2001.The 219.3% increase in All Other revenues to $42.8 million in 2001 is primarilydue to the $19.5 million fiber capacity sale in 2001 as previously described andincreased revenues from managed services.Cost of Sales and ServiceTotal cost of sales and services increased 16.8% to $139.8 million in 2001. As apercentage of total revenues, total cost of sales and services decreased from40.9% in 2000 to 39.1% in 2001. Excluding the fiber capacity sale in 2001, totalcost of sales and services as a percentage of total revenues decreased from 40.9% in 2000 to 36.1% in 2001.Long-distance services cost of sales and services decreased 4.3% to $73.3million in 2001. Long-distance services cost of sales as a percentage oflong-distance services revenues decreased from 41.9% in 2000 to 36.5% in 2001primarily due to reduced satellite transponder cost of sales beginning April2000 upon our acquiring owned satellite transponder capacity, reductions inaccess costs due to distribution and termination of our traffic on our own localservices network instead of paying other carriers to distribute and terminateour traffic, the conclusion of a dispute with ACS which allowed us to reverse$2.0 million in accrued costs, and a $450,000 non-recurring refund in 2001 froma local exchange carrier in respect of its earnings that exceeded regulatoryrequirements. Offsetting the 2001 decrease as compared to 2000 is a decrease inthe average rate per minute billed to customers without a comparable decrease inaccess charges paid by us. We expect cost savings to occur as long-distancetraffic originated, carried, and terminated on our own facilities grows.Cable services cost of sales and services increased 16.9% to $20.8 million in2001. Cable services cost of sales and services as a percentage of cablerevenues, which is less as a percentage of revenues than are long-distance,local access and Internet services cost of sales and services, increased from26.2% in 2000 to 27.2% in 2001. Cable services rate increases did not keep pacewith increases in programming costs in 2001. Programming costs increased formost of our cable services offerings, and we incurred additional costs on newprogramming introduced in 2000 and 2001.Local access services cost of sales and services increased 30.4% to $14.0million in 2001. Local access services cost of sales and services as apercentage of local access services revenues increased from 53.3% in 2000 to55.6% in 2001. The local access services cost of sales increase as a percentageof local access services revenues is due to decreased external local accessservices revenues as the number of customers purchasing both long-distance andlocal access services from us increase. The increases in local access servicescost of sales as a 70percentage of local access services revenues described above are off-set byeconomies of scale and more efficient network utilization as local accessservices revenues increase. ACS requested and received permission for a 7.7%increase in the local loop lease rate effective in November 2001. We expect theincreased cost will result in a 4.0% to 5.0% increase in the local accessservices cost of sales as a percentage of local access services revenue for theyear ended December 31, 2002.Internet services cost of sales and services increased 8.2% to $4.7 million in2001. Internet services costs of sales as a percentage of Internet servicesrevenues totaled 39.6% and 52.1% in 2001 and 2000, respectively. The Internetservices costs of sales decrease as a percentage of Internet services revenuesis primarily due to a $5.6 million increase in Internet's portion of cable modemrevenue that generally has higher margins than do other Internet products. AsInternet services revenues increase, economies of scale and more efficientnetwork utilization continue to result in reduced Internet cost of sales andservices as a percentage of Internet services revenues.Selling, General and Administrative ExpensesSelling, general and administrative expenses increased 15.2% to $120.8 millionin 2001 and, as a percentage of total revenues, decreased from 35.9% in 2000 to33.8% in 2001. Excluding the fiber capacity sale in 2001, selling, general andadministrative expenses, as a percentage of total revenues, were 35.4% in 2001.The increase in selling, general and administrative expenses in 2001 is due toincreased labor and health insurance costs, increased accrual of a company-widesuccess sharing bonus, and incremental new costs to operate GCI FiberCommunication Co., Inc. ("GFCC") (see note 3 to the accompanying Notes toConsolidated Financial Statements).Marketing and advertising expenses as a percentage of total revenues decreased from 2.8% in 2000 to 2.4% in 2001. Excluding the fiber capacity sale in 2001,marketing and advertising expenses as a percentage of total revenues were 2.5%in 2001.Depreciation and AmortizationDepreciation and amortization expense increased 9.8% to $57.1 million in 2001.The increase is attributable to our $43.7 million investment in equipment andfacilities placed into service during 2000 for which a full year of depreciationwas recorded during the year ended December 31, 2001 and the $68.0 millioninvestment in other equipment and facilities placed into service during the yearended December 31, 2001 for which a partial year of depreciation was recordedduring 2001.Interest Expense, NetInterest expense, net of interest income, decreased 19.0% to $30.9 million in2001. This decrease resulted primarily from decreased interest rates in 2001 onour variable rate debt, a $943,000 net interest benefit earned in 2001 from ourtwo interest rate swap agreements as previously described, decreased averageoutstanding long-term debt balances during the first six months of 2001 and acharge of $2.0 million to interest expense in 2000 to write-off previouslycapitalized interest expense. Partially offsetting these decreases were anincrease in average outstanding indebtedness in the last six months of 2001 andan increase in our average outstanding capital lease obligation balances in thelast six months of 2000.Income Tax (Expense) BenefitIncome tax (expense) benefit was ($4.1) million in 2001 and $8.4 million in2000. The change was due to our generation of net income before income taxes in2001 as compared to a net loss before income taxes in 2000. Our effective incometax rate increased from 38.9% in 2000 to 47.0% in 2001 due to the effect ofitems that are nondeductible for income tax purposes.At December 31, 2001, we have (1) tax net operating loss carryforwards ofapproximately $156.1 million that will begin expiring in 2007 if not utilized,and (2) alternative minimum tax credit carryforwards of approximately $2.1million 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. 71Tax 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 40% to 50% in2002.The Job Creation and Worker Assistance Act of 2002 was signed into law on March9, 2002 and contains several provisions that are effective for tax years endingin 2001, one of which relates to net operating losses. The Act amends InternalRevenue Code ("IRC") Section 172(b)(1) to provide, generally, that a netoperating loss for a tax year ending in 2001 or 2002 can be carried back fiveyears, rather than the two-year carryback generally allowed by section172(b)(1)(A). The Act also amends IRC Section 56(d)(1) to allow alternativeminimum tax net operating losses carried forward into tax years ending in 2001or 2002 to be used without regard to the 90 percent alternative minimum taxableincome limitation that generally applies. In addition, alternative minimum taxnet operating losses generated in 2001 or 2002 and carried back to an earlieryear under IRC Section 172 are not subject to the 90 percent alternative minimumtaxable income limitation. Statement of Financial Accounting Standard ("SFAS")No. 109 states that a change in tax law or rates that affects deferred incometaxes is recorded in the statement of operations in the year of enactment.Accordingly the deferred income tax effect, which we estimate to totalapproximately $2 million, will be recorded as a reduction of our recorded deferred tax assets in our consolidated balance sheet in the first quarter of2002.Our U.S. income tax return for 1999 was selected for examination by the InternalRevenue Service during 2001. The examination commenced during the third quarterof 2001. We believe this examination will not have a material adverse effect onour financial position, results of operations or our liquidity.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 services revenues from residential, commercial, governmental, andother common carrier customers increased 11.4% to $182.7 million in 2000. Thelong-distance services revenue increase in 2000 was largely due to thefollowing: - 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 message telephone service 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 services revenue increases were offset by the following: - A decrease of 2.4% 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 72 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 services revenues increased 11.0% to $67.9 million in 2000. Programmingservices revenues increased 6.6% to $55.7 million in 2000 and revenue peraverage basic subscriber per month increased $0.12, or 0.3% in 2000. Revenueincreases resulted from the following: - Basic subscribers increased approximately 3,600 to approximately 120,400 at December 31, 2000 as compared to December 31, 1999, - Increased sales of pay-per-view and premium services, - New facility construction efforts in 2000 resulted in approximately 3,400 additional homes passed, a 1.9% increase from 1999, and - Digital subscribers increased 131.7% to 13,500 at December 31, 2000 as compared to December 31, 1999.The cable services segment's share of cable modem revenue (offered through our Internet services segment) increased $2.0 million to $2.4 million in 2000 afterthe introduction of such services 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 16,100 active residential, commercial and smallbusiness retail cable modem subscribers at December 31, 2000 as compared toapproximately 5,700 at December 31, 1999.All Other revenues decreased 60.2% to $13.4 million in 2000 primarily due to the$19.5 million fiber capacity sale we completed in 1999 in a cash transaction.The sale included both capacity within Alaska, and between Alaska and the Lower49 states.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 services cost of sales and services decreased from $81.0 millionin 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 to26.2% 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. 73Local 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,respectively. The Internet services costs of sales decrease as a percentage ofInternet services revenues is primarily due to a $2.6 million increase inInternet services' portion of cable modem revenues which generally have highermargins than do other Internet products. As Internet services revenues haveincreased, economies of scale and more efficient network utilization haveresulted in reduced Internet cost of sales and services as a percentage ofInternet services revenues.Selling, General and Administrative ExpensesSelling, general and administrative expenses increased 6.8% to $104.9 million in 2000. Selling, general and administrative expenses, as a percentage of totalrevenues, increased from 35.2% in 1999 to 35.9% in 2000.Depreciation and AmortizationDepreciation and amortization expense increased 21.8% to $52.0 million in 2000.The increase is attributable to our $38.8 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 for which depreciation began in 2000, the $43.7million investment in other equipment and facilities during 2000 for which apartial year of depreciation was recorded during 2000, and a charge of $1.7million in 2000 resulting from a change in the estimated remaining lives ofassets that we intend to replace 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 from the capital lease of satellite transponder capacity in 2000,higher interest rates on our variable rate debt in 2000, 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.Fluctuations in Quarterly Results of OperationsThe following chart provides selected unaudited statement of operations datafrom our quarterly results of operations during 2001 and 2000: 74 (Amounts in thousands, except per share amounts) ------------------------------------------------------------- First Second Third Fourth Total Quarter Quarter Quarter Quarter Year ------------------------------------------------------------- 2001 Revenues: Long-distance services $ 46,236 49,851 53,892 50,715 200,694 Cable services $ 18,046 18,873 19,113 20,522 76,554 Local access services $ 5,958 6,183 6,397 6,691 25,229 Internet services $ 2,619 3,134 3,019 3,224 11,996 All Other services (1) $ 24,058 7,494 5,598 5,635 42,785 ------------------------------------------------------------- Total revenues $ 96,917 85,535 88,019 86,787 357,258 Operating income (1) $ 13,042 8,411 10,192 7,928 39,573 Net income before income taxes $ 4,322 436 2,717 1,184 8,659 Net income $ 2,423 166 1,527 473 4,589 Basic net income (loss) per common share $ 0.04 (0.01) 0.02 0.00 0.05 Diluted net income (loss) per common share (2) $ 0.03 (0.01) 0.02 0.00 0.05 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 All 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) 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) ----------------- (1) The first quarter of 2001 includes $19.5 million of revenue and $8.7 of operating income from the sale of long-haul capacity in the Alaska United undersea fiber optic cable system. See Part I, Item 1, Historical Development of our Business During the Past Fiscal Year for more information. (2) Due to rounding, the sum of quarterly net income (loss) per common share amounts does not agree to total year net income per common share amounts. -----------------RevenuesTotal revenues for the quarter ended December 31, 2001 ("fourth quarter") were$86.8 million, representing a 1.4% decrease from $88.0 million for the quarterended September 30, 2001 ("third quarter"). The fourth quarter decrease resultedprimarily from a 5.9% decrease in long-distance services revenue to $50.7million primarily due to the following: - Revenues from other common carriers decreased 8.4% to $20.5 million, primarily due to a 10.5% decrease in minutes carried to 180.4 million minutes. The decrease in minutes is largely due to seasonality, - A 6.3% decrease in long-distance minutes of traffic carried for customers other than other common carriers to 83.6 million minutes primarily due to seasonality, and - A decrease in the long-distance services average rate per minute from $0.119 in the third quarter to $0.118 in the fourth quarter.The decrease in long-distance service revenue was partially offset by a 7.4%increase in cable services revenues to $20.5 million resulting from thefollowing: - Basic subscribers served increased approximately 9,000 to approximately 132,000 (of which approximately 7,000 basic subscribers were acquired from Rogers on November 19, 2001), and 75 - Digital subscriber counts increased 14.4% to approximately 24,600 at December 31, 2001 as compared to September 30, 2001.Long-distance revenues have historically been highest in the summer monthsbecause 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 access and Internet services are notexpected to exhibit significant seasonality. Our ability to implementconstruction projects is also hampered during the winter months because of coldtemperatures, snow and short daylight hours.Cost of Sales and ServicesCost of sales and services decreased from $32.7 million in the third quarter to$31.1 million in the fourth quarter. As a percentage of revenues, third andfourth quarter cost of sales and services totaled 37.2% and 35.9%, respectively.The fourth quarter decrease as a percentage of revenues primarily results from a$450,000 non-recurring refund in the third quarter from a local exchange carrierin respect of its earnings that exceeded regulatory requirements, and reductionsin access costs due to distribution and termination of traffic on our ownlong-distance and local services networks instead of paying other carriers todistribute and terminate our traffic. We expect cost savings to continue astraffic carried on our own facilities grows.Selling, General and Administrative ExpensesSelling, general and administrative expenses increased 4.7% to $32.4 million inthe fourth quarter as compared to the third quarter. As a percentage ofrevenues, fourth quarter selling, general and administrative expenses were 37.4%as compared to 35.2% for the third quarter. The increase in selling, general andadministrative expenses in the fourth quarter as a percentage of revenues ascompared to the third quarter is primarily due to reduced revenues without a comparable decrease in costs, increased accrual of company-wide success sharingand incentive compensation bonuses, and new product development costs.Net IncomeWe reported net income of $473,000 for the fourth quarter as compared to a $1.5million for the third quarter. The decrease is due to decreased operating incomepartially offset by decreased net interest expense and decreased income taxexpense.Liquidity and Capital ResourcesCash flows from operating activities totaled $82.3 million in 2001 as comparedto $41.4 million in 2000, net of changes in the components of working capital.The increase in 2001 is primarily due to the fiber capacity sale in 2001 andincreased cash flow from substantially all service offerings. Expenditures forproperty and equipment, including construction in progress, totaled $68.0million in 2001. Other uses of cash during 2001 included the acquisition of allof the common stock of Rogers for approximately $19 million (of which $18.5million was paid in 2001) net of cash received, repayment of $13.7 million oflong-term borrowings and capital lease obligations, advances to Kanas andpayments on Kanas' behalf of approximately $5.6 million (see note 3 to theaccompanying Notes to Consolidated Financial Statements), payment of a $1.2million equipment lease deposit, and payment of $2.2 million in preferred stockdividends. Other sources of cash in 2001 include $29.0 million in long-termborrowings and $3.9 million from the issuance of our common stock.Trade receivables increased $9.0 million from December 31, 2000 to December 31,2001 primarily due to an increase in other common carrier trade receivables andbroadband trade receivables related to our services to hospitals and healthclinics. The increase in other common carrier trade receivables is primarily dueto a 11.5% increase in message telephone service revenues to $80.1 million in2001 from other common carriers. The increase in broadband trade receivables isprimarily due to a 278.9% increase in broadband revenues to $7.5 million in 2001related to our provision of services to hospitals and health clinics. 76Working capital deficit totaled ($4.8) million at December 31, 2001, a $15.4million decrease from working capital of $10.6 million as of December 31, 2000.The decrease is primarily attributed to our use of proceeds from the 2001 fibercapacity sale to purchase long-term capital assets and repay long-term debt andthe classification of $5.7 million to current maturities of long-term debt.Our semi-annual Senior Notes interest payments of $8.8 million are due in thefirst and third quarters.On April 13, 1999, we amended our Holdings credit facilities. The amendedfacilities reduced the aggregate commitment by $50,000,000 to $200,000,000 andprovided for the payment of a one-time amendment fee of $530,000. Pursuant tothe FASB Emerging Issues Task Force Issue 98-14, "Debtor's Accounting forChanges in Line-of-Credit or Revolving Debt Arrangements," we recorded asadditional interest expense $472,000 of deferred financing costs in the secondquarter of 1999 associated with reduced borrowing capacity resulting from theamendment.On October 25, 2000, March 23, 2001, April 27, 2001 and October 31, 2001 wefurther amended the Holdings $150,000,000 and $50,000,000 credit facilities.Certain of these amendments provided for our acquisitions of Kanas and Rogers,and contain, among other things, provision for payment of amendment fees of$433,000, changes in certain financial covenants and ratios, and a limit of $70million and $60 million for 2001 and 2002, respectively, for capitalexpenditures (excluding capital expenditures by certain subsidiaries). Underthese amendments, 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 through September 30, 2003 and, - Fixed charges coverage ratio (as defined) of Holdings and certain of its subsidiaries to exceed 1.00 to 1.00 from January 1, 2003 through March 31, 2004 (which adjusts to 1.05 to 1.0 in April, 2004 and thereafter).On December 17, 2001 we further amended the Holdings $150,000,000 and$50,000,000 credit facilities. We paid a one-time fee of $438,000 in conjunctionwith this amendment. Changes in certain financial covenants and ratios outlinedin this amendment are effective only upon the acquisition of the assets of WCICable, Inc. and its subsidiaries ("WCIC") (see note 12). Because of theuncertainty of the likelihood that we will complete the acquisition of theassets of WCIC we recognized the amendment fee as an expense during the yearended December 31, 2001 rather than deferring and amortizing the fee over theremaining life of the Senior Holdings Loan. Under these amendments, theapplicable margin has been increased to the following amounts: Total Leverage Ratio Base Rate LIBOR -------------------- --------- ----- Greater than or equal to 6.50 to 1.00 1.375% 2.500% Greater than or equal to 6.00 to 1.00 but less than 6.50 to 1.00 1.000% 2.125% Greater than or equal to 5.50 to 1.00 but less than 6.00 to 1.00 0.750% 1.875% Greater than or equal to 5.00 to 1.00 but less than 5.50 to 1.00 0.500% 1.625% Greater than or equal to 4.50 to 1.00 but less than 5.00 to 1.00 0.250% 1.375% Greater than or equal to 4.00 to 1.00 but less than 4.50 to 1.00 0.000% 1.250% Less than 4.00 to 1.00 0.000% 1.000%If we complete the acquisition of the assets of WCIC and its subsidiaries and weenter into a refinancing of a portion of the Senior Holdings Loan the base rateand LIBOR applicable margins will be 1.125% and 2.250%, respectively.Additionally, the amendments require changes in certain financial covenants andratios and a capital expenditure limit of $70 million in 2001, $65 million in2002, $50 million in 2003, and $15 million in January 1, 2004 through March 31,2004 (excluding capital expenditures by certain subsidiaries). Additionally ifthe acquisition is completed, Holdings may not permit the fixed charges coverageratio (as defined) of Holdings and certain of its subsidiaries to exceed 1.00 to1.00 from January 1, 2003 through December 31, 2004 (which adjusts to 1.05 to1.0 in January, 2005 and thereafter). 77We were in compliance with all loan covenants at December 31, 2001.We borrowed an additional $9.0 million on our Holdings credit facilities in thefirst quarter of 2002. We are scheduled to make a $5.7 million principal paymenton our Holdings credit facilities in the fourth quarter of 2002, though weexpect to refinance the Holdings credit facilities prior to the due date of suchpayment.Our expenditures for property and equipment, including construction in progress,totaled $68.0 million and $48.9 million during 2001 and 2000, respectively. Weexpect our expenditures for property and equipment, including construction inprogress, for our core operations to total $50 million - $60 million during theyear ended December 31, 2002. Planned capital expenditures over the next fiveyears include those necessary for continued expansion of our long-distance,local exchange and Internet facilities, continuing development of our PCSnetwork, cable telephony, and upgrades to our cable television plant. Additionalcapital expenditures will be incurred if we successfully acquire backup orstandby facilities as described above. You should also see note 12 to theaccompanying Notes to Consolidated Financial Statements included in Part II ofthis Report for more information.Dividends earned on our Series B preferred stock are payable at the semi-annualpayment dates of April 30 and October 31 of each year. The determination ofwhether additional dividends will be paid in cash or additional fully paidshares of Series B preferred stock is made at each semi-annual payment datethrough the four-year anniversary of the April 30, 1999 closing. Dividendsearned after the four-year anniversary of closing are payable semi-annually incash only. In October 2001, a Series B preferred stockholder converted 5,665 shares of Series B preferred stock to shares of GCI Class A common stock.We issued 10,000 shares of Series C preferred stock on June 30, 2001 to acquirea controlling interest in Kanas (see note 3 to the accompanying Notes toConsolidated Financial Statements). The non-voting Series C preferred stock isconvertible at $12 per share into GCI Class A common stock and pays a 6% perannum quarterly cash dividend. We may redeem the Series C preferred stock at anytime in whole but not in part. Mandatory redemption is required at any timeafter the fourth anniversary date at the option of holders of 80% of theoutstanding shares of the Series C preferred stock. The redemption price is$1,000 per share plus the amount of all accrued and unpaid dividends, whetherearned or declared, through the redemption date. In the event of a liquidationof GCI, the holders of the Series C preferred stock shall be entitled to be paidan amount equal to the redemption price before any distribution or payment ismade upon Junior Securities.Our contractual obligations, including commitments for future payments undernon-cancelable lease arrangements and long-term debt arrangements, aresummarized below and are more fully disclosed in notes 5 and 12 to theaccompanying Notes to Consolidated Financial Statements (amounts in thousands): Payments Due by Period --------------------------------------------- After 5 Total 1-3 Years 4-5 Years Years ----------- ---------- ---------- ----------- Long-term debt $ 351,700 110,272 58,571 182,857 Capital lease obligations 47,282 6,724 12,414 28,144 Operating leases 40,344 21,603 8,372 10,369 ----------- ---------- ---------- ----------- Total contractual obligations $ 439,326 138,599 79,357 221,370 =========== ========== ========== ===========$3.0 million of the Senior Holdings Loan facilities have been used to provide aletter of credit to secure payment of certain access charges associated with ourprovision of telecommunications services within the State of Alaska.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 andtechnological changes will affect our ability to obtain financing. 78We believe that we will be able to meet our current and long-term liquidity andcapital requirements, fixed charges and preferred stock dividends through ourcash flows from operating activities, existing cash, cash equivalents,short-term investments, credit facilities, and other external financing andequity sources. Should cash flows be insufficient to support additionalborrowings, capital expenditures will likely be reduced.New Accounting StandardsIn July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.142, "Goodwill and Other Intangible Assets." SFAS No. 142 provides accountingand reporting standards for intangible assets acquired individually, with agroup of other assets, or as part of a business combination. This statementaddresses how acquired goodwill and other intangible assets are recorded upontheir acquisition as well as how they are to be accounted for after they havebeen initially recognized in the financial statements. This statement alsorequires expanded disclosure for goodwill and other intangible assets. We willadopt this standard January 1, 2002.Under this statement, goodwill and other intangibles with indefinite usefullives will no longer be amortized on a prospective basis. Impairment tests will be preformed at least annually based on a fair value comparison. Intangiblesthat have finite useful lives will continue to be amortized over theirrespective useful lives. We estimate that our 2002 goodwill amortization expensewill be reduced by approximately $1.2 million as a result of adopting thisstandard.We are waiting for further guidance from the FASB and/or the SEC on whether ourcable franchise agreements qualify as indefinite lived intangible assets. Thisguidance is expected before we file our first quarter 2002 Form 10-Q. As ofDecember 31, 2001, we had unamortized franchise agreement assets of $191.1million, and recorded amortization expense related to these during 2001 of$5,179,000. Upon adoption of SFAS No. 142, we may cease amortization of ourfranchise agreement assets if they are determined to have indefinite lives underSFAS No. 142.At the date of adoption, we will be required to complete a transitionalintangible asset impairment test. Any resulting impairment loss will berecognized as a cumulative effect of a change in accounting principle. We are inthe process of evaluating whether any of our goodwill or intangible asset valuesare impaired pursuant to the provisions of SFAS No. 142 and 144 (as describedbelow). Although our analysis is not complete, we currently do not expectwrite-downs of the carrying value of our intangible assets or goodwill, if any,to have a material affect on our results of operations, financial position andcash flows.In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset RetirementObligations". SFAS No. 143 provides accounting and reporting standards for costsassociated with the retirement of long-lived assets. This statement requiresentities to record the fair value of a liability for an asset retirementobligation in the period in which it is incurred. When the liability isinitially recorded, the entity capitalizes a cost by increasing the carryingamount of the related long-lived asset. Over time, the liability is accreted toits present value each period, and the capitalized cost is depreciated over theuseful life of the related asset. Upon settlement of the liability, an entityeither settles the obligation for its recorded amount or incurs a gain or lossupon settlement. We will be required to adopt this statement no later thanJanuary 1, 2003 and do not expect that it will have a material effect on ourresults of operations, financial position and cash flows. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment orDisposal of Long-Lived Assets". SFAS No. 144 replaces SFAS No. 121, "Accountingfor the Impairment of Long-Lived Assets and for Long-Lived Assets to Be DisposedOf". However it retains the fundamental provisions of SFAS No. 121 forrecognition and measurement of the impairment of long-lived assets to be heldand used and for measurement of long-lived assets to be disposed of by sale.This statement applies to all long-lived assets, including discontinuedoperations, and replaces the provisions of APB Opinion No. 30, Reporting Resultsof Operations-Reporting the Effects of Disposal of a Segment of a Business, forthe disposal of segments of a business. This statement requires that thoselong-lived assets be measured at the lower of carrying amount or fair value lesscost to sell, whether 79reported in continuing operations or in discontinued operations. We will adoptthis statement January 1, 2002 and do not expect that it will have a materialeffect on our results of operations, financial position and cash flows.Critical Accounting PoliciesWe believe the following critical accounting policies affect our moresignificant judgments and estimates used in the preparation of our consolidatedfinancial statements. - We recognize unbilled revenues based upon minutes of use processed and established rates, net of credits and adjustments. - We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We base our estimates on the aging of our accounts receivable balances and our historical write-off experience, net of recoveries. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. - When recording depreciation expense associated with our telephony and cable television distribution systems, we use estimated useful lives. Because of changes in technology and industry conditions, we periodically evaluate the useful lives of our telephony and cable television distribution systems. These evaluations could result in a change in useful lives in future periods. - When recording amortization expense on intangible assets, we use estimated useful lives. We periodically evaluate the useful lives of our intangible assets. These evaluations could result in a change in useful lives in future periods. Additionally, we periodically review the valuation of our intangible assets. These reviews could result in write-down of the value of intangible assets. - We record a valuation allowance to reduce our deferred tax assets to the amount that we believe is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination was made. Likewise, should we determine that we would be able to realize our deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax assets would increase income in the period such determination was made. - We have recorded revenues in 1999 and 2001 associated with cash sales of indefeasible rights to use certain amounts of our fiber system capacity. The fiber system capacity sold was treated as integral equipment because it is attached to real estate. Because, in each sale, all of the benefits and risks of ownership were transferred to the purchaser upon full receipt of the purchase price and other terms of the contract meet the requirements of SFAS No. 66, "Accounting for Sales of Real Estate," we accounted for the fiber capacity sales as sales-type leases. The accounting for the sale of fiber system capacity is currently evolving and accounting guidance may become available in the future which could require us to change our policy. If we are required to change our policy, it is likely the effect would be to recognize the gain from future sales of fiber capacity, if any, over the term the capacity is provided.Geographic Concentration and the Alaska EconomyWe offer voice and data telecommunication and video services to customersprimarily throughout Alaska. Because of this geographic concentration, growth ofour business and of our operations depends upon economic conditions in Alaska.The economy of Alaska is dependent upon the natural resource industries, and inparticular oil production, as well as investment earnings, tourism, government,and United States military spending. Any deterioration in these markets couldhave an adverse impact on us. In fiscal 2001 the state's preliminary actualresults indicate that Alaska's oil revenues and federal funding supplied 60% and35%, respectively, of the state's total revenues. Investment losses negativelyaffected the state's total revenues in fiscal 2001 due to the recent decline inits stock market investments. Investment losses comprised 16.1% of the state'stotal revenues. All of the federal funding is dedicated for specific purposes,leaving oil revenues as the primary funding source of general operatingexpenditures. In fiscal 2002 state economists forecast that Alaska's federalfunding, oil 80revenues, and investment earnings will supply 43%, 32% and 9%,respectively, of the state's total projected revenues.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 with an averageof 0.991 million barrels produced per day in fiscal 2001. The state forecaststhe production of 1.012 million barrels per day in fiscal 2002. The stateforecasts a production rate slightly above 1.0 million barrels per day throughfiscal 2010 due to future development of recent discoveries in the NationalPetroleum Reserve Alaska, further development of heavy oil in both the Kuparukand Prudhoe Bay fields, and additional satellite field development.Market prices for North Slope oil averaged $27.85 in fiscal 2001 and areforecasted to average $20.55 in fiscal 2002. State economists forecast theaverage price of North Slope oil to decline to $18.81 in fiscal 2003. Theclosing price per barrel was $21.02 on March 15, 2002.State economists believe that growth in demand for crude oil will bottom out in2002 as the result of the economic recession in the United States and theSeptember 11, 2001 terrorist attacks, with the consequent reduction of airtravel and jet fuel usage. State economists believe demand for oil will thenbegin to increase at just over 1.5% per year, an amount close to the historicalaverage. Economists also believe that non-Organization of Petroleum ExportingCountries will increase their production in 2002 through 2004, puttingsignificant pressure on the Organization of Petroleum Exporting Countries("OPEC") to reduce their production if they want to support an OPEC oil pricebetween $22 and $28 per barrel. The production policy of OPEC and its ability tocontinue to act in concert represents a key uncertainty in the state's revenueforecast.The 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 2004. 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. A legislative fiscal policy caucus has been formedand caucus members believe they need to take action in 2002 to prevent a fiscalcrisis. The caucus is considering an income tax, a sales tax, an increase in thealcohol and motor fuel taxes, a tax on cruise ship passengers, additional taxrevenue from the oil and gas industry, a reduction in oil and gas royaltydeposits to the Alaska Permanent Fund, and capping the annual Alaska PermanentFund dividend check to Alaskans.Tourism, air cargo, and service sectors have helped offset the prevailingpattern of oil industry downsizing that has occurred during much of the lastseveral years. Funds from federal sources totaling $2.1 billion are expected tobe distributed to the State of Alaska for highways and other federally supportedprojects in fiscal 2002.Should new oil discoveries or developments not materialize or the price of oilbecome depressed, the long term trend of continued decline in oil productionfrom the Prudhoe Bay field area is inevitable with a corresponding adverseimpact on the economy of the state, in general, and on demand fortelecommunications and cable television services, and, therefore, on us, inparticular. In the past year, there has been a renewed effort to allowexploration and development in the Arctic National Wildlife Refuge ("ANWR"). OnAugust 2, 2001 the U.S. House of Representatives voted in favor of opening ANWRand now the bill must go before the Senate. The U.S. Department of Energyestimates it could take seven to twelve years after approval of ANWR explorationfor the first production.Deployment of a natural gas pipeline from the State of Alaska's North Slope tothe Lower 48 states has been proposed to supplement natural gas supplies. Acompeting natural gas pipeline through Canada has also been proposed. Theeconomic viability of a natural gas pipeline depends upon the price of anddemand for natural gas. Either project could have a positive impact on the Stateof Alaska's revenues and the Alaska economy. According to their public comments,neither Exxon Mobil, BP nor Phillips Petroleum, Alaska's large natural gas 81owners, believe either natural gas pipeline makes financial sense based upontheir preliminary analysis, though Phillips Petroleum says it will move forwardwith permitting of the project if certain federal income tax incentives areincluded. The governor of the State of Alaska and certain natural gastransportation companies continue to support a natural gas pipeline fromAlaska's North Slope by trying to reduce the project's costs and by advocatingfor federal tax incentives to further reduce the project's costs. In February2002 Senate Majority Leader Tom Daschle announced he will offer an amendment tohis energy bill mandating the following: - A North Slope natural gas pipeline will follow the Alaska Highway route, - Gas producers will be allowed to take a credit on their federal income taxes if prices fall, - Alaskans along the pipeline route will have access to the gas, and - Future gas discoveries will be allowed to move through the pipeline.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. The State of Alaska's population is distributed as follows: - 42% are located in the Municipality of Anchorage, - 13% is located in the Fairbanks North Star Borough, and - 5% is located in the City and Borough of Juneau.The rest is spread out over the vast reaches of Alaska. No assurance can begiven that the driving forces in the Alaska economy, and in particular, oilproduction, will continue at levels to provide an environment for expandedeconomic 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.SeasonalityLong-distance revenues have historically been highest in the summer monthsbecause 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 access and Internet services are notexpected to exhibit significant seasonality. Our ability to implementconstruction projects is also hampered during the winter months because of coldtemperatures, snow and short daylight hours.Regulatory DevelopmentsYou should read Part I, Item 1 Business, Regulation, Franchise Authorizationsand Tariffs 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 agreement carries interest rate risk. Amounts borrowedunder this agreement bear interest at either Libor plus 1.0% to 2.5%, dependingon the leverage ratio of Holdings and certain of its 82subsidiaries, or at the greater of the prime rate or the federal funds effectiverate (as defined) plus 0.05%, in each case plus an additional 0.0% to 1.375%,depending on the leverage ratio of Holdings and certain of its subsidiaries.Should the Libor rate, the lenders' base rate or the leverage ratios change, ourinterest expense will increase or decrease accordingly. As of December 31, 2001,we have borrowed $111.7 million subject to interest rate risk. On this amount, a1% increase in the interest rate would cost us $1,117,000 in additional grossinterest cost on an annualized basis.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. The swap agreement carries interest raterisk. Should the Libor rate change, our interest expense will increase ordecrease accordingly. A 1% change in the variable interest rate will change theannualized benefit of the swap by $500,000. As of December 31, 2001, theinterest rate spread between the fixed and swapped variable rate is 4.18%, anannualized reduction in interest expense of approximately $2,090,000.On September 21, 2001, we entered into an interest rate swap agreement toconvert $25 million of variable interest rate debt to 3.98% fixed rate debt plusapplicable margin. The swap agreement carries interest rate risk. Should theLibor rate change, our interest expense will increase or decrease accordingly. A1% change in the variable interest rate will change the annualized benefit ofthe swap by $250,000. As of December 31, 2001, the interest rate spread betweenthe variable rate and swapped fixed rate is 1.33%, an annualized increase ininterest expense of approximately $333,000.Our Fiber Facility carries interest rate risk. Amounts borrowed under thisAgreement bear interest at either Libor plus 2.5%-2.75%, or at our choice, thelender's prime rate plus 1.25%-1.5%. Should the Libor rate, the lenders' baserate or the leverage ratios change, our interest expense will increase ordecrease accordingly. As of December 31, 2001, we have borrowed $60.0 millionsubject to interest rate risk. On this amount, a 1% increase in the interestrate would cost us $600,000 in additional gross interest cost on an annualizedbasis.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, 2001, we have borrowed $45.9 million subject to interest raterisk. On this amount, a 1% increase in the interest rate would cost us $459,000in 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 84. The financial statement schedules required under Regulation S-X arefiled pursuant to Item 14 of this Report.Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.None. Part IIIIncorporated herein by reference from our Proxy Statement for our 2002 AnnualShareholders' meeting. 83 INDEPENDENT AUDITORS' REPORT The Board of DirectorsGeneral Communication, Inc.:We have audited the accompanying consolidated balance sheets of GeneralCommunication, Inc. and subsidiaries as of December 31, 2001 and 2000, and therelated consolidated statements of operations, stockholders' equity and cashflows for each of the years in the three-year period ended December 31, 2001.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, 2001 and 2000, and theresults of their operations and their cash flows for each of the years in thethree-year period ended December 31, 2001 in conformity with accountingprinciples generally accepted in the United States of America. /s/ KPMG LLPAnchorage, AlaskaMarch 8, 2002 84 GENERAL COMMUNICATION, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, ASSETS 2001 2000------------------------------------------------------------------------------------------- ----------- ------------ (Amounts in thousands) Current assets: Cash and cash equivalents $ 11,097 5,962 ----------- ----------- Receivables: Trade 58,895 49,872 Employee and other 1,587 378 ----------- ----------- 60,482 50,250 Less allowance for doubtful receivables 4,166 2,864 ----------- ----------- Net receivables 56,316 47,386 ----------- ----------- Prepaid and other current assets 3,061 2,505 Deferred income taxes, net 4,690 3,221 Inventories 3,462 5,717 Property held for sale 481 10,877 Notes receivable with related parties 182 241 ----------- ----------- Total current assets 79,289 75,909 ----------- -----------Property and equipment in service, at cost: Land and buildings 3,116 3,051 Telephony distribution systems 335,238 294,300 Cable television distribution systems 134,697 106,953 Support equipment 46,013 40,831 Transportation equipment 4,890 3,867 Property and equipment under capital leases 50,771 50,771 ----------- ----------- 574,725 499,773 Less accumulated depreciation 178,838 151,971 ----------- ----------- Net property and equipment in service 395,887 347,802 Construction in progress 8,121 8,097 ----------- ----------- Net property and equipment 404,008 355,899 ----------- -----------Cable certificates, net of amortization of $26,884,000 and $21,509,000 at December 31, 2001 and 2000, respectively 191,132 184,983Goodwill, net of amortization of $7,200,000 and $5,952,000 at December 31, 2001 and 2000, respectively 40,940 40,002Other intangible assets, net of amortization of $1,252,000 and $729,000 at December 31, 2001 and 2000, respectively 3,387 3,936Deferred loan and senior notes costs, net of amortization of $5,568,000 and $4,166,000 at December 31, 2001 and 2000, respectively 7,630 8,402Notes receivable with related parties 3,246 3,235Property held for sale 1,170 1,550Other assets, at cost, net of amortization of $70,000 and $63,000 at December 31, 2001 and 2000, respectively 3,877 5,091 ----------- ----------- Total other assets 251,382 247,199 ----------- ----------- Total assets $ 734,679 679,007 =========== ===========See accompanying notes to consolidated financial statements. 85 (Continued) GENERAL COMMUNICATION, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued) December 31, LIABILITIES AND STOCKHOLDERS' EQUITY 2001 2000------------------------------------------------------------------------------------------- ------------ ----------- (Amounts in thousands) Current liabilities: Current maturities of long-term debt and obligations under capital leases $ 7,346 1,600 Accounts payable 36,464 29,094 Accrued payroll and payroll related obligations 15,289 10,385 Deferred revenue 11,129 9,477 Accrued interest 8,049 9,256 Accrued liabilities 4,697 4,134 Subscriber deposits 1,121 1,362 ----------- ----------- Total current liabilities 84,095 65,308Long-term debt, excluding current maturities 346,000 334,400Obligations under capital leases, excluding current maturities 45,016 46,882Obligation under capital lease due to related party, excluding current maturities 620 214Deferred income taxes, net of deferred income tax benefit 25,069 22,057Other liabilities 4,580 4,077 ----------- ----------- Total liabilities 505,380 472,938 ----------- -----------Redeemable preferred stock 26,907 22,589 ----------- -----------Stockholders' equity: Common stock (no par): Class A. Authorized 100,000,000 shares; issued 50,967,196 and 48,642,870 shares at December 31, 2001 and 2000, respectively 195,647 182,706 Class B. Authorized 10,000,000 shares; issued 3,882,843 and 3,904,038 shares at December 31, 2001 and 2000, respectively; convertible on a share-per-share basis into Class A common stock 3,281 3,299 Less cost of 357,958 Class A common shares held in treasury at December 31, 2001 and 2000, respectively (1,659) (1,659) Paid-in capital 10,474 7,368 Notes receivable with related parties issued upon stock option exercise (2,588) (2,976) Retained deficit (2,771) (5,258) Accumulated other comprehensive income 8 --- ----------- ----------- Total stockholders' equity 202,392 183,480 ----------- ----------- Commitments and contingencies Total liabilities and stockholders' equity $ 734,679 679,007 =========== ===========See accompanying notes to consolidated financial statements. 86 GENERAL COMMUNICATION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 2001 2000 1999 ------------- ------------ ------------- (Amounts in thousands except per share amounts) Revenues $ 357,258 292,605 279,179Cost of sales and services 139,793 119,712 122,467Selling, general and administrative expenses 120,815 104,918 98,282Depreciation and amortization expense 57,077 51,972 42,680 ------------- ------------ ------------- Operating income 39,573 16,003 15,750 ------------- ------------ -------------Interest expense 31,208 38,845 31,237Interest income 294 702 621 ------------- ------------ ------------- Interest expense, net 30,914 38,143 30,616Gain on sale of property and equipment --- 491 --- ------------- ------------ ------------- Net income (loss) before income taxes and cumulative effect of a change in accounting principle 8,659 (21,649) (14,866)Income tax (expense) benefit (4,070) 8,415 5,683 ------------- ------------ ------------- Net income (loss) before cumulative effect of a change in accounting principle 4,589 (13,234) (9,183) Cumulative effect of a change in accounting principle, net of income tax benefit of $245 --- --- 344 ------------- ------------ ------------- Net income (loss) $ 4,589 (13,234) (9,527) ============= ============ =============Basic and diluted net income (loss) per common share: Income (loss) before cumulative effect of a change in accounting principle $ 0.05 (0.29) (0.20) Cumulative effect of a change in accounting principle 0.00 0.00 (0.01) ------------- ------------ ------------- Net income (loss) $ 0.05 (0.29) (0.21) ============= ============ =============See accompanying notes to consolidated financial statements. 87 GENERAL COMMUNICATION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 Notes Class A Receivable Accumulated Class A Class B Shares Issued to Retained Other Common Common Held in Paid-in Related Earnings Comprehensive (Amounts in thousands) Stock Stock Treasury Capital Parties (Deficit) Income Total ------------------------------------------------------------------------------------------ Balances at December 31, 1998 $172,708 3,432 (1,607) 5,609 (637) 20,502 --- 200,007 Net loss --- --- --- --- --- (9,527) --- (9,527) Tax effect of excess stock compensation expense for tax purposes over amounts recognized for financial reporting purposes --- --- --- 211 --- --- --- 211 Class B shares converted to Class A 10 (10) --- --- --- --- --- --- Shares issued under stock option plan 1,595 --- --- --- (1,389) --- --- 206 Shares issued under officer stock option agreement and notes issued upon officer stock option exercise 38 --- --- --- (141) --- --- (103) Amortization of the excess of GCI stock market value over stock option exercise cost on date of stock option grant --- --- --- 431 --- --- --- 431 Shares issued to Employee Stock Purchase Plan 1,770 --- --- --- --- --- --- 1,770 Warrants issued --- --- --- 92 --- --- --- 92 Shares issued upon acquisition of customer base 619 --- --- --- --- --- --- 619 Preferred stock dividends --- --- --- --- --- (1,158) --- (1,158) ------------------------------------------------------------------------------------------ Balances at December 31, 1999 176,740 3,422 (1,607) 6,343 (2,167) 9,817 --- 192,548 Net loss --- --- --- --- --- (13,234) --- (13,234) Tax effect of excess stock compensation expense for tax purposes over amounts recognized for financial reporting purposes --- --- --- 640 --- --- --- 640 Class B shares converted to Class A 123 (123) --- --- --- --- --- --- Shares issued under stock option plan and notes issued upon stock option exercise 1,213 --- --- --- (809) --- --- 404 Amortization of the excess of GCI stock market value over stock option exercise cost on date of stock option grant --- --- --- 385 --- --- --- 385 Shares issued upon warrant exercise 1,381 --- --- --- --- --- --- 1,381 Shares issued to Employee Stock Purchase Plan 3,249 --- --- --- --- --- --- 3,249 Purchase of treasury stock --- --- (52) --- --- --- --- (52) Preferred stock dividends --- --- --- --- --- (1,841) --- (1,841) ------------------------------------------------------------------------------------------ Balances at December 31, 2000 $182,706 3,299 (1,659) 7,368 (2,976) (5,258) --- 183,480 ------------------------------------------------------------------------------------------ 88 (Continued) GENERAL COMMUNICATION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Continued) Notes Class A Receivable Accumulated Class A Class B Shares Issued to Retained Other Common Common Held in Paid-in Related Earnings Comprehensive (Amounts in thousands) Stock Stock Treasury Capital Parties (Deficit) Income Total ------------------------------------------------------------------------------------------ Balances at December 31, 2000 $182,706 3,299 (1,659) 7,368 (2,976) (5,258) --- 183,480 Net income --- --- --- --- --- 4,589 --- 4,589 Fair value of cash flow hedge, net of income tax expense of $5 --- --- --- --- --- --- 8 8 Comprehensive income --- --- --- --- --- --- --- 4,597 Tax effect of excess stock compensation expense for tax purposes over amounts recognized for financial reporting purposes --- --- --- 2,317 --- --- --- 2,317 Class B shares converted to Class A 18 (18) --- --- --- --- --- --- Shares issued under stock option plan 4,182 --- --- --- (300) --- --- 3,882 Amortization of the excess of GCI stock market value over stock option exercise cost on date of stock option grant --- --- --- 789 --- --- --- 789 Shares issued to Employee Stock Purchase Plan 688 --- --- --- --- --- --- 688 Acquisition of G.C. Cablevision, Inc. net assets and customer base 2,388 --- --- --- --- --- --- 2,388 Series B preferred stock converted to Class A common stock 5,665 --- --- --- --- --- --- 5,665 Payment received on note issued upon officer stock option exercise --- --- --- --- 688 --- --- 688 Preferred stock dividends --- --- --- --- --- (2,102) --- (2,102) ------------------------------------------------------------------------------------------ Balances at December 31, 2001 $195,647 3,281 (1,659) 10,474 (2,588) (2,771) 8 202,392 ==========================================================================================See accompanying notes to consolidated financial statements 89 GENERAL COMMUNICATION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 2001 2000 1999 ------------------------------------ (Amounts in thousands) Cash flows from operating activities: Net income (loss) $ 4,589 (13,234) (9,527) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 57,077 51,972 42,680 Amortization charged to selling, general and administrative expense --- 554 1,770 Non-cash cost of sales 10,877 --- 3,703 Deferred income tax expense (benefit) 3,958 (8,415) (5,928) Deferred compensation and compensatory stock options 1,191 982 675 Bad debt expense, net of write-offs 1,294 983 1,946 Employee Stock Purchase Plan expense funded with issuance of General Communication, Inc. Class A common stock --- 2,773 2,448 Write-off of capitalized interest 170 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 (44) 356 (114) Change in operating assets and liabilities 3,158 3,942 (5,413) ---------- --------- --------- Net cash provided by operating activities 82,270 41,377 33,343 ---------- --------- ---------Cash flows from investing activities: Purchases of property and equipment, including construction period interest (67,981) (48,896) (36,573) Proceeds from sale of property and equipment --- 802 --- Acquisition of Rogers net of cash received (18,533) --- --- Advances and billings to Kanas (5,632) --- --- (Payment) refund of deposit (1,200) 9,100 --- Purchases of other assets and intangible assets (1,096) (2,957) (1,236) Payments received on notes receivable with related parties 1,065 455 653 Notes receivable issued to related parties (959) (971) (952) Purchases of and additions to property held for sale (101) (1,550) --- Cash received upon acquisition of controlling interest in Kanas 228 --- --- ---------- --------- --------- Net cash used in investing activities (94,209) (44,017) (38,108) ---------- --------- ---------Cash flows from financing activities: Long-term borrowings - bank debt 29,000 5,000 13,776 Repayments of long-term borrowings and capital lease obligations (13,667) (11,151) (26,620) Proceeds from common stock issuance, net of notes receivable with related party issued upon stock option exercise 3,882 1,706 103 Proceeds from preferred stock issuance --- --- 20,000 Payment of preferred stock dividends (2,200) --- --- Payment received on note receivable with related party issued upon stock option exercise 688 --- --- Payment of debt issuance costs (629) (635) (768) Purchase of treasury stock --- (52) --- ---------- --------- --------- Net cash provided by (used in) financing activities 17,074 (5,132) 6,491 ---------- --------- --------- Net increase (decrease) in cash and cash equivalents 5,135 (7,772) 1,726 Cash and cash equivalents at beginning of year 5,962 13,734 12,008 ---------- --------- --------- Cash and cash equivalents at end of year $ 11,097 5,962 13,734 ========== ========= ========= See accompanying notes to consolidated financial statements. 90 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 and Fairbanks, Alaska - Internet access services - Termination of traffic in Alaska for certain common carriers - Private line and private network services - Managed services to certain commercial customers - Broadband services, including our SchoolAccess(TM) offering to rural school districts and a similar offering to rural hospitals and health clinics - Sales and service of dedicated communications systems and related equipment - Lease and sales of 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 Holdings, Inc.'s 85% controlling interest in GCI Fiber Communication Co., Inc., GCI Communication Corp.'s wholly-owned subsidiary Potter View Development Co., Inc., GCI Cable, Inc.'s wholly-owned subsidiary GCI American Cablesystems, Inc., GCI American Cablesystems, Inc.'s wholly-owned subsidiary GCI Cablesystems of Alaska, Inc., GCI Transport Co., Inc.'s wholly-owned subsidiaries GCI Satellite Co., Inc., GCI Fiber Co., Inc. and Fiber Hold Co., Inc. and GCI Fiber Co., Inc.'s and Fiber Hold Co., Inc.'s wholly-owned partnership Alaska United Fiber System Partnership ("Alaska United"). The consolidated financial statements include the consolidated accounts of GCI and its wholly owned subsidiaries with all significant intercompany transactions eliminated. 91 (Continued) GENERAL COMMUNICATION, INC. Notes to Consolidated Financial Statements (c) Net Income (Loss) Per Common Share Net income (loss) per common share ("EPS") and common shares used to calculate basic and diluted EPS consist of the following (amounts in thousands): Year Ended December 31, 2001 ------------------------------ Income Shares (Num- (Denom- Per-share erator) inator) Amounts ------------------------------ Net income $ 4,589 Less preferred stock dividends: Series B 1,801 Series C 301 ---------- Basic EPS: Income available to common stockholders 2,487 53,091 $ .05 Effect of Dilutive Securities: Unexercised stock options --- 1,381 --- ---------- -------- ---------- Diluted EPS: Income available to common stockholders $ 2,487 54,472 $ .05 ========== ======== ========== Years Ended December 31, 2000 1999 ------------------------------ ------------------------------- Loss Shares Loss Shares (Num- (Denom- Per-share (Num- (Denom- Per-share erator) inator) Amounts erator) inator) Amounts ------------------------------ ------------------------------- Net loss $(13,234) $ (9,527) Less preferred stock dividends: Series B 1,841 1,158 ---------- ---------- Basic and Diluted EPS: Loss available to common stockholders $(15,075) 51,444 $ (.29) $(10,685) 49,978 $ (.21) ========== ======== ========== ========== ========= ========== Potentially dilutive common shares outstanding which are anti-dilutive for purposes of calculating the net income (loss) per common share for the years ended December 31, 2001, 2000 and 1999 and are not included in the diluted net income (loss) per share calculation consist of the following (shares, in thousands): 2001 2000 1999 ----------- ---------- ----------- Unexercised stock options --- 527 587 Series B redeemable preferred stock 3,832 4,070 3,588 Series C redeemable preferred stock 833 --- --- ----------- ---------- ----------- Potentially anti-dilutive common shares outstanding 4,665 4,597 4,175 =========== ========== =========== 92 (Continued) GENERAL COMMUNICATION, INC. Notes to Consolidated Financial Statements Weighted average shares associated with outstanding stock options for the years ended December 31, 2001, 2000 and 1999 which have been excluded from the diluted income (loss) per share calculations because the options' exercise price was greater than the average market price of the common shares consist of the following (shares, in thousands): 2001 2000 1999 ----------- ---------- ----------- Weighted average shares associated with outstanding stock options 36 3,123 2,260 =========== ========== =========== Effective March 31, 2001 we acquired the assets and customer base of G.C. Cablevision, Inc. The seller received 238,199 unregistered shares of GCI Class A common stock with a future payment in additional shares contingent upon the market price of our common stock on a future date. At December 31, 2001 the market price condition was not met and no common stock would be issuable if this date was the end of the contingency period. (d) Common Stock Following is the statement of common stock at December 31, 2001, 2000 and 1999 (shares, in thousands): Class A Class B ------------- -------------- 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 --- ------------- -------------- Balances at December 31, 1999 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 48,643 3,904 Class B shares converted to Class A 21 (21) Shares issued under stock option plan 1,044 --- Conversion of preferred stock Series B to Class A common stock 1,021 --- Shares issued upon acquisition of G.C. Cablevision, Inc. net assets and customer base 238 --- ------------- -------------- Balances at December 31, 2001 50,967 3,883 ============= ============== 93 (Continued) GENERAL COMMUNICATION, INC. Notes to Consolidated Financial Statements (e) Redeemable Preferred Stocks Redeemable preferred stocks at December 31, 2001 and 2000 consist of (amounts in thousands): 2001 2000 ------------- -------------- Series B $ 16,907 22,589 Series C 10,000 --- ------------- -------------- ------------- -------------- $ 26,907 22,589 ============= ============== We have 1,000,000 shares of preferred stock authorized with the following shares issued at December 31, 2001 and 2000 (shares, in thousands): Series B Series C ------------- -------------- Balances at December 31, 1999 and 2000 20 --- Shares issued in lieu of cash dividend payment 3 --- Shares converted to GCI Class A common stock (6) --- Shares issued upon acquisition of Kanas --- 10 ------------- -------------- Balances at December 31, 2001 17 10 ============= ============== The combined aggregate amount of preferred stock mandatory redemption requirements follow (amounts in thousands): Years ending December 31: 2002 $ --- 2003 --- 2004 --- 2005 10,150 2006 --- --------- $ 10,150 ========= Series B The redemption amount of our convertible redeemable accreting Series B preferred stock at December 31, 2001 and 2000 is $17,148,000 and $23,474,000, respectively. The difference between the carrying and redemption amounts is due to accrued dividends which are included in Accrued Liabilities in the Consolidated Balance Sheets until either paid in cash or through the issuance of additional Series B preferred stock. In October 2001, a Series B preferred stockholder converted 5,665 shares of Series B preferred stock to GCI Class A common stock resulting in the issuance of approximately 1,021,000 shares of GCI Class A common stock. 94 (Continued) GENERAL COMMUNICATION, INC. Notes to Consolidated Financial Statements Series C We issued 10,000 shares of convertible redeemable accreting Series C preferred stock as of June 30, 2001 to acquire a controlling interest in Kanas (see note 3). The Series C preferred stock is convertible at $12 per share into GCI Class A common stock, is non-voting, and pays a 6% per annum quarterly cash dividend. We may redeem the Series C preferred stock at any time in whole but not in part. Mandatory redemption is required at any time after the fourth anniversary date at the option of holders of 80% of the outstanding shares of the Series C preferred stock. The redemption price is $1,000 per share plus the amount of all accrued and unpaid dividends, whether earned or declared, through the redemption date. In the event of a liquidation of GCI, the holders of Series C preferred stock shall be entitled to be paid an amount equal to the redemption price before any distribution or payment is made upon our common stock and other shares of our capital stock hereafter issued which by its terms is junior to the Series C preferred stock. Series B preferred stock is senior to Series C preferred stock. The redemption amount on December 31, 2001 was $10,000,000. (f) Cash and Cash Equivalents Cash equivalents consist of short-term, highly liquid investments that are readily convertible into cash. (g) 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. (h) 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, 2001; management intends to place this equipment in service during 2002. 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 5-15 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. (i) 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. 95 (Continued) GENERAL COMMUNICATION, INC. Notes to Consolidated Financial Statements Cable certificates (certificates of convenience and public necessity) represent certain perpetual operating rights to provide cable services and are being amortized on a straight-line basis over 20 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. 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. In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." We will adopt this statement January 1, 2002. Amongst other requirements, SFAS No. 142 requires that goodwill acquired after June 30, 2001 be subject immediately to the nonamortization and amortization provisions of the statement. Accordingly, we did not recognize amortization expense on the goodwill acquired from the purchase of all of the stock of Rogers during the year ended December 31, 2001. (j) 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 issuance costs were amortized to amortization expense. (k) Other Assets Other assets are recorded at cost and are amortized on a straight-line basis over periods of 2-15 years. (l) Accounting for Derivative Instruments and Hedging Activities Effective January 1, 2001, we adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended. SFAS No. 133 requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. (m) Comprehensive Income SFAS No. 130, "Reporting Comprehensive Income" requires us to report and display comprehensive income or loss and its components in a financial statement that is displayed with the same prominence as other financial statements. During the year ended December 31, 2001 we had other comprehensive income of approximately $8,000 as a result of the cash flow hedge discussed in note 11. Total comprehensive income at December 31, 2001 is $4,597,000. There were no components of other comprehensive income during the years ended December 31, 2000 and 1999. (n) Revenue Recognition All revenues are recognized when the earnings process is complete in accordance with SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." 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 contracts. Cable television service, local access service, Internet service and private line telecommunication revenues are billed in advance and are 96 (Continued) GENERAL COMMUNICATION, INC. Notes to Consolidated Financial Statements recognized as the associated service is provided. Other revenues are recognized when the service is provided. We recognize unbilled revenues when the service is provided based upon minutes of use processed or established rates, net of credits and adjustments. (o) Sale of Fiber Optic Cable System Capacity During the first quarter of 2001 we completed a $19.5 million sale of long-haul capacity in the Alaska United undersea fiber optic cable system ("fiber capacity sale") in a cash transaction (see note 8). The sale included both capacity within Alaska, and between Alaska and the Lower 48 states. We used the proceeds from the 2001 fiber capacity sale to repay $11.7 million of the Fiber Facility debt and to fund capital expenditures and working capital. During the second quarter of 1999 we completed a separate $19.5 million sale of long-haul capacity in the Alaska United undersea fiber optic cable system. The fiber capacity sales in 1999 and 2001 were pursuant to a contract giving the purchaser an indefeasible right to use a certain amount of fiber system capacity expiring on February 4, 2024. The term may be extended if the actual useful life of the fiber system capacity extends beyond the estimated useful life of twenty-five years. The fiber system capacity sold in 1999 and 2001 is integral equipment because it is attached to real estate. Because all of the benefits and risks of ownership have been transferred to the purchaser upon full receipt of the purchase price and other terms of the contract meet the requirements of SFAS No. 66, "Accounting for Sales of Real Estate" we accounted for the fiber capacity sales as sales-type leases. We recognized $19.5 million in revenue from the 2001 and 1999 fiber capacity sales. We recognized $10.9 million and $3.7 million as cost of sales during the years ended December 31, 2001 and 1999, respectively. Upon the agreement for the second sale of fiber system capacity but before receipt of the cash payment, we classified $10.9 million as Property Held for Sale in the Consolidated Balance Sheets at December 31, 2000 and 1999. The accounting for the sale of fiber system capacity is currently evolving and accounting guidance may become available in the future which could require us to change our policy. If we are required to change our policy, it is likely the effect would be to recognize the gain from future sales of fiber capacity, if any, over the term the capacity is provided. (p) Advertising and Research and Development Expense We expense advertising and research and development costs as incurred. Advertising expenses were approximately $3,168,000, $3,438,000 and $4,574,000 for the years ended December 31, 2001, 2000 and 1999, respectively. We had no research and development costs for the years ended December 31, 2001, 2000 and 1999. (q) Interest Expense Interest costs incurred during the construction period of significant capital projects are capitalized. Interest costs capitalized totaled $1,260,000 during the year ended December 31, 1999. No interest was capitalized during the years ended December 31, 2001 and 2000. (r) 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. 97 (Continued) GENERAL COMMUNICATION, INC. Notes to Consolidated Financial Statements (s) 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. (t) ILEC Over-Earnings Refunds We receive refunds from time to time from ILECs with which we do business in respect of their earnings that exceed regulatory requirements. Rate of return carriers are required by the FCC to refund earnings from interstate access charges assessed to long-distance carriers when their earnings exceed their authorized rate of return. Such refunds are computed based on the ILEC's earnings in several access categories. Uncertainties exist with respect to the amount of their earnings, the refunds (if any), their timing, and their realization. We account for such refundable amounts as gain contingencies, and, accordingly, do not recognize them until realization is a certainty upon receipt. (u) 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," which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS 123 had been applied. We have elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS 123. (v) Stock Options and Stock warrants Issued for Non-employee Services We account for stock options and warrants issued in exchange for nonemployee services pursuant to the provisions of SFAS 123, Emerging Issues Task Force ("EITF") 96-3 and EITF 96-18, wherein such transactions are accounted for at the fair value of the consideration or services received or the fair value of the equity instruments issued, whichever is more reliably measurable. When a stock option or warrant is issued for non-employee services where the fair value of such services is not stated, we value the stock option or warrant issued using the Black Scholes method. The fair value determined using these principles is charged to operating expense over the term for which non-employee services are provided or the stock option or warrant vesting period if no service term is stated. (w) 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. 98 (Continued) GENERAL COMMUNICATION, INC. Notes to Consolidated Financial Statements (x) 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, 2001 and 2000, substantially all of our cash and cash equivalents were invested in short-term liquid money instruments. Our customers are located primarily throughout Alaska. Because of this geographic concentration, our growth and operations depend upon economic conditions in Alaska. The economy of Alaska is dependent upon the natural resources industries, and in particular oil production, as well as tourism, government, and United States military spending. Though limited to one geographical area, the concentration of credit risk with respect to our receivables is minimized due to the large number of customers, individually small balances, and short payment terms. (y) 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. (z) 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 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. SFAS No. 121 has been superceded by SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." (aa) Business Combinations SFAS No. 141, "Business Combinations," requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Use of the pooling-of-interests method has been prohibited on a prospective basis only. We used the purchase method of accounting for our acquisition of all of the common stock of Rogers (see note 3). (ab) Year 2000 Costs We charged incremental Year 2000 assessment and remediation costs to expense as incurred during the years ended December 31, 2000 and 1999. No such costs were incurred during the year ended December 31, 2001. (ac) Reclassifications Reclassifications have been made to the 1999 and 2000 financial statements to make them comparable with the 2001 presentation. 99 (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, 2001 2000 1999 ------------ ------------ ------------- Increase in accounts receivable $ (10,229) (3,451) (5,783) Decrease in income tax receivable --- --- 1,965 Increase in prepaid and other current assets (487) (390) (235) (Increase) decrease in inventories 2,255 (1,963) (767) Increase (decrease) in accounts payable 5,701 3,773 (2,229) Increase (decrease) in accrued liabilities 1,091 982 (95) Increase in accrued payroll and payroll related obligations 4,872 2,260 1,368 Increase in deferred revenue 1,519 2,178 1,802 Increase (decrease) in accrued interest (1,207) 1,271 (87) Decrease in subscriber deposits (253) (826) (944) Increase (decrease) in components of other long-term liabilities (104) 108 (408) ------------ ------------ ------------- $ 3,158 3,942 (5,413) ============ ============ ============= We paid income taxes totaling $112,000 during the year ended December 31, 2001. We paid no income taxes during the years ended December 31, 2000 and 1999. Net income tax refunds received totaled $1,965,000 during the year ended December 31, 1999. We received no income tax refunds during the years ended December 31, 2001 and 2000. We paid interest totaling approximately $32,175,000, $36,223,000 and $32,900,000 during the years ended December 31, 2001, 2000 and 1999, respectively. We recorded $789,000, $640,000 and $211,000 during the years ended December 31, 2001, 2000 and 1999, 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 and 1999 we funded the employer matching portion of Employee Stock Purchase Plan contributions by issuing GCI Class A common stock valued at $2,773,000 and $2,448,000, respectively. Employer matching shares were purchased on the open market during the year ended December 31, 2001. 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). We chose to issue 2,677 additional shares of Series B preferred stock in lieu of cash payments for dividends payable thereon in 2000. The amount of dividends that would have been paid in cash totaled approximately $2,677,000. The additional shares of Series B preferred stock were issued in 2001. Effective March 31, 2001 we acquired the assets and customer base of G.C. Cablevision, Inc. The seller received 238,199 unregistered shares of GCI Class A common stock (see note 3). Effective June 30, 2001 we issued $10.0 million of Series C preferred stock in exchange for WorldCom's 85% controlling interest in Kanas (see note 3). 100 (Continued) GENERAL COMMUNICATION, INC. Notes to Consolidated Financial Statements(3) Acquisitions Effective March 31, 2001 we acquired the assets and customer base of G.C. Cablevision, Inc. of Fairbanks. The seller received 238,199 unregistered shares of GCI Class A common stock with a future payment in additional shares contingent upon certain conditions (see note 1 (c)). The property and equipment was valued at $2,088,000 on the date of acquisition. The remaining assets and liabilities acquired were immaterial. Effective June 30, 2001 we completed the acquisition of WorldCom's 85% controlling interest in Kanas, which owns the 800-mile fiber optic cable system that extends from Prudhoe Bay to Valdez via Fairbanks. The corporation owning the fiber optic system was renamed and is now operated as GFCC. The fiber optic cable system was valued at approximately $21,198,000 on the date of acquisition. On June 30, 2001 we issued to WorldCom, a related party, shares of Series C preferred stock (see note 1(e)) valued at $10.0 million. The balance of the purchase price consisted of payments to Kanas to fund its operations prior to June 30, 2001. The remaining assets and liabilities acquired were immaterial. Effective November 19, 2001 we acquired all of the stock of Rogers, a cable television service provider in Palmer and Wasilla, Alaska for $18.5 million in cash. Per the acquisition agreement $467,000 was withheld from the original payment to account for the amount by which Rogers' current liabilities exceeded current assets and for certain capital expenditures incurred by the previous owners of Rogers through May 2001. We expect the final settlement to occur during the second quarter of 2002. This acquisition was funded through a $19.0 million draw on our Senior Holdings Loan. The results of Roger's operations have been included in the consolidated financial statements in the cable services segment since the acquisition date. Because of this acquisition our cable services segment has increased homes passed by approximately 10,000 homes and has increased cable services subscribers by approximately 7,000 subscribers. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition (amounts in thousands): Current assets $ 525 Property and equipment, net of accumulated depreciation 5,160 Franchise agreement 11,192 Goodwill 2,293 ---------- Total assets 19,170 Current liabilities 170 ---------- Net assets acquired $ 19,000 ========== The allocation of the purchase price is subject to refinement pending final working capital settlement and valuation of property and equipment. 101 (Continued) GENERAL COMMUNICATION, INC. Notes to Consolidated Financial Statements (4) Notes Receivable with Related Parties Notes receivable with related parties consist of the following (amounts in thousands): December 31, 2001 2000 --------------- ------------ 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 GCIcommon stock, due through December 3, 2005 $ 4,213 5,456 Notes receivable from other related parties bearing interest up to 8.305% or at the rate paid by us on our senior indebtedness, unsecured and secured by property, due through October 24, 2006 961 212 Interest receivable 842 784 --------------- ------------ Total notes receivable with related parties 6,016 6,452 Less notes receivable with related parties issued upon stock option exercise, classified as a component of stockholders' equity 2,588 2,976 Less current portion, including current interest receivable 182 241 --------------- ------------ Long-term portion, including long-term interest receivable $ 3,246 3,235 =============== ============ (5) Long-term Debt Long-term debt consists of the following (amounts in thousands): December 31, 2001 2000 ------------- -------------- Senior Notes (a) $ 180,000 180,000 Senior Holdings Loan (b) 106,000 82,700 Fiber Facility (c) 60,000 71,700 ------------- -------------- Long-term debt, excluding current maturities $ 346,000 334,400 ============= ============== (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 before 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 2001. The Senior Notes are unsecured obligations.(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 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 102 (Continued) GENERAL COMMUNICATION, INC. Notes to Consolidated Financial Statements 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 $405,000, $570,000 and $533,000 during the years ended December 31, 2001, 2000 and 1999, respectively. On April 13, 1999, we amended our Holdings credit facilities. The amended facilities reduced the aggregate commitment by $50,000,000 to $200,000,000 and provided for the payment of a one-time amendment fee of $530,000. Pursuant to the FASB 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, March 23, 2001, April 27, 2001 and October 31, 2001 we further amended the Holdings $150,000,000 and $50,000,000 credit facilities. Among other things, amendments provided for our acquisitions of Kanas and Rogers, and contain, among other things, provision for payment of amendment fees of $433,000, changes in certain financial covenants and ratios, and a limit of $70 million and $60 million for 2001 and 2002, respectively, for capital expenditures (excluding capital expenditures by certain subsidiaries). Under these amendments, 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 through September 30, 2003, and - Fixed charges coverage ratio (as defined) of Holdings and certain of its subsidiaries to exceed 1.00 to 1.00 from January 1, 2003 through March 31, 2004 (which adjusts to 1.05 to 1.0 in April, 2004 and thereafter). On December 17, 2001 we further amended the Holdings $150,000,000 and $50,000,000 credit facilities. We paid a one-time fee of $438,000 in conjunction with this amendment. Changes in certain financial covenants and ratios outlined in this amendment are effective only upon the acquisition of the assets of WCIC (see note 12). Because of the uncertainty of the likelihood that we will complete the acquisition of the assets of WCIC we recognized the amendment fee as an expense during the year ended December 31, 2001 rather than deferring and amortizing the fee over the remaining life of the Senior Holdings Loan. Under these amendments, the applicable margin has been increased to the following amounts: Total Leverage Ratio Base Rate LIBOR -------------------- --------- ----- Greater than or equal to 6.50 to 1.00 1.375% 2.500% Greater than or equal to 6.00 to 1.00 but less than 6.50 to 1.00 1.000% 2.125% Greater than or equal to 5.50 to 1.00 but less than 6.00 to 1.00 0.750% 1.875% Greater than or equal to 5.00 to 1.00 but less than 5.50 to 1.00 0.500% 1.625% Greater than or equal to 4.50 to 1.00 but less than 5.00 to 1.00 0.250% 1.375% Greater than or equal to 4.00 to 1.00 but less than 4.50 to 1.00 0.000% 1.250% Less than 4.00 to 1.00 0.000% 1.000% If we complete the acquisition of the assets of WCIC and its subsidiaries and we enter into a refinancing of a portion of the Senior Holdings Loan the base rate and LIBOR applicable margins will be 1.125% and 2.250%, respectively. Additionally, the amendments require changes in certain financial covenants and ratios and a capital expenditure limit of $70 million in 2001, $65 million in 2002, $50 million in 2003, and $15 million in January 1, 2004 through March 31, 2004 (excluding capital expenditures by certain subsidiaries). Additionally if the expenditures by certain subsidiaries). Additionally if the acquisition is completed, Holdings may not permit the fixed charges coverage ratio (as defined) of Holdings and certain of its subsidiaries to exceed 1.00 to 1.00 from January 1, 103 (Continued) GENERAL COMMUNICATION, INC. Notes to Consolidated Financial Statements 2003 through December 31, 2004 (which adjusts to 1.05 to 1.0 in January, 2005 and thereafter). The Series B preferred stock issuance proceeds of $19 million 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: Percentage of Reduction of Outstanding Date Range of Quarterly Payments Facilities ----------------------------------------------------- ---------------- 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 We borrowed an additional $9.0 million on our Holdings credit facilities in the first quarter of 2002 to fund our Senior Notes interest payment. We are scheduled to make a $5.7 million principal payment on our Holdings credit facilities at December 31, 2002, though we expect to refinance the Holdings credit facilities during the second or third quarter of 2002. 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, 2001. Substantially all of Holdings' assets as well as a pledge of Holdings' stock by GCI, Inc. collateralize the Senior Holdings Loan facilities. $3.0 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 since the initial funding through December 31, 2001 of approximately $3,893,000 that are being amortized to amortization expense over the life of the agreement and approximately $438,000 that were charged to Selling, General and Administrative Expense in the Consolidated Statements of Operations during the year ended December 31, 2001. (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 interest rate was either Libor plus 3.0%, or at the lender's prime rate plus 104 (Continued) GENERAL COMMUNICATION, INC. Notes to Consolidated Financial Statements 1.75% while the loan balance was greater than $60 million. The interest rate declined 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 was reduced to $60 million. The Fiber Facility contains 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 December 31, 2001. 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 were amortized to Construction in Progress. Commencing February 1999, (the month the fiber optic cable was placed in service) the bank fees and costs were 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, 2001 maturities of long-term debt were as follows (amounts in thousands): Years ending December 31, 2003 $ 45,286 2004 59,286 2005 44,286 2006 14,285 2007 and thereafter 182,857 ----------- $ 346,000 ===========(6) Income Taxes Total income tax (expense) benefit was allocated as follows (amounts in thousands): Years ended December 31, 2001 2000 1999 ----------- ----------- ---------- Net (income) loss from continuing operations $ (4,070) 8,415 5,928 Cumulative effect of a change in accounting principle --- --- (245) ----------- ----------- ---------- (4,070) 8,415 5,683 Tax effect of excess stock compensation expense for tax purposes over amounts recognized for financial reporting purposes in Stockholders' Equity 2,317 640 211 ----------- ----------- ---------- $ (1,753) 9,055 5,894 =========== =========== ========== 105 (Continued) GENERAL COMMUNICATION, INC. Notes to Consolidated Financial Statements Income tax (expense) benefit consists of the following (amounts in thousands): Years ended December 31, 2001 2000 1999 ----------- ---------- ----------- Deferred tax (expense) benefit: Federal taxes $ (3,115) 6,494 4,807 State taxes (955) 1,921 876 ----------- ---------- ----------- Total tax (expense) benefit $ (4,070) 8,415 5,683 =========== ========== =========== Total income tax (expense) benefit differed from the "expected" income tax (expense) benefit determined by applying the statutory federal income tax rate of 34% as follows (amounts in thousands): Years ended December 31, 2001 2000 1999 ------------ ---------- ----------- "Expected" statutory tax (expense) benefit $ (2,944) 7,361 5,054 State income taxes, net of federal benefit (630) 1,268 649 Income tax effect of goodwill amortization, nondeductible expenditures and other items, net (496) (399) (469) Other --- 185 449 ------------ ---------- ----------- $ (4,070) 8,415 5,683 ============ ========== =========== The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2001 and 2000 are presented below (amounts in thousands): December 31, 2001 2000 -------------- ------------- Current deferred tax assets: Accounts receivable, principally due to allowance for doubtful accounts $ 1,351 539 Compensated absences, accrued for financial reporting purposes 1,599 1,305 Inventory expense for financial reporting purposes in excess of amounts recognized for tax purposes 1,323 892 Workers compensation and self insurance health reserves, principally due to accrual for financial reporting purposes 637 341 Other (220) 144 -------------- ------------- Total current deferred tax assets $ 4,690 3,221 ============== ============= 106 (Continued) GENERAL COMMUNICATION, INC. Notes to Consolidated Financial Statements December 31, 2001 2000 -------------- ------------- Long-term deferred tax assets: Net operating loss carryforwards $ 62,760 51,052 Alternative minimum tax credits 2,081 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 1,913 979 State income taxes 1,755 --- Employee stock option compensation expense for financial reporting purposes in excess of (less than) amounts recognized for tax purposes 145 (579) Sweepstakes award in excess of amounts recognized for tax purposes 188 193 Charitable contributions expense for financial reporting purposes in excess of amounts recognized for tax purposes 423 315 Deferred loan fees for financial reporting purposes in excess of amounts recognized for tax purposes 347 --- Cost of sales and services for financial reporting purposes in excess of amounts recognized for tax purposes 402 --- Other 350 82 -------------- ------------- Total long-term deferred tax assets 70,364 55,401 -------------- ------------- Long-term deferred tax liabilities: Plant and equipment, principally due to differences in depreciation 80,516 67,108 Amortizable assets 13,670 9,017 Costs recognized for tax purposes in excess of amounts recognized for book purposes 891 1,319 Other 356 14 -------------- ------------- Total gross long-term deferred tax liabilities 95,433 77,458 -------------- ------------- Net combined long-term deferred tax liabilities $ 25,069 22,057 ============== ============= In conjunction with the acquisition of seven Alaska cable television companies in 1996, 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, 2001, we have (1) tax net operating loss carryforwards of approximately $156.1 million that will begin expiring in 2007 if not utilized, and (2) alternative minimum tax credit carryforwards of approximately $2.1 million available to offset regular income taxes payable in future years. The following schedule shows our tax net operating loss carryforwards by year of expiration (amounts in thousands): 107 (Continued) GENERAL COMMUNICATION, INC. Notes to Consolidated Financial Statements Years ending December 31, 2007 $ 3,006 2008 7,509 2009 11,482 2010 8,935 2011 6,685 2012 --- 2018 19,386 2019 28,786 2020 45,400 2021 24,931 --------- Total tax net operating loss carryforwards $ 156,120 ========= 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. The Job Creation and Worker Assistance Act of 2002 was signed into law on March 9, 2002 and contains several provisions that are effective for tax years ending in 2001, one of which relates to net operating losses. The Act amends IRC Section 172(b)(1) to provide, generally, that a net operating loss for a tax year ending in 2001 or 2002 can be carried back five years, rather than the two-year carryback generally allowed by section 172(b)(1)(A). The Act also amends IRC Section 56(d)(1) to allow alternative minimum tax net operating losses carried forward into tax years ending in 2001 or 2002 to be used without regard to the 90 percent alternative minimum taxable income limitation that generally applies. In addition, alternative minimum tax net operating losses generated in 2001 or 2002 and carried back to an earlier year under IRC Section 172 are not subject to the 90 percent alternative minimum taxable income limitation. SFAS No. 109 states that a change in tax law or rates that affects deferred income taxes is recorded in the statement of operations in the year of enactment. Accordingly the deferred income tax effect, which we estimate to total approximately $2 million, will be recorded as a reduction of our recorded deferred tax assets in our consolidated balance sheet in the first quarter of 2002.(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 8,251,509 shares of GCI's Class A common stock that represents approximately 16 and 17 percent of the issued and outstanding shares at December 31, 2001 and 2000, respectively. WorldCom owns 1,275,791 shares of GCI's Class B common stock that represents approximately 33 percent of the issued and outstanding shares at December 31, 2001 and 2000. Certain subsidiaries of WorldCom filed a Schedule 13D with the SEC on November 13, 2001 disclosing their intention to monitor their investments in us, to take actions consistent with their best interests, and, 108 (Continued) GENERAL COMMUNICATION, INC. Notes to Consolidated Financial Statements subject to market conditions and other factors, to explore opportunities to sell up to one-half of their interest in us. On February 13, 2002 we filed a Form S-3 with the SEC on behalf of WorldCom to register for resale 4,500,000 shares of our Class A common stock. In the Schedule 13D WorldCom disclosed their intention to maintain strategic and commercial relationships with us for the foreseeable future and their expectation that their two current representatives on our Board of Directors will continue as directors, subject to their nomination and approval at our annual meetings of shareholders. We also intend to maintain strategic and commercial relationships with WorldCom and its subsidiaries for the foreseeable future. In October 2001, a Series B preferred stockholder converted 5,665 shares of Series B preferred stock to GCI Class A common stock resulting in the issuance of approximately 1,021,000 shares of GCI Class A common stock. 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 difference in these amounts at the time of grant is expensed ratably over the vesting period of the option. Options granted pursuant to the Option Plan are only exercisable if at the time of exercise the option holder is our employee, non-employee director, or a consultant or advisor working on our behalf. Information for the years 1999, 2000 and 2001 with respect to the Option Plan follows: Weighted Average Range of Exercise Shares Exercise Price Prices ------------- --------------- ------------------ 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-$7.63 109 (Continued) GENERAL COMMUNICATION, INC. Notes to Consolidated Financial Statements Weighted Average Range of Exercise Shares Exercise Price Prices ------------- --------------- ------------------ 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 $0.01-$7.63 Granted 755,277 $7.34 $2.84-$11.25 Exercised (1,044,511) $4.01 $0.01-$7.50 Forfeited (24,200) $6.53 $6.00-$10.98 ------------- Outstanding at December 31, 2001 5,100,131 $6.11 $0.01-$11.25 ============= Available for grant at December 31, 2001 659,280 ============= 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 $0.75 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 before their expiration. Stock Warrants Not Pursuant to a Plan We entered into a stock warrant agreement in December 1998 with Prime II Management, L.P. ("PMLP"). In lieu of cash payments for services from January 1, 1998 to January 31, 1999 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 stock warrant date and an exercise price of $3.25 per share. The fair value of the stock warrant was $750,000. The stock warrant was exercised in 2000. We entered into a stock warrant agreement in exchange for services in December 1998 with certain of our legal counsel which provides for the purchase of 16,667 shares of GCI Class A common stock, vesting in December 1999, with an exercise price of $3.00 per share, and expiring December 2003. The fair value of the stock warrant was approximately $23,000. We entered into a stock warrant agreement in exchange for services in June 1999 with certain of our legal counsel which provides for the purchase of 25,000 shares of GCI Class A common stock, vesting through December 2001, with an exercise price of $3.00 per share, and expiring December 2003. The fair value of the stock warrant was approximately $94,000. SFAS 123 Disclosures Our stock options and warrants expire at various dates through October 2011. At December 31, 2001, 2000, and 1999, the weighted-average remaining contractual lives of options outstanding were 6.95, 6.88 and 6.14 years, respectively. At December 31, 2001, 2000, and 1999, the number of exercisable shares under option was 2,837,361, 2,350,334 and 2,509,756, respectively, and the weighted-average exercise price of those options was $5.75, $4.78 and $3.91, respectively. The per share weighted-average fair value of stock options granted during 2001 was $6.99 per share for compensatory and $10.58 for non-compensatory options; for 2000 was $4.07 per share for compensatory and $2.71 for non-compensatory options; and for 1999 was $4.14 per share for compensatory and $2.85 for non-compensatory options. The amounts were determined as of the options' grant dates using a qualified 110 (Continued) GENERAL COMMUNICATION, INC. Notes to Consolidated Financial Statements Black-Scholes option-pricing model with the following weighted-average assumptions: 2001 - risk-free interest rate of 4.664%, volatility of 0.6178 and an expected life of 6.67 years; 2000 - risk-free interest rate of 4.987%, volatility of 0.6203 and an expected life of 5.82 years; and 1999 - risk-free interest rate of 6.66%, volatility of 0.6455 and an expected life of 5.7 years. Summary information about our stock options and warrants outstanding at December 31, 2001: 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 12/31/01 Life Exercise Price of 12/31/01 Exercise Price ----------------------------------------------------------------------- -------------------------------------- $0.01-$4.00 872,646 5.07 $3.48 744,199 $3.54 $4.06-$5.69 438,804 7.57 $4.97 176,800 $4.92 $6.00-$6.00 608,283 6.57 $6.00 392,989 $6.00 $6.13-$6.13 50,000 8.95 $6.13 10,000 $6.13 $6.50-$6.50 1,824,600 7.76 $6.50 656,714 $6.50 $6.63-$6.94 80,000 6.08 $6.80 45,333 $6.81 $7.00-$7.00 778,022 6.63 $7.00 428,788 $7.00 $7.25-$7.50 544,750 7.00 $7.41 346,000 $7.36 $7.63-$10.98 145,693 8.31 $8.88 36,538 $7.63 $11.25-$11.25 50,000 9.50 $11.25 --- $ --- ------------------------------------------------- -------------------------------------- $0.01-$11.25 5,392,798 6.95 $6.10 2,837,361 $5.75 ================================================= ====================================== Had compensation cost for our 2001, 2000 and 1999 grants for stock-based compensation plans been determined consistent with SFAS 123, our net income (loss) and net income (loss) per common share would approximate the pro forma amounts below (in thousands except per share data): As Reported Pro Forma ---------------- ------------------- 2001: Net income $ 4,589 $ 1,578 Basic and diluted net income (loss) per common share $ 0.05 $ (0.01) 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) Pro forma net income (loss) reflects options granted in 1996 through 2001. 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 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. 111 (Continued) GENERAL COMMUNICATION, INC. Notes to Consolidated Financial Statements Employee Stock Purchase Plan In December 1986, we adopted an Employee Stock Purchase Plan ("Plan") qualified under Section 401 of the Internal Revenue Code of 1986 ("Code"). The Plan provides for acquisition of GCI's Class A and Class B common stock at market value. The Plan permits each employee who has completed one year of service to elect to participate in the Plan. 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 2001 and $11,000 in 2002; 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 our Board of Directors each year, but not more than 10 percent of any one employee's compensation will be matched in any year. For the years ended December 31, 2001, 2000 and 1999 the combination of salary reductions, after tax contributions and matching contributions could not exceed 25 percent of any employee's compensation (determined after salary reduction) for any year. For the year ended December 31, 2002 the combination of salary reductions, after tax contributions and matching contributions cannot exceed 100 percent of any employee's compensation up to a maximum of $40,000 (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 our Board of Directors each year, in GCI common stock. Employee contributions invested in other than GCI common stock receive up to 50% matching, as determined by our Board of Directors each year, in GCI common stock. Our matching contributions allocated to participant accounts totaled approximately $3,194,000, $2,773,000 and $2,448,000 for the years ended December 31, 2001, 2000, and 1999, 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 1999 and 2000 we funded our employer-matching contributions through the issuance of new shares of GCI common stock rather than market purchases. In 2001 we funded our employer-matching contributions through the purchase of shares on the open market. 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. We are exploring opportunities to allow our employees to diversify certain of their holdings of GCI common stock in the Plan beginning in 2002.(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 the fiber optic system capacity have been sold (see note 1(o)).(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. 112 (Continued) GENERAL COMMUNICATION, INC. Notes to Consolidated Financial Statements 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. We offer digital cable television services in Anchorage, Fairbanks, Juneau and Kenai and retail cable modem service (through our Internet services segment) in Anchorage, Fairbanks, Juneau and several other communities in Alaska. 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 Fairbanks and plan to provide similar competitive local exchange services in Juneau during the first quarter of 2002 and in other locations pending regulatory approval. Internet services. We offer wholesale and retail Internet services. We offer cable modem service in Anchorage, Fairbanks, Juneau and several other communities in Alaska and plan to provide cable modem service in other areas in 2002. Our undersea fiber optic cable allows us to offer enhanced services with high-bandwidth requirements. Included in the "All Other" category in the tables that follow are our managed services, product sales, cellular telephone services, and management services for Kanas, a related party (see note 11). None of these business units has ever met the quantitative thresholds for determining reportable segments. Also included in the All Other category are corporate related expenses including marketing, customer service, management information systems, accounting, legal and regulatory, human resources and other general and administrative expenses. In 1999 and 2001, the All Other category includes revenues and costs associated with sales of undersea fiber optic cable system capacity (see note 1(o)). 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. 113 (Continued) GENERAL COMMUNICATION, INC. Notes to Consolidated Financial Statements Summarized financial information for our reportable segments for the years ended December 31, 2001, 2000 and 1999 follows (amounts in thousands): Reportable Segments -------------------------------------------------------- Long- Local Total Distance Cable Access Internet Reportable All Services Services Services Services Segments Other Total ------------------------------------------------------------------------------ 2001 Revenues: Intersegment $ 20,239 1,650 8,716 6,110 36,715 355 37,070 External 200,694 76,554 25,229 11,996 314,473 42,785 357,258 ------------------------------------------------------------------------------ Total revenues 220,933 78,204 33,945 18,106 351,188 43,140 394,328 ------------------------------------------------------------------------------ Cost of sales and services: Intersegment 16,739 --- 1,586 17,345 35,670 461 36,131 External 73,257 20,829 14,037 4,749 112,872 26,921 139,793 ------------------------------------------------------------------------------ Total cost of sales and services 89,996 20,829 15,623 22,094 148,542 27,382 175,924 ------------------------------------------------------------------------------ Contribution: Intersegment 3,500 1,650 7,130 (11,235) 1,045 (106) 939 External 127,437 55,725 11,192 7,247 201,601 15,864 217,465 ------------------------------------------------------------------------------ Total contribution 130,937 57,375 18,322 (3,988) 202,646 15,758 218,404 Selling, general and administrative expenses 34,218 19,528 9,122 5,698 68,566 52,249 120,815 ------------------------------------------------------------------------------ Earnings (loss) from operations before depreciation, amortization, net interest expense and income taxes 96,719 37,847 9,200 (9,686) 134,080 (36,491) 97,589 Depreciation and amortization 23,301 20,704 3,530 2,879 50,414 6,663 57,077 ------------------------------------------------------------------------------ Operating income (loss) $ 73,418 17,143 5,670 (12,565) 83,666 (43,154) 40,512 ============================================================================== Total assets $ 294,175 321,722 30,040 27,363 673,300 61,379 734,679 ============================================================================== Capital expenditures $ 27,035 16,034 8,085 6,516 57,670 10,311 67,981 ============================================================================== 2000 Revenues: Intersegment $ 15,750 1,493 6,675 3,173 27,091 123 27,214 External 182,676 67,898 20,205 8,425 279,204 13,401 292,605 ------------------------------------------------------------------------------ Total revenues 198,426 69,391 26,880 11,598 306,295 13,524 319,819 ------------------------------------------------------------------------------ Cost of sales and services: Intersegment 13,554 --- 1,401 11,692 26,647 123 26,770 External 76,568 17,821 10,768 4,389 109,546 10,166 119,712 ------------------------------------------------------------------------------ Total cost of sales and services 90,122 17,821 12,169 16,081 136,193 10,289 146,482 ------------------------------------------------------------------------------ Contribution: Intersegment 2,196 1,493 5,274 (8,519) 444 --- 444 External 106,108 50,077 9,437 4,036 169,658 3,235 172,893 ------------------------------------------------------------------------------ Total contribution 108,304 51,570 14,711 (4,483) 170,102 3,235 173,337 114 (Continued) GENERAL COMMUNICATION, INC. Notes to Consolidated Financial Statements Reportable Segments -------------------------------------------------------- Long- Local Total Distance Cable Access Internet Reportable All Services Services Services Services Segments Other Total ------------------------------------------------------------------------------ Selling, general and administrative expenses $ 31,139 17,997 9,343 5,090 63,569 41,349 104,918 ------------------------------------------------------------------------------ Earnings (loss) from operations before depreciation, amortization, net interest expense and income taxes 77,165 33,573 5,368 (9,573) 106,533 (38,114) 68,419 Depreciation and amortization 20,817 18,942 4,375 1,915 46,049 5,923 51,972 ------------------------------------------------------------------------------ 104,918 Operating income (loss) $ 56,348 14,631 993 (11,488) 60,484 (44,037) 16,447 ============================================================================== Total assets $ 257,913 304,094 24,827 22,768 609,602 69,405 679,007 ============================================================================== Capital expenditures $ 15,577 11,661 3,430 7,902 38,570 10,326 48,896 ============================================================================== 1999 Revenues: Intersegment $ 5,243 1,942 3,937 207 11,329 --- 11,329 External 164,043 61,146 15,543 4,799 245,531 33,648 279,179 ------------------------------------------------------------------------------ Total revenues 169,286 63,088 19,480 5,006 256,860 33,648 290,508 ------------------------------------------------------------------------------ Cost of sales and services: Intersegment 3,430 --- 1,255 6,094 10,779 --- 10,779 External 80,970 15,478 7,892 3,151 107,491 14,976 122,467 ------------------------------------------------------------------------------ Total cost of sales and services 84,400 15,478 9,147 9,245 118,270 14,976 133,246 ------------------------------------------------------------------------------ Contribution: Intersegment 1,813 1,942 2,682 (5,887) 550 --- 550 External 83,073 45,668 7,651 1,648 138,040 18,672 156,712 ------------------------------------------------------------------------------ Total contribution 84,886 47,610 10,333 (4,239) 138,590 18,672 157,262 Selling, general and administrative expenses 22,872 15,092 9,269 4,448 51,681 46,601 98,282 ------------------------------------------------------------------------------ Earnings (loss) from operations before depreciation, amortization, net interest expense and income taxes 62,014 32,518 1,064 (8,687) 86,909 (27,929) 58,980 Depreciation and amortization 16,270 17,626 3,281 1,128 38,305 4,375 42,680 ------------------------------------------------------------------------------ 104,918 Operating income (loss) $ 45,744 14,892 (2,217) (9,815) 48,604 (32,304) 16,300 ============================================================================== Total assets $ 223,941 310,421 28,364 16,176 578,902 64,249 643,151 ============================================================================== Capital expenditures $ 17,626 7,186 3,207 5,991 34,010 2,563 36,573 ============================================================================== Long-distance services, local access services and Internet services are billed utilizing a unified accounts receivable system and are not reported separately by business segment. All such accounts receivable are included above in the long-distance services segment for all periods presented. 115 (Continued) GENERAL COMMUNICATION, INC. Notes to Consolidated Financial Statements A reconciliation of reportable segment revenues to consolidated revenues follows (amounts in thousands): Years ended December 31, 2001 2000 1999 --------------- --------------- -------------- Reportable segment revenues $ 351,188 306,295 256,860 Plus All Other revenues 43,140 13,524 33,648 Less intersegment revenues eliminated in consolidation 37,070 27,214 11,329 --------------- --------------- -------------- Consolidated revenues $ 357,258 292,605 279,179 =============== =============== ============== A reconciliation of reportable segment earnings from operations before depreciation, amortization, net interest expense, income taxes and cumulative effect of a change in accounting principle to consolidated net income (loss) before income taxes and cumulative effect of a change in accounting principle follows (amounts in thousands): Years ended December 31, 2001 2000 1999 -------------- ---------------- -------------- Reportable segment earnings from operations before depreciation, amortization, net interest expense, income taxes and cumulative effect of a change in accounting principle $ 134,080 106,533 86,909 Less All Other loss from operations before depreciation, amortization, net interest expense, income taxes and cumulative effect of a change in accounting principle 36,491 38,114 27,929 Less intersegment contribution eliminated in consolidation 939 444 550 -------------- ---------------- -------------- Consolidated earnings from operations before depreciation, amortization, net interest expense, income taxes and cumulative effect of a change in accounting principle 96,650 67,975 58,430 Less depreciation and amortization expense 57,077 51,972 42,680 -------------- ---------------- -------------- Consolidated operating income 39,573 16,003 15,750 Less interest expense, net 30,914 38,143 30,616 Plus gain on sale of property and equipment --- 491 --- -------------- ---------------- -------------- Consolidated net income (loss) before income taxes and cumulative effect of a change in accounting principle $ 8,659 (21,649) (14,866) ============== ================ ============== 116 (Continued) GENERAL COMMUNICATION, INC. Notes to Consolidated Financial Statements A reconciliation of reportable segment operating income to consolidated net income (loss) before income taxes and cumulative effect of a change in accounting principle follows (amounts in thousands): Years ended December 31, 2001 2000 1999 --------------- --------------- -------------- Reportable segment operating income $ 83,666 60,484 48,604 Less All Other operating loss 43,154 44,037 32,304 Less intersegment contribution eliminated in consolidation 939 444 550 --------------- --------------- -------------- Consolidated operating income 39,573 16,003 15,750 Less interest expense, net 30,914 38,143 30,616 Plus gain on sale of property and equipment --- 491 --- --------------- --------------- -------------- Consolidated net income (loss) before income taxes and cumulative effect of a change in accounting principle $ 8,659 (21,649) (14,866) =============== =============== ============== 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 $36,899,000 for the year ended December 31, 2001. As a percentage of total revenues, Sprint revenues totaled 10.3% for the year ended December 31, 2001. Sprint was not a major customer for segment disclosure purposes for the years ended December 31, 2000 and 1999.(10) Financial Instruments Fair Value of Financial Instruments The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties. The carrying amounts and estimated fair values of our financial instruments at December 31, 2001 and 2000 follows (amounts in thousands): 2001 2000 ------------------------- ------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------------------------- ------------------------- Short-term assets $ 66,747 66,747 53,589 53,589 Notes receivable with related parties $ 3,246 3,246 3,235 3,235 Short-term liabilities $ 47,172 47,172 41,312 41,312 Long-term debt and capital lease obligations $397,096 411,712 381,496 396,976 Fair value hedge asset $ 1,261 1,261 --- --- Cash flow hedge liability $ 217 217 --- --- The following methods and assumptions were used to estimate fair values: Short-term assets: The fair values of cash and cash equivalents, net receivables and current portion of notes receivable with related parties approximate their carrying values due to the short-term nature of these financial instruments. Notes receivable with related parties: The carrying value of notes receivable with related parties is estimated to approximate fair values. Although there are no quoted market prices available for these 117 (Continued) GENERAL COMMUNICATION, INC. Notes to Consolidated Financial Statements instruments, the fair value estimates were based on the change in interest rates and risk related interest rate spreads since the note 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. Derivative Instruments and Hedging Activities Effective January 3, 2001, we entered into an interest rate swap agreement to convert $50 million of 9.75% fixed rate debt to a variable interest rate equal to the 90 day Libor rate plus 334 basis points. Terms of the interest rate swap mirror the underlying fixed rate debt, except the interest rate swap extends through August 1, 2007 and is cancelable at the option of the counterparty beginning August 1, 2002. We entered into the transaction to take advantage of an anticipated decline in interest rates. Under SFAS No. 133, the interest rate swap is accounted for as a fair value hedge. 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. During the year ended December 31, 2001 we recognized approximately $1.1 million as a decrease to interest expense. As of December 31, 2001, the amount of change in the fair value of debt approximates the change in the fair value of the interest rate swap. Effective September 21, 2001, we entered into an interest rate swap agreement to convert $25 million of variable interest rate debt equal to the 90 day Libor rate plus 334 basis points to 3.98% fixed rate debt plus applicable margins. Terms of the interest rate swap mirror the underlying variable rate debt, except the interest rate swap terminates on September 21, 2004. We entered into the transaction to help insulate us from future increases in interest rates. Under SFAS No. 133, the interest rate swap is accounted for as a cash flow hedge. The initial fair value of the interest rate swap was recorded in other comprehensive income in the consolidated statements of stockholders' equity. The change in the fair value of the interest rate swap net of income taxes will be recorded as an increase or decrease in other comprehensive income in the Consolidated Statements of Stockholders' Equity in the period in which it is recognized. The interest rate swap fair value of $13,000 ($8,000 after deducting income taxes) was recorded in other comprehensive income in the Consolidated Statements of Stockholders' Equity during the year ended December 31, 2001. The accrual of interest income or expense is recognized in Interest Expense in the Consolidated Statements of Operations. During the year ended December 31, 2001 we recognized approximately $112,000 in incremental interest expense resulting from this transaction.(11) Related Party Transactions We earned revenues from WorldCom, a major shareholder of GCI (see note 7), net of discounts, of approximately $58,225,000, $53,065,000 and $43,676,000 for the years ended December 31, 2001, 2000 and 1999, respectively. As a percentage of total revenues, WorldCom revenues totaled 16.3%, 18.1% and 15.6% for the years ended December 31, 2001, 2000 and 1999, respectively. Amounts receivable, net of accounts payable, from WorldCom totaled $15,379,000 and $10,453,000 at December 31, 2001 and 2000, respectively. We paid WorldCom for distribution of our traffic in the Lower 49 states amounts totaling approximately $7,289,000, $9,124,000 and $10,623,000 for the years ended December 31, 2001, 2000 and 1999, 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 $19,200 118 (Continued) GENERAL COMMUNICATION, INC. Notes to Consolidated Financial Statements effective October 2003. Since the property was not sold prior to the tenth year of the lease, the owner is required to pay us the greater of one-half of the appreciated value of the property over $900,000, or $500,000. Accordingly, we have recognized a $500,000 account receivable in Employee and Other Receivables and a corresponding increase in Obligations Under Capital Lease Due to Related Party at December 31, 2001. The account receivable was paid in the first quarter of 2002. 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 and $334,000 including reimbursable expenses for the years ended December 31, 2000 and 1999, respectively. During the six-month period ended June 30, 2001 and the year ended December 31, 2000 we provided management services to Kanas. Effective June 30, 2001 we completed the acquisition of WorldCom's 85% controlling interest in Kanas (see note 3). During the six-month period ended June 30, 2001 and the year ended December 31, 2000 we earned revenues of approximately $618,000 and $690,000, respectively, for management services and long-distance services provided to Kanas. We paid approximately $372,000 and $744,000 to Kanas for the lease and maintenance of fiber optic cable capacity during the six-month period ended June 30, 2001 and the year ended December 31, 2000, respectively. We advanced approximately $4.9 million and $3.0 million to Kanas to partially fund its operations during the six-month period ended June 30, 2001 and the year ended December 31, 2000, respectively. Accounts receivable from Kanas were approximately $3.7 million at December 31, 2000 and were classified as Other Assets in the Consolidated Balance Sheets at December 31, 2000. In January 2001 we entered into an aircraft operating lease agreement with a company owned by GCI'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 December 31, 2001 204,333 shares under the option agreement are exercisable, the remaining 45,667 shares become exercisable at a rate of approximately 11,000 per month through April 2002. 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 $9,292,000, $8,152,000 and $13,678,000 for the years ended December 31, 2001, 2000 and 1999, respectively. Satellite Transponder Capacity Capital Lease. We lease satellite transponder capacity through a capital lease arrangement with a leasing company. The capital lease was entered into in March 2000. The effective term of the lease is nine years from the closing date. The capital lease includes certain covenants requiring maintenance of specific levels of operating cash flow to indebtedness and limitations on additional indebtedness. We were in compliance with all covenants during the year ending December 31, 2001. 119 (Continued) GENERAL COMMUNICATION, INC. Notes to Consolidated Financial Statements We began operating the satellite transponders on April 1, 2000. The satellite transponders are recorded at a cost of $48.2 million and are being depreciated over nine years with a remaining residual value of $14.3 million at December 31, 2001. At December 31, 2001 and 2000 $45.9 million and $47.6 million, respectively, was financed under this capital lease. A summary of future minimum lease payments for all leases follows (amounts in thousands): Years ending December 31: Operating Capital ------------ ------------- 2002 $ 8,692 6,771 2003 7,393 6,673 2004 5,518 8,632 2005 4,994 10,426 2006 3,378 9,868 2007 and thereafter 10,369 34,250 ------------ ------------- Total minimum lease payments $ 40,344 76,620 ============ Less amount representing interest (29,338) Less current maturities of obligations under capital leases (1,646) ------------- Subtotal - long-term obligations under capital leases 45,636 Less long-term obligations under capital leases due to related party, excluding current maturities (620) ------------- Long-term obligations under capital leases, excluding related party, excluding current maturities $ 45,016 ============= 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 DS3 circuits on Alaska United facilities within Alaska, and between Alaska and the Lower 48 states. The lease agreements were for three years with renewal options. One lease was canceled in January 2002, approximately two months before its expiration. We do not expect that the remaining two leases will be renewed. In 2000 we signed additional agreements with WorldCom (see note 11) for the lease of DS3 circuits within Alaska, and between Alaska and the Lower 48 states. The lease agreements are for five years with no renewal options. A summary of minimum future operating lease rentals follows (amounts in thousands): Years ending December 31, 2002 $ 4,513 2003 3,984 2004 3,984 2005 3,984 --------- Total minimum lease rentals $ 16,465 ========= Telecommunication Services Agreement We lease a portion of our 800-mile fiber optic system capacity that extends from Prudhoe Bay to Valdez via Fairbanks, and provide management and maintenance services for this capacity to a customer. The telecommunications service agreement is for fifteen years and may be extended for up to two successive three-year periods and, upon expiration of the extensions, one additional year. 120 (Continued) GENERAL COMMUNICATION, INC. Notes to Consolidated Financial Statements A summary of minimum future service revenues, assuming the agreement is not terminated pursuant to contract provisions, follows (amounts in thousands): Years ending December 31, 2002 $ 7,620 2003 7,620 2004 7,620 2005 7,620 2006 7,620 2007 and thereafter 72,087 ----------- Total minimum future service revenues $ 110,187 =========== In December 2001 we signed an additional agreement with our customer in which we agreed to, amongst other things, upgrade the 800-mile fiber optic system, install multiple earth stations, and potentially provide other services. Deferred Compensation Plan During 1995, we adopted a non-qualified, unfunded deferred compensation plan to provide a means by which certain employees may elect to defer receipt of designated percentages or amounts of their compensation and to provide a means for certain other deferrals of compensation. We may contribute matching deferrals at a rate selected by us. Participants immediately vest in all elective deferrals and all income and gain attributable thereto. Matching contributions and all income and gain attributable thereto vest over a six-year period. Participants may elect to be paid in either a single lump sum payment or annual installments over a period not to exceed 10 years. Vested balances are payable upon termination of employment, unforeseen emergencies, death and total disability. Participants are general creditors of us with respect to deferred compensation plan benefits. Compensation deferred pursuant to the plan totaled approximately $39,000, $0 and $60,000 for the years ended December 31, 2001, 2000 and 1999, 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 $1.5 million and $660,000 was recorded at December 31, 2001 and 2000, 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. We are self-insured for damage or loss to certain of our transmission facilities, including our buried, under sea, and above-ground transmission lines. If we become subject to substantial uninsured liabilities due to damage or loss to such facilities, our financial position, results of operations or liquidity may be adversely affected. 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. 121 (Continued) GENERAL COMMUNICATION, INC. Notes to Consolidated Financial Statements Cable Service Rate Reregulation Federal law permits regulation of basic cable programming services rates. However, Alaska law provides that cable television service is exempt from regulation by the RCA unless 25% of a system's subscribers request such regulation by filing a petition with the RCA. At December 31, 2001, only the Juneau system is subject to RCA regulation of its basic service rates. No petition requesting regulation has been filed for any other system. (The Juneau system serves 7.4% of our total basic service subscribers at December 31, 2001.) On July 27, 2000 the RCA approved in full a requested rate increase for the Juneau system, which was effective October 1, 2000. Internal Revenue Service Examination Our U.S. income tax return for 1999 was selected for examination by the Internal Revenue Service during 2001. The examination commenced during the third quarter of 2001. We believe this examination will not have a material adverse effect on our financial position, results of operations or our liquidity. ILEC Over-earnings Refund The FCC ruled in February 2001 that ACS's earnings for the 1997 to 1998 reporting period exceeded their authorized rate of return and ordered a refund to us of approximately $2.7 million, plus interest. Rate of return carriers such as ACS are required by the FCC to refund earnings from interstate access charges assessed to long-distance carriers when their earnings exceed their authorized rate of return. ACS has appealed the FCC ruling which is expected to be decided by the U.S. Court of Appeals for the District of Columbia circuit in June 2002. We are unable to determine the final amount to be refunded and when it may be refunded. The refundable amount has been accounted for as a gain contingency, and, accordingly, has not been recorded. The refundable amount, if any, will be recorded upon receipt when realization is a certainty. Bid to Purchase Fiber Optic Cable System Assets The assets of WCIC, a competing fiber optic cable system connecting Alaska to the Lower 48 states, have been offered for sale following its bankruptcy filing and reorganization. We have submitted several bids to purchase system assets and capacity, none of which have been accepted. We have amended our credit agreements as described further in note 5 to allow us to obtain sufficient financing in the event we are the successful bidder. We expect the seller to complete the sales transaction in the second or third quarter of 2002. 122 (Continued) GENERAL COMMUNICATION, INC. Notes to Consolidated Financial Statements(13) Supplementary Financial Data The following is a summary of unaudited quarterly results of operations for the years ended December 31, 2001 and 2000 (amounts in thousands, except per share amounts): First Second Third Fourth Total Quarter Quarter Quarter Quarter Year ------------ ----------- ------------ ----------- ------------ 2001 Total revenues (1) $ 96,917 85,535 88,019 86,787 357,258 Net income (1) $ 2,423 166 1,527 473 4,589 Basic net income (loss) per common share $ 0.04 (0.01) 0.02 0.00 0.05 Diluted net income (loss) per common share (2) $ 0.03 (0.01) 0.02 0.00 0.05 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) -------------- (1) The first quarter of 2001 includes $19.5 million of revenue and $8.7 of operating income from the sale of long-haul capacity in the Alaska United undersea fiber optic cable system. (2) Due to rounding, the sum of quarterly net income (loss) per common share amounts does not agree to total year net income per common share. -------------- 123 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 Auditors' Report..............................................................84 Consolidated Balance Sheets, December 31, 2001 and 2000...................................85 -- 86 Consolidated Statements of Operations, Years ended December 31, 2001, 2000 and 1999...........................................87 Consolidated Statements of Stockholders' Equity, Years ended December 31, 2001, 2000 and 1999...........................................88 Consolidated Statements of Cash Flows, Years ended December 31, 2001, 2000 and 1999...........................................90 Notes to Consolidated Financial Statements................................................91 -- 123 (a)(2) Consolidated Financial Statement Schedules Included in Part IV of this Report: Independent Auditors' Report..............................................................131 Schedule VIII - Valuation and Qualifying Accounts, Years ended December 31, 2001, 2000 and 1999...........................................132 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. 124(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 (30) 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) 10.29 Asset Purchase Agreement, dated April 15, 1996, among General Communication, 125 Exhibit No. Description ------------------------------------------------------------------------------------------------------------------ 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 L. Tindall dated August 15, 1994 (19) 126 Exhibit No. Description ------------------------------------------------------------------------------------------------------------------ 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) 127 Exhibit No. Description ------------------------------------------------------------------------------------------------------------------ 10.83 Fourth Amendment to $50,000,000 Amended and Restated Credit Agreements (30) 10.84 Fourth Amendment to $200,000,000 Amended and Restated Credit Agreement (30) 10.85 Fifth Amendment to $50,000,000 Amended and Restated Credit Agreements (30) 10.86 Fifth Amendment to $200,000,000 Amended and Restated Credit Agreement (30) 10.87 Sixth Amendment to $50,000,000 Amended and Restated Credit Agreements (30) 10.88 Sixth Amendment to $200,000,000 Amended and Restated Credit Agreements (30) 10.89 Fifth Amendment to Contract for Alaska Access Services between General Communication, Inc. and its wholly owned subsidiary GCI Communication Corp., and MCI WorldCom Network Services, Inc., formerly known as MCI Telecommunications Corporation dated August 7, 2000 ** (31) 10.90 Sixth Amendment to Contract for Alaska Access Services between General Communication, Inc. and its wholly owned subsidiary GCI Communication Corp., and MCI WorldCom Network Services, Inc., formerly known as MCI Telecommunications Corporation dated February 14, 2001 ** (31) 10.91 Seventh Amendment to Contract for Alaska Access Services between General Communication, Inc. and its wholly owned subsidiary GCI Communication Corp., and MCI WorldCom Network Services, Inc., formerly known as MCI Telecommunications Corporation dated March 8, 2001 ** (31) 10.92 Sixth 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. dated March 9, 2001 ** (31) 10.93 Seventh Amendment to $50,000,000 Amended and Restated Credit Agreements (33) 10.94 Seventh Amendment to $200,000,000 Amended and Restated Credit Agreements (33) 10.95 Eighth Amendment to $50,000,000 Amended and Restated Credit Agreements * 10.96 Eighth Amendment to $200,000,000 Amended and Restated Credit Agreements * 10.97 Ninth Amendment to $50,000,000 Amended and Restated Credit Agreements * 10.98 Ninth Amendment to $200,000,000 Amended and Restated Credit Agreements * 10.99 Statement of Stock Designation (Series C) * 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) 99.28 The Bylaws of Potter View Development Co., Inc. (32) 99.29 The Articles of Incorporation of Potter View Development Co., Inc. (32) 99.30 The Bylaws of GCI American Cablesystems, Inc. * 99.31 The Articles of Incorporation of GCI American Cablesystems, Inc. * 128 Exhibit No. Description ------------------------------------------------------------------------------------------------------------------ 99.32 The Bylaws of GCI Cablesystems of Alaska, Inc. * 99.33 The Articles of Incorporation of GCI Cablesystems of Alaska, Inc. * 99.34 The Bylaws of GCI Fiber Communication Co., Inc. * 99.35 The Articles of Incorporation of GCI Fiber Communication Co., Inc. * ------------------------- ** Certain information has been redacted from this document which we desire to keep undisclosed. * Filed herewith. ------------------------- Exhibit Reference Description ------------------------------------------------------------------------------------------------------------------ 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. 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 129 Exhibit Reference Description ------------------------------------------------------------------------------------------------------------------ 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. 30 Incorporated by reference to The Company's Annual Report on Form 10-K for the year ended December 31, 2000. 31 Incorporated by reference to The Company's Quarterly Report on Form 10-Q for the period ended March 31, 2001 32 Incorporated by reference to The Company's Quarterly Report on Form 10-Q for the period ended June 30, 2001 33 Incorporated by reference to The Company's Quarterly Report on Form 10-Q for the period ended September 30, 2001(c) Reports on Form 8-K None. 130 INDEPENDENT AUDITORS' REPORT The Board of Directors and StockholdersGeneral Communication, Inc.:Under date of March 8, 2002, we reported on the consolidated balance sheets ofGeneral Communication, Inc. and subsidiaries ("Company") as of December 31, 2001and 2000 and the related consolidated statements of operations, stockholders'equity and cash flows for each of the years in the three-year period endedDecember 31, 2001, which are included in the Company's 2001 Annual Report onForm 10-K. In connection with our audit of the aforementioned consolidatedfinancial statements, we also audited the related consolidated financialstatement schedule which is listed in the index in Item 14(a)(2) of theCompany's 2001 Annual Report on Form 10-K. This consolidated financial statementschedule is the responsibility of the Company's management. Our responsibilityis to express an opinion on this consolidated financial statement schedule basedon our audits.In our opinion this consolidated financial statement schedule, when consideredin relation to the consolidated financial statements taken as a whole, presentsfairly, in all material respects the information set forth therein. /s/ KPMG LLPAnchorage, AlaskaMarch 8, 2002 131Schedule VIII GENERAL COMMUNICATION, INC. AND SUBSIDIARIES Valuation and Qualifying Accounts Years ended December 31, 2001, 2000 and 1999 Additions Deductions ------------------- ---------- Balance at Charged to Write-offs Balance beginning profit and net of at end ofDescription of year loss Other recoveries year------------------------------------------------------- -------------------------------------------------------------- (Amounts in thousands) Allowance for doubtful receivables, year ended: December 31, 2001 $ 2,864 4,076 --- 2,774 4,166 ============= ============ ========= ============= =========== December 31, 2000 $ 2,833 5,546 --- 5,515 2,864 ============= ============ ========= ============= =========== December 31, 1999 $ 887 4,224 --- 2,278 2,833 ============= ============ ========= ============= =========== 132 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 Ronald A. Duncan, President (Chief Executive Officer)Date: March 27, 2002 Pursuant 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. Signatures Title Date ---------- ----- ---- /s/ Carter F. Page Chairman of the Board March 27, 2002 ------------------------------- and Director ------------------------------ Carter F. Page /s/ Ronald A. Duncan President, Chief Executive March 27, 2002 ------------------------------- Officer and Director ------------------------------ Ronald A. Duncan (Principal Executive Officer) /s/ Robert M. Walp Vice Chairman of Board March 27, 2002 ------------------------------- and Director ------------------------------ Robert M. Walp Director ------------------------------- ------------------------------ Ronald R. Beaumont /s/ Stephen M. Brett Director March 27, 2002 ------------------------------- ------------------------------ Stephen M. Brett /s/ Donne F. Fisher Director March 27, 2002 ------------------------------- ------------------------------ Donne F. Fisher /s/ William P. Glasgow Director March 27, 2002 ------------------------------- ------------------------------ William P. Glasgow /s/ Paul S. Lattanzio Director March 27, 2002 ------------------------------- ------------------------------ Paul S. Lattanzio /s/ Stephen R. Mooney Director March 27, 2002 ------------------------------- ------------------------------ Stephen R. Mooney Director ------------------------------- ------------------------------ James M. Schneider /s/ John M. Lowber Senior Vice President, March 27, 2002 ------------------------------- Chief Financial Officer, ------------------------------ John M. Lowber Secretary and Treasurer (Principal Financial Officer) /s/ Alfred J. Walker Vice President, Chief March 27, 2002 ------------------------------- Accounting Officer ------------------------------ Alfred J. Walker (Principal Accounting Officer) 133 EIGHTH AMENDMENT TO $50,000,000 AMENDED AND RESTATED CREDIT AGREEMENT EIGHTH AMENDMENT TO $50,000,000 AMENDED AND RESTATED CREDIT AGREEMENT(this "Amendment") is dated as of the 31st day of October, 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., as AdministrativeAgent for itself and the Lenders (the "Administrative Agent"), CREDIT LYONNAISNEW YORK BRANCH, as Documentation Agent and TD SECURITIES (USA), INC. asSyndication 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, by that certain FourthAmendment to Amended and Restated Credit Agreement dated as of January 18, 2000,by that certain Fifth Amendment to Amended and Restated Credit Agreement datedas of October 25, 2000, by that certain Sixth Amendment to Amended and RestatedCredit Agreement dated as of March 23, 2001 and by that certain SeventhAmendment to Amended and Restated Credit Agreement dated as of April 27, 2001(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, by that certain Fifth Amendment to Amended andRestated Credit Agreement dated as of October 25, 2000, by that certain SixthAmendment to Amended and Restated Credit Agreement dated as of March 23, 2001,by that certain Seventh Amendment to Amended and Restated Credit Agreement datedas of April 27, 2001, and as further amended, restated or otherwise modifiedfrom time to time, the "$200MM Credit Facility"); WHEREAS, the Borrower has requested certain provisions of the CreditAgreement 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. (a) Unless specifically defined or redefined below, capitalized termsused herein shall have the meanings ascribed thereto in the Credit Agreement. (b) The definition of "Rogers" shall be added to Article I inalphabetical order and shall read in its entirety as follows: "Rogers" means Rogers American Cablesystems, Inc., a Delaware Corporation. (c) The definition of "Kanas Notes Default" shall be added to Article Iin alphabetical order and shall read in its entirety as follows: "Kanas Notes Default" means the failure of GCI Fiber Communication Co., Inc. (f/k/a/ Kanas) to pay the Kanas Notes and the promissory note originally due MCI WorldCom Network Services, Inc., dated May 18, 2001, in the principal amount of $3,000,000, which notes have been assigned to the Borrower, which in turn assigned the notes to the Lenders as collateral for the Obligations. 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, 2003, 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, 2003 through March 31, 2004 1.00 to 1.00 April 1, 2004 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 paid or incurred by theBorrower and the Restricted Subsidiaries shall not exceed, in the aggregate, thefollowing amounts during the following fiscal years, provided that, any unusedportion of any such year may be used during the following fiscal year only (butnot thereafter): 2 Fiscal Year Maximum Amount ----------- -------------- 1998 $90,000 1999 $35,000 2000 $35,000 2001 $70,000 2002 $60,000 January 1, 2003 and thereafter Not Applicable SECTION 4. Amendment to Section 7.06. Section 7.06 in Article VII ofthe Credit Agreement shall be 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 except (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, the Borrower and the Parents may make Restricted Payments made (A) exclusively out of the Capital Stock of GCI and/or (B) exclusively out of Excess Cash Flow, provided that all such Restricted Payments made under this subsection (B) in the aggregate over the term of this Agreement shall not exceed the difference between $15,000,000 minus the sum of (I) the aggregate amount of Investments made in accordance with the terms of Section 7.10(e) hereof over the term of this Agreement, and (II) all cash distributions made by the Borrower in accordance with the terms of Section 7.06(e) or Section 7.06(f) hereof and those payments permitted pursuant to Section 5 of the Seventh Amendment to Amended and Restated Credit Agreement dated as of April 27, 2001, 3 (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 (i) Distributions to GCII in an amount not in excess of cash income Taxes attributable to income from the Borrower and its Restricted Subsidiaries allocated to GCII (and GCII may make Restricted Payments in such amounts in the form of Distributions to GCI), and (ii) 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, the Borrower or any other GCI Entity may make payments 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 may make scheduled Restricted Payments on Funded Debt which was incurred in accordance with the terms of Sections 7.02(b) hereof (but with respect to the Senior Notes, only payments of cash interest accrued thereon made in accordance with Section 7.06(b)(ii) above may be made), 7.02(d), 7.02(f)(i), and 7.02(g) hereof (but in no case shall any prepayments be made on such Funded Debt), (e) 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, and . (f) so long as (i) there exists no Default or Event of Default both before and after giving effect to the payment thereof, (ii) the Total Leverage Ratio is less than 5.00 to 1.00 both before and after giving effect to each such Restricted 4 Payment, (iii) each such Distribution made by the Borrower to GCI shall be used by GCI within one Business Day after its receipt to make the Restricted Payment described below, and (iv) each such payment is deducted from the $15,000,000 basket permitted by Section 7.06(a) above, GCI may make (A) a cash interest payment in an aggregate amount not to exceed $1,000,000 on April 30, 2002 and (B) a cash interest payment in an aggregate amount not to exceed $1,000,000 on October 31, 2002, in each case to the holders of its Series B 81/2% Preferred Stock, and the Borrower may make a cash Distribution to GCI in such amounts. SECTION 5. Amendment to Section 7.10. Section 7.10 in Article VII ofthe Credit Agreement shall be 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 5 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, 6 Investments in 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 Cable Inc. acquires not less than 100% of the Capital Stock of Rogers, (C) all Capital Stock of Rogers owned by GCI Cable Inc. and each of its Subsidiaries 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 such Capital Stock is immediately delivered to the Administrative Agent together with stock powers and other items reasonably requested by the Administrative Agent to secure the Obligations, (D) the aggregate purchase price for such Capital Stock does not exceed $19,000,000 cash (subject to adjustments not in excess of $1,000,000 in accordance with the securities purchase agreement to be executed in connection with the acquisition) 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, (E) Rogers and each of its Subsidiaries 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 Cable Inc. of the Capital Stock of Rogers, (F) the Administrative Agent has received all other documentation, information and agreements relating to Rogers and its Subsidiaries, and the purchase of the Capital Stock of Rogers reasonably requested by the Administrative Agent, 7 (G) the Administrative Agent has received projections after giving effect to the purchase of the Capital Stock of Rogers demonstrating pro forma compliance with the financial covenants contained in this Agreement throughout the term of this Agreement, (H) the Capital Stock of Rogers is acquired free and clear of all Liens (except Liens of the Lenders securing the Obligations), (I) Rogers and its Subsidiaries each 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 (J) 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 Rogers, 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 Cable Inc. may purchase 100% of the Capital Stock of Rogers. SECTION 6. Conditions Precedent. This Eighth Amendment shall not beeffective until the Administrative Agent shall have determined in its solediscretion that all proceedings of the Borrower taken in connection with thisEighth 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 Eighth Amendment and the other Loan Papers, (ii) that there exists no Default or Event of Default, and the execution, delivery and performance of this Eighth 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 Eighth Amendment and all Loan Papers and to execute and perform all transactions contemplated by this Eighth Amendment, and all other documents and instruments delivered or executed in connection with this Eighth Amendment, 8 (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 Eighth 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 Administrative Agent shall have received an opinion of counsel to the Parents, the Borrower and its Subsidiaries, in form and substance acceptable to the Administrative Agent and Special Counsel; (c) the Borrower and the Lenders shall have entered into a Eighth amendment to the $200MM Credit Facility on terms substantially identical to the terms of this Eighth Amendment; (d) the Borrower shall have paid the Administrative Agent a 15 basis points amendment fee, such amendment fee to be allocated among the Lenders executing this Eighth Amendment prior to noon (Central Standard time), November 7, 2001, as evidenced by a facsimile receipt by counsel to the Administrative Agent of such Lender's signature to this Eighth Amendment prior to such time; (e) the Administrative Agent shall have received each of the Loan Papers, financial statements, projections, legal opinions, consents, and other documentation required to be delivered pursuant to Section 7.10 of the Credit Agreement in connection with the acquisition of the Capital Stock of Kanas, including without limitation ; Pledge and Security Agreements executed by the Borrower, and GCI Fiber Communication Co. Inc. (formerly, Kanas), Capital Stock and blank stock powers and UCC-1's with respect thereto, the Kanas Notes and $3,000,000 Restated Subordinated Demand Note, duly endorsed by the Borrower, together with each of the loan documents and collateral documents securing same, as reasonably requested by the Administrative Agent. No Default Certificates executed by the Borrower and GCI Fiber Communication Co., Inc., Guaranty executed by GCI Fiber Communication Co., Inc., and Subordination Agreement and Consent and Waiver Agreement executed by the Borrower and GCI Fiber Communication Co., Inc. (f) the Administrative Agent shall have received each of the Loan Papers, financial statements, projections, legal opinions, consents, and other documentation in the possession of the Borrower in connection with the acquisition of the Capital Stock of Rogers; and (g) the Borrower shall have delivered such other documents, instruments, and certificates, in form and substance satisfactory to the 9 Administrative Agent, as the Administrative Agent shall deem necessary or appropriate in connection with this Eighth 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 EighthAmendment 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 8. Waiver. GCI has acquired the Kanas Notes and assigned themto the Borrower. The Borrower has informed the Administrative Agent of theexistence of the Kanas Notes Default and now seeks a waiver by the Lenders ofthe Event of Default which exists as a result thereof under Section 8.01(h) ofthe Credit Agreement (the "Kanas Default"). The Lenders hereby waive the KanasDefault, subject to the satisfaction of the terms and conditions of Section 6hereof. The Borrower acknowledges that this waiver is a one-time limited andconditional continuing waiver of Section 8.01(h) of the Credit Agreement, anddoes not constitute a waiver by any Lender of any of its rights or remedies nowor at any time in the future. SECTION 9. 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 10. Counterparts. This Eighth 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 11. GOVERNING LAW. THIS Eighth 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. 10 SECTION 12. 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 IN THE 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 13. 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.================================================================================ 11 IN WITNESS WHEREOF, this Eighth Amendment to Amended and RestatedCredit Agreement is executed as of the date first set forth above. GCI HOLDINGS, INC. By: Its: 12 BANK OF AMERICA, N.A., Individually as a Lender and as Administrative Agent By: Its: 13 CREDIT LYONNAIS NEW YORK BRANCH, as Documentation Agent and Individually as a Lender By: Its: 14 TD SECURITIES (USA), INC., as Syndication Agent By: Its: 15 TORONTO DOMINION (TEXAS), INC., Individually as a Lender By: Its: 16 COBANK, ACB, Individually as a Lender By: Its: 17 GENERAL ELECTRIC CAPITAL CORPORATION, Individually as a Lender By: Its: 18 UNION BANK OF CALIFORNIA, N.A., Individually as a Lender By: Its: 19 BANK OF HAWAII, Individually as a Lender By: Its: 20 THE BANK OF NEW YORK, Individually as a Lender By: /s/ Brendan Nedzi Its: Senior Vice President 21 BNP PARIBAS, Individually as a Lender By: Its: By: Its: 22 FLEET NATIONAL BANK, Individually as a Lender By: Its: 23 THE FUJI BANK, LIMITED, Individually as a Lender By: Its: 24 SUMITOMO MITSUI BANKING CORPORATION, Individually as a Lender By: Its: 25 WELLS FARGO BANK ALASKA, N.A. f/k/a NATIONAL BANK OF ALASKA, Individually as a Lender By: Its: 26 ALLFIRST BANK, Individually as a Lender By: Its: 27 EIGHTH AMENDMENT TO $200,000,000 AMENDED AND RESTATED CREDIT AGREEMENT EIGHTH AMENDMENT TO $200,000,000 AMENDED AND RESTATED CREDIT AGREEMENT(this "Amendment") is dated as of the 31st day of October, 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., as AdministrativeAgent for itself and the Lenders (the "Administrative Agent"), CREDIT LYONNAISNEW YORK BRANCH, as Documentation Agent and TD SECURITIES (USA), INC. asSyndication 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, by that certain FourthAmendment to Amended and Restated Credit Agreement dated as of January 18, 2000,by that certain Fifth Amendment to Amended and Restated Credit Agreement datedas of October 25, 2000, by that certain Sixth Amendment to Amended and RestatedCredit Agreement dated as of March 23, 2001 and by that certain SeventhAmendment to Amended and Restated Credit Agreement dated as of April 27, 2001(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, by that certain Fifth Amendment to Amended andRestated Credit Agreement dated as of October 25, 2000, by that certain SixthAmendment to Amended and Restated Credit Agreement dated as of March 23, 2001,by that certain Seventh Amendment to Amended and Restated Credit Agreement datedas of April 27, 2001, and as further amended, restated or otherwise modifiedfrom time to time, the "$50MM Credit Facility"); WHEREAS, the Borrower has requested certain provisions of the CreditAgreement 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. (a) Unless specifically defined or redefined below, capitalized termsused herein shall have the meanings ascribed thereto in the Credit Agreement. (b) The definition of "Rogers" shall be added to Article I inalphabetical order and shall read in its entirety as follows: "Rogers" means Rogers American Cablesystems, Inc., a Delaware Corporation. (c) The definition of "Kanas Notes Default" shall be added to Article Iin alphabetical order and shall read in its entirety as follows: "Kanas Notes Default" means the failure of GCI Fiber Communication Co., Inc. (f/k/a Kanas) to pay the Kanas Notes and the promissory note originally due MCI WorldCom Network Services, Inc., dated May 18, 2001, in the principal amount of $3,000,000, which notes have been assigned to the Borrower, which in turn assigned the notes to the Lenders as collateral for the Obligations. 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, 2003, 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, 2003 through March 31, 2004 1.00 to 1.00 April 1, 2004 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 paid or incurred by theBorrower and the Restricted Subsidiaries shall not exceed, in the aggregate, thefollowing amounts during the following fiscal years, provided that, any unusedportion of any such year may be used during the following fiscal year only (butnot thereafter): 2 Fiscal Year Maximum Amount ----------- -------------- 1998 $90,000 1999 $35,000 2000 $35,000 2001 $70,000 2002 $60,000 January 1, 2003 and thereafter Not ApplicableSECTION 4. Amendment to Section 7.06. Section 7.06 in Article VII of the CreditAgreement shall be 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 except (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, the Borrower and the Parents may make Restricted Payments made (A) exclusively out of the Capital Stock of GCI and/or (B) exclusively out of Excess Cash Flow, provided that all such Restricted Payments made under this subsection (B) in the aggregate over the term of this Agreement shall not exceed the difference between $15,000,000 minus the sum of (I) the aggregate amount of Investments made in accordance with the terms of Section 7.10(e) hereof over the term of this Agreement, and (II) all cash distributions made by the Borrower in accordance with the terms of Section 7.06(e) or Section 7.06(f) hereof and those payments permitted pursuant to Section 5 of the Seventh Amendment to Amended and Restated Credit Agreement dated as of April 27, 2001, 3 (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 (i) Distributions to GCII in an amount not in excess of cash income Taxes attributable to income from the Borrower and its Restricted Subsidiaries allocated to GCII (and GCII may make Restricted Payments in such amounts in the form of Distributions to GCI), and (ii) 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, Borrower or any GCI Entity may make payments 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 may make scheduled Restricted Payments on Funded Debt which was incurred in accordance with the terms of Sections 7.02(b) hereof (but with respect to the Senior Notes, only payments of cash interest accrued thereon made in accordance with Section 7.06(b)(ii) above may be made), 7.02(d), 7.02(f)(i), and 7.02(g) hereof (but in no case shall any prepayments be made on such Funded Debt), (e) 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, and . (f) so long as (i) there exists no Default or Event of Default both before and after giving effect to the payment thereof, (ii) the Total Leverage Ratio is less than 5.00 to 1.00 both before and after giving effect to each such Restricted 4 Payment, (iii) each such Distribution made by the Borrower to GCI shall be used by GCI within one Business Day after its receipt to make the Restricted Payment described below, and (iv) each such payment is deducted from the $15,000,000 basket permitted by Section 7.06(a) above, GCI may make (A) a cash interest payment in an aggregate amount not to exceed $1,000,000 on April 30, 2002 and (B) a cash interest payment in an aggregate amount not to exceed $1,000,000 on October 31, 2002, in each case to the holders of its Series B 81/2% Preferred Stock, and the Borrower may make a cash Distribution to GCI in such amounts. SECTION 5. Amendment to Section 7.10. Section 7.10 in Article VII ofthe Credit Agreement shall be 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 5 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 3such 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, 6 Investments in 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 Cable Inc. acquires not less than 100% of the Capital Stock of Rogers, (C) all Capital Stock of Rogers owned by GCI Cable Inc. and each of its Subsidiaries 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 such Capital Stock is immediately delivered to the Administrative Agent together with stock powers and other items reasonably requested by the Administrative Agent to secure the Obligations, (D) the aggregate purchase price for such Capital Stock does not exceed $19,000,000 cash (subject to adjustments not in excess of $1,000,000 in accordance with the securities purchase agreement to be executed in connection with the acquisition) 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, (E) Rogers and each of its Subsidiaries 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 Cable Inc. of the Capital Stock of Rogers, (F) the Administrative Agent has received all other documentation, information and agreements relating to Rogers and its Subsidiaries, and the purchase of the Capital Stock of Rogers, reasonably requested by the Administrative Agent, 7 (G) the Administrative Agent has received projections after giving effect to the purchase of the Capital Stock of Rogers demonstrating pro forma compliance with the financial covenants contained in this Agreement throughout the term of this Agreement, (H) the Capital Stock of Rogers is acquired free and clear of all Liens (except Liens of the Lenders securing the Obligations), (I) Rogers and its Subsidiaries each 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 (J) 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 Rogers, 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 Cable Inc. may purchase 100% of the Capital Stock of Rogers. SECTION 6. Conditions Precedent. This Eighth Amendment shall not beeffective until the Administrative Agent shall have determined in its solediscretion that all proceedings of the Borrower taken in connection with thisEighth 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 Eighth Amendment and the other Loan Papers, (ii) that there exists no Default or Event of Default, and the execution, delivery and performance of this Eighth 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 Eighth Amendment and all Loan Papers and to execute and perform all transactions contemplated by this Eighth Amendment, and all other documents and instruments delivered or executed in connection with this Eighth Amendment, 8 (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 Eighth 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 Administrative Agent shall have received an opinion of counsel to the Parents, the Borrower and its Subsidiaries, in form and substance acceptable to the Administrative Agent and Special Counsel; (c) the Borrower and the Lenders shall have entered into a Eighth amendment to the $50MM Credit Facility on terms substantially identical to the terms of this Eighth Amendment; (d) the Borrower shall have paid the Administrative Agent a 15 basis points amendment fee, such amendment fee to be allocated among the Lenders executing this Eighth Amendment prior to noon (Central Standard time), November 7, 2001, as evidenced by a facsimile receipt by counsel to the Administrative Agent of such Lender's signature to this Eighth Amendment prior to such time; (e) the Administrative Agent shall have received each of the Loan Papers, financial statements, projections, legal opinions, consents, and other documentation required to be delivered pursuant to Section 7.10 of the Credit Agreement in connection with the acquisition of the Capital Stock of Kanas, including without limitation ; Pledge and Security Agreements executed by the Borrower, and GCI Fiber Communication Co. Inc. (formerly, Kanas), Capital Stock and blank stock powers and UCC-1's with respect thereto, the Kanas Notes and $3,000,000 Restated Subordinated Demand Note, duly endorsed by the Borrower, together with each of the loan documents and collateral documents securing same, as reasonably requested by the Administrative Agent. No Default Certificates executed by the Borrower and GCI Fiber Communication Co., Inc., Guaranty executed by GCI Fiber Communication Co., Inc., and Subordination Agreement and Consent and Waiver Agreement executed by the Borrower and GCI Fiber Communication Co., Inc. (f) the Administrative Agent shall have received each of the Loan Papers, financial statements, projections, legal opinions, consents, and other documentation in the possession of the Borrower in connection with the acquisition of the Capital Stock of Rogers; and (g) the Borrower shall have delivered such other documents, instruments, and certificates, in form and substance satisfactory to the 9 Administrative Agent, as the Administrative Agent shall deem necessary or appropriate in connection with this Eighth 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 EighthAmendment 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 8. Waiver. GCI has acquired the Kanas Notes and assigned themto the Borrower. The Borrower has informed the Administrative Agent of theexistence of the Kanas Notes Default and now seeks a waiver by the Lenders ofthe Event of Default which exists as a result thereof under Section 8.01(h) ofthe Credit Agreement (the "Kanas Default"). The Lenders hereby waive the KanasDefault, subject to the satisfaction of the terms and conditions of Section 6hereof. The Borrower acknowledges that this waiver is a one-time limited andconditional continuing waiver of Section 8.01(h) of the Credit Agreement, anddoes not constitute a waiver by any Lender of any of its rights or remedies nowor at any time in the future. SECTION 9. 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 10. Counterparts. This Eighth 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 11. GOVERNING LAW. THIS Eighth 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. 10 SECTION 12. 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 IN THE 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 13. 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.================================================================================ 11 IN WITNESS WHEREOF, this Eighth Amendment to Amended and RestatedCredit Agreement is executed as of the date first set forth above. GCI HOLDINGS, INC. By: /s/ John M. Lowber Its: Secretary/Treasurer 12 BANK OF AMERICA, N.A., Individually as a Lender and as Administrative Agent By: /s/ Derrick Bell Its: Principal 13 CREDIT LYONNAIS NEW YORK BRANCH, as Documentation Agent and Individually as a Lender By: /s/ Jeremy Horn Its: 14 TD SECURITIES (USA), INC., as Syndication Agent By: /s/ Michael J. Bandzierz Its: Managing Director 15 TORONTO DOMINION (TEXAS), INC., Individually as a Lender By: /s/ Jill Hall Its: Vice President 16 COBANK, ACB, Individually as a Lender By: /s/ JR Koer Its: Vice President 17 GENERAL ELECTRIC CAPITAL CORPORATION, Individually as a Lender By: /s/ Brian P. Ward Its: Manager-Operations 18 UNION BANK OF CALIFORNIA, N.A., Individually as a Lender By: /s/ Stender E. Sweeney II Its: Vice President 19 BANK OF HAWAII, Individually as a Lender By: /s/ J. Bryan Scearce Its: Vice President 20 THE BANK OF NEW YORK, Individually as a Lender By: /s/ Brendan Nedzi Its: Senior Vice Presiden 21 BNP PARIBAS, Individually as a Lender By: /s/ Gregg Bonardi Its: Director, Media & Telecom Finance By: /s/ Serge Desrayaud Its: Head of Asset Management Media & Telecommunications Group 22 FLEET NATIONAL BANK, Individually as a Lender By: /s/ Denis D. Hamboyan Its: Director 23 THE FUJI BANK, LIMITED, Individually as a Lender By: /s/ Masahito Fukuda Its: Senior Vice President 24 SUMITOMO MITSUI BANKING CORPORATION, Individually as a Lender By: /s/ Suresh S. Tata Its: Senior Vice President 25 WELLS FARGO BANK ALASKA, N.A. f/k/a NATIONAL BANK OF ALASKA, Individually as a Lender By: Brent Ulmer Its: Vice President 26 ALLFIRST BANK, Individually as a Lender By: Michael G. Toomey Its: Vice President 27 NINTH AMENDMENT TO $50,000,000 AMENDED AND RESTATED CREDIT AGREEMENT NINTH AMENDMENT TO $50,000,000 AMENDED AND RESTATED CREDIT AGREEMENT(this "Amendment") is dated as of the 17th day of December, 2001 and enteredinto among 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., as AdministrativeAgent for itself and the Lenders (the "Administrative Agent"), CREDIT LYONNAISNEW YORK BRANCH, as Documentation Agent and TD SECURITIES (USA), INC. asSyndication 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, by that certain FourthAmendment to Amended and Restated Credit Agreement dated as of January 18, 2000,by that certain Fifth Amendment to Amended and Restated Credit Agreement datedas of October 25, 2000, by that certain Sixth Amendment to Amended and RestatedCredit Agreement dated as of March 23, 2001, by that certain Seventh Amendmentto Amended and Restated Credit Agreement dated as of April 27, 2001, and by thatcertain Eighth Amendment to Amended and Restated Credit Agreement dated as ofOctober 31, 2001 (as amended and as further amended, restated or otherwisemodified from time to time, the "Credit Agreement") and a $200,000,000 Amendedand Restated Credit Agreement, dated as of November 14, 1997 (as amended by thatcertain Consent and First Amendment, dated January 27, 1998, by that certainSecond Amendment to Amended and Restated Credit Agreement dated as of July 3,1998, by that certain Third Amendment to Amended and Restated Credit Agreementdated as of April 13, 1999, by that certain Fourth Amendment to Amended andRestated Credit Agreement dated as of January 18, 2000, by that certain FifthAmendment to Amended and Restated Credit Agreement dated as of October 25, 2000,by that certain Sixth Amendment to Amended and Restated Credit Agreement datedas of March 23, 2001, by that certain Seventh Amendment to Amended and RestatedCredit Agreement dated as of April 27, 2001, and by that certain EighthAmendment to Amended and Restated Credit Agreement dated as of October 31, 2001,and as further amended, restated or otherwise modified from time to time, the"$200MM Credit Facility"); WHEREAS, the Borrower has requested certain provisions of the CreditAgreement 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. (a) Unless specifically defined or redefined below, capitalized termsused herein shall have the meanings ascribed thereto in the Credit Agreement. (b) The definition of "Applicable Margin" in Article I is herebydeleted and the following definition of "Applicable Margin" is substituted inits stead: "Applicable Margin" means (i) with respect to the Base Rate Advances under the Facility, 1.375% per annum and (ii) with respect to LIBOR Advances under the Facility, 2.500% per annum. Notwithstanding the foregoing, effective three Business Days after receipt by the Administrative Agent from the Borrower of a Compliance Certificate delivered to the Lenders for any reason and demonstrating a change in the Total Leverage Ratio to an amount so that another Applicable Margin should be applied pursuant to the table set forth below, the Applicable Margin for each type of Advance shall mean the respective amount set forth below opposite such relevant Total Leverage Ratio in Columns A and B below, in each case until the first succeeding Quarterly Date which is at least three Business Days after receipt by the Administrative Agent from the Borrower of a Compliance Certificate, demonstrating a change in the Total Leverage Ratio to an amount so that another Applicable Margin shall be applied; provided that, if there exists a Default or if the Total Leverage Ratio shall at any time be greater than or equal to 6.50 to 1.00, the Applicable Margin shall again be the respective amounts first set forth in this definition; provided further, that the Applicable Margin in effect on the Closing Date shall be determined pursuant to a Compliance Certificate delivered on the Closing Date, provided, further, that if the Borrower fails to deliver any financial statements to the Administrative Agent within the required time periods set forth in Sections 6.05(a) and Section 6.05(b) hereof, the Applicable Margin shall again be the respective amounts first set forth in this definition until the date which is three Business Days after the Administrative Agent receives financial statements from the Borrower which demonstrate that another Applicable Margin should be applied pursuant to the table set forth below; and provided further, that the Applicable Margin shall never be a negative number. 2 Column A Column B Total Leverage Ratio Base Rate LIBOR----------------------------------------------------------------- ---------------- ---------------- Greater than or equal to 6.50 to 1.00 1.375% 2.500%Greater than or equal to 6.00 to 1.00 but less than 6.50 to 1.00 1.000% 2.125%Greater than or equal to 5.50 to 1.00 but less than 6.00 to 1.00 0.750% 1.875%Greater than or equal to 5.00 to 1.00 but less than 5.50 to 1.00 0.500% 1.625%Greater than or equal to 4.50 to 1.00 but less than 5.00 to 1.00 0.250% 1.375%Greater than or equal to 4.00 to 1.00 but less than 4.50 to 1.00 0.000% 1.250%Less than 4.00 to 1.00 0.000% 1.000% Notwithstanding the foregoing, if (a) the Borrower acquires the assets of WCIC as contemplated by the terms of this Agreement and (b) the Borrower enters into the Term Loan B Agreement, then, on such date that both of the preceding (a) and (b) are satisfied, the Applicable Margin set forth above shall no longer be applicable, and the following definition of Applicable Margin shall apply, immediately, automatically and without notice to any Person: "Applicable Margin" means (i) with respect to the Base Rate Advances under the Facility, 1.125% per annum and (ii) with respect to LIBOR Advances under the Facility, 2.250% per annum; provided that, notwithstanding the foregoing, if the interest rate margin for libor advances or base rate advances under the Term Loan B Agreement is more than 0.50% higher or lower than the corresponding interest rate margin set forth in clause (i) or clause (ii) preceding in this definition of "Applicable Margin", then the Applicable Margin hereunder shall mean a per annum percentage rate equal to (a) with respect to the Base Rate Advances under the Facility, that percentage rate which is 0.50% below the per annum applicable interest rate margin for base rate advances under the Term Loan B Agreement (however defined in such Term Loan B Agreement), and (b) with respect to the LIBOR Advances under the Facility, that percentage rate which is 0.50% below the per annum applicable interest rate margin for libor rate advances under the Term Loan B Agreement (however defined in such Term Loan B Agreement). If neither base rate advances or libor rate advances (or their equivalents) are offered under the Term Loan B Agreement, the parties hereto agree that the Applicable Margin hereunder shall be in each case 0.50% below the economic equivalent of the applicable interest rate margin provided for in the Term Loan B Agreement. (c) The definition of "Intercreditor Agreement" is hereby added inalphabetical order to Article I of the Credit Agreement and shall read in itsentirety as follows: "Intercreditor Agreement" means that certain Intercreditor Agreement, in the form attached as Exhibit A, between the Borrower, Bank of America, N.A. as collateral agent thereunder and the Administrative Agent, evidencing the agreement between the Lenders hereunder and the lenders under the Term Loan B Agreement for the Collateral to secure the Obligations and the Term Loan B Obligations on a pari passu basis, as such agreement is amended, restated or otherwise modified from time to time. 3 (d) The definition of "Lenders" in Article I is hereby deleted and thefollowing definition of "Lenders" is substituted in its stead: "Lenders" means the lenders listed on the signature pages of this Agreement, and each Eligible Assignee which hereafter becomes a party to this Agreement pursuant to Section 10.04 hereof or pursuant to an amendment to this Agreement, for so long as any such Person is owed any portion of the Obligation or is obligated to make Advances under the Revolver/Term Loan, and, any Bank Affiliate who is owed any portion of the Obligations. (e) The definition of "Loan Papers" in Article I is hereby deleted andthe following definition of "Loan Papers" is substituted in its stead: "Loan Papers" means this Agreement; the Notes; Interest Rate Hedge Agreements executed among any GCI Entity and any Lender or Bank Affiliate; the Intercreditor Agreement, all Pledge Agreements; all Guaranties executed by any Person guaranteeing payment of any portion of the Obligations; all Fee Letters; each Assignment and Acceptance; all promissory notes evidencing any portion of the Obligations; assignments, security agreements and pledge agreements granting any interest in any of the Collateral; stock certificates and partnership agreements constituting part of the Collateral; mortgages, deeds of trust, financing statements, collateral assignments, and other documents and instruments granting an interest in any portion of the Collateral, or related to the perfection and/or the transfer thereof, all collateral assignments or other agreements granting a Lien on any intercompany note, including without limitation, the Intercompany Notes; and all other documents, instruments, agreements or certificates executed or delivered by the Borrower or any other GCI Entity, as security for the Borrower's obligations hereunder, in connection with the loans to the Borrower or otherwise; as each such document shall, with the consent of the Lenders pursuant to the terms hereof, be amended, revised, renewed, extended, substituted or replaced from time to time. (f) The definition of "Ninth Amendment " is hereby added inalphabetical order to Article I and shall read in its entirety as follows: "Ninth Amendment" means that certain Ninth Amendment to this $50,000,000 Amended and Restated Credit Agreement, dated as of December 17, 2001, among the Borrower, the Administrative Agent and certain Lenders. (g) The definition of "Term Loan B Agreement" is hereby added inalphabetical order to Article I and shall read in its entirety as follows: "Term Loan B Agreement" means that certain senior secured term loan agreement entered into after the date hereof as a replacement and refinancing of a portion of indebtedness previously available under this Agreement, to be executed 4 among the Borrower, Bank of America, N.A., as Administrative Agent and the lenders as defined therein, as such agreement may be amended, restated or otherwise modified from time to time. (h) The definition of "Term Loan B Obligations" is hereby added inalphabetical order to Article I and shall read in its entirety as follows: "Term Loan B Obligations" means, with respect to the Term Loan B Agreement and all of the Term Loan B Papers, all present and future obligations, indebtedness and liabilities, and all renewals and extensions of all or any part thereof, of the Borrower and each other GCI Entity to lenders and administrative agent under the Term Loan B Agreement arising from, by virtue of, or pursuant to the Term Loan B Agreement, any of the other Term Loan B Papers and any and all renewals and extensions thereof or any part thereof, or future amendments thereto, all interest accruing on all or any part thereof and reasonable attorneys' fees incurred by lenders and administrative agent thereunder for the administration, execution of waivers, amendments and consents, and in connection with any restructuring, workouts or in the enforcement or the collection of all or any part thereof, whether such obligations, indebtedness and liabilities are direct, indirect, fixed, contingent, joint, several or joint and several. Without limiting the generality of the foregoing, "Term Loan B Obligations" includes all amounts which would be owed by the Borrower, each other GCI Entity and any other Person (other than administrative agent or lenders thereunder) to the administrative agent or lenders thereunder under any Term Loan B Paper, but for the fact that they are unenforceable or not allowable due to the existence of a bankruptcy, reorganization or similar proceeding involving the Borrower, any other GCI Entity or any other Person (including all such amounts which would become due or would be secured but for the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding of the Borrower, any other GCI Entity or any other Person under any Debtor Relief Law). (i) The definition of "Term Loan B Papers" is hereby added inalphabetical order to Article I and shall read in its entirety as follows: "Term Loan B Papers" means "Loan Papers" as it will be defined under the Term Loan B Agreement, including without limitation, the Term Loan B Agreement, the Intercreditor Agreement, all promissory notes, fee letters, pledge agreements, security agreements, mortgages, deeds of trust, assignments and other documentation executed in connection with the Term Loan B Agreement from time to time, all guarantees executed by any Person guaranteeing payment of any portion of the Term Loan B Obligations, each assignment and acceptance; as each such document shall be amended, revised, renewed, extended, substituted or replaced from time to time. 5 (j) The definition of "WCIC" is hereby added in alphabetical order toArticle I and shall read in its entirety as follows: "WCIC" means WCI Cable, Inc. and its Subsidiaries. SECTION 2. Amendment to Opening Phrase of Section 2.04(b)(ii). Theopening phrase of Section 2.04(b)(ii) in Article II of the Credit Agreementshall be amended and restated in its entirety as follows: (ii) Asset Sales. On the date of any Asset Sale by any of the GCI Entities (this provision not permitting such Asset Sales) excluding Asset Sales permitted under Section 7.05(b) hereof, SECTION 3. Amendment to Section 2.04(c). Section 2.04(c) in Article IIof the Credit Agreement shall be amended and restated in its entirety asfollows: (c) Commitment Reductions, Generally. To the extent the sum of the aggregate outstanding Advances under the Revolver/Term Loan exceed the Revolver/Term Commitment after any reduction thereof, prior to or on the Conversion Date, the Borrower shall immediately repay on the date of such reduction, any such excess amount and all accrued interest thereon, together with any amounts constituting any Consequential Loss. Once reduced or terminated pursuant to this Section 2.04, the Revolver/Term Commitment may not be increased or reinstated. At such time as the Intercreditor Agreement becomes effective, each of the terms and provisions of Sections 2.04(b)(ii),(iii),(iv), (v), and (vi) shall be governed by the terms and provisions of the Intercreditor Agreement, and in the event of a conflict between this Section 2.04 and the Intercreditor Agreement, the terms and provisions of the Intercreditor Agreement shall control. SECTION 4. Amendment to Section 2.05(b)(i). Section 2.05(b)(i) inArticle II of the Credit Agreement shall be amended and restated in its entiretyas follows: (b) Mandatory Prepayments. (i) Asset Sales. (A) Prior to the Conversion Date, on the date of any Asset Sale of any GCI Entity (except Asset Sales in accordance with the terms of Section 7.05(b) hereof), the Borrower shall repay the Obligations and the obligations under the Revolving Credit Agreement by an amount equal to 100% of the Net Proceeds, applied pro rata to the obligations as specified under the Revolving Credit Agreement and Advances outstanding under the Revolver/Term Loan, and (B) after the Conversion Date, (I) if there exists no Default or Event of Default, on the date of any Asset Sale of any GCI Entity (except Asset Sales in accordance with the terms of Section 7.05(b) hereof), the Borrower shall repay the obligations by an amount equal to 100% of the Net Proceeds, applied to the obligations as specified under the Revolving Credit Agreement, and (II) if 6 there exists a Default or Event of Default, on the date of any Asset Sale of any GCI Entity, the Borrower shall repay the Obligations and the obligations under the Revolving Credit Agreement by an amount equal to 100% of the Net Proceeds, applied pro rata to the obligations as specified under the Revolving Credit Agreement and Advances outstanding under the Revolver/Term Loan. Any amounts repaying the Revolver/Term Loan on and after the Conversion Date will be applied in the inverse order of maturity and may not be reborrowed. On such date, the Borrower shall deliver to the Administrative Agent a certificate of an Authorized Officer certifying as to the amount of (including the calculation of) such repayment and, with respect to the Asset Sale giving rise thereto, the gross proceeds thereof and the costs and expenses payable as a result thereof which were deducted in determining the amount of Net Proceeds. SECTION 5. Amendment to Section 2.05(c). Section 2.05(c) in Article IIof the Credit Agreement shall be amended and restated in its entirety as follows: (c) Prepayments, Generally. Any prepayment of Advances pursuant to this Section 2.05 shall be applied first to Base Rate Advances, if any, then outstanding under the Facility, second to LIBOR Advances for which the date of prepayment is the last day of the applicable Interest Period, if any, outstanding under the Facility and third to LIBOR Advances with the shortest remaining Interest Periods outstanding under the Facility. At such time as the Intercreditor Agreement becomes effective, each of the terms and provisions of Sections 2.05(b)(i), (ii), (iii), (iv), and (v) shall be governed by the terms and provisions of the Intercreditor Agreement, and in the event of a conflict between this Section 2.05 and the Intercreditor Agreement, the terms and provisions of the Intercreditor Agreement shall control. SECTION 6. Amendment to Section 2.12(d). Section 2.12(d) in Article IIof the Credit Agreement shall be amended and restated in its entirety asfollows: (d) Except as specifically set forth in Sections 2.04 and 2.05 hereof, so long as there exists no Default or Event of Default all payments made by the Borrower shall be applied as designated by the Borrower, and, if there exists a Default or Event of Default, or if the Borrower fails to designate application of payments, all payments made by the Borrower shall be applied pro rata among the obligations under the Revolving Credit Agreement and the Revolver/Term Loan. Any payment made by the Borrower in excess of the Revolver/Term Commitment or outstanding Advances under the Revolver/Term Loan, shall be applied to outstanding amounts (or to reduce the commitment) of any other outstanding Obligations. Notwithstanding the foregoing, if the Intercreditor Agreement is effective, all mandatory prepayments made by the Borrower and proceeds and dispositions of Collateral shall be applied in accordance with the terms of the Intercreditor Agreement, to the extent that the terms and provisions of the Intercreditor Agreement govern such application. 7 SECTION 7. Amendment to Section 7.01(e). Section 7.01(e) in Article IIof the Credit Agreement shall be amended and restated in its entirety asfollows: (e) Fixed Charges Coverage Ratio. (i) Prior to the acquisition of the assets of WCIC in accordance with the terms of this Agreement, Commencing January 1, 2003, 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, 2003 through March 31, 2004 1.00 to 1.00 April 1, 2004 and thereafter 1.05 to 1.00, or (ii) On and after the acquisition of the assets of WCIC in accordance with the terms of this Agreement, Commencing April 1, 2004, 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 April 1, 2004 through December 31, 2004 1.00 to 1.00 January 1, 2005 and thereafter 1.05 to 1.00 SECTION 8. Amendment to Section 7.01(f). Section 7.01(f) in Article IIof the Credit Agreement shall be amended and restated in its entirety asfollows: (f) Capital Expenditures. (i) Prior to the acquisition of the assets of WCIC in accordance with the terms of this Agreement, 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 fiscal years, provided that, any unused portion of any such year may be used during the following fiscal year only (but not thereafter): 8 Fiscal Year Maximum Amount ----------- -------------- 1998 $90,000,000 1999 $35,000,000 2000 $35,000,000 2001 $70,000,000 2002 $60,000,000 January 1, 2003 and thereafter Not Applicable, or (ii) On and after the acquisition of the assets of WCIC in accordance with the terms of this Agreement, 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 fiscal years, provided that, any unused portion of any such year may be used during the following fiscal year only (but not thereafter), provided that, in the fiscal year 2002 only, the Borrower may exclude the purchase price for the acquisition of WCIC's assets from the calculation of its Capital Expenditures, in an amount not to exceed $65,000,000: Fiscal Year Maximum Amount ----------- -------------- 1998 $90,000,000 1999 $35,000,000 2000 $35,000,000 2001 $70,000,000 2002 $65,000,000 2003 $50,000,000 January 1, 2004 through March 31, 2004 $15,000,000 April 1, 2004 and thereafter Not Applicable SECTION 9. Amendment to Section 7.02. Section 7.02 in Article VII ofthe Credit Agreement shall be amended and restated in its entirety as follows: 7.02. Debt. The Borrower shall not, and shall not permit any of the other GCI Entities to, create, incur, assume, become or be liable in any manner in respect of, or suffer to exist, any Debt, except (a) Debt under the Loan Papers and the Revolving Credit Agreement, (b) Debt under the Senior Notes and other Debt in existence on the date hereof as shown on Schedule 5.08a hereto, and renewals, extensions (but not increases), and refinancings thereof on terms substantially similar thereto and on terms no more restrictive, (c) trade payables incurred and paid in the ordinary course of business, (d) Debt permitted to be incurred as Contingent Liabilities pursuant to Section 7.03 hereof, (e) Debt between the 9 Borrower and its Restricted Subsidiaries, (f) so long as there exists no Default or Event of Default in existence at the time incurred and none is caused thereby, (i) $5,000,000 in Debt constituting Capital Leases outstanding in the aggregate at any one time, (ii) unsecured subordinated Debt of the Borrower on terms and conditions acceptable to the Administrative Agent and each Lender, subordinated to the Facility pursuant to the subordination language set forth on Schedule 7.02 hereto, (g) Debt under the Project Agreements, and (h) so long as (i) there exists no Default or Event of Default both before and after giving effect to its incurrence, (ii) the maturity of such Debt is later than the Maturity Date, (iii) the weighted average life of such Debt is longer than the weighted average life of the Revolver/Term Loan, (iv) the Term Loan B Agreement contains representations and warranties, conditions precedent, affirmative covenants, negative covenants and events of default substantially similar to the representations and warranties, conditions precedent, affirmative covenants, negative covenants and Events of Default in this Agreement (and in no case may such terms be more restrictive than the terms of this Agreement) and (v) the Borrower has paid in immediately available funds an amendment fee to the Administrative Lender for the benefit of those Lenders that executed and delivered the Ninth Amendment to the Administrative Agent prior to noon (eastern time) on December 17, 2001, such amendment fee to be in an amount equal to 40 basis points on each such executing Lender's pro rata portion of the principal amount of the outstanding Revolver/Term Loan, the Borrower and the other GCI Entities may incur senior secured Debt under the Term Loan B Agreement, and the Term Loan B Obligations, in a maximum principal amount not to exceed the lesser of (A) $65,000,000, or (B) the gross cash purchase price paid by the Borrower for the acquisition of the assets of WCIC. SECTION 10. Amendment to Section 7.04. Section 7.04 in Article VII ofthe Credit Agreement shall be amended and restated in its entirety as follows: 7.04. Liens. Borrower shall not, and shall not permit any of the other GCI Entities to, create or suffer to exist any Lien upon any of its Properties, except Permitted Liens and Liens securing Debt permitted under Section 7.02(f)(i) and, on a pari passu basis pursuant to the Intercreditor Agreement, Liens securing Term Loan B Obligations permitted to be incurred under Section 7.02(h) hereof. It is specifically acknowledged and agreed that the Borrower shall not, and shall not permit any of the other GCI Entities to, hereafter agree with any Person (other than Administrative Agent) not to grant a Lien on any of its assets, except as specifically provided in the Indenture on the Closing Date and except as provided in the Term Loan B Agreement and the Term Loan B Papers. SECTION 11. Amendment to Section 7.05. Section 7.05 in Article VII ofthe Credit Agreement shall be amended and restated in its entirety as follows: 10 7.05. Dispositions of Assets. The Borrower shall not, and shall not permit any of the other GCI Entities to, sell, lease, assign, or otherwise dispose of any assets of the Borrower or any Restricted Subsidiary, or otherwise consummate any Asset Sale, except (a) Permitted Dispositions and sales or dispositions of assets in the ordinary course of business, including dispositions of obsolete or useless assets, (b) so long as there exists no Default or Event of Default both before and after giving effect to such disposition, any sale of any portion of the assets acquired by the Borrower from WCIC described on Schedule 7.05 hereto, so long as such sales do not generate, in the aggregate, gross proceeds in excess of $10,000,000 and (c) so long as there exists no Default or Event of Default both before and after giving effect to such disposition, Asset Sales in an aggregate amount over the term of this Agreement not to exceed $10,000,000 (or $20,000,000 if before and immediately after giving effect to any Asset Sale, the Total Leverage Ratio is equal to or less than 4.50 to 1.00), so long as any amounts received from Asset Sales (except those Asset Sales permitted by Sections 7.05(a) and (b) above) in the aggregate over $10,000,000 in any fiscal year of the Borrower and its Restricted Subsidiaries (or $20,000,000 if before and immediately after giving effect to any Asset Sale, the Total Leverage Ratio is equal to or less than 4.50 to 1.00) are immediately used to reduce the Revolving Commitment, and the Revolver/Term Commitment, in accordance with Section 2.04 hereof, and repay the outstanding Obligations in accordance with the terms of Section 2.05 hereof, as applicable. SECTION 12. Amendment to Section 7.06. Section 7.06 in Article VII ofthe Credit Agreement shall be amended by deleting the "and" after subsection(e), adding "and" after subsection (f), and adding subsection (g) which shallread as follows: (g) Restricted Payments to pay scheduled interest and principal on Term Loan B Obligations under the Term Loan B Agreement, and costs, fees and expenses and other Term Loan B Obligations payable under the Term Loan B Agreement and the other Term Loan B Papers. SECTION 13. Amendment to Section 7.10(j) and Addition of New Section7.10(k). Section 7.10(j) in Article VII of the Credit Agreement shall be amendedand restated in its entirety as follows, and a new Section 7.10(k) shall beadded to the end of Section 7.10 of the Credit Agreement as follows: (j) INTENTIONALLY DELETED. (k) so long as (A) there is no Default or Event of Default both before and after giving effect to such Investment or acquisition, 11 (B) all assets owned by WCIC and each of its Subsidiaries are immediately upon acquisition thereof pledged and collaterally assigned to secure the Obligations (on a pari passu basis with the Debt evidenced by the Term Loan B Agreement pursuant to the Intercreditor Agreement) pursuant to a security agreement and/or collateral assignment in form substantially similar to those security agreements executed previously by the GCI Entities and Administrative Agent receives all other items reasonably requested by the Administrative Agent to secure the Obligations, (C) the aggregate purchase price for such assets is paid in cash and/or equity, or any combination thereof, and does not exceed $65,000,000, 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, (D) the Administrative Agent has received all other documentation, information and agreements relating to WCIC and its Subsidiaries, as is reasonably requested by the Administrative Agent, including without limitation, an Intercreditor Agreement, (E) the Administrative Agent has received projections after giving effect to the purchase of the assets of WCIC demonstrating pro forma compliance with the financial covenants contained in this Agreement throughout the term of this Agreement, (F) the assets of WCIC are acquired free and clear of all Liens (except Permitted Liens, Liens of the Lenders securing the Obligations and Liens securing the Term Loan B Obligations under the Term Loan B Agreement on a pari passu basis), and (G) 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 (in the form delivered in connection with the acquisition), and such other matters as reasonably requested by Special Counsel, including, without limitation, opinions regarding the Indenture and AUSP Credit Agreement, and the related agreements, the Borrower may purchase the assets of WCIC and its Subsidiaries. SECTION 14. Amendment to Section 7.18. Section 7.18 in Article VII ofthe Credit Agreement shall be amended and restated in its entirety as follows: 12 7.18. Amendments to Material Agreements. The Borrower shall not, nor shall the Borrower permit any other GCI Entity to, amend or change any Project Agreement or any AUSP Financing Agreement in any manner that is material and adverse to the interests of the Lenders except with the prior written consent of Majority Lenders, or amend or change any Loan Paper other than with the prior written consent of the Lenders pursuant to Section 10.01 hereof, nor shall the Borrower or any other GCI Entity change or amend (or take any action or fail to take any action the result of which is an effective amendment or change) or accept any waiver or consent with respect to (a) any Non-Compete Agreement, (b) that certain Transponder Purchase Agreement for Galaxy X, dated August 24, 1995, among the Borrower and Hughes Communications Galaxy, Inc., now held by PanAmSat Corp., as assignee, (c) that certain Transponder Service Agreement, dated August 24, 1995, among General Communication Corp. and Hughes Communications Satellite Services, Inc., now held by PanAmSat Corp., as assignee, (d) the Senior Notes and all documentation and agreements relating to the Senior Notes, other than changes that result in a decrease in interest rate, extension of maturity, or deletion of covenants or obligations to repay, and changes anticipated by Section 9.01(1) of the Indenture, (e) the Prime Management Agreement, (f) all documentation related to any Funded Debt of any GCI Entity, and (g) the Term Loan B Agreement or any of the Term Loan B Papers, except, in the case of this subsection (g), amendments, modifications, consents, waivers and changes to immaterial provisions, or amendments, modifications, consents, waivers and changes which are in form and substance similar to any amendments, modifications, consents, waivers and changes to this Agreement or the other Loan Papers. SECTION 15. Amendment to Section 7.19. Section 7.19 in Article VII ofthe Credit Agreement shall be amended and restated in its entirety as follows: 7.19 Limitation on Restrictive Agreements. The Borrower shall not, and shall not permit the Parents or any Restricted Subsidiary to, other than in connection with the Term Loan B Agreement, the Term Loan B Papers, the Senior Notes, the Revolving Credit Agreement, the AUSP Financing Agreements or the Project Agreements, enter into any indenture, agreement, instrument, financing document or other arrangement which, directly or indirectly, prohibits or restrains, or has the effect of prohibiting or restraining, or imposes materially adverse conditions upon: (a) the incurrence of Debt, (b) the granting of Liens (except for provisions contained in Capital Leases of property that are permitted hereunder that limit Liens only on the specific property subject to the Capital Lease, except for Liens in favor of the Administrative Agent and the Lenders), (c) the making or granting of Guarantees, (d) the payment of dividends or Distributions, (e) the purchase, redemption or retirement of any Capital Stock, (f) the making of loans or advances, (g) transfers or sales of property or assets (including Capital Stock) by the Parents, the Borrower or any of the Restricted 13 Subsidiaries, (h) the making of Investments or acquisitions, or (i) any change of control or management. SECTION 16. Amendment to Section 8.01. Section 8.01 in Article VIII ofthe Credit Agreement shall be amended by deleting the "or" after subsection (w),adding "or" after subsection (y) and adding subsection (z) which shall read asfollows: (z) an Event of Default shall have occurred under the Term Loan B Agreement. SECTION 17. Addition of Schedule 7.05. Schedule 7.05 attached to thisNinth Amendment shall be added to Schedules to the Credit Agreement in numericalorder as Schedule 7.05. SECTION 18. Conditions Precedent. This Amendment shall not be effectiveuntil the Administrative Agent shall have determined in its sole discretion thatall proceedings of the Borrower taken in connection with this Amendment and thetransactions contemplated hereby shall be satisfactory in form and substance tothe Administrative Agent and the Borrower has satisfied the followingconditions: (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 Amendment and the other Loan Papers, (ii) that there exists no Default or Event of Default, and the execution, delivery and performance of this 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 Amendment and all Loan Papers and to execute and perform all transactions contemplated by this Amendment, and all other documents and instruments delivered or executed in connection with this 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 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 Administrative Agent shall have received an opinion of counsel to the Parents, the Borrower and its Subsidiaries, in form and substance acceptable to the Administrative Agent and Special Counsel, including without limitation, an opinion as to no conflict with the transactions contemplated herein under the Indenture and the AUSP Credit Agreement; 14 (c) the Borrower and the Lenders shall have entered into a Ninth Amendment to the $200MM Credit Facility on terms substantially identical to the terms of this Amendment; (d) the Borrower shall have paid the Administrative Agent a ten basis points amendment fee, such amendment fee to be allocated among the Lenders executing this Amendment prior to noon (eastern time), December 17, 2001, as evidenced by a facsimile receipt by counsel to the Administrative Agent of such Lender's signature to this Amendment prior to such time; (e) the Administrative Agent shall have received each of the Loan Papers, financial statements, projections, legal opinions, consents, and other documentation, as reasonably requested by the Administrative Agent, and the Administrative Agent shall have received "No Default Certificates" executed by the Borrower and its Restricted Subsidiaries; 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 Amendment and the transactions contemplated hereby. SECTION 19. Representations and Warranties. The Borrower represents andwarrants to the Lenders and the Administrative Agent that (a) this Amendmentconstitutes its legal, valid, and binding obligation, enforceable in accordancewith the terms hereof (subject as to enforcement of remedies to any applicablebankruptcy, reorganization, moratorium, or other laws or principles of equityaffecting the enforcement of creditors' rights generally), (b) there exists noDefault or Event of Default under the Credit Agreement, (c) its representationsand warranties set forth in the Credit Agreement and other Loan Papers are trueand correct on the date hereof, (d) it has complied with all agreements andconditions to be complied with by it under the Credit Agreement and the otherLoan Papers by the date hereof, and (e) the Credit Agreement, as amended hereby,and the other Loan Papers remain in full force and effect. SECTION 20. 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 21. Counterparts. This Amendment may be executed in any numberof counterparts, all of which taken together shall constitute one and the sameinstrument. In making 15proof hereof, it shall not be necessary to produce or account for anycounterpart other than one signed by the party against which enforcement issought. SECTION 22. GOVERNING LAW. THIS 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 23. 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 SUCH COURT 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 24. 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. SECTION 25. Intercreditor Agreement. The undersigned Lenders herebyapprove of the Intercreditor Agreement in the form attached hereto as Exhibit Aand consent to the execution and delivery by the Administrative Agent on theirbehalf of the Intercreditor Agreement in substantially the same form andsubstance as the Intercreditor Agreement attached hereto as Exhibit A.================================================================================ THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.================================================================================ 16 Schedule 7.05 Description of WCIC Assets To Be Sold 17 Exhibit A to Ninth Amendment Form of Intercreditor Agreement 18 IN WITNESS WHEREOF, this Ninth Amendment to Amended and Restated CreditAgreement is executed as of the date first set forth above. GCI HOLDINGS, INC. By: /s/ John M. Lowber Its: Secretary/Treasurer 19 BANK OF AMERICA, N.A., Individually as a Lender and as Administrative Agent By: /s/ Derrick C. Bell Its: Principal 20 CREDIT LYONNAIS NEW YORK BRANCH, as Documentation Agent and Individually as a Lender By: /s/ Jeremy Horn Its: 21 TD SECURITIES (USA), INC., as Syndication Agent By: /s/ Michael J. Bandzierz Its: Managing Director 22 TORONTO DOMINION (TEXAS), INC., Individually as a Lender By: /s/ Michael J. Bandzierz Its: Managing Director 23 COBANK, ACB, Individually as a Lender By: Its: 24 GENERAL ELECTRIC CAPITAL CORPORATION, Individually as a Lender By: /s/ Karl Keiffer Its: Duly Authorized Signatory 25 UNION BANK OF CALIFORNIA, N.A., Individually as a Lender By: /s/ Stender E. Sweeney II Its: Vice President 26 BANK OF HAWAII, Individually as a Lender By: /s/ J. Bryan Scearce Its: Vice President 27 THE BANK OF NEW YORK, Individually as a Lender By: Its: 28 BNP PARIBAS, Individually as a Lender By: /s/ Gregg Bonardi Its: Director, Media & Telecom Finance By: /s/ Ben Todres Its: Director, Media & Telecom Finance 29 FLEET NATIONAL BANK, Individually as a Lender By: Its: 30 THE FUJI BANK, LIMITED, Individually as a Lender By: /s/ Masahito Fukuda Its: Senior Vice President 31 SUMITOMO MITSUI BANKING CORPORATION, Individually as a Lender By: Its: 32 WELLS FARGO BANK ALASKA, N.A. f/k/a NATIONAL BANK OF ALASKA, Individually as a Lender By: /s/ Brent Ulmer Its: Vice President 33 ALLFIRST BANK, Individually as a Lender By: /s/ Michael G. Toomey Its: Vice President 34 Schedule 7.05 Description of WCIC Assets To Be Sold Ninth Amendment Schedule 7.05 WCI Cable, Inc. Real EstateAt the time that WCI Cable, Inc. filed for protection under the Bankruptcy Code,it owned two pieces of real estate. Descriptions of the real estate is asfollows:WCI Headquarters ComplexPurpose: WCI's Administrative Office Building/Collocation FacilityPhysical Address: 19720 NW Tanasborne Drive, Hillsboro, Oregon Size: 47,923 rentable sfNotes: - Facility built for purpose - Constructed: 1997-1998 - Network requires continued use of collocation facility - No pending requirement for administrative office space - Property appears difficult to sub-divide into two separate facilities - GCI option to rent administrative office space or to sell facility and lease back the collocation space on a long term basis - Outstanding Keybank secured debt: $6.2M - Current market value of facility: $6-7MSouth Anchorage NOCC FacilityPurpose: Alaska Fiberstar NOCC and Collocation SpacePhysical Address: Diamond D Circle, Anchorage, AlaskaSize: Estimated 12,000 usable sf (gj)Notes: - Facility built for purpose - Constructed 1998 - Network requires temporary use of collocation facility - Office space is poorly laid out for administrative use - Facility may appeal for a contractor - GCI option to rent administrative office space or to sell facility with a short term (less than one year) lease back of the collocation space. - Outstanding Keybank secured debt: $2.5M - Current market value of facility: $2.5-$3.2M (gj) Exhibit A to Ninth Amendment Form of Intercreditor Agreement FORM OF COLLATERAL AGENT AND INTERCREDITOR AGREEMENT THIS COLLATERAL AGENT AND INTERCREDITOR AGREEMENT (as the same may fromtime to time be amended, restated, supplemented or otherwise modified, the"Collateral Agent Agreement") dated is made by GCI HOLDINGS, INC.,an Alaskan corporation ("Borrower"), GRANTORS signatory hereto, BANK OF AMERICA,N.A., as Collateral Agent (the "Collateral Agent"), BANK OF AMERICA, N.A, asAdministrative Agent (in such capacity, the "Administrative Agent") for itselfand certain other lenders (collectively, the "Lenders") under both the$200,000,000 Credit Agreement (as hereinafter defined) and the $50,000,000Credit Agreement (as hereinafter defined), LENDERS party hereto, BANK OFAMERICA, N.A, as Administrative Agent (the "Term Loan B Administrative Agent")for itself and certain other lenders (collectively, the "Term Loan B Lenders")under the Term Loan B Agreement (as hereinafter defined) and the TERM LOAN BLENDERS party hereto. W I T N E S S E T H : WHEREAS, the Borrower is a party to two Amended and Restated CreditAgreements dated as of December 14, 1997, with the Lenders and theAdministrative Agent, one which provides for a revolving credit facility in theamount of $200,000,000 (as the same may from time to time be amended, restated,supplemented or otherwise modified, the "$200,000,000 Credit Agreement") and onethat provides for a term loan facility in the amount of $50,000,000 (as the samemay from time to time be amended, restated, supplemented or otherwise modified,the "$50,000,000 Credit Agreement"; the $200,000,000 Credit Agreement and the$50,000,000 Credit Agreement are herein collectively referred to as the "CreditAgreement"); WHEREAS, the Borrower is a party to the Term Loan Agreement dated as of the date hereof (as the same may from time to time be amended, restated,supplemented or otherwise modified, the "Term Loan B Agreement") with Borrower,Bank of America, N.A. (in such capacity, the "Term Loan B Administrative Agent")and the Term Loan B Lenders pursuant to which the Term Loan B Lenders haveagreed to make the Borrower a term loan in an aggregate principal amount not toexceed $65,000,000; WHEREAS, it is the agreement of the parties that the rights of paymentand liens and security interests of the Term Loan B Lenders in the Collateral(as hereinafter defined) are subject to and pari passu with the rights of theLenders; and the rights of payment and liens and security interests of theLenders in the Collateral are subject to and pari passu with the rights of theTerm Loan B Lenders A-1 WHEREAS, it is a requirement of the Credit Agreement and the Term LoanB Agreement that upon the execution of the Term Loan B Agreement, the Grantors(hereinafter defined), the Administrative Agent, the Lenders, the Term Loan BAdministrative Agent, the Term Loan B Lenders and Borrower execute and deliverto the Collateral Agent, for the benefit of the Lenders and Term Loan B Lendersthis Collateral Agent Agreement in order to further define the rights andobligations of the parties hereto; NOW, THEREFORE, in consideration of the premises and of the mutualcovenants herein contained and for other good and valuable consideration, thereceipt of which is hereby acknowledged, the Grantors, Administrative Agent, theLenders, the Term Loan B Administrative Agent, and the Term Loan B Lenders agreewith the Collateral Agent as follows: SECTION 1 DEFINED TERMS As used in this Collateral Agent Agreement, capitalized terms shallhave the meanings set forth in the Credit Agreement. In addition the followingterms shall have the meanings set forth below: "Collateral" shall mean, collectively, all of the property in which theLenders or Term Loan B Lenders have a Lien pursuant to the Security Agreements. "Determining Lenders" shall mean any combination of the Lenders andTerm Loan B Lenders having at least 66-23% of the aggregate amount of theObligations and Term Loan B Obligations outstanding. "Distribution Date" shall mean each date established by the CollateralAgent as a date for the distribution of amounts on deposit in the CollateralAccount, as defined in subsection 4.1. "Event of Default" shall mean the occurrence of an Event of Default asthat term is defined in both the Credit Agreement and the Term Loan B Agreement. "Grantor" shall mean each GCI Entity and any Person party to any LoanPaper or Term Loan B Paper that grants a Lien on any Collateral. "Loan Papers" means the Notes; Interest Rate Hedge Agreements executedamong any GCI Entity and any Lender or Bank Affiliate; this Collateral AgentAgreement, all Pledge Agreements; all Guaranties executed by any Personguaranteeing payment of any portion of the Obligations; all Fee Letters; eachAssignment and Acceptance; all promissory notes evidencing any portion of theObligations; assignments, security agreements and pledge agreements granting anyinterest in any of the Collateral; stock certificates and partnership agreementsconstituting part of the Collateral; mortgages, deeds of trust, financingstatements, collateral assignments, and other documents and instruments grantingan interest in any portion of the Collateral, or related to the perfection and/or the transfer thereof, all collateral assignments or other agreementsgranting a Lien on any intercompany note; and all other documents, instruments,agreements or A-2certificates executed or delivered by the Grantors or any other GCI Entity, assecurity for Grantors' obligations under the Credit Agreement and the LoanPapers, in connection with the loans to the Borrower or otherwise; as each suchdocument shall, with the consent of the Lenders pursuant to the terms of theCredit Agreement, be amended, revised, renewed, extended, substituted orreplaced from time to time. "Obligations" means all present and future obligations, indebtednessand liabilities, and all renewals and extensions of all or any part thereof, ofthe Borrower and each other GCI Entity to Lenders and Administrative Agentarising from, by virtue of, or pursuant to the Credit Agreement, any of theother Loan Papers and any and all renewals and extensions thereof or any partthereof, or future amendments thereto, all interest accruing on all or any partthereof and reasonable attorneys' fees incurred by Lenders and AdministrativeAgent for the administration, execution of waivers, amendments and consents, andin connection with any restructuring, workouts or in the enforcement or thecollection of all or any part thereof, whether such obligations, indebtednessand liabilities are direct, indirect, fixed, contingent, joint, several or jointand several. Without limiting the generality of the foregoing, "Obligations"includes all amounts which would be owed by the Borrower, each other GCI Entityand any other Person (other than Administrative Agent or Lenders) toAdministrative Agent or Lenders under any Loan Paper, but for the fact that theyare unenforceable or not allowable due to the existence of a bankruptcy,reorganization or similar proceeding involving the Borrower, any other GCIEntity or any other Person (including all such amounts which would become due orwould be secured but for the filing of any petition in bankruptcy, or thecommencement of any insolvency, reorganization or like proceeding of theBorrower, any other GCI Entity or any other Person under any Debtor Relief Law). "Proceeds" shall have the meaning assigned to it under the UniformCommercial of Texas and, in any event, shall include, but not be limited to, (i)any and all proceeds of any insurance, indemnity, warranty or guaranty payableto any Grantor from time to time with respect to any of the Collateral, (ii) anyand all payments (in any form whatsoever) made or due and payable to any Grantorfrom time to time in connection with any requisition, confiscation,condemnation, seizure or forfeiture of all or any part of the Collateral by anygovernmental body, authority, bureau or agency (or any person acting under thecolor of governmental authority) and (iii) any and all other amounts from timeto time paid or payable under or in connection with any of the Collateral. "Pro Rata" shall mean for any Person a fraction (a) the numerator ofwhich is the sum of the amount of unpaid (i) Obligations owing to such Personand (ii) Term Loan B Obligations owing to such Person, and (b) the denominatorof which is the sum of the amount of unpaid (i) Obligations and (ii) Term Loan BObligations. "Security Agreements" means, collectively, the Term Loan B Loan Papersand the Loan Papers. "Term Loan B Obligations" means, with respect to the Term Loan BAgreement and all of the Term Loan B Papers, all present and future obligations,indebtedness and liabilities, and all renewals and extensions of all or any partthereof, of the Borrower and each other GCI Entity to lenders and administrativeagent under the Term Loan B Agreement arising from, by virtue of, A-3or pursuant to the Term Loan B Agreement, any of the other Term Loan B Papersand any and all renewals and extensions thereof or any part thereof, or futureamendments thereto, all interest accruing on all or any part thereof and reasonable attorneys' fees incurred by lenders and administrative agentthereunder for the administration, execution of waivers, amendments andconsents, and in connection with any restructuring, workouts or in theenforcement or the collection of all or any part thereof, whether suchobligations, indebtedness and liabilities are direct, indirect, fixed,contingent, joint, several or joint and several. Without limiting the generalityof the foregoing, "Term Loan B Obligations" includes all amounts which would beowed by the Borrower, each other GCI Entity and any other Person (other thanadministrative agent or lenders thereunder) to the administrative agent orlenders thereunder under any Term Loan B Paper, but for the fact that they areunenforceable or not allowable due to the existence of a bankruptcy,reorganization or similar proceeding involving the Borrower, any other GCIEntity or any other Person (including all such amounts which would become due orwould be secured but for the filing of any petition in bankruptcy, or thecommencement of any insolvency, reorganization or like proceeding of theBorrower, any other GCI Entity or any other Person under any Debtor Relief Law). "Term Loan B Papers" means "Loan Papers" as defined under the Term LoanB Agreement, including without limitation, the Term Loan B Agreement, thisCollateral Agent Agreement, all promissory notes, fee letters, pledgeagreements, security agreements, mortgages, deeds of trust, assignments andother documentation executed in connection with the Term Loan B Agreement fromtime to time, all guarantees executed by any Person guaranteeing payment of anyportion of the Term Loan B Obligations, each assignment and acceptance; as eachsuch document shall be amended, revised, renewed, extended, substituted orreplaced from time to time. SECTION 2 AGREEMENT TO HOLD COLLATERAL In reliance upon, and subject to, the provisions of Section 7 of thisCollateral Agent Agreement, the Collateral Agent will hold the security interestgranted to it in the Collateral under each Security Agreement on behalf of andfor the ratable benefit of the Lenders and the Term Loan B Lenders on a paripassu basis and on the terms and conditions set forth in this Collateral AgentAgreement, notwithstanding the date, time, manner or order of the creation,attachment or perfection of their respective Liens in any Collateral; or anyterms, covenants or conditions of the Credit Agreement, the Term Loan BAgreement, or the Security Agreements, Debtor Relief Laws, the UniformCommercial Code or any other applicable law. A-4 SECTION 3 ACCELERATION OF SECURED OBLIGATIONS 3.1 Exercise of Rights and Remedies. The Collateral Agent may exercisethe rights and remedies provided in this Collateral Agent Agreement and in theSecurity Agreements. If Administrative Agent, the Term Loan B AdministrativeAgent, and Collateral Agent are not the same Person, Administrative Agent and\orthe Term Loan B Administrative Agent (as the case may be) shall give theCollateral Agent notice of an Event of Default under their respectiveagreements. 3.2 General Authority of the Collateral Agent over the Collateral. EachGrantor hereby irrevocably constitutes and appoints the Collateral Agent and anyofficer or agent thereof, with full power of substitution, as its true andlawful attorney-in-fact with full power and authority in the name of suchGrantor or in the Collateral Agent's own name, from time to time in theCollateral Agent's discretion, so long as an Event of Default has occurred andis continuing, to take any and all appropriate action and to execute any and alldocuments and instruments which may be necessary or desirable to carry out theterms of this Collateral Agent Agreement and the Security Agreements and accomplish the purposes hereof and thereof and, without limiting the generalityof the foregoing, each Grantor hereby gives the Collateral Agent the power andrights on behalf of such Grantor given to the Administrative Agent, and the TermLoan B Administrative Agent under any Security Agreements. 3.3 Right to Initiate Judicial Proceedings. If an Event of Default hasoccurred and is continuing, the Collateral Agent (i) shall have the right andpower to institute and maintain such suits and proceedings as it may deemappropriate and permitted under any Security Agreements to protect and enforcethe rights vested in it by this Collateral Agent Agreement and each SecurityAgreement and (ii) may either after entry, or without entry, proceed by suit orsuits at law or in equity to enforce such rights and to foreclose upon theCollateral and to sell all or, from time to time, any of the Collateral underthe judgment or decree of a court of competent jurisdiction, all in accordancewith the Security Agreements. 3.4 Right to Appoint a Receiver. If an Event of Default has occurredand is continuing, the Collateral Agent shall, to the extent permitted by lawand in accordance with the Security Agreements, without notice to any Grantor orany party claiming through any Grantor, except as provided in the SecurityAgreements, without regard to the solvency or insolvency at the time of anyPerson then liable for the payment of any of the Obligations or the Term Loan BObligations, without regard to the then value of the Collateral, and withoutrequiring any bond from any complainant in such proceedings, be entitled as amatter of right to the appointment of a receiver or receivers (who may be theCollateral Agent) of the Collateral, or any part thereof, and of the rents,issues, tolls, profits, royalties, revenues and other income thereof, pendingsuch proceedings, with such powers as the court making such appointment shallconfer, and to the entry of an order directing that the rents, issues, tolls,profits, royalties, revenues and other income of the property constituting thewhole or any part of the Collateral be segregated, sequestered and impounded forthe benefit of the Collateral Agent, the Lenders and the Term Loan B Lenders,and each Grantor irrevocably consents to the appointments of such receiver orreceivers and to the entry of such order; provided that, notwithstanding theappointment of any A-5receiver, the Collateral Agent shall be entitled to retain possession andcontrol of all cash held by or deposited with it pursuant to this CollateralAgent Agreement or any Security Agreement. 3.5 Remedies Not Exclusive. (a) No remedy conferred upon or reserved tothe Collateral Agent herein or to the Administrative Agent or the Term Loan BAdministrative Agent in the Security Agreements is intended to be exclusive ofany other remedy or remedies, but every such remedy shall be cumulative andshall be in addition to every other remedy conferred herein or in any SecurityAgreement or now or hereafter existing at law or in equity or by statute. (b) No delay or omission by the Collateral Agent, any Lender or anyTerm Loan B Lender to exercise any right, remedy or power hereunder or under anySecurity Agreement shall impair any such right, remedy or power or shall beconstrued to be a waiver thereof, and every right, power and remedy given bythis Collateral Agent Agreement or any Security Agreement to the CollateralAgent, the Lenders or the Term Loan B Lenders may be exercised from time to timeand as often as may be deemed expedient by the Collateral Agent. (c) If the Collateral Agent shall have proceeded to enforce any right,remedy or power under this Collateral Agent Agreement or any Security Agreementand the proceeding for the enforcement thereof shall have been discontinued orabandoned for any reason or shall have been determined adversely to theCollateral Agent, then Grantors, the Collateral Agent, the Term Loan B Lendersand Lenders shall, subject to any determination in such proceeding, severallyand respectively be restored to their former positions and rights hereunder orthereunder with respect to the Collateral and in all other respects, andthereafter all rights, remedies and powers of the Collateral Agent shallcontinue as though no such proceeding had been taken. (d) All rights of action and of asserting claims upon or under thisCollateral Agent Agreement and the Security Agreements may be enforced by theCollateral Agent without the possession of any Security Agreement or instrumentevidencing any Obligations or Term Loan B Obligations or the production thereofat any trial or other proceeding relative thereto, and any suit or proceedinginstituted by the Collateral Agent shall be brought in its name as CollateralAgent and any recovery of judgment shall be held as part of the Collateral onbehalf of and for the ratable benefit of the Lenders and Term Loan B Lenders. 3.6 Waiver and Estoppel. (a) Each Grantor agrees, to the extent it maylawfully do so, that it will not at any time in any manner whatsoever claim ortake the benefit or advantage of, any appraisement, valuation, stay, extension,moratorium, turnover or redemption law, or any law permitting it to direct theorder in which the Collateral shall be sold, now or at any time hereafter inforce, which may delay, prevent or otherwise affect the performance orenforcement of this Collateral Agent Agreement or any Security Agreement andhereby waives all benefit or advantage of all such laws and covenants that itwill not hinder, delay or impede the execution of any power granted to theCollateral Agent in this Collateral Agent Agreement or any Security Agreementbut will suffer and permit the execution of every such power as though no suchlaw were in force. (b) Each Grantor, to the extent it may lawfully do so, on behalf ofitself and all who may claim through or under it, including without limitationany and all subsequent creditors, vendees, assignees and lienors, waives andreleases all rights to demand or to have any A-6marshalling of the Collateral upon any sale, whether made under any power ofsale granted herein or in any Security Agreement or pursuant to judicialproceedings or upon any foreclosure or any enforcement of this Collateral AgentAgreement or any Security Agreement and consents and agrees that all theCollateral may at any such sale be offered and sold as an entirety. (c) Each Grantor waives to the extent permitted by applicable law,presentment, demand, protest and any notice of any kind (except noticesexplicitly required hereunder or under any Security Agreement) in connectionwith this Collateral Agent Agreement and the Security Agreements and any actiontaken by the Collateral Agent with respect to the Collateral. 3.7 Limitation on Collateral Agent's Duty in Respect of Collateral.Beyond its duties as to the custody thereof expressly provided herein or in anySecurity Agreement and to account to the Lenders and Term Loan B Lenders formoneys and other property received by it hereunder or under any SecurityAgreement, the Collateral Agent shall not have any duty to any Grantor, the TermLoan B Lenders or to the Lenders as to any Collateral in its possession orcontrol or in the possession or control of any of its agents or nominees, or anyincome thereon or as to the preservation of rights against prior parties or anyother rights pertaining thereto. 3.8 Limitation by Law. All rights, remedies and powers provided hereinmay be exercised only to the extent that the exercise thereof does not violateany applicable provision of law, and all the provisions hereof are intended tobe subject to all applicable mandatory provisions of law which may becontrolling and to be limited to the extent necessary so that they will notrender this Collateral Agent Agreement or any Security Agreement invalid,unenforceable in whole or in part or not entitled to be recorded, registered orfiled under the provisions of any applicable law. SECTION 4 COLLATERAL ACCOUNT; DISTRIBUTIONS 4.1 The Collateral Account. Notwithstanding anything contained in theCredit Agreement or the Term Loan B Agreement, all mandatory prepayments (andany corresponding mandatory commitment reductions) required by Sections2.04(b)(ii),(iii),(iv), (v), and(vi) and 2.05(b)(i), (ii), (iii), (iv), and (v)of each of the Credit Agreements and of the Term Loan B Agreement, shall bedelivered to the Collateral Agent, for distribution in accordance with Section4.4 hereof, and each of the Credit Agreements and the Term Loan B Agreementshall be amended to provide therefor. Furthermore, notwithstanding anythingcontained in any Security Agreement, each Security Agreement that requiresmoneys to be delivered to the Administrative Agent or the Term Loan BAdministrative Agent shall be amended by this Collateral Agent Agreement torequire that such moneys be delivered to the Collateral Agent. All moneys whichare required by this Collateral Agent Agreement or any Security Agreement to bedelivered to the Collateral Agent or which are received by the Collateral Agentor any agent or nominee of the Collateral Agent, the Administrative Agent, theTerm Loan B Administrative Agent, or any Lender or Term Loan B Lender in respectof the Collateral shall be deposited in an account A-7established at an office of the Collateral Agent (the "Collateral Account") andheld by the Collateral Agent and applied in accordance with the terms of thisCollateral Agent Agreement. 4.2 Control of Collateral Account. Subject to the terms of thisCollateral Agent Agreement, all right, title and interest in and to theCollateral Account shall vest in the Collateral Agent and the Collateral Accountshall be subject to the exclusive dominion and control of the Collateral Agent. 4.3 Investment of Funds Deposited in Collateral Account. The CollateralAgent shall use reasonable efforts to invest and reinvest moneys on deposit inthe Collateral Account at any time in: (i) marketable obligations of the United States having a maturity of not more than six months from the date of acquisition; (ii) marketable obligations directly and fully guaranteed by the United States having a maturity of not more than one year from the date of acquisition; (iii) bankers' acceptances and certificates of deposit and other interest-bearing obligations issued by the Collateral Agent or any bank organized under the Laws of the United States or any state thereof with capital, surplus and undivided profits aggregating at least $100,000,000, in each case having a maturity of not more than six months from the date of acquisition; (iv) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clauses (i), (ii) and (iii) entered into with the Collateral Agent or any bank meeting the qualifications specified in clause (iii) above; and (v) commercial paper rated at least A-1 or the equivalent thereof by Standard & Poor's Corporation or P-1 or the equivalent thereof by Moody's Investors Service, Inc. and maturing within three months after the date of acquisition.All such investments and the interest and income received thereon and the netproceeds realized on the sale or redemption thereof shall be held in theCollateral Account as part of the Collateral. The Collateral Agent shall not beliable for any investment, for any failure to invest hereunder, or for anyperformance of any such investment or any loss or penalty resulting therefrom. 4.4 Application of Moneys. (a) The Collateral Agent shall have theright at any time to apply moneys held by it in the Collateral Account to thepayment of due and unpaid fees and expenses owing to it hereunder. All remainingmoneys held by the Collateral Agent in the Collateral Account or received by the Collateral Agent shall, to the extent available for distribution (it beingunderstood that the Collateral Agent may liquidate investments prior to maturityin order to make a distribution pursuant to this subsection 4.4), be distributedby the Collateral Agent on each Distribution Date in the following order ofpriority: First: to the Collateral Agent for any unpaid expenses owing to it and then to the Administrative Agent, the Term Loan B Administrative Agent, any Term Loan B Lender A-8 and any Lender which has theretofore advanced or paid any such fees and expenses constituting administrative expenses allowable under Section 503(b) of the Bankruptcy Code of 1978, pro rata an amount equal to the amount thereof so advanced or paid by such Term Loan B Lender or Lender and for which such Term Loan B Lender or Lender has not been reimbursed prior to such Distribution Date; Second: to any Term Loan B Lender and any Lender which has theretofore advanced or paid any expenses of the Collateral Agent other than such administrative expenses, pro rata an amount equal to the amount thereof so advanced or paid by such Term Loan B Lender or Lender and for which such Term Loan B Lender or Lender has not been reimbursed prior to such Distribution Date; Third: to the Term Loan B Administrative Agent on behalf of the Term Loan B Lenders and to the Administrative Agent on behalf of Lenders, Pro Rata in an amount equal to the unpaid principal or face amount of the Obligations and Term Loan B Obligations, unpaid interest on and fees, charges, expenses or other amounts payable, if any, in respect of, the Obligations and Term Loan B Obligations, whether or not then due and owing, including without limitation the costs and expenses of the Term Loan B Lenders and Lenders and their representatives which are due and owing under the relative Security Agreements and which constitute the Obligations and Term Loan B Obligations as of the Distribution Date; Fourth: to the Term Loan B Administrative Agent on behalf of the Term Loan B Lenders and to the Administrative Agent on behalf of Lenders, Pro Rata amounts equal to all other sums which constitute the Obligations and Term Loan B Obligations, and Fifth: any surplus then remaining shall be paid to Grantors or their respective successors or assigns or to whomsoever may be lawfully entitled to receive the same or as a court of competent jurisdiction may direct. (b) The term "unpaid" as used in clause Third of subsection 4.4(a)refers: (i) in the absence of a bankruptcy proceeding with respect to any Grantor, to all amounts of the Obligations and the Term Loan B Obligations outstanding as of a Distribution Date, and (ii) during the pendency of a bankruptcy proceeding with respect to any Grantor, to all amounts allowed by the bankruptcy court in respect of the Obligations and the Term Loan B Obligations as a basis for distribution (including estimated amounts, if any, allowed in respect of contingent claims), to the extent that prior distributions have not been made in respect thereof. (c) The Collateral Agent shall make all payments and distributionsunder this subsection 4.4 on account of the Obligations to the AdministrativeAgent for redistribution in accordance with the provisions of the $50,000,000Credit Agreement and the $200,000,00 Credit Agreement and on account of the TermLoan B Obligations to the Term Loan B Administrative Agent for redistribution in accordance with the provisions of the Term Loan B Agreement. A-9 4.5 Collateral Agent's Calculations. In making the determinations andallocations required by subsection 4.4, the Collateral Agent may rely uponinformation supplied by the Administrative Agent as to the amounts payable withrespect to the Obligations and by Term Loan B Administrative Agent as to amountspayable with respect to the Term Loan B Obligations, and the Collateral Agentshall have no liability to any of the Lenders or Term Loan B Lenders for actionstaken in reliance on such information. All distributions made by the CollateralAgent pursuant to subsection 4.4 shall be (subject to any decree of any court ofcompetent jurisdiction) final, and the Collateral Agent shall have no duty toinquire as to the application by the Administrative Agent or the Term Loan BAdministrative Agent of any amounts distributed to them. SECTION 5 AGREEMENTS WITH COLLATERAL AGENT 5.1 Delivery of Security Agreements. Each of the Administrative Agentand the Term Loan B Administrative Agent has delivered to the Collateral Agenttrue and complete copies of all Security Agreements as in effect on the datehereof. Each of the Administrative Agent and the Term Loan B AdministrativeAgent shall deliver to the Collateral Agent, promptly upon the executionthereof, a true and complete copy of all amendments, modifications orsupplements to any Security Agreement entered into after the date hereof. 5.2 Certain Information. In the event Administrative Agent, the TermLoan B Administrative Agent, and the Collateral Agent are not the same Person,the Administrative Agent and\or the Term Loan B Administrative Agent, as thecase may be, shall deliver to the Collateral Agent, between May 1 and May 15 andbetween November 1 and November 15 in each year, and from time to time uponrequest of the Collateral Agent, a list setting forth as of a date not more than10 days prior to the date of such delivery, the aggregate unpaid principal andinterest on the Obligations and the Term Loan B Obligations, as the case may be,outstanding and the name and address of the Administrative Agent and the nameand address of each holder thereof. In addition, each of the AdministrativeAgent and the Term Loan B Administrative Agent will promptly notify theCollateral Agent of each of their respective changes in the identity. 5.3 Compensation and Expenses. The Borrower agrees to pay to theCollateral Agent, from time to time upon demand, all of the costs and expensesof the Collateral Agent (including, without limitation, the reasonable fees anddisbursements of its counsel and such special counsel as the Collateral Agentelects to retain) which arise in addition to the fees, costs and expenses ofAdministrative Agent, the Term Loan B Administrative Agent, or any Lender underthe Credit Agreement or any Term Loan B Lender under the Term Loan B Agreement,(A) arising in connection with the preparation, execution, delivery,modification, and termination of this Collateral Agent Agreement, the CreditAgreement, and Term Loan B Agreement and each Security Agreement or theenforcement of any of the provisions hereof or thereof, (B) incurred or requiredto be advanced in connection with the administration of the Collateral, the saleor other disposition of Collateral pursuant to any Security Agreement and thepreservation, A-10protection or defense of the Collateral Agent's rights under this CollateralAgent Agreement, the Credit Agreement, and Term Loan B Agreement and theSecurity Agreements and in and to the Collateral or (C) incurred by theCollateral Agent in connection with the resignation of the Collateral Agentpursuant to subsection 7.6. The obligations of Borrower under this subsection5.3 shall survive the termination of the other provisions of this Collateral Agent Agreement. 5.4 Stamp and Other Similar Taxes. Borrower agrees to indemnify andhold harmless the Collateral Agent, the Administrative Agent, the Term Loan BAdministrative Agent, each Lender and each Term Loan B Lender from any presentor future claim for liability for any stamp or any other similar tax and anypenalties or interest with respect thereto, which may be assessed, levied orcollected by any jurisdiction in connection with this Collateral AgentAgreement, the Credit Agreement, any Security Agreement, or any Collateral, tothe extent permitted by law. The obligations of each Borrower under thissubsection 5.4 shall survive the termination of the other provisions of thisCollateral Agent Agreement. 5.5 Filing Fees, Excise Taxes, Etc. Borrower agrees to pay or toreimburse the Collateral Agent for any and all payments made by the CollateralAgent in respect of all search, filing, recording and registration fees, taxes,excise taxes and other similar imposts which may be payable or determined to bepayable in respect to the execution and delivery of this Collateral AgentAgreement and each Security Agreement. The obligations of Borrower under thissubsection 5.5 shall survive the termination of the other provisions of thisCollateral Agent Agreement. 5.6 Indemnification Borrower agrees to indemnify, and hold theCollateral Agent, Administrative Agent, the Term Loan B Administrative Agent,the Lenders and the Term Loan B Lenders harmless from and against any and allliabilities, obligations, losses, damages, penalties, actions, judgments, suits,costs, expenses (including, without limitation, the reasonable fees and expensesof counsel) and disbursements of any kind or nature whatsoever which may at anytime be imposed on, incurred by or asserted against them of any of theirrepresentatives, directors, officers, employees, or agents in any way relatingto or arising out of any of this Collateral Agent Agreement, the CreditAgreement, Term Loan B Agreement, the Security Agreements or any documentscontemplated by or referred to herein or therein (including in connection withor as a result of, in whole or in part, the negligence of any of the CollateralAgent, Administrative Agent, the Term Loan B Administrative Agent, the Lendersand the Term Loan B Lenders), any transaction related hereto or thereto, or anyact, omission or transaction of any Grantor or any of their representatives,directors, officers, employees, or other agents, to the extent that any of thesame results, directly or indirectly, from any claims made or actions, suits orproceedings commenced by or on behalf of any person or entity, other than theCollateral Agent, Administrative Agent, the Term Loan B Administrative Agent,the Lenders or the Term Loan B Lenders. In any suit, proceeding or actionbrought by the Collateral Agent under or with respect to any contract,agreement, interest or obligation constituting part of the Collateral for anysum owing thereunder, or to enforce any provisions thereof, Borrower will save,indemnify and keep the Collateral Agent, Administrative Agent, the Term Loan BAdministrative Agent, the Lenders and the Term Loan B Lenders or any of theirrepresentatives, directors, officers, employees or agents harmless from andagainst all expense, loss or damage suffered by reason of any defense, setoff,counterclaim, recoupment or reduction of liability whatsoever of the obligorthereunder (including in connection with or as a result of, in whole or in part,the negligence of A-11any of the Collateral Agent, Administrative Agent, the Term Loan BAdministrative Agent, the Lenders and the Term Loan B Lenders), arising out of abreach by any Grantor of any obligation thereunder or arising out of any otheragreement, indebtedness or liability at any time owing to or in favor of suchobligor or its successors from such Grantor, and all such obligations ofGrantors shall be and remain enforceable against and only against such Grantorand shall not be enforceable against the Collateral Agent, the AdministrativeAgent, the Term Loan B Administrative Agent, any Lender, any Term Loan B Lender,or any of their representatives, directors, officers, employees or agents. Theagreements in this subsection 5.6 shall survive the payment of the Obligations,the Term Loan B Obligations and termination of the other provisions of thisCollateral Agent Agreement. The Collateral Agent, Administrative Agent, the Term Loan B Administrative Agent, the Lenders or the Term Loan B Lenders shall not beso indemnified and held harmless for any losses or damages, which are finallydetermined by a court of competent jurisdiction, were caused by the indemnifiedparty's willful misconduct or gross negligence. 5.7 Collateral Agent's Lien. Notwithstanding anything to the contraryin this Collateral Agent Agreement, as security for the payment of the expensesof the Collateral Agent hereunder (i) the Collateral Agent is hereby granted afirst and prior Lien by each Grantor, the Lenders and the Term Loan B Lendersupon all Collateral and (ii) the Collateral Agent shall have the right to useand apply any of the funds held by the Collateral Agent in the CollateralAccount to cover such expenses. 5.8 Further Assurances. At any time and from time to time, upon therequest of the Collateral Agent, and at the expense of the Grantors, to theextent required under any Security Agreements, the Grantors will promptlyexecute and deliver any and all such further instruments and documents and takesuch further action as is necessary or reasonably requested further to perfect,or to protect the perfection of, the Liens and security interests granted underthe Security Agreements, including, without limitation, the filing of anyfinancing or continuation statements under the Uniform Commercial Code in effectin any such jurisdiction. Each Grantor also hereby authorizes the CollateralAgent to sign and to file any such financing or continuation statements withoutthe signature of such Grantor to the extent permitted by applicable law. 5.9 Additional Collateral. To the extent required under any SecurityAgreements, each Grantor shall promptly notify the Collateral Agent of any newCollateral and shall forthwith pledge, mortgage and hypothecate its leaseholdinterest in and to such Collateral to the Collateral Agent pursuant to the termsand provisions of this Collateral Agent Agreement. It is expressly understood,however that in no event shall Term Loan B Administrative Agent or any Term LoanB Lender be entitled to a grant of a lien, security interest, pledge or otherencumbrance in any Collateral in which the Collateral Agent is not granted alien, security interest, pledge or other encumbrance that is pari passu with theAdministrative Agent's or the Lenders' Lien. A-12 SECTION 6 POSSESSION AND USE OF COLLATERAL; PARTIAL RELEASES 6.1 Use of Collateral. The rights of the Grantors in and to theCollateral are set forth in the Credit Agreement, Term Loan B Agreement and theSecurity Agreements. 6.2 Releases. Releases and dispositions of Collateral (other thansales, releases and dispositions of Collateral which are permitted by the termsand provisions of the Credit Agreement, the Term Loan B Agreement and theSecurity Agreements) may be made by the Collateral Agent, only at the directionof the Determining Lenders. Sales, releases or other dispositions of Collateralwhich are permitted by the terms and provisions of the Credit Agreement, TermLoan B Agreement and the Security Agreements shall not require any written ororal authorization or consent of the Collateral Agent, Lenders or Term Loan BLenders, and sales or other dispositions of Collateral which are pursuant to theexercise of remedies hereunder or under any Security Agreement shall not requireany written or oral authorization or consent of the Lenders or Term Loan BLenders. It shall not be necessary for any Lender or Term Loan B Lender to signsuch release. Such request shall be in writing, shall describe the property tobe released in reasonable detail, and, shall state that such release is or willbe in accordance with the Credit Agreement, the Term Loan B Agreement and theSecurity Agreements. The Collateral Agent shall send a copy of all releases tothe Term Loan B Administrative Agent and the Administrative Agent. SECTION 7 THE COLLATERAL AGENT 7.1 Appointment. Each Term Loan B Lender and each Lender irrevocablydesignates and appoints Bank of America, N.A. as the Collateral Agent of suchLender and such Term Loan B Lender under this Collateral Agent Agreement and theSecurity Agreements and each such Term Loan B Lender and each such Lenderirrevocably authorizes Bank of America, N.A. as the Collateral Agent for suchLender and Term Loan B Lender, to take such action on such Lender's and suchTerm Loan B Lender's behalf under the provisions of this Collateral AgentAgreement and the Security Agreements and to exercise such powers and performsuch duties as are expressly delegated to the Collateral Agent and/or theAdministrative Agent, the Term Loan B Administrative Agent, the Lenders and theTerm Loan B Lenders by the terms hereof and thereof, together with such otherpowers as are reasonably incidental thereto. Notwithstanding any provision tothe contrary in this Collateral Agent Agreement and the Security Agreements, theCollateral Agent shall not have any duties or responsibilities, except thoseexpressly set forth in this Collateral Agent Agreement and the SecurityAgreements, or any fiduciary relationship with any Lender or Term Loan B Lender,and no implied covenants, functions, responsibilities, duties, obligations orliabilities shall be read into this Collateral Agent Agreement and the SecurityAgreements or otherwise exist against the Collateral Agent. Furthermore,notwithstanding any provision to the contrary in this Collateral Agent Agreementor any Security Agreement, the Collateral Agent is not an agent of Borrower, theGrantors, any Lender, the A-13Administrative Agent or any Term Loan B Lender, the Term Loan B AdministrativeAgent and shall have no liability to such parties for any of its acts oromissions under this Collateral Agent Agreement, or any of the SecurityAgreements or for creating, perfecting, preserving or continuing any lien,security interest or pledge on any of the Collateral. 7.2 Exculpatory Provisions. (a) The Collateral Agent shall not beresponsible in any manner whatsoever for the correctness of any recitals,statements, representations or warranties herein, all of which are made solelyby the Grantors or Borrower, as the case may be. The Collateral Agent makes norepresentations as to the value or condition of the Collateral or any partthereof, or as to the title of any Grantor thereto or as to the securityafforded by this Collateral Agent Agreement or any Security Agreement, or as tothe validity, execution, enforceability, legality or sufficiency of thisCollateral Agent Agreement, the Security Agreements, the Obligations or the TermLoan B Obligations, and the Collateral Agent shall incur no liability orresponsibility in respect of any such matters. The Collateral Agent shall not beresponsible for insuring the Collateral or for the payment of taxes, charges orassessments or discharging of Liens upon the Collateral or otherwise as to themaintenance of the Collateral. (b) The Collateral Agent shall not be required to ascertain or inquireas to the performance by any Grantor of any of the covenants or agreementscontained herein or in any Security Agreement. Whenever it is necessary, or inthe opinion of the Collateral Agent advisable, for the Collateral Agent toascertain the amount of the Obligations or the Term Loan B Obligations, thenheld by the Lenders or Term Loan B Lenders, as the case may be, the CollateralAgent may rely on a certificate of Administrative Agent, in the case of theObligations, or of the Term Loan B Administrative Agent, in the case of the TermLoan B Obligations and, if the Administrative Agent or the Term Loan BAdministrative Agent shall not give such information to the Collateral Agent,they shall not be entitled to receive distributions hereunder (in which casedistributions to those Persons who have supplied such information to theCollateral Agent shall be calculated by the Collateral Agent using, for thosePersons who have not supplied such information, the list then most recentlydelivered by the Company pursuant to subsection 5.2). (c) The Collateral Agent shall be under no obligation or duty to takeany action under this Collateral Agent Agreement or any Security Agreement if taking such action (i) would subject the Collateral Agent to a tax in anyjurisdiction where it is not then subject to a tax or (ii) would require theCollateral Agent to qualify to do business in any jurisdiction where it is notthen so qualified, unless the Collateral Agent receives security or indemnitysatisfactory to it against such tax (or equivalent liability), or any liabilityresulting from such qualification, in each case as results from the taking ofsuch action under this Collateral Agent Agreement or any Security Agreement. (d) Notwithstanding any other provision of this Collateral AgentAgreement, the Collateral Agent shall not be liable for any action taken oromitted to be taken by it in accordance with this Collateral Agent Agreement orthe Security Agreements. A-14 (e) The Collateral Agent shall have the same rights with respect to anyObligation or Term Loan B Obligation held by it as any other Secured Party andmay exercise such rights as though it were not the Collateral Agent hereunder,and may accept deposits from, lend money to, and generally engage in any kind ofbusiness with Grantors as if it were not the Collateral Agent. 7.3 Delegation of Duties. The Collateral Agent may execute any of thepowers hereof and perform any duty hereunder either directly or by or throughagents or attorneys-in-fact. The Collateral Agent shall be entitled to advice ofcounsel concerning all matters pertaining to such powers and duties. TheCollateral Agent shall not be responsible for the negligence or misconduct ofany agents or attorneys-in-fact selected by it. 7.4 Reliance by Collateral Agent. (a) The Collateral Agent may consultwith counsel, and any advice or statements of legal counsel (including, withoutlimitation, counsel to the Grantors) shall be full and complete authorizationand protection in respect of any action taken or suffered by it hereunder orunder any Security Agreement in accordance therewith. (b) The Collateral Agent may conclusively rely, and shall be fullyprotected in acting, upon any resolution, statement, certificate, instrument,opinion, report, notice, request, consent, order, bond or other paper ordocument believed by it to be genuine and to have been signed or presented bythe proper party or parties or, in the case of cables, telecopies and telexes,to have been sent by the proper party or parties. The Collateral Agent mayconclusively rely, as to the truth of the statements and the correctness of theopinions expressed therein, upon any certificates or opinions furnished to theCollateral Agent and conforming to the requirements of this Collateral AgentAgreement. (c) The Collateral Agent shall not be under any obligation to exerciseany of the rights or powers vested in the Collateral Agent by this CollateralAgent Agreement and the Security Agreements, at the request or direction of theAdministrative Agent, the Term Loan B Administrative Agent, the Lenders or TermLoan B Lenders pursuant to this Collateral Agent Agreement, or otherwise, unlessthe Collateral Agent shall have been provided security and indemnity to itssatisfaction against the fees, costs, expenses and liabilities which may beincurred by it, including such reasonable advances as may be requested by theCollateral Agent. 7.5 Limitations on Duties of Collateral Agent. (a) The Collateral Agentshall be obligated to perform such duties and only such duties as arespecifically set forth in this Collateral Agent Agreement and the SecurityAgreements, and no implied covenants or obligations shall be read into thisCollateral Agent Agreement or any Security Agreement against the CollateralAgent. The Collateral Agent may exercise the rights and powers vested in it bythis Collateral Agent Agreement and the Security Agreements, and shall not beliable with respect to any action taken by it, or omitted to be taken by it. (b) The Collateral Agent shall not be under any obligation to take anyaction, which is discretionary with the Collateral Agent under the provisionshereto, or of any Security Agreement except upon the written request of the Determining Lenders. A-15 7.6 Resignation of the Collateral Agent. Should the Collateral Agentever cease to be a Lender or a Term Loan B Lender, or should the CollateralAgent ever resign as the Collateral Agent, or should the Collateral Agent everbe removed with cause by unanimous action of all Lenders and Term Loan B Lenders(other than the Lender then acting as the Collateral Agent), then the Lenderappointed by the other Lenders and Term Loan B Lenders shall forthwith becomethe Collateral Agent, and each Grantor and the Lenders and Term Loan B Lendersshall execute such documents as any Lender or Term Loan B Lender may reasonablyrequest to reflect such change. Any resignation or removal of the CollateralAgent shall become effective upon the appointment by the Lenders and Term Loan BLenders of a successor Collateral Agent; provided, however, that if the Lendersand Term Loan B Lenders fail for any reason to appoint a successor within 60days after such removal or resignation, Collateral Agent shall thereafter haveno obligation to act as Collateral Agent hereunder. 7.7 Status of Successor. Every successor Collateral Agent appointedpursuant to subsection 7.6 shall be a bank or trust company in good standing andhaving power to act as Collateral Agent hereunder, incorporated under the lawsof the United States of America or any State thereof or the District ofColumbia. 7.8 Merger of the Collateral Agent. Any corporation into which theCollateral Agent may be merged, or with which it may be consolidated, or anycorporation resulting from any merger or consolidation to which the CollateralAgent shall be a party, shall be Collateral Agent under this Collateral AgentAgreement and the Security Agreements without the execution or filing of anypaper or any further act on the part of the parties hereto. 7.9 Treatment of Payee or Endorsee by Collateral Agent; Representativesof Lenders and Term Loan B Lenders. The Collateral Agent may treat theregistered holder or, if none, the payee or endorsee of any promissory note ordebenture evidencing the Obligations or the Term Loan B Obligations as theabsolute owner thereof for all purposes and shall not be affected by any noticeto the contrary, whether such promissory note or debenture shall be past due ornot. 7.10 Non-Reliance on Collateral Agent. Each of the AdministrativeAgent, the Term Loan B Administrative Agent, and each Lender and Term Loan BLender expressly acknowledge that neither the Collateral Agent nor any of itsofficers, directors, employees, agents, attorneys-in-fact or affiliates has madeany representations or warranties to them and that no act by the CollateralAgent hereinafter taken, including any review of the affairs of the Borrower,shall be deemed to constitute any representation or warranty by the CollateralAgent to any Lender or Term Loan B Lender. Each Lender and Term Loan B Lenderrepresents to the Collateral Agent that such Lender or Term Loan B Lenderindependently and without reliance upon the Collateral Agent, and based on suchdocuments and information as they have deemed or will deem appropriate, has madeand will make its own appraisal of and investigation into the business,operations, property, financial and other condition and creditworthiness of theBorrower and has made and will make their own decision to extend credit to theBorrower. Each Lender and Term Loan B Lender also represent that they will,independently and without reliance upon the Collateral Agent, and based on suchdocuments and information as they shall deem appropriate at the time continue tomake their own creditor analysis, appraisals and decisions in taking or nottaking action under the Collateral Agent Agreement, and to make suchinvestigation as they deem necessary to inform themselves as to the business,operations, A-16property, financial and other condition and creditworthiness of the Borrower.Except for notices, reports and other documents expressly required to be furnished to the Lenders and Term Loan B Lenders by the Collateral Agenthereunder, the Collateral Agent shall not have any duty or responsibility toprovide any Lender or Term Loan B Lender with any credit or other informationconcerning the business, operations, property, financial and other condition orcreditworthiness of the Borrower which may come into its possession or thepossession of any of its officers, directors, employees, agents,attorneys-in-fact or affiliates. Each Lender and Term Loan B Lender acknowledgethat the Collateral Agent and its affiliates may exercise all contractual andlegal rights and remedies which may exist from time to time with respect toother existing and future relationships with Grantors without any duty toaccount therefor to such Lender or Term Loan B Lender. 7.11 Indemnification. Each of the Administrative Agent, the Term Loan BAdministrative Agent, the Lenders and the Term Loan B Lenders agree to indemnifythe Collateral Agent (in its capacity as such), without limiting the obligationof each Grantor to do so, ratably according to the respective principal amountsof the Obligations and Term Loan B Obligations held by the Lenders and Term LoanB Lenders at the date of any claim by the Collateral Agent for indemnity underthis subsection, from and against any and all liabilities, obligations, losses,damages, penalties, actions, judgments, suits, costs, expenses (including,without limitation, the reasonable fees and expenses of counsel) ordisbursements of any kind whatsoever which may at any time be imposed on,incurred by or asserted against the Collateral Agent in any way relating to orarising out of this Collateral Agent Agreement, the Credit Agreement, Term LoanB Agreement, the Security Agreements, or any documents contemplated hereby orthereby or referred to herein or therein or the transactions contemplated herebyor thereby or any action taken or omitted by the Collateral Agent hereunder orthereunder or in connection therewith, including any negligence of theCollateral Agent, but excluding any acts or omissions of the Collateral Agentfinally determined by a court of competent jurisdiction to as a result of theCollateral Agent's gross negligence or willful misconduct. The Lenders and TermLoan B Lenders agree to reimburse the Collateral Agent (to the extent notreimbursed by the Grantors), Pro Rata, promptly upon demand for anyout-of-pocket expenses (including attorneys' fees) incurred by the CollateralAgent in connection with the preparation, execution, delivery, administration,modification, amendment, or enforcement (whether through legal proceedings orotherwise) of, or legal advice in respect of rights or responsibilities under,this Collateral Agent Agreement, the Credit Agreement, the Term Loan BAgreement, the Security Agreements, or any other documents contemplated herebyor thereby. The agreements in this subsection 7.11 shall survive the payment ofthe Obligations, the Term Loan B Obligations and the termination of the otherprovisions of this Collateral Agent Agreement. SECTION 8 PARI PASSU PROVISIONS 8.1 Agreement. Notwithstanding anything contained in the Term Loan BAgreement, the Credit Agreement or any Security Agreement to the contrary, theterms and provisions of this Section 8 shall control. The Term Loan B Lenders,the Term Loan B Administrative Agent, Grantors, the Lenders and AdministrativeAgent agree that any security interests, Liens, pledges A-17of stock, or other encumbrances on behalf of and for the ratable benefit of theTerm Loan B Lenders securing the Term Loan B Obligations, are and shall besubject to and pari passu with the security interests, Liens, pledges of stockor other encumbrances of the Administrative Agent on behalf of and for theratable benefit of the Lenders securing payment of the Obligations. The TermLoan B Lenders, the Term Loan B Administrative Agent, Grantors, the Lenders andAdministrative Agent agree that any and all of the Term Loan B AdministrativeAgent's rights and remedies with respect to the Collateral shall remain subjectto and pari passu with the rights and remedies of the Administrative Agent withrespect thereto. In the event that Grantors, the Administrative Agent, the TermLoan B Administrative Agent, any Lender, or any Term Loan B Lender at any time obtains possession of any of the Collateral, it shall promptly deliver suchCollateral to the Collateral Agent, unless precluded by law or judicial order. 8.2 Authority of Collateral Agent. Grantors, each Lender, theAdministrative Agent, the Term Loan B Administrative Agent, and each Term Loan BLender agree as follows: (a) Each of the Lenders, Term Loan B Lenders, the Administrative Agent,the Term Loan B Administrative Agent, and Borrower hereby irrevocablyconstitutes and appoints the Collateral Agent and any officer or agent thereofuntil such time as this Collateral Agent Agreement terminates pursuant tosubsection 9.9, with full power of substitution, as its true and lawfulattorney-in-fact with full power and authority in the name of each Grantor, suchLender, the Administrative Agent, the Term Loan B Administrative Agent, or suchTerm Loan B Lender or in the Collateral Agent's own name, from time to time inthe Collateral Agent's discretion, to take any and all appropriate actionpermitted hereunder and under the Security Agreements and to execute any and alldocuments and instruments which may be necessary or desirable to carry out theterms of this Collateral Agent Agreement and the Security Agreements andaccomplish the purposes hereof and thereof and, without limiting the generalityof the foregoing, each of the Lenders, the Term Loan B Lenders, the Borrower,the Administrative Agent, and the Term Loan B Administrative Agent hereby givesthe Collateral Agent the power and rights on behalf of each of the Lenders, theAdministrative Agent, the Term Loan B Lenders and the Term Loan B AdministrativeAgent, without notice to or further assent of any of such parties to do thefollowing: (i) to ask for, demand, sue for, collect, receive and give acquittance for any and all moneys due or to become due upon, or in connection with, the Collateral; (ii) to receive, take, endorse, assign and deliver any and all checks, notes, drafts, acceptances, documents and other negotiable and non-negotiable instruments taken or received by the Collateral Agent as, or in connection with, the Collateral; (iii) to commence, prosecute, defend, settle, compromise or adjust any claim, suit, action or proceeding with respect to, or in connection with, the Collateral; (iv) to sell, transfer, release, assign or otherwise deal in or with the Collateral or any part thereof as fully and effectively as if the Collateral Agent were the absolute owner thereof; and A-18 (v) to do, at its option, at any time or from time to time, all acts and things which the Collateral Agent deems necessary to protect or preserve the Collateral and to realize upon the Collateral. Said attorney, the Collateral Agent, is hereby granted and given fullpower and authority to do and perform every act necessary and proper to be donein the exercise of any of the foregoing powers. Understanding that powers ofattorney are strictly construed, each of the Term Loan B Lenders, Lenders, theAdministrative Agent, the Term Loan B Administrative Agent, and Grantorsdeclares that it is its expressed intention that this power of attorney shall beliberally construed to give the fullest effect to the powers granted herein. (b) All distributions upon or with respect to the Term Loan BObligations or the Obligations which are received by Grantors, any Lender, anyTerm Loan B Lender, the Administrative Agent, or the Term Loan B AdministrativeAgent on account of any security interests, liens, pledges of stock or otherencumbrances contrary to the provisions of this Collateral Agent Agreement shallbe received in trust for the benefit of the Lenders and Term Loan B Lenders,shall be segregated from other funds and property held by the party receivingsame, and shall be forthwith paid over to the Collateral Agent in the same formas so received (with any necessary endorsement) to be applied (in the case of cash) to or held as collateral (in the case of non-cash property or securities)for the payment or prepayment of the Obligations and Term Loan B Obligations inaccordance with the terms of the Credit Agreement and Term Loan B Agreement. 8.3 No Commencement of Any Proceeding. Each of the Term Loan B Lenders,the Lenders, the Administrative Agent, and the Term Loan B Administrative Agentagrees that, so long as any of the Obligations and the Term Loan B Obligationsshall remain unpaid, it will not exercise any right, power or remedy referred toin subsection 8.2(a) hereof with respect to the Collateral, without the consentof the Collateral Agent. 8.4 Obligations Hereunder Not Affected. All rights and interests of theLenders, Term Loan B Lenders, the Administrative Agent, and the Term Loan BAdministrative Agent hereunder, and all agreements and obligations of Grantorsunder this Collateral Agent Agreement, shall remain in full force and effectirrespective of: (a) any lack of validity or enforceability of the Credit Agreement,this Collateral Agent Agreement, the Term Loan B Agreement, or the SecurityAgreements. (b) any change in the time, manner or place of payment of, or in anyother term of, all or any of the Obligations or Term Loan B Obligations, or anyother amendment or waiver of or any consent to departure from the CreditAgreement, this Collateral Agent Agreement, the Term Loan B Agreement, or theSecurity Agreements. (c) any exchange, release or non-perfection of any Collateral, or anyrelease or amendment or waiver of or consent to departure from any guaranty, forall or any of the Obligations or Term Loan B Obligations. (d) any other circumstance which might otherwise constitute a defenseavailable to, or a discharge of, any Grantor in respect of the Obligations orTerm Loan B Obligations or A-19Grantors in respect of this Collateral Agent Agreement. This Collateral AgentAgreement shall continue to be effective or be reinstated, as the case may be,if at any time any payment of any of the Obligations or Term Loan B Obligationsis rescinded or must otherwise be returned by the Collateral Agent upon theinsolvency, bankruptcy or reorganization of any of the Grantors or otherwise,all as though such payment had not been made. 8.5 Waiver. The Lenders, Term Loan B Lenders, the Term Loan BAdministrative Agent, Administrative Agent and Grantors each hereby waivepromptness, diligence, notice of acceptance and any other notice with respect toany of the Obligations or the Term Loan B Obligations and this Collateral AgentAgreement and any requirement that the Collateral Agent protect, secure, perfector insure any security interest or Lien or any property subject thereto orexhaust any right or take any action against Grantors or any other Person orentity or any Collateral. SECTION 9 MISCELLANEOUS 9.1 Notices. Unless otherwise provided herein, all notices, requests,consents and demands shall be in writing and shall be personally delivered ormailed by certified mail, postage prepaid, to the respective addresses specifiedherein, or, as to any party, to such other address as may be designated by it inwritten notice to all other parties. All notices, requests, consents and demandshereunder will be effective when personally delivered or mailed by certifiedmail, postage prepaid, addressed as aforesaid. 9.2 No Waivers. No failure on the part of the Collateral Agent, theAdministrative Agent, the Term Loan B Administrative Agent, any Term Loan BLender or any Lender to exercise, no course of dealing with respect to, and nodelay in exercising, any right, power or privilege under this Collateral AgentAgreement or any Security Agreement shall operate as a waiver thereof nor shallany single or partial exercise of any such right, power or privilege precludeany other or further exercise thereof or the exercise of any other right, poweror privilege. 9.3 Amendments, Supplements and Waivers. The provisions of thisCollateral Agent Agreement may not be amended, modified or waived except by thewritten agreement of the Term Loan B Administrative Agent, Administrative Agent,and the Collateral Agent. The provisions of each Security Agreement may not beamended, modified or waived, except in accordance with the terms thereof andwith the written consent of the Collateral Agent. Any such supplementalagreements shall be binding upon each Grantor, the Administrative Agent, theTerm Loan B Administrative Agent, the Lenders, the Collateral Agent, the TermLoan B Lenders, and their respective successors and assigns. 9.4 Headings. The headings of Sections and subsections have beenincluded herein and in the Security Agreements for convenience only and shouldnot be considered in interpreting this Collateral Agent Agreement or theSecurity Agreements. A-20 9.5 Severability. Any provision of this Collateral Agent Agreement,which is prohibited or unenforceable in any jurisdiction, shall not invalidatethe remaining provisions hereof, and any such prohibition or unenforceability inany jurisdiction shall not invalidate or render unenforceable such provision inany other jurisdiction. 9.6 Successors and Assigns. This Collateral Agent Agreement shall bebinding upon and inure to the benefit of each of the parties hereto and shallinure to the benefit of each of the Lenders, the Term Loan B Lenders, theAdministrative Agent, the Term Loan B Administrative Agent, and their respectivesuccessors and assigns, and nothing herein is intended or shall be construed togive any other Person any right, remedy or claim under, to or in respect of thisCollateral Agent Agreement or any Collateral. 9.7 GOVERNING LAW. THIS COLLATERAL AGENT AGREEMENT SHALL BE GOVERNEDBY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OFTEXAS. WITHOUT EXCLUDING ANY OTHER JURISDICTION, THE GRANTORS, LENDERS,ADMINISTRATIVE AGENT, COLLATERAL AGENT, THE TERM LOAN B ADMINISTRATIVE AGENT,TERM LOAN B LENDERS AND GRANTORS AGREE THAT THE COURTS OF TEXAS SHALL HAVEJURISDICTION OVER THE PROCEEDINGS IN CONNECTION WITH THIS COLLATERAL AGENTAGREEMENT. 9.8 Counterparts. This Collateral Agent Agreement may be signed in anynumber of counterparts with the same effect as if the signatures thereto andhereto were upon the same instrument. 9.9 Termination. Upon receipt by the Collateral Agent from theAdministrative Agent and the Term Loan B Administrative Agent of a writtendirection to cause the Collateral Agent's interest in all of the Liens by theSecurity Agreements of the Lenders and Term Loan B Lenders to be released anddischarged, this Collateral Agent Agreement shall terminate with respect to theCollateral Agent, Administrative Agent, the Term Loan B Administrative Agent,the Term Loan B Lenders, and Lenders; and the security interests of theCollateral Agent as secured party created by subsection 5.7 and by the SecurityAgreements shall be released; provided, that the provisions of subsections 5.3,5.4, 5.5, 5.6 and 7.11 shall not be affected by any such termination. 9.10 Grantors Jointly and Severally Liable. All of the obligations ofthe Grantors under this Collateral Agent Agreement shall be deemed to be jointand several obligations of all of the Grantors. 9.11 Control. Notwithstanding anything contained herein which may be tothe contrary, this agreement and the transactions contemplated hereby do not andwill not constitute, create, or have the effect of constituting or creating,directly or indirectly, actual or practical ownership of the Grantors by theLenders or the Term Loan B Lenders, or control, affirmative or negative, director indirect, by the Lenders or the Term Loan B Lenders, over the management, orany other aspect of the day-to-day operation of Grantors, which control remainsin Grantors, its shareholders and boards of directors. A-21 9.12 ENTIRE AGREEMENT. THIS WRITTEN AGREEMENT AND THE OTHER DOCUMENTSREFERENCED HEREIN OR CONTEMPLATED HEREBY REPRESENT THE FINAL AGREEMENT AMONG THEPARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS ORSUBSEQUENT ORAL AGREEMENTS OF THE PARTIES HERETO. THERE ARE NO UNWRITTEN ORALAGREEMENTS AMONG THE PARTIES. A-22 IN WITNESS WHEREOF, the parties hereto have caused this CollateralAgent Agreement to be duly executed by their respective authorized officers asof the day and year first written above. A-23GRANTORS:COLLATERAL AGENT: BANK OF AMERICA, N.A. By: Title:BORROWER: GCI HOLDINGS, INC. By: Title:GRANTORS: GCI, INC. By: Its: GCI COMMUNICATION CORP. By: Title: GCI CABLE, INC. By: Title: A-24 GCI AMERICAN CABLESYSTEMS, INC. By: Title: GCI CABLESYSTEMS OF ALASKA, INC. By: Title: GCI FIBER COMMUNICATION CO., INC. By: Title:ADMINISTRATIVE AGENTAND LENDER: BANK OF AMERICA, N.A. By: Title:TERM LOAN B ADMINISTRATIVE AGENT: BANK OF AMERICA, N.A. By: Title: A-25 NINTH AMENDMENT TO $200,000,000 AMENDED AND RESTATED CREDIT AGREEMENT NINTH AMENDMENT TO $200,000,000 AMENDED AND RESTATED CREDIT AGREEMENT(this "Amendment") is dated as of the 17th day of December, 2001 and enteredinto among 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., as AdministrativeAgent for itself and the Lenders (the "Administrative Agent"), CREDIT LYONNAISNEW YORK BRANCH, as Documentation Agent and TD SECURITIES (USA), INC. asSyndication 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, by that certain FourthAmendment to Amended and Restated Credit Agreement dated as of January 18, 2000,by that certain Fifth Amendment to Amended and Restated Credit Agreement datedas of October 25, 2000, by that certain Sixth Amendment to Amended and RestatedCredit Agreement dated as of March 23, 2001, by that certain Seventh Amendmentto Amended and Restated Credit Agreement dated as of April 27, 2001, and by thatcertain Eighth Amendment to Amended and Restated Credit Agreement dated as ofOctober 31, 2001 (as amended and as further amended, restated or otherwisemodified from time to time, the "Credit Agreement") and a $50,000,000 Amendedand Restated Credit Agreement, dated as of November 14, 1997 (as amended by thatcertain Consent and First Amendment, dated January 27, 1998, by that certainSecond Amendment to Amended and Restated Credit Agreement dated as of July 3,1998, by that certain Third Amendment to Amended and Restated Credit Agreementdated as of April 13, 1999, by that certain Fourth Amendment to Amended andRestated Credit Agreement dated as of January 18, 2000, by that certain FifthAmendment to Amended and Restated Credit Agreement dated as of October 25, 2000,by that certain Sixth Amendment to Amended and Restated Credit Agreement datedas of March 23, 2001, by that certain Seventh Amendment to Amended and RestatedCredit Agreement dated as of April 27, 2001, and by that certain EighthAmendment to Amended and Restated Credit Agreement dated as of October 31, 2001,and as further amended, restated or otherwise modified from time to time, the"$50MM Credit Facility"); WHEREAS, the Borrower has requested certain provisions of the CreditAgreement 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. (a) Unless specifically defined or redefined below, capitalized termsused herein shall have the meanings ascribed thereto in the Credit Agreement. (b) The definition of "Applicable Margin" in Article I is herebydeleted and the following definition of "Applicable Margin" is substituted inits stead: "Applicable Margin" means (i) with respect to the Base Rate Advances under the Facility, 1.375% per annum and (ii) with respect to LIBOR Advances under the Facility, 2.500% per annum. Notwithstanding the foregoing, effective three Business Days after receipt by the Administrative Agent from the Borrower of a Compliance Certificate delivered to the Lenders for any reason and demonstrating a change in the Total Leverage Ratio to an amount so that another Applicable Margin should be applied pursuant to the table set forth below, the Applicable Margin for each type of Advance shall mean the respective amount set forth below opposite such relevant Total Leverage Ratio in Columns A and B below, in each case until the first succeeding Quarterly Date which is at least three Business Days after receipt by the Administrative Agent from the Borrower of a Compliance Certificate, demonstrating a change in the Total Leverage Ratio to an amount so that another Applicable Margin shall be applied; provided that, if there exists a Default or if the Total Leverage Ratio shall at any time be greater than or equal to 6.50 to 1.00, the Applicable Margin shall again be the respective amounts first set forth in this definition; provided further, that the Applicable Margin in effect on the Closing Date shall be determined pursuant to a Compliance Certificate delivered on the Closing Date, provided, further, that if the Borrower fails to deliver any financial statements to the Administrative Agent within the required time periods set forth in Sections 6.05(a) and Section 6.05(b) hereof, the Applicable Margin shall again be the respective amounts first set forth in this definition until the date which is three Business Days after the Administrative Agent receives financial statements from the Borrower which demonstrate that another Applicable Margin should be applied pursuant to the table set forth below; and provided further, that the Applicable Margin shall never be a negative number. 2 Column A Column B Total Leverage Ratio Base Rate LIBOR----------------------------------------------------------------- ---------------- ---------------- Greater than or equal to 6.50 to 1.00 1.375% 2.500%Greater than or equal to 6.00 to 1.00 but less than 6.50 to 1.00 1.000% 2.125%Greater than or equal to 5.50 to 1.00 but less than 6.00 to 1.00 0.750% 1.875%Greater than or equal to 5.00 to 1.00 but less than 5.50 to 1.00 0.500% 1.625%Greater than or equal to 4.50 to 1.00 but less than 5.00 to 1.00 0.250% 1.375%Greater than or equal to 4.00 to 1.00 but less than 4.50 to 1.00 0.000% 1.250%Less than 4.00 to 1.00 0.000% 1.000% Notwithstanding the foregoing, if (a) the Borrower acquires the assets of WCIC as contemplated by the terms of this Agreement and (b) the Borrower enters into the Term Loan B Agreement, then, on such date that both of the preceding (a) and (b) are satisfied, the Applicable Margin set forth above shall no longer be applicable, and the following definition of Applicable Margin shall apply, immediately, automatically and without notice to any Person: "Applicable Margin" means (i) with respect to the Base Rate Advances under the Facility, 1.125% per annum and (ii) with respect to LIBOR Advances under the Facility, 2.250% per annum; provided that, notwithstanding the foregoing, if the interest rate margin for libor advances or base rate advances under the Term Loan B Agreement is more than 0.50% higher or lower than the corresponding interest rate margin set forth in clause (i) or clause (ii) preceding in this definition of "Applicable Margin", then the Applicable Margin hereunder shall mean a per annum percentage rate equal to (a) with respect to the Base Rate Advances under the Facility, that percentage rate which is 0.50% below the per annum applicable interest rate margin for base rate advances under the Term Loan B Agreement (however defined in such Term Loan B Agreement), and (b) with respect to the LIBOR Advances under the Facility, that percentage rate which is 0.50% below the per annum applicable interest rate margin for libor rate advances under the Term Loan B Agreement (however defined in such Term Loan B Agreement). If neither base rate advances or libor rate advances (or their equivalents) are offered under the Term Loan B Agreement, the parties hereto agree that the Applicable Margin hereunder shall be in each case 0.50% below the economic equivalent of the applicable interest rate margin provided for in the Term Loan B Agreement. (c) The definition of "Intercreditor Agreement" is hereby added inalphabetical order to Article I of the Credit Agreement and shall read in itsentirety as follows: "Intercreditor Agreement" means that certain Intercreditor Agreement, in the form attached as Exhibit A, between the Borrower, Bank of America, N.A. as collateral agent thereunder and the Administrative Agent, evidencing the agreement between the Lenders hereunder and the lenders under the Term Loan B Agreement for the Collateral to secure the Obligations and the Term Loan B Obligations on a pari passu basis, as such agreement is amended, restated or otherwise modified from time to time. 3 (d) The definition of "Lenders" in Article I is hereby deleted and thefollowing definition of "Lenders" is substituted in its stead: "Lenders" means the lenders listed on the signature pages of this Agreement, and each Eligible Assignee which hereafter becomes a party to this Agreement pursuant to Section 10.04 hereof or pursuant to an amendment to this Agreement, for so long as any such Person is owed any portion of the Obligation or is obligated to make Advances under the Revolving Loan, and, any Bank Affiliate who is owed any portion of the Obligations. (e) The definition of "Loan Papers" in Article I is hereby deleted andthe following definition of "Loan Papers" is substituted in its stead: "Loan Papers" means this Agreement; the Notes; Interest Rate Hedge Agreements executed among any GCI Entity and any Lender or Bank Affiliate; the Intercreditor Agreement, all Pledge Agreements; all Guaranties executed by any Person guaranteeing payment of any portion of the Obligations; all Fee Letters; each Assignment and Acceptance; all promissory notes evidencing any portion of the Obligations; assignments, security agreements and pledge agreements granting any interest in any of the Collateral; stock certificates and partnership agreements constituting part of the Collateral; mortgages, deeds of trust, financing statements, collateral assignments, and other documents and instruments granting an interest in any portion of the Collateral, or related to the perfection and/or the transfer thereof, all collateral assignments or other agreements granting a Lien on any intercompany note, including without limitation, the Intercompany Notes; and all other documents, instruments, agreements or certificates executed or delivered by the Borrower or any other GCI Entity, as security for the Borrower's obligations hereunder, in connection with the loans to the Borrower or otherwise; as each such document shall, with the consent of the Lenders pursuant to the terms hereof, be amended, revised, renewed, extended, substituted or replaced from time to time. (f) The definition of "Ninth Amendment " is hereby added inalphabetical order to Article I and shall read in its entirety as follows: "Ninth Amendment" means that certain Ninth Amendment to this $200,000,000 Amended and Restated Credit Agreement, dated as of December 17, 2001, among the Borrower, the Administrative Agent and certain Lenders. (g) The definition of "Term Loan B Agreement" is hereby added inalphabetical order to Article I and shall read in its entirety as follows: "Term Loan B Agreement" means that certain senior secured term loan agreement entered into after the date hereof as a replacement and refinancing of a 4 portion of indebtedness previously available under this Agreement, to be executed among the Borrower, Bank of America, N.A., as Administrative Agent and the lenders as defined therein, as such agreement may be amended, restated or otherwise modified from time to time. (h) The definition of "Term Loan B Obligations" is hereby added inalphabetical order to Article I and shall read in its entirety as follows: "Term Loan B Obligations" means, with respect to the Term Loan B Agreement and all of the Term Loan B Papers, all present and future obligations, indebtedness and liabilities, and all renewals and extensions of all or any part thereof, of the Borrower and each other GCI Entity to lenders and administrative agent under the Term Loan B Agreement arising from, by virtue of, or pursuant to the Term Loan B Agreement, any of the other Term Loan B Papers and any and all renewals and extensions thereof or any part thereof, or future amendments thereto, all interest accruing on all or any part thereof and reasonable attorneys' fees incurred by lenders and administrative agent thereunder for the administration, execution of waivers, amendments and consents, and in connection with any restructuring, workouts or in the enforcement or the collection of all or any part thereof, whether such obligations, indebtedness and liabilities are direct, indirect, fixed, contingent, joint, several or joint and several. Without limiting the generality of the foregoing, "Term Loan B Obligations" includes all amounts which would be owed by the Borrower, each other GCI Entity and any other Person (other than administrative agent or lenders thereunder) to the administrative agent or lenders thereunder under any Term Loan B Paper, but for the fact that they are unenforceable or not allowable due to the existence of a bankruptcy, reorganization or similar proceeding involving the Borrower, any other GCI Entity or any other Person (including all such amounts which would become due or would be secured but for the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding of the Borrower, any other GCI Entity or any other Person under any Debtor Relief Law). (i) The definition of "Term Loan B Papers" is hereby added inalphabetical order to Article I and shall read in its entirety as follows: "Term Loan B Papers" means "Loan Papers" as it will be defined under the Term Loan B Agreement, including without limitation, the Term Loan B Agreement, the Intercreditor Agreement, all promissory notes, fee letters, pledge agreements, security agreements, mortgages, deeds of trust, assignments and other documentation executed in connection with the Term Loan B Agreement from time to time, all guarantees executed by any Person guaranteeing payment of any portion of the Term Loan B Obligations, each assignment and acceptance; as each 5 such document shall be amended, revised, renewed, extended, substituted or replaced from time to time. (j) The definition of "WCIC" is hereby added in alphabetical order toArticle I and shall read in its entirety as follows: "WCIC" means WCI Cable, Inc. and its Subsidiaries. SECTION 2. Amendment to Opening Phrase of Section 2.04(b)(ii). Theopening phrase of Section 2.04(b)(ii) in Article II of the Credit Agreementshall be amended and restated in its entirety as follows: (ii) Asset Sales. On the date of any Asset Sale by any of the GCI Entities (this provision not permitting such Asset Sales) excluding Asset Sales permitted under Section 7.05(b) hereof, SECTION 3. Amendment to Section 2.04(c). Section 2.04(c) in Article IIof the Credit Agreement shall be amended and restated in its entirety asfollows: (c) Commitment Reductions, Generally. To the extent the sum of (i) the aggregate outstanding Advances under the Revolving Loan plus (ii) the sum of the aggregate face amount of all outstanding Letters of Credit plus, (iii) without duplication, all reimbursement obligations related to any draw on any Letter of Credit, exceed the Revolving Commitment after any reduction thereof, the Borrower shall immediately repay on the date of such reduction, any such excess amount and all accrued interest thereon, together with any amounts constituting any Consequential Loss. Once reduced or terminated pursuant to this Section 2.04, the Revolving Commitment may not be increased or reinstated. At such time as the Intercreditor Agreement becomes effective, each of the terms and provisions of Sections 2.04(b)(ii),(iii),(iv), (v), and(vi) shall be governed by the terms and provisions of the Intercreditor Agreement, and in the event of a conflict between this Section 2.04 and the Intercreditor Agreement, the terms and provisions of the Intercreditor Agreement shall control. SECTION 4. Amendment to Section 2.05(b)(i). Section 2.05(b)(i) inArticle II of the Credit Agreement shall be amended and restated in its entiretyas follows: (b) Mandatory Prepayments. (i) Asset Sales. (A) Prior to the Conversion Date, on the date of any Asset Sale of any GCI Entity (except Asset Sales in accordance with the terms of Section 7.05(b) hereof), the Borrower shall repay the Obligations and the obligations under the Revolver/Term Credit 6 Agreement by an amount equal to 100% of the Net Proceeds applied either pro rata to Advances outstanding under the Revolving Loan and the obligations as specified in the Revolver/Term Credit Agreement, and (B) after the Conversion Date, (I) if there exists no Default or Event of Default, on the date of any Asset Sale of any GCI Entity (except Asset Sales in accordance with the terms of Section 7.05(b) hereof), the Borrower shall repay the Obligations by an amount equal to 100% of the Net Proceeds, applied to Advances outstanding under the Revolving Loan, and (II) if there exists a Default or Event of Default, on the date of any Asset Sale of any GCI Entity, the Borrower shall repay the Obligations and the obligations under the Revolver/Term Credit Agreement by an amount equal to 100% of the Net Proceeds, applied either pro rata to Advances outstanding under the Revolving Loan and the obligations as specified under the Revolver/Term Credit Agreement. On such date, the Borrower shall deliver to the Administrative Agent a certificate of an Authorized Officer certifying as to the amount of (including the calculation of) such repayment and, with respect to the Asset Sale giving rise thereto, the gross proceeds thereof and the costs and expenses payable as a result thereof which were deducted in determining the amount of Net Proceeds. SECTION 5. Amendment to Section 2.05(c). Section 2.05(c) in Article IIof the Credit Agreement shall be amended and restated in its entirety as follows: (c) Prepayments, Generally. No prepayments of Advances under the Revolving Loan made solely pursuant to this Section 2.05 shall cause the Commitment to be reduced. Any prepayment of Advances pursuant to this Section 2.05 shall be applied first to Base Rate Advances, if any, then outstanding under the Facility, second to LIBOR Advances for which the date of prepayment is the last day of the applicable Interest Period, if any, outstanding under the Facility and third to LIBOR Advances with the shortest remaining Interest Periods outstanding under the Facility. Any amounts repaying the Revolver/Term Loan on and after the Conversion Date will be applied in the inverse order of maturity and may not be reborrowed. At such time as the Intercreditor Agreement becomes effective, each of the terms and provisions of Sections 2.05(b)(i), (ii), (iii), (iv), and (v) shall be governed by the terms and provisions of the Intercreditor Agreement, and in the event of a conflict between this Section 2.05 and the Intercreditor Agreement, the terms and provisions of the Intercreditor Agreement shall control. SECTION 6. Amendment to Section 2.12(d). Section 2.12(d) in Article IIof the Credit Agreement shall be amended and restated in its entirety asfollows: (d) Except as specifically set forth in Sections 2.04 and 2.05 hereof, so long as there exists no Default or Event of Default all payments made by the Borrower shall be applied as designated by the Borrower, and, if there exists a Default or Event of Default, or if the Borrower fails to designate application of payments, all payments made by the Borrower shall be applied pro rata among the Revolving Loan and the obligations as specified in the Revolver/Term Credit 7 Agreement. Any payment made by the Borrower in excess of the Revolving Commitment or outstanding Advances under the Revolving Loan, shall be applied to outstanding amounts (or to reduce the commitment) of any other outstanding Obligations. Notwithstanding the foregoing, if the Intercreditor Agreement is effective, all mandatory prepayments made by the Borrower and proceeds and dispositions of Collateral shall be applied in accordance with the terms of the Intercreditor Agreement, to the extent that the terms and provisions of the Intercreditor Agreement govern such application. SECTION 7. Amendment to Section 7.01(e). Section 7.01(e) in Article IIof the Credit Agreement shall be amended and restated in its entirety asfollows: (e) Fixed Charges Coverage Ratio. (i) Prior to the acquisition of the assets of WCIC in accordance with the terms of this Agreement, Commencing January 1, 2003, 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, 2003 through March 31, 2004 1.00 to 1.00 April 1, 2004 and thereafter 1.05 to 1.00, or (ii) On and after the acquisition of the assets of WCIC in accordance with the terms of this Agreement, Commencing April 1, 2004, 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 April 1, 2004 through December 31, 2004 1.00 to 1.00 January 1, 2005 and thereafter 1.05 to 1.00 SECTION 8. Amendment to Section 7.01(f). Section 7.01(f) in Article IIof the Credit Agreement shall be amended and restated in its entirety asfollows: 8 (f) Capital Expenditures. (i) Prior to the acquisition of the assets of WCIC in accordance with the terms of this Agreement, 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 fiscal years, provided that, any unused portion of 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 2002 $60,000,000 January 1, 2003 and thereafter Not Applicable, or (ii) On and after the acquisition of the assets of WCIC in accordance with the terms of this Agreement, 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 fiscal years, provided that, any unused portion of any such year may be used during the following fiscal year only (but not thereafter), provided that, in the fiscal year 2002 only, the Borrower may exclude the purchase price for the acquisition of WCIC's assets from the calculation of its Capital Expenditures, in an amount not to exceed $65,000,000: Fiscal Year Maximum Amount ----------- -------------- 1998 $90,000,000 1999 $35,000,000 2000 $35,000,000 2001 $70,000,000 2002 $65,000,000 2003 $50,000,000 January 1, 2004 through March 31, 2004 $15,000,000 April 1, 2004 and thereafter Not Applicable 9 SECTION 9. Amendment to Section 7.02. Section 7.02 in Article VII ofthe Credit Agreement shall be amended and restated in its entirety as follows: 7.02. Debt. The Borrower shall not, and shall not permit any of the other GCI Entities to, create, incur, assume, become or be liable in any manner in respect of, or suffer to exist, any Debt, except (a) Debt under the Loan Papers and the Revolver/Term Credit Agreement, (b) Debt under the Senior Notes and other Debt in existence on the date hereof as shown on Schedule 5.08a hereto, and renewals, extensions (but not increases), and refinancings thereof on terms substantially similar thereto and on terms no more restrictive, (c) trade payables incurred and paid in the ordinary course of business, (d) Debt permitted to be incurred as Contingent Liabilities pursuant to Section 7.03 hereof, (e) Debt between the Borrower and its Restricted Subsidiaries, (f) so long as there exists no Default or Event of Default in existence at the time incurred and none is caused thereby, (i) $5,000,000 in Debt constituting Capital Leases outstanding in the aggregate at any one time, (ii) unsecured subordinated Debt of the Borrower on terms and conditions acceptable to the Administrative Agent and each Lender, subordinated to the Facility pursuant to the subordination language set forth on Schedule 7.02 hereto, (g) Debt under the Project Agreements, and (h) so long as (i) there exists no Default or Event of Default both before and after giving effect to its incurrence, (ii) the maturity of such Debt is later than the Maturity Date, (iii) the weighted average life of such Debt is longer than the weighted average life of the Revolving Loan, (iv) the Term Loan B Agreement contains representations and warranties, conditions precedent, affirmative covenants, negative covenants and events of default substantially similar to the representations and warranties, conditions precedent, affirmative covenants, negative covenants and Events of Default in this Agreement (and in no case may such terms be more restrictive than the terms of this Agreement) and (v) the Borrower has paid in immediately available funds an amendment fee to the Administrative Lender for the benefit of those Lenders that executed and delivered the Ninth Amendment to the Administrative Agent prior to noon (eastern time) on December 17, 2001, such amendment fee to be in an amount equal to 40 basis points on each such executing Lender's pro rata portion of the Revolving Commitment, the Borrower and the other GCI Entities may incur senior secured Debt under the Term Loan B Agreement, and the Term Loan B Obligations, in a maximum principal amount not to exceed the lesser of (A) $65,000,000, or (B) the gross cash purchase price paid by the Borrower for the acquisition of the assets of WCIC. SECTION 10. Amendment to Section 7.04. Section 7.04 in Article VII ofthe Credit Agreement shall be amended and restated in its entirety as follows: 7.04. Liens. Borrower shall not, and shall not permit any of the other GCI Entities to, create or suffer to exist any Lien upon any of its Properties, 10 except Permitted Liens and Liens securing Debt permitted under Section 7.02(f)(i) and, on a pari passu basis pursuant to the Intercreditor Agreement, Liens securing Term Loan B Obligations permitted to be incurred under Section 7.02(h) hereof. It is specifically acknowledged and agreed that the Borrower shall not, and shall not permit any of the other GCI Entities to, hereafter agree with any Person (other than Administrative Agent) not to grant a Lien on any of its assets, except as specifically provided in the Indenture on the Closing Date and except as provided in the Term Loan B Agreement and the Term Loan B Papers. SECTION 11. Amendment to Section 7.05. Section 7.05 in Article VII ofthe Credit Agreement shall be amended and restated in its entirety as follows: 7.05. Dispositions of Assets. The Borrower shall not, and shall not permit any of the other GCI Entities to, sell, lease, assign, or otherwise dispose of any assets of the Borrower or any Restricted Subsidiary, or otherwise consummate any Asset Sale, except (a) Permitted Dispositions and sales or dispositions of assets in the ordinary course of business, including dispositions of obsolete or useless assets, (b) so long as there exists no Default or Event of Default both before and after giving effect to such disposition, any sale of any portion of the assets acquired by the Borrower from WCIC described on Schedule 7.05 hereto, so long as such sales do not generate, in the aggregate, gross proceeds in excess of $10,000,000 and (c) so long as there exists no Default or Event of Default both before and after giving effect to such disposition, Asset Sales in an aggregate amount over the term of this Agreement not to exceed $10,000,000 (or $20,000,000 if before and immediately after giving effect to any Asset Sale, the Total Leverage Ratio is equal to or less than 4.50 to 1.00), so long as any amounts received from Asset Sales (except those Asset Sales permitted by Sections 7.05(a) and (b) above) in the aggregate over $10,000,000 in any fiscal year of the Borrower and its Restricted Subsidiaries (or $20,000,000 if before and immediately after giving effect to any Asset Sale, the Total Leverage Ratio is equal to or less than 4.50 to 1.00) are immediately used to reduce the Revolving Commitment, and the Revolver/Term Commitment, in accordance with Section 2.04 hereof, and repay the outstanding Obligations in accordance with the terms of Section 2.05 hereof, as applicable. SECTION 12. Amendment to Section 7.06. Section 7.06 in Article VII ofthe Credit Agreement shall be amended by deleting the "and" after subsection(e), adding "and" after subsection (f), and adding subsection (g) which shallread as follows: (g) Restricted Payments to pay scheduled interest and principal on Term Loan B Obligations under the Term Loan B Agreement, and costs, fees and expenses and other Term Loan B Obligations payable under the Term Loan B Agreement and the other Term Loan B Papers. 11 SECTION 13. Amendment to Section 7.10(j) and Addition of New Section7.10(k). Section 7.10(j) in Article VII of the Credit Agreement shall be amendedand restated in its entirety as follows, and a new Section 7.10(k) shall beadded to the end of Section 7.10 of the Credit Agreement as follows: (j) INTENTIONALLY DELETED. (k) so long as (A) there is no Default or Event of Default both before and after giving effect to such Investment or acquisition, (B) all assets owned by WCIC and each of its Subsidiaries are immediately upon acquisition thereof pledged and collaterally assigned to secure the Obligations (on a pari passu basis with the Debt evidenced by the Term Loan B Agreement pursuant to the Intercreditor Agreement) pursuant to a security agreement and/or collateral assignment in form substantially similar to those security agreements executed previously by the GCI Entities and Administrative Agent receives all other items reasonably requested by the Administrative Agent to secure the Obligations, (C) the aggregate purchase price for such assets is paid in cash and/or equity, or any combination thereof, and does not exceed $65,000,000, 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, (D) the Administrative Agent has received all other documentation, information and agreements relating to WCIC and its Subsidiaries, as is reasonably requested by the Administrative Agent, including without limitation, an Intercreditor Agreement, (E) the Administrative Agent has received projections after giving effect to the purchase of the assets of WCIC demonstrating pro forma compliance with the financial covenants contained in this Agreement throughout the term of this Agreement, (F) the assets of WCIC are acquired free and clear of all Liens (except Permitted Liens, Liens of the Lenders securing the Obligations and Liens securing the Term Loan B Obligations under the Term Loan B Agreement on a pari passu basis), and 12 (G) 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 (in the form delivered in connection with the acquisition), and such other matters as reasonably requested by Special Counsel, including, without limitation, opinions regarding the Indenture and AUSP Credit Agreement, and the related agreements, the Borrower may purchase the assets of WCIC and its Subsidiaries. SECTION 14. Amendment to Section 7.18. Section 7.18 in Article VII ofthe Credit Agreement shall be amended and restated in its entirety as follows: 7.18. Amendments to Material Agreements. The Borrower shall not, nor shall the Borrower permit any other GCI Entity to, amend or change any Project Agreement or any AUSP Financing Agreement in any manner that is material and adverse to the interests of the Lenders except with the prior written consent of Majority Lenders, or amend or change any Loan Paper other than with the prior written consent of the Lenders pursuant to Section 10.01 hereof, nor shall the Borrower or any other GCI Entity change or amend (or take any action or fail to take any action the result of which is an effective amendment or change) or accept any waiver or consent with respect to (a) any Non-Compete Agreement, (b) that certain Transponder Purchase Agreement for Galaxy X, dated August 24, 1995, among the Borrower and Hughes Communications Galaxy, Inc., now held by PanAmSat Corp., as assignee, (c) that certain Transponder Service Agreement, dated August 24, 1995, among General Communication Corp. and Hughes Communications Satellite Services, Inc., now held by PanAmSat Corp., as assignee, (d) the Senior Notes and all documentation and agreements relating to the Senior Notes, other than changes that result in a decrease in interest rate, extension of maturity, or deletion of covenants or obligations to repay, and changes anticipated by Section 9.01(1) of the Indenture, (e) the Prime Management Agreement, (f) all documentation related to any Funded Debt of any GCI Entity, and (g) the Term Loan B Agreement or any of the Term Loan B Papers, except, in the case of this subsection (g), amendments, modifications, consents, waivers and changes to immaterial provisions, or amendments, modifications, consents, waivers and changes which are in form and substance similar to any amendments, modifications, consents, waivers and changes to this Agreement or the other Loan Papers. SECTION 15. Amendment to Section 7.19. Section 7.19 in Article VII ofthe Credit Agreement shall be amended and restated in its entirety as follows: 7.19 Limitation on Restrictive Agreements. The Borrower shall not, and shall not permit the Parents or any Restricted Subsidiary to, other than in connection with the Term Loan B Agreement, the Term Loan B Papers, the 13 Senior Notes, the Revolver/Term Credit Agreement, the AUSP Financing Agreements or the Project Agreements, enter into any indenture, agreement, instrument, financing document or other arrangement which, directly or indirectly, prohibits or restrains, or has the effect of prohibiting or restraining, or imposes materially adverse conditions upon: (a) the incurrence of Debt, (b) the granting of Liens (except for provisions contained in Capital Leases of property that are permitted hereunder that limit Liens only on the specific property subject to the Capital Lease, except for Liens in favor of the Administrative Agent and the Lenders), (c) the making or granting of Guarantees, (d) the payment of dividends or Distributions, (e) the purchase, redemption or retirement of any Capital Stock, (f) the making of loans or advances, (g) transfers or sales of property or assets (including Capital Stock) by the Parents, the Borrower or any of the Restricted Subsidiaries, (h) the making of Investments or acquisitions, or (i) any change of control or management SECTION 16. Amendment to Section 8.01. Section 8.01 in Article VIII ofthe Credit Agreement shall be amended by deleting the "or" after subsection (w),adding "or" after subsection (y) and adding subsection (z) which shall read asfollows: (z) an Event of Default shall have occurred under the TermLoan B Agreement. SECTION 17. Addition of Schedule 7.05. Schedule 7.05 attached to thisNinth Amendment shall be added to Schedules to the Credit Agreement in numericalorder as Schedule 7.05. SECTION 18. Conditions Precedent. This Amendment shall not be effectiveuntil the Administrative Agent shall have determined in its sole discretion thatall proceedings of the Borrower taken in connection with this Amendment and thetransactions contemplated hereby shall be satisfactory in form and substance tothe Administrative Agent and the Borrower has satisfied the followingconditions: (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 Amendment and the other Loan Papers, (ii) that there exists no Default or Event of Default, and the execution, delivery and performance of this 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 Amendment and all Loan Papers and to execute and perform all transactions contemplated by this Amendment, and all other documents and instruments delivered or executed in connection with this 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 Amendment by the date hereof and (v) that it has received 14 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 Administrative Agent shall have received an opinion of counsel to the Parents, the Borrower and its Subsidiaries, in form and substance acceptable to the Administrative Agent and Special Counsel, including without limitation, an opinion as to no conflict with the transactions contemplated herein under the Indenture and the AUSP Credit Agreement; (c) the Borrower and the Lenders shall have entered into a Ninth Amendment to the $50MM Credit Facility on terms substantially identical to the terms of this Amendment; (d) the Borrower shall have paid the Administrative Agent a ten basis points amendment fee, such amendment fee to be allocated among the Lenders executing this Amendment prior to noon (eastern time), December 17, 2001, as evidenced by a facsimile receipt by counsel to the Administrative Agent of such Lender's signature to this Amendment prior to such time; (e) the Administrative Agent shall have received each of the Loan Papers, financial statements, projections, legal opinions, consents, and other documentation, as reasonably requested by the Administrative Agent, and the Administrative Agent shall have received "No Default Certificates" executed by the Borrower and its Restricted Subsidiaries; 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 Amendment and the transactions contemplated hereby. SECTION 19. Representations and Warranties. The Borrower represents andwarrants to the Lenders and the Administrative Agent that (a) this Amendmentconstitutes its legal, valid, and binding obligation, enforceable in accordancewith the terms hereof (subject as to enforcement of remedies to any applicablebankruptcy, reorganization, moratorium, or other laws or principles of equityaffecting the enforcement of creditors' rights generally), (b) there exists noDefault or Event of Default under the Credit Agreement, (c) its representationsand warranties set forth in the Credit Agreement and other Loan Papers are trueand correct on the date hereof, (d) it has complied with all agreements andconditions to be complied with by it under the Credit Agreement and the otherLoan Papers by the date hereof, and (e) the Credit Agreement, as amended hereby,and the other Loan Papers remain in full force and effect. 15 SECTION 20. 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 21. Counterparts. This Amendment may be executed in any numberof counterparts, all of which taken together shall constitute one and the sameinstrument. 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 22. GOVERNING LAW. THIS 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 23. 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 OR RELATING 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 24. 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 16OTHERWISE) IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOANPAPER OR THE RELATIONSHIP ESTABLISHED THEREUNDER. SECTION 25. Intercreditor Agreement. The undersigned Lenders herebyapprove of the Intercreditor Agreement in the form attached hereto as Exhibit Aand consent to the execution and delivery by the Administrative Agent on theirbehalf of the Intercreditor Agreement in substantially the same form andsubstance as the Intercreditor Agreement attached hereto as Exhibit A.================================================================================ THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.================================================================================ 17 Schedule 7.05 Description of WCIC Assets To Be Sold 18 Exhibit A to Ninth Amendment Form of Intercreditor Agreement 19 IN WITNESS WHEREOF, this Ninth Amendment to Amended and Restated CreditAgreement is executed as of the date first set forth above. GCI HOLDINGS, INC. By: /s/ John M. Lowber Its: Secretary/Treasurer 20 BANK OF AMERICA, N.A., Individually as a Lender and as Administrative Agent By: /s/ Derrick C. Bell Its: Principal 21 CREDIT LYONNAIS NEW YORK BRANCH, as Documentation Agent and Individually as a Lender By: /s/ Jeremy Horn Its: 22 TD SECURITIES (USA), INC., as Syndication Agent By: /s/ Michael J. Bandzierz Its: Managing Director 23 TORONTO DOMINION (TEXAS), INC., Individually as a Lender By: /s/ Michael J. Bandzierz Its: Managing Director 24 COBANK, ACB, Individually as a Lender By: Its: 25 GENERAL ELECTRIC CAPITAL CORPORATION, Individually as a Lender By: /s/ Karl Keiffer Its: Duly Authorized Signatory 26 UNION BANK OF CALIFORNIA, N.A., Individually as a Lender By: /s/ Stender E. Sweeney II Its: Vice President 27 BANK OF HAWAII, Individually as a Lender By: /s/ J. Bryan Scearce Its: Vice President 28 THE BANK OF NEW YORK, Individually as a Lender By: Its: 29 BNP PARIBAS, Individually as a Lender By: /s/ Gregg Bonardi Its: Director, Media & Telecom Finance By: /s/ Ben Todres Its: Director, Media & Telecom Finance 30 FLEET NATIONAL BANK, Individually as a Lender By: Its: 31 THE FUJI BANK, LIMITED, Individually as a Lender By: /s/ Masahito Fukuda Its: Senior Vice President 32 SUMITOMO MITSUI BANKING CORPORATION, Individually as a Lender By: Its: 33 WELLS FARGO BANK ALASKA, N.A. f/k/a NATIONAL BANK OF ALASKA, Individually as a Lender By: /s/ Brent Ulmer Its: Vice President 34 ALLFIRST BANK, Individually as a Lender By: /s/ Michael G. Toomey Its: Vice President 35 Schedule 7.05 Description of WCIC Assets To Be Sold Ninth Amendment Schedule 7.05 WCI Cable, Inc. Real EstateAt the time that WCI Cable, Inc. filed for protection under the Bankruptcy Code,it owned two pieces of real estate. Descriptions of the real estate is asfollows:WCI Headquarters ComplexPurpose: WCI's Administrative Office Building/Collocation FacilityPhysical Address: 19720 NW Tanasborne Drive, Hillsboro, OregonSize: 47,923 rentable sfNotes: - Facility built for purpose - Constructed: 1997-1998 - Network requires continued use of collocation facility - No pending requirement for administrative office space - Property appears difficult to sub-divide into two separate facilities - GCI option to rent administrative office space or to sell facility and lease back the collocation space on a long term basis - Outstanding Keybank secured debt: $6.2M - Current market value of facility: $6-7MSouth Anchorage NOCC FacilityPurpose: Alaska Fiberstar NOCC and Collocation SpacePhysical Address: Diamond D Circle, Anchorage, AlaskaSize: Estimated 12,000 usable sf (gj)Notes: - Facility built for purpose - Constructed 1998 - Network requires temporary use of collocation facility - Office space is poorly laid out for administrative use - Facility may appeal for a contractor - GCI option to rent administrative office space or to sell facility with a short term (less than one year) lease back of the collocation space. - Outstanding Keybank secured debt: $2.5M - Current market value of facility: $2.5-$3.2M (gj) Exhibit A to Ninth Amendment Form of Intercreditor Agreement FORM OF COLLATERAL AGENT AND INTERCREDITOR AGREEMENT THIS COLLATERAL AGENT AND INTERCREDITOR AGREEMENT (as the same may fromtime to time be amended, restated, supplemented or otherwise modified, the"Collateral Agent Agreement") dated is made by GCI HOLDINGS, INC.,an Alaskan corporation ("Borrower"), GRANTORS signatory hereto, BANK OF AMERICA,N.A., as Collateral Agent (the "Collateral Agent"), BANK OF AMERICA, N.A, asAdministrative Agent (in such capacity, the "Administrative Agent") for itselfand certain other lenders (collectively, the "Lenders") under both the$200,000,000 Credit Agreement (as hereinafter defined) and the $50,000,000Credit Agreement (as hereinafter defined), LENDERS party hereto, BANK OFAMERICA, N.A, as Administrative Agent (the "Term Loan B Administrative Agent")for itself and certain other lenders (collectively, the "Term Loan B Lenders")under the Term Loan B Agreement (as hereinafter defined) and the TERM LOAN B LENDERS party hereto. W I T N E S S E T H : WHEREAS, the Borrower is a party to two Amended and Restated CreditAgreements dated as of December 14, 1997, with the Lenders and theAdministrative Agent, one which provides for a revolving credit facility in theamount of $200,000,000 (as the same may from time to time be amended, restated,supplemented or otherwise modified, the "$200,000,000 Credit Agreement") and onethat provides for a term loan facility in the amount of $50,000,000 (as the samemay from time to time be amended, restated, supplemented or otherwise modified,the "$50,000,000 Credit Agreement"; the $200,000,000 Credit Agreement and the$50,000,000 Credit Agreement are herein collectively referred to as the "CreditAgreement"); WHEREAS, the Borrower is a party to the Term Loan Agreement dated as ofthe date hereof (as the same may from time to time be amended, restated,supplemented or otherwise modified, the "Term Loan B Agreement") with Borrower,Bank of America, N.A. (in such capacity, the "Term Loan B Administrative Agent")and the Term Loan B Lenders pursuant to which the Term Loan B Lenders haveagreed to make the Borrower a term loan in an aggregate principal amount not toexceed $65,000,000; WHEREAS, it is the agreement of the parties that the rights of paymentand liens and security interests of the Term Loan B Lenders in the Collateral(as hereinafter defined) are subject to and pari passu with the rights of theLenders; and the rights of payment and liens and security interests of theLenders in the Collateral are subject to and pari passu with the rights of theTerm Loan B Lenders A-1 WHEREAS, it is a requirement of the Credit Agreement and the Term LoanB Agreement that upon the execution of the Term Loan B Agreement, the Grantors(hereinafter defined), the Administrative Agent, the Lenders, the Term Loan BAdministrative Agent, the Term Loan B Lenders and Borrower execute and deliverto the Collateral Agent, for the benefit of the Lenders and Term Loan B Lendersthis Collateral Agent Agreement in order to further define the rights andobligations of the parties hereto; NOW, THEREFORE, in consideration of the premises and of the mutualcovenants herein contained and for other good and valuable consideration, thereceipt of which is hereby acknowledged, the Grantors, Administrative Agent, theLenders, the Term Loan B Administrative Agent, and the Term Loan B Lenders agreewith the Collateral Agent as follows: SECTION 1 DEFINED TERMS As used in this Collateral Agent Agreement, capitalized terms shallhave the meanings set forth in the Credit Agreement. In addition the followingterms shall have the meanings set forth below: "Collateral" shall mean, collectively, all of the property in which theLenders or Term Loan B Lenders have a Lien pursuant to the Security Agreements. "Determining Lenders" shall mean any combination of the Lenders andTerm Loan B Lenders having at least 66-23% of the aggregate amount of theObligations and Term Loan B Obligations outstanding. "Distribution Date" shall mean each date established by the CollateralAgent as a date for the distribution of amounts on deposit in the CollateralAccount, as defined in subsection 4.1. "Event of Default" shall mean the occurrence of an Event of Default asthat term is defined in both the Credit Agreement and the Term Loan B Agreement. "Grantor" shall mean each GCI Entity and any Person party to any LoanPaper or Term Loan B Paper that grants a Lien on any Collateral. "Loan Papers" means the Notes; Interest Rate Hedge Agreements executedamong any GCI Entity and any Lender or Bank Affiliate; this Collateral AgentAgreement, all Pledge Agreements; all Guaranties executed by any Personguaranteeing payment of any portion of the Obligations; all Fee Letters; eachAssignment and Acceptance; all promissory notes evidencing any portion of theObligations; assignments, security agreements and pledge agreements granting anyinterest in any of the Collateral; stock certificates and partnership agreementsconstituting part of the Collateral; mortgages, deeds of trust, financingstatements, collateral assignments, and other documents and instruments grantingan interest in any portion of the Collateral, or related to the perfectionand/or the transfer thereof, all collateral assignments or other agreementsgranting a Lien on any intercompany note; and all other documents, instruments,agreements or A-2certificates executed or delivered by the Grantors or any other GCI Entity, assecurity for Grantors' obligations under the Credit Agreement and the LoanPapers, in connection with the loans to the Borrower or otherwise; as each suchdocument shall, with the consent of the Lenders pursuant to the terms of theCredit Agreement, be amended, revised, renewed, extended, substituted orreplaced from time to time. "Obligations" means all present and future obligations, indebtednessand liabilities, and all renewals and extensions of all or any part thereof, ofthe Borrower and each other GCI Entity to Lenders and Administrative Agentarising from, by virtue of, or pursuant to the Credit Agreement, any of theother Loan Papers and any and all renewals and extensions thereof or any partthereof, or future amendments thereto, all interest accruing on all or any partthereof and reasonable attorneys' fees incurred by Lenders and AdministrativeAgent for the administration, execution of waivers, amendments and consents, andin connection with any restructuring, workouts or in the enforcement or thecollection of all or any part thereof, whether such obligations, indebtednessand liabilities are direct, indirect, fixed, contingent, joint, several or jointand several. Without limiting the generality of the foregoing, "Obligations"includes all amounts which would be owed by the Borrower, each other GCI Entityand any other Person (other than Administrative Agent or Lenders) toAdministrative Agent or Lenders under any Loan Paper, but for the fact that theyare unenforceable or not allowable due to the existence of a bankruptcy,reorganization or similar proceeding involving the Borrower, any other GCIEntity or any other Person (including all such amounts which would become due orwould be secured but for the filing of any petition in bankruptcy, or thecommencement of any insolvency, reorganization or like proceeding of theBorrower, any other GCI Entity or any other Person under any Debtor Relief Law). "Proceeds" shall have the meaning assigned to it under the UniformCommercial of Texas and, in any event, shall include, but not be limited to, (i)any and all proceeds of any insurance, indemnity, warranty or guaranty payableto any Grantor from time to time with respect to any of the Collateral, (ii) anyand all payments (in any form whatsoever) made or due and payable to any Grantorfrom time to time in connection with any requisition, confiscation,condemnation, seizure or forfeiture of all or any part of the Collateral by anygovernmental body, authority, bureau or agency (or any person acting under thecolor of governmental authority) and (iii) any and all other amounts from timeto time paid or payable under or in connection with any of the Collateral. "Pro Rata" shall mean for any Person a fraction (a) the numerator ofwhich is the sum of the amount of unpaid (i) Obligations owing to such Personand (ii) Term Loan B Obligations owing to such Person, and (b) the denominatorof which is the sum of the amount of unpaid (i) Obligations and (ii) Term Loan BObligations. "Security Agreements" means, collectively, the Term Loan B Loan Papersand the Loan Papers. "Term Loan B Obligations" means, with respect to the Term Loan BAgreement and all of the Term Loan B Papers, all present and future obligations,indebtedness and liabilities, and all renewals and extensions of all or any partthereof, of the Borrower and each other GCI Entity to lenders and administrativeagent under the Term Loan B Agreement arising from, by virtue of, A-3or pursuant to the Term Loan B Agreement, any of the other Term Loan B Papersand any and all renewals and extensions thereof or any part thereof, or futureamendments thereto, all interest accruing on all or any part thereof andreasonable attorneys' fees incurred by lenders and administrative agentthereunder for the administration, execution of waivers, amendments andconsents, and in connection with any restructuring, workouts or in theenforcement or the collection of all or any part thereof, whether suchobligations, indebtedness and liabilities are direct, indirect, fixed,contingent, joint, several or joint and several. Without limiting the generalityof the foregoing, "Term Loan B Obligations" includes all amounts which would beowed by the Borrower, each other GCI Entity and any other Person (other thanadministrative agent or lenders thereunder) to the administrative agent orlenders thereunder under any Term Loan B Paper, but for the fact that they areunenforceable or not allowable due to the existence of a bankruptcy,reorganization or similar proceeding involving the Borrower, any other GCIEntity or any other Person (including all such amounts which would become due orwould be secured but for the filing of any petition in bankruptcy, or thecommencement of any insolvency, reorganization or like proceeding of theBorrower, any other GCI Entity or any other Person under any Debtor Relief Law). "Term Loan B Papers" means "Loan Papers" as defined under the Term LoanB Agreement, including without limitation, the Term Loan B Agreement, thisCollateral Agent Agreement, all promissory notes, fee letters, pledgeagreements, security agreements, mortgages, deeds of trust, assignments andother documentation executed in connection with the Term Loan B Agreement fromtime to time, all guarantees executed by any Person guaranteeing payment of anyportion of the Term Loan B Obligations, each assignment and acceptance; as eachsuch document shall be amended, revised, renewed, extended, substituted orreplaced from time to time. SECTION 2 AGREEMENT TO HOLD COLLATERAL In reliance upon, and subject to, the provisions of Section 7 of thisCollateral Agent Agreement, the Collateral Agent will hold the security interestgranted to it in the Collateral under each Security Agreement on behalf of andfor the ratable benefit of the Lenders and the Term Loan B Lenders on a paripassu basis and on the terms and conditions set forth in this Collateral AgentAgreement, notwithstanding the date, time, manner or order of the creation,attachment or perfection of their respective Liens in any Collateral; or anyterms, covenants or conditions of the Credit Agreement, the Term Loan BAgreement, or the Security Agreements, Debtor Relief Laws, the UniformCommercial Code or any other applicable law. A-4 SECTION 3 ACCELERATION OF SECURED OBLIGATIONS 3.1 Exercise of Rights and Remedies. The Collateral Agent may exercise the rights and remedies provided in this Collateral Agent Agreement and in theSecurity Agreements. If Administrative Agent, the Term Loan B AdministrativeAgent, and Collateral Agent are not the same Person, Administrative Agent and\orthe Term Loan B Administrative Agent (as the case may be) shall give theCollateral Agent notice of an Event of Default under their respectiveagreements. 3.2 General Authority of the Collateral Agent over the Collateral. EachGrantor hereby irrevocably constitutes and appoints the Collateral Agent and anyofficer or agent thereof, with full power of substitution, as its true andlawful attorney-in-fact with full power and authority in the name of suchGrantor or in the Collateral Agent's own name, from time to time in theCollateral Agent's discretion, so long as an Event of Default has occurred andis continuing, to take any and all appropriate action and to execute any and alldocuments and instruments which may be necessary or desirable to carry out theterms of this Collateral Agent Agreement and the Security Agreements andaccomplish the purposes hereof and thereof and, without limiting the generalityof the foregoing, each Grantor hereby gives the Collateral Agent the power andrights on behalf of such Grantor given to the Administrative Agent, and the TermLoan B Administrative Agent under any Security Agreements. 3.3 Right to Initiate Judicial Proceedings. If an Event of Default hasoccurred and is continuing, the Collateral Agent (i) shall have the right andpower to institute and maintain such suits and proceedings as it may deemappropriate and permitted under any Security Agreements to protect and enforcethe rights vested in it by this Collateral Agent Agreement and each SecurityAgreement and (ii) may either after entry, or without entry, proceed by suit orsuits at law or in equity to enforce such rights and to foreclose upon theCollateral and to sell all or, from time to time, any of the Collateral underthe judgment or decree of a court of competent jurisdiction, all in accordancewith the Security Agreements. 3.4 Right to Appoint a Receiver. If an Event of Default has occurredand is continuing, the Collateral Agent shall, to the extent permitted by lawand in accordance with the Security Agreements, without notice to any Grantor orany party claiming through any Grantor, except as provided in the SecurityAgreements, without regard to the solvency or insolvency at the time of anyPerson then liable for the payment of any of the Obligations or the Term Loan BObligations, without regard to the then value of the Collateral, and withoutrequiring any bond from any complainant in such proceedings, be entitled as amatter of right to the appointment of a receiver or receivers (who may be theCollateral Agent) of the Collateral, or any part thereof, and of the rents,issues, tolls, profits, royalties, revenues and other income thereof, pendingsuch proceedings, with such powers as the court making such appointment shallconfer, and to the entry of an order directing that the rents, issues, tolls,profits, royalties, revenues and other income of the property constituting thewhole or any part of the Collateral be segregated, sequestered and impounded forthe benefit of the Collateral Agent, the Lenders and the Term Loan B Lenders,and each Grantor irrevocably consents to the appointments of such receiver orreceivers and to the entry of such order; provided that, notwithstanding theappointment of any A-5receiver, the Collateral Agent shall be entitled to retain possession andcontrol of all cash held by or deposited with it pursuant to this CollateralAgent Agreement or any Security Agreement. 3.5 Remedies Not Exclusive. (a) No remedy conferred upon or reserved tothe Collateral Agent herein or to the Administrative Agent or the Term Loan BAdministrative Agent in the Security Agreements is intended to be exclusive ofany other remedy or remedies, but every such remedy shall be cumulative andshall be in addition to every other remedy conferred herein or in any SecurityAgreement or now or hereafter existing at law or in equity or by statute. (b) No delay or omission by the Collateral Agent, any Lender or anyTerm Loan B Lender to exercise any right, remedy or power hereunder or under any Security Agreement shall impair any such right, remedy or power or shall beconstrued to be a waiver thereof, and every right, power and remedy given bythis Collateral Agent Agreement or any Security Agreement to the CollateralAgent, the Lenders or the Term Loan B Lenders may be exercised from time to timeand as often as may be deemed expedient by the Collateral Agent. (c) If the Collateral Agent shall have proceeded to enforce any right,remedy or power under this Collateral Agent Agreement or any Security Agreementand the proceeding for the enforcement thereof shall have been discontinued orabandoned for any reason or shall have been determined adversely to theCollateral Agent, then Grantors, the Collateral Agent, the Term Loan B Lendersand Lenders shall, subject to any determination in such proceeding, severallyand respectively be restored to their former positions and rights hereunder orthereunder with respect to the Collateral and in all other respects, andthereafter all rights, remedies and powers of the Collateral Agent shallcontinue as though no such proceeding had been taken. (d) All rights of action and of asserting claims upon or under thisCollateral Agent Agreement and the Security Agreements may be enforced by theCollateral Agent without the possession of any Security Agreement or instrumentevidencing any Obligations or Term Loan B Obligations or the production thereofat any trial or other proceeding relative thereto, and any suit or proceedinginstituted by the Collateral Agent shall be brought in its name as CollateralAgent and any recovery of judgment shall be held as part of the Collateral onbehalf of and for the ratable benefit of the Lenders and Term Loan B Lenders. 3.6 Waiver and Estoppel. (a) Each Grantor agrees, to the extent it maylawfully do so, that it will not at any time in any manner whatsoever claim ortake the benefit or advantage of, any appraisement, valuation, stay, extension,moratorium, turnover or redemption law, or any law permitting it to direct theorder in which the Collateral shall be sold, now or at any time hereafter inforce, which may delay, prevent or otherwise affect the performance orenforcement of this Collateral Agent Agreement or any Security Agreement andhereby waives all benefit or advantage of all such laws and covenants that itwill not hinder, delay or impede the execution of any power granted to theCollateral Agent in this Collateral Agent Agreement or any Security Agreementbut will suffer and permit the execution of every such power as though no suchlaw were in force. (b) Each Grantor, to the extent it may lawfully do so, on behalf ofitself and all who may claim through or under it, including without limitationany and all subsequent creditors, vendees, assignees and lienors, waives andreleases all rights to demand or to have any A-6marshalling of the Collateral upon any sale, whether made under any power ofsale granted herein or in any Security Agreement or pursuant to judicialproceedings or upon any foreclosure or any enforcement of this Collateral AgentAgreement or any Security Agreement and consents and agrees that all theCollateral may at any such sale be offered and sold as an entirety. (c) Each Grantor waives to the extent permitted by applicable law,presentment, demand, protest and any notice of any kind (except noticesexplicitly required hereunder or under any Security Agreement) in connectionwith this Collateral Agent Agreement and the Security Agreements and any actiontaken by the Collateral Agent with respect to the Collateral. 3.7 Limitation on Collateral Agent's Duty in Respect of Collateral.Beyond its duties as to the custody thereof expressly provided herein or in anySecurity Agreement and to account to the Lenders and Term Loan B Lenders formoneys and other property received by it hereunder or under any SecurityAgreement, the Collateral Agent shall not have any duty to any Grantor, the TermLoan B Lenders or to the Lenders as to any Collateral in its possession orcontrol or in the possession or control of any of its agents or nominees, or anyincome thereon or as to the preservation of rights against prior parties or anyother rights pertaining thereto. 3.8 Limitation by Law. All rights, remedies and powers provided hereinmay be exercised only to the extent that the exercise thereof does not violateany applicable provision of law, and all the provisions hereof are intended tobe subject to all applicable mandatory provisions of law which may becontrolling and to be limited to the extent necessary so that they will notrender this Collateral Agent Agreement or any Security Agreement invalid,unenforceable in whole or in part or not entitled to be recorded, registered orfiled under the provisions of any applicable law. SECTION 4 COLLATERAL ACCOUNT; DISTRIBUTIONS 4.1 The Collateral Account. Notwithstanding anything contained in theCredit Agreement or the Term Loan B Agreement, all mandatory prepayments (andany corresponding mandatory commitment reductions) required by Sections2.04(b)(ii),(iii),(iv), (v), and(vi) and 2.05(b)(i), (ii), (iii), (iv), and (v)of each of the Credit Agreements and of the Term Loan B Agreement, shall bedelivered to the Collateral Agent, for distribution in accordance with Section4.4 hereof, and each of the Credit Agreements and the Term Loan B Agreementshall be amended to provide therefor. Furthermore, notwithstanding anythingcontained in any Security Agreement, each Security Agreement that requiresmoneys to be delivered to the Administrative Agent or the Term Loan BAdministrative Agent shall be amended by this Collateral Agent Agreement torequire that such moneys be delivered to the Collateral Agent. All moneys whichare required by this Collateral Agent Agreement or any Security Agreement to bedelivered to the Collateral Agent or which are received by the Collateral Agentor any agent or nominee of the Collateral Agent, the Administrative Agent, theTerm Loan B Administrative Agent, or any Lender or Term Loan B Lender in respectof the Collateral shall be deposited in an account A-7established at an office of the Collateral Agent (the "Collateral Account") andheld by the Collateral Agent and applied in accordance with the terms of thisCollateral Agent Agreement. 4.2 Control of Collateral Account. Subject to the terms of thisCollateral Agent Agreement, all right, title and interest in and to theCollateral Account shall vest in the Collateral Agent and the Collateral Accountshall be subject to the exclusive dominion and control of the Collateral Agent. 4.3 Investment of Funds Deposited in Collateral Account. The CollateralAgent shall use reasonable efforts to invest and reinvest moneys on deposit inthe Collateral Account at any time in: (i) marketable obligations of the United States having a maturity of not more than six months from the date of acquisition; (ii) marketable obligations directly and fully guaranteed by the United States having a maturity of not more than one year from the date of acquisition; (iii) bankers' acceptances and certificates of deposit and other interest-bearing obligations issued by the Collateral Agent or any bank organized under the Laws of the United States or any state thereof with capital, surplus and undivided profits aggregating at least $100,000,000, in each case having a maturity of not more than six months from the date of acquisition; (iv) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clauses (i), (ii) and (iii) entered into with the Collateral Agent or any bank meeting the qualifications specified in clause (iii) above; and (v) commercial paper rated at least A-1 or the equivalent thereof by Standard & Poor's Corporation or P-1 or the equivalent thereof by Moody's Investors Service, Inc. and maturing within three months after the date of acquisition.All such investments and the interest and income received thereon and the netproceeds realized on the sale or redemption thereof shall be held in theCollateral Account as part of the Collateral. The Collateral Agent shall not beliable for any investment, for any failure to invest hereunder, or for anyperformance of any such investment or any loss or penalty resulting therefrom. 4.4 Application of Moneys. (a) The Collateral Agent shall have theright at any time to apply moneys held by it in the Collateral Account to thepayment of due and unpaid fees and expenses owing to it hereunder. All remainingmoneys held by the Collateral Agent in the Collateral Account or received by theCollateral Agent shall, to the extent available for distribution (it beingunderstood that the Collateral Agent may liquidate investments prior to maturityin order to make a distribution pursuant to this subsection 4.4), be distributedby the Collateral Agent on each Distribution Date in the following order ofpriority: First: to the Collateral Agent for any unpaid expenses owing to it and then to the Administrative Agent, the Term Loan B Administrative Agent, any Term Loan B Lender A-8 and any Lender which has theretofore advanced or paid any such fees and expenses constituting administrative expenses allowable under Section 503(b) of the Bankruptcy Code of 1978, pro rata an amount equal to the amount thereof so advanced or paid by such Term Loan B Lender or Lender and for which such Term Loan B Lender or Lender has not been reimbursed prior to such Distribution Date; Second: to any Term Loan B Lender and any Lender which has theretofore advanced or paid any expenses of the Collateral Agent other than such administrative expenses, pro rata an amount equal to the amount thereof so advanced or paid by such Term Loan B Lender or Lender and for which such Term Loan B Lender or Lender has not been reimbursed prior to such Distribution Date; Third: to the Term Loan B Administrative Agent on behalf of the Term Loan B Lenders and to the Administrative Agent on behalf of Lenders, Pro Rata in an amount equal to the unpaid principal or face amount of the Obligations and Term Loan B Obligations, unpaid interest on and fees, charges, expenses or other amounts payable, if any, in respect of, the Obligations and Term Loan B Obligations, whether or not then due and owing, including without limitation the costs and expenses of the Term Loan B Lenders and Lenders and their representatives which are due and owing under the relative Security Agreements and which constitute the Obligations and Term Loan B Obligations as of the Distribution Date; Fourth: to the Term Loan B Administrative Agent on behalf of the Term Loan B Lenders and to the Administrative Agent on behalf of Lenders, Pro Rata amounts equal to all other sums which constitute the Obligations and Term Loan B Obligations, and Fifth: any surplus then remaining shall be paid to Grantors or their respective successors or assigns or to whomsoever may be lawfully entitled to receive the same or as a court of competent jurisdiction may direct. (b) The term "unpaid" as used in clause Third of subsection 4.4(a)refers: (i) in the absence of a bankruptcy proceeding with respect to any Grantor, to all amounts of the Obligations and the Term Loan B Obligations outstanding as of a Distribution Date, and (ii) during the pendency of a bankruptcy proceeding with respect to any Grantor, to all amounts allowed by the bankruptcy court in respect of the Obligations and the Term Loan B Obligations as a basis for distribution (including estimated amounts, if any, allowed in respect of contingent claims), to the extent that prior distributions have not been made in respect thereof. (c) The Collateral Agent shall make all payments and distributionsunder this subsection 4.4 on account of the Obligations to the AdministrativeAgent for redistribution in accordance with the provisions of the $50,000,000Credit Agreement and the $200,000,00 Credit Agreement and on account of the TermLoan B Obligations to the Term Loan B Administrative Agent for redistribution inaccordance with the provisions of the Term Loan B Agreement. A-9 4.5 Collateral Agent's Calculations. In making the determinations andallocations required by subsection 4.4, the Collateral Agent may rely uponinformation supplied by the Administrative Agent as to the amounts payable withrespect to the Obligations and by Term Loan B Administrative Agent as to amountspayable with respect to the Term Loan B Obligations, and the Collateral Agentshall have no liability to any of the Lenders or Term Loan B Lenders for actionstaken in reliance on such information. All distributions made by the CollateralAgent pursuant to subsection 4.4 shall be (subject to any decree of any court ofcompetent jurisdiction) final, and the Collateral Agent shall have no duty toinquire as to the application by the Administrative Agent or the Term Loan BAdministrative Agent of any amounts distributed to them. SECTION 5 AGREEMENTS WITH COLLATERAL AGENT 5.1 Delivery of Security Agreements. Each of the Administrative Agentand the Term Loan B Administrative Agent has delivered to the Collateral Agenttrue and complete copies of all Security Agreements as in effect on the datehereof. Each of the Administrative Agent and the Term Loan B AdministrativeAgent shall deliver to the Collateral Agent, promptly upon the executionthereof, a true and complete copy of all amendments, modifications orsupplements to any Security Agreement entered into after the date hereof. 5.2 Certain Information. In the event Administrative Agent, the TermLoan B Administrative Agent, and the Collateral Agent are not the same Person,the Administrative Agent and\or the Term Loan B Administrative Agent, as thecase may be, shall deliver to the Collateral Agent, between May 1 and May 15 andbetween November 1 and November 15 in each year, and from time to time uponrequest of the Collateral Agent, a list setting forth as of a date not more than10 days prior to the date of such delivery, the aggregate unpaid principal andinterest on the Obligations and the Term Loan B Obligations, as the case may be,outstanding and the name and address of the Administrative Agent and the nameand address of each holder thereof. In addition, each of the AdministrativeAgent and the Term Loan B Administrative Agent will promptly notify theCollateral Agent of each of their respective changes in the identity. 5.3 Compensation and Expenses. The Borrower agrees to pay to theCollateral Agent, from time to time upon demand, all of the costs and expensesof the Collateral Agent (including, without limitation, the reasonable fees anddisbursements of its counsel and such special counsel as the Collateral Agentelects to retain) which arise in addition to the fees, costs and expenses ofAdministrative Agent, the Term Loan B Administrative Agent, or any Lender underthe Credit Agreement or any Term Loan B Lender under the Term Loan B Agreement,(A) arising in connection with the preparation, execution, delivery, modification, and termination of this Collateral Agent Agreement, the CreditAgreement, and Term Loan B Agreement and each Security Agreement or theenforcement of any of the provisions hereof or thereof, (B) incurred or requiredto be advanced in connection with the administration of the Collateral, the saleor other disposition of Collateral pursuant to any Security Agreement and thepreservation, A-10protection or defense of the Collateral Agent's rights under this CollateralAgent Agreement, the Credit Agreement, and Term Loan B Agreement and theSecurity Agreements and in and to the Collateral or (C) incurred by theCollateral Agent in connection with the resignation of the Collateral Agentpursuant to subsection 7.6. The obligations of Borrower under this subsection5.3 shall survive the termination of the other provisions of this CollateralAgent Agreement. 5.4 Stamp and Other Similar Taxes. Borrower agrees to indemnify andhold harmless the Collateral Agent, the Administrative Agent, the Term Loan BAdministrative Agent, each Lender and each Term Loan B Lender from any presentor future claim for liability for any stamp or any other similar tax and anypenalties or interest with respect thereto, which may be assessed, levied orcollected by any jurisdiction in connection with this Collateral AgentAgreement, the Credit Agreement, any Security Agreement, or any Collateral, tothe extent permitted by law. The obligations of each Borrower under thissubsection 5.4 shall survive the termination of the other provisions of thisCollateral Agent Agreement. 5.5 Filing Fees, Excise Taxes, Etc. Borrower agrees to pay or toreimburse the Collateral Agent for any and all payments made by the CollateralAgent in respect of all search, filing, recording and registration fees, taxes,excise taxes and other similar imposts which may be payable or determined to bepayable in respect to the execution and delivery of this Collateral AgentAgreement and each Security Agreement. The obligations of Borrower under thissubsection 5.5 shall survive the termination of the other provisions of thisCollateral Agent Agreement. 5.6 Indemnification Borrower agrees to indemnify, and hold theCollateral Agent, Administrative Agent, the Term Loan B Administrative Agent,the Lenders and the Term Loan B Lenders harmless from and against any and allliabilities, obligations, losses, damages, penalties, actions, judgments, suits,costs, expenses (including, without limitation, the reasonable fees and expensesof counsel) and disbursements of any kind or nature whatsoever which may at anytime be imposed on, incurred by or asserted against them of any of theirrepresentatives, directors, officers, employees, or agents in any way relatingto or arising out of any of this Collateral Agent Agreement, the CreditAgreement, Term Loan B Agreement, the Security Agreements or any documentscontemplated by or referred to herein or therein (including in connection withor as a result of, in whole or in part, the negligence of any of the CollateralAgent, Administrative Agent, the Term Loan B Administrative Agent, the Lendersand the Term Loan B Lenders), any transaction related hereto or thereto, or anyact, omission or transaction of any Grantor or any of their representatives,directors, officers, employees, or other agents, to the extent that any of thesame results, directly or indirectly, from any claims made or actions, suits orproceedings commenced by or on behalf of any person or entity, other than theCollateral Agent, Administrative Agent, the Term Loan B Administrative Agent,the Lenders or the Term Loan B Lenders. In any suit, proceeding or actionbrought by the Collateral Agent under or with respect to any contract,agreement, interest or obligation constituting part of the Collateral for anysum owing thereunder, or to enforce any provisions thereof, Borrower will save,indemnify and keep the Collateral Agent, Administrative Agent, the Term Loan BAdministrative Agent, the Lenders and the Term Loan B Lenders or any of theirrepresentatives, directors, officers, employees or agents harmless from andagainst all expense, loss or damage suffered by reason of any defense, setoff,counterclaim, recoupment or reduction of liability whatsoever of the obligorthereunder (including in connection with or as a result of, in whole or in part,the negligence of A-11any of the Collateral Agent, Administrative Agent, the Term Loan BAdministrative Agent, the Lenders and the Term Loan B Lenders), arising out of abreach by any Grantor of any obligation thereunder or arising out of any otheragreement, indebtedness or liability at any time owing to or in favor of suchobligor or its successors from such Grantor, and all such obligations ofGrantors shall be and remain enforceable against and only against such Grantorand shall not be enforceable against the Collateral Agent, the AdministrativeAgent, the Term Loan B Administrative Agent, any Lender, any Term Loan B Lender,or any of their representatives, directors, officers, employees or agents. Theagreements in this subsection 5.6 shall survive the payment of the Obligations,the Term Loan B Obligations and termination of the other provisions of thisCollateral Agent Agreement. The Collateral Agent, Administrative Agent, the TermLoan B Administrative Agent, the Lenders or the Term Loan B Lenders shall not beso indemnified and held harmless for any losses or damages, which are finallydetermined by a court of competent jurisdiction, were caused by the indemnifiedparty's willful misconduct or gross negligence. 5.7 Collateral Agent's Lien. Notwithstanding anything to the contraryin this Collateral Agent Agreement, as security for the payment of the expensesof the Collateral Agent hereunder (i) the Collateral Agent is hereby granted afirst and prior Lien by each Grantor, the Lenders and the Term Loan B Lendersupon all Collateral and (ii) the Collateral Agent shall have the right to useand apply any of the funds held by the Collateral Agent in the CollateralAccount to cover such expenses. 5.8 Further Assurances. At any time and from time to time, upon therequest of the Collateral Agent, and at the expense of the Grantors, to theextent required under any Security Agreements, the Grantors will promptlyexecute and deliver any and all such further instruments and documents and takesuch further action as is necessary or reasonably requested further to perfect,or to protect the perfection of, the Liens and security interests granted underthe Security Agreements, including, without limitation, the filing of anyfinancing or continuation statements under the Uniform Commercial Code in effectin any such jurisdiction. Each Grantor also hereby authorizes the CollateralAgent to sign and to file any such financing or continuation statements withoutthe signature of such Grantor to the extent permitted by applicable law. 5.9 Additional Collateral. To the extent required under any SecurityAgreements, each Grantor shall promptly notify the Collateral Agent of any newCollateral and shall forthwith pledge, mortgage and hypothecate its leaseholdinterest in and to such Collateral to the Collateral Agent pursuant to the termsand provisions of this Collateral Agent Agreement. It is expressly understood,however that in no event shall Term Loan B Administrative Agent or any Term LoanB Lender be entitled to a grant of a lien, security interest, pledge or otherencumbrance in any Collateral in which the Collateral Agent is not granted alien, security interest, pledge or other encumbrance that is pari passu with theAdministrative Agent's or the Lenders' Lien. A-12 SECTION 6 POSSESSION AND USE OF COLLATERAL; PARTIAL RELEASES 6.1 Use of Collateral. The rights of the Grantors in and to theCollateral are set forth in the Credit Agreement, Term Loan B Agreement and theSecurity Agreements. 6.2 Releases. Releases and dispositions of Collateral (other thansales, releases and dispositions of Collateral which are permitted by the termsand provisions of the Credit Agreement, the Term Loan B Agreement and theSecurity Agreements) may be made by the Collateral Agent, only at the directionof the Determining Lenders. Sales, releases or other dispositions of Collateral which are permitted by the terms and provisions of the Credit Agreement, TermLoan B Agreement and the Security Agreements shall not require any written ororal authorization or consent of the Collateral Agent, Lenders or Term Loan BLenders, and sales or other dispositions of Collateral which are pursuant to theexercise of remedies hereunder or under any Security Agreement shall not requireany written or oral authorization or consent of the Lenders or Term Loan BLenders. It shall not be necessary for any Lender or Term Loan B Lender to signsuch release. Such request shall be in writing, shall describe the property tobe released in reasonable detail, and, shall state that such release is or willbe in accordance with the Credit Agreement, the Term Loan B Agreement and theSecurity Agreements. The Collateral Agent shall send a copy of all releases tothe Term Loan B Administrative Agent and the Administrative Agent. SECTION 7 THE COLLATERAL AGENT 7.1 Appointment. Each Term Loan B Lender and each Lender irrevocablydesignates and appoints Bank of America, N.A. as the Collateral Agent of suchLender and such Term Loan B Lender under this Collateral Agent Agreement and theSecurity Agreements and each such Term Loan B Lender and each such Lenderirrevocably authorizes Bank of America, N.A. as the Collateral Agent for suchLender and Term Loan B Lender, to take such action on such Lender's and suchTerm Loan B Lender's behalf under the provisions of this Collateral AgentAgreement and the Security Agreements and to exercise such powers and performsuch duties as are expressly delegated to the Collateral Agent and/or theAdministrative Agent, the Term Loan B Administrative Agent, the Lenders and theTerm Loan B Lenders by the terms hereof and thereof, together with such otherpowers as are reasonably incidental thereto. Notwithstanding any provision tothe contrary in this Collateral Agent Agreement and the Security Agreements, theCollateral Agent shall not have any duties or responsibilities, except thoseexpressly set forth in this Collateral Agent Agreement and the SecurityAgreements, or any fiduciary relationship with any Lender or Term Loan B Lender,and no implied covenants, functions, responsibilities, duties, obligations orliabilities shall be read into this Collateral Agent Agreement and the SecurityAgreements or otherwise exist against the Collateral Agent. Furthermore,notwithstanding any provision to the contrary in this Collateral Agent Agreementor any Security Agreement, the Collateral Agent is not an agent of Borrower, theGrantors, any Lender, the A-13Administrative Agent or any Term Loan B Lender, the Term Loan B AdministrativeAgent and shall have no liability to such parties for any of its acts oromissions under this Collateral Agent Agreement, or any of the SecurityAgreements or for creating, perfecting, preserving or continuing any lien,security interest or pledge on any of the Collateral. 7.2 Exculpatory Provisions. (a) The Collateral Agent shall not beresponsible in any manner whatsoever for the correctness of any recitals,statements, representations or warranties herein, all of which are made solelyby the Grantors or Borrower, as the case may be. The Collateral Agent makes norepresentations as to the value or condition of the Collateral or any partthereof, or as to the title of any Grantor thereto or as to the securityafforded by this Collateral Agent Agreement or any Security Agreement, or as tothe validity, execution, enforceability, legality or sufficiency of thisCollateral Agent Agreement, the Security Agreements, the Obligations or the TermLoan B Obligations, and the Collateral Agent shall incur no liability orresponsibility in respect of any such matters. The Collateral Agent shall not beresponsible for insuring the Collateral or for the payment of taxes, charges orassessments or discharging of Liens upon the Collateral or otherwise as to themaintenance of the Collateral. (b) The Collateral Agent shall not be required to ascertain or inquireas to the performance by any Grantor of any of the covenants or agreements contained herein or in any Security Agreement. Whenever it is necessary, or inthe opinion of the Collateral Agent advisable, for the Collateral Agent toascertain the amount of the Obligations or the Term Loan B Obligations, thenheld by the Lenders or Term Loan B Lenders, as the case may be, the CollateralAgent may rely on a certificate of Administrative Agent, in the case of theObligations, or of the Term Loan B Administrative Agent, in the case of the TermLoan B Obligations and, if the Administrative Agent or the Term Loan BAdministrative Agent shall not give such information to the Collateral Agent,they shall not be entitled to receive distributions hereunder (in which casedistributions to those Persons who have supplied such information to theCollateral Agent shall be calculated by the Collateral Agent using, for thosePersons who have not supplied such information, the list then most recentlydelivered by the Company pursuant to subsection 5.2). (c) The Collateral Agent shall be under no obligation or duty to takeany action under this Collateral Agent Agreement or any Security Agreement iftaking such action (i) would subject the Collateral Agent to a tax in anyjurisdiction where it is not then subject to a tax or (ii) would require theCollateral Agent to qualify to do business in any jurisdiction where it is notthen so qualified, unless the Collateral Agent receives security or indemnitysatisfactory to it against such tax (or equivalent liability), or any liabilityresulting from such qualification, in each case as results from the taking ofsuch action under this Collateral Agent Agreement or any Security Agreement. (d) Notwithstanding any other provision of this Collateral AgentAgreement, the Collateral Agent shall not be liable for any action taken oromitted to be taken by it in accordance with this Collateral Agent Agreement orthe Security Agreements. A-14 (e) The Collateral Agent shall have the same rights with respect to anyObligation or Term Loan B Obligation held by it as any other Secured Party andmay exercise such rights as though it were not the Collateral Agent hereunder,and may accept deposits from, lend money to, and generally engage in any kind ofbusiness with Grantors as if it were not the Collateral Agent. 7.3 Delegation of Duties. The Collateral Agent may execute any of thepowers hereof and perform any duty hereunder either directly or by or throughagents or attorneys-in-fact. The Collateral Agent shall be entitled to advice ofcounsel concerning all matters pertaining to such powers and duties. TheCollateral Agent shall not be responsible for the negligence or misconduct ofany agents or attorneys-in-fact selected by it. 7.4 Reliance by Collateral Agent. (a) The Collateral Agent may consultwith counsel, and any advice or statements of legal counsel (including, withoutlimitation, counsel to the Grantors) shall be full and complete authorizationand protection in respect of any action taken or suffered by it hereunder orunder any Security Agreement in accordance therewith. (b) The Collateral Agent may conclusively rely, and shall be fullyprotected in acting, upon any resolution, statement, certificate, instrument,opinion, report, notice, request, consent, order, bond or other paper ordocument believed by it to be genuine and to have been signed or presented bythe proper party or parties or, in the case of cables, telecopies and telexes,to have been sent by the proper party or parties. The Collateral Agent mayconclusively rely, as to the truth of the statements and the correctness of theopinions expressed therein, upon any certificates or opinions furnished to theCollateral Agent and conforming to the requirements of this Collateral AgentAgreement. (c) The Collateral Agent shall not be under any obligation to exerciseany of the rights or powers vested in the Collateral Agent by this CollateralAgent Agreement and the Security Agreements, at the request or direction of theAdministrative Agent, the Term Loan B Administrative Agent, the Lenders or TermLoan B Lenders pursuant to this Collateral Agent Agreement, or otherwise, unlessthe Collateral Agent shall have been provided security and indemnity to its satisfaction against the fees, costs, expenses and liabilities which may beincurred by it, including such reasonable advances as may be requested by theCollateral Agent. 7.5 Limitations on Duties of Collateral Agent. (a) The Collateral Agentshall be obligated to perform such duties and only such duties as arespecifically set forth in this Collateral Agent Agreement and the SecurityAgreements, and no implied covenants or obligations shall be read into thisCollateral Agent Agreement or any Security Agreement against the CollateralAgent. The Collateral Agent may exercise the rights and powers vested in it bythis Collateral Agent Agreement and the Security Agreements, and shall not beliable with respect to any action taken by it, or omitted to be taken by it. (b) The Collateral Agent shall not be under any obligation to take anyaction, which is discretionary with the Collateral Agent under the provisionshereto, or of any Security Agreement except upon the written request of theDetermining Lenders. A-15 7.6 Resignation of the Collateral Agent. Should the Collateral Agentever cease to be a Lender or a Term Loan B Lender, or should the CollateralAgent ever resign as the Collateral Agent, or should the Collateral Agent everbe removed with cause by unanimous action of all Lenders and Term Loan B Lenders(other than the Lender then acting as the Collateral Agent), then the Lenderappointed by the other Lenders and Term Loan B Lenders shall forthwith becomethe Collateral Agent, and each Grantor and the Lenders and Term Loan B Lendersshall execute such documents as any Lender or Term Loan B Lender may reasonablyrequest to reflect such change. Any resignation or removal of the CollateralAgent shall become effective upon the appointment by the Lenders and Term Loan BLenders of a successor Collateral Agent; provided, however, that if the Lendersand Term Loan B Lenders fail for any reason to appoint a successor within 60days after such removal or resignation, Collateral Agent shall thereafter haveno obligation to act as Collateral Agent hereunder. 7.7 Status of Successor. Every successor Collateral Agent appointedpursuant to subsection 7.6 shall be a bank or trust company in good standing andhaving power to act as Collateral Agent hereunder, incorporated under the lawsof the United States of America or any State thereof or the District ofColumbia. 7.8 Merger of the Collateral Agent. Any corporation into which theCollateral Agent may be merged, or with which it may be consolidated, or anycorporation resulting from any merger or consolidation to which the CollateralAgent shall be a party, shall be Collateral Agent under this Collateral AgentAgreement and the Security Agreements without the execution or filing of anypaper or any further act on the part of the parties hereto. 7.9 Treatment of Payee or Endorsee by Collateral Agent; Representativesof Lenders and Term Loan B Lenders. The Collateral Agent may treat theregistered holder or, if none, the payee or endorsee of any promissory note ordebenture evidencing the Obligations or the Term Loan B Obligations as theabsolute owner thereof for all purposes and shall not be affected by any noticeto the contrary, whether such promissory note or debenture shall be past due ornot. 7.10 Non-Reliance on Collateral Agent. Each of the AdministrativeAgent, the Term Loan B Administrative Agent, and each Lender and Term Loan BLender expressly acknowledge that neither the Collateral Agent nor any of itsofficers, directors, employees, agents, attorneys-in-fact or affiliates has madeany representations or warranties to them and that no act by the CollateralAgent hereinafter taken, including any review of the affairs of the Borrower,shall be deemed to constitute any representation or warranty by the CollateralAgent to any Lender or Term Loan B Lender. Each Lender and Term Loan B Lenderrepresents to the Collateral Agent that such Lender or Term Loan B Lenderindependently and without reliance upon the Collateral Agent, and based on suchdocuments and information as they have deemed or will deem appropriate, has made and will make its own appraisal of and investigation into the business,operations, property, financial and other condition and creditworthiness of theBorrower and has made and will make their own decision to extend credit to theBorrower. Each Lender and Term Loan B Lender also represent that they will,independently and without reliance upon the Collateral Agent, and based on suchdocuments and information as they shall deem appropriate at the time continue tomake their own creditor analysis, appraisals and decisions in taking or nottaking action under the Collateral Agent Agreement, and to make suchinvestigation as they deem necessary to inform themselves as to the business,operations, A-16property, financial and other condition and creditworthiness of the Borrower.Except for notices, reports and other documents expressly required to befurnished to the Lenders and Term Loan B Lenders by the Collateral Agenthereunder, the Collateral Agent shall not have any duty or responsibility toprovide any Lender or Term Loan B Lender with any credit or other informationconcerning the business, operations, property, financial and other condition orcreditworthiness of the Borrower which may come into its possession or thepossession of any of its officers, directors, employees, agents,attorneys-in-fact or affiliates. Each Lender and Term Loan B Lender acknowledgethat the Collateral Agent and its affiliates may exercise all contractual andlegal rights and remedies which may exist from time to time with respect toother existing and future relationships with Grantors without any duty toaccount therefor to such Lender or Term Loan B Lender. 7.11 Indemnification. Each of the Administrative Agent, the Term Loan BAdministrative Agent, the Lenders and the Term Loan B Lenders agree to indemnifythe Collateral Agent (in its capacity as such), without limiting the obligationof each Grantor to do so, ratably according to the respective principal amountsof the Obligations and Term Loan B Obligations held by the Lenders and Term LoanB Lenders at the date of any claim by the Collateral Agent for indemnity underthis subsection, from and against any and all liabilities, obligations, losses,damages, penalties, actions, judgments, suits, costs, expenses (including,without limitation, the reasonable fees and expenses of counsel) ordisbursements of any kind whatsoever which may at any time be imposed on,incurred by or asserted against the Collateral Agent in any way relating to orarising out of this Collateral Agent Agreement, the Credit Agreement, Term LoanB Agreement, the Security Agreements, or any documents contemplated hereby orthereby or referred to herein or therein or the transactions contemplated herebyor thereby or any action taken or omitted by the Collateral Agent hereunder orthereunder or in connection therewith, including any negligence of theCollateral Agent, but excluding any acts or omissions of the Collateral Agentfinally determined by a court of competent jurisdiction to as a result of theCollateral Agent's gross negligence or willful misconduct. The Lenders and TermLoan B Lenders agree to reimburse the Collateral Agent (to the extent notreimbursed by the Grantors), Pro Rata, promptly upon demand for anyout-of-pocket expenses (including attorneys' fees) incurred by the CollateralAgent in connection with the preparation, execution, delivery, administration,modification, amendment, or enforcement (whether through legal proceedings orotherwise) of, or legal advice in respect of rights or responsibilities under,this Collateral Agent Agreement, the Credit Agreement, the Term Loan BAgreement, the Security Agreements, or any other documents contemplated herebyor thereby. The agreements in this subsection 7.11 shall survive the payment ofthe Obligations, the Term Loan B Obligations and the termination of the otherprovisions of this Collateral Agent Agreement. SECTION 8 PARI PASSU PROVISIONS 8.1 Agreement. Notwithstanding anything contained in the Term Loan BAgreement, the Credit Agreement or any Security Agreement to the contrary, theterms and provisions of this Section 8 shall control. The Term Loan B Lenders,the Term Loan B Administrative Agent, Grantors, the Lenders and Administrative Agent agree that any security interests, Liens, pledges A-17of stock, or other encumbrances on behalf of and for the ratable benefit of theTerm Loan B Lenders securing the Term Loan B Obligations, are and shall besubject to and pari passu with the security interests, Liens, pledges of stockor other encumbrances of the Administrative Agent on behalf of and for theratable benefit of the Lenders securing payment of the Obligations. The TermLoan B Lenders, the Term Loan B Administrative Agent, Grantors, the Lenders andAdministrative Agent agree that any and all of the Term Loan B AdministrativeAgent's rights and remedies with respect to the Collateral shall remain subjectto and pari passu with the rights and remedies of the Administrative Agent withrespect thereto. In the event that Grantors, the Administrative Agent, the TermLoan B Administrative Agent, any Lender, or any Term Loan B Lender at any timeobtains possession of any of the Collateral, it shall promptly deliver suchCollateral to the Collateral Agent, unless precluded by law or judicial order. 8.2 Authority of Collateral Agent. Grantors, each Lender, theAdministrative Agent, the Term Loan B Administrative Agent, and each Term Loan BLender agree as follows: (a) Each of the Lenders, Term Loan B Lenders, the Administrative Agent,the Term Loan B Administrative Agent, and Borrower hereby irrevocablyconstitutes and appoints the Collateral Agent and any officer or agent thereofuntil such time as this Collateral Agent Agreement terminates pursuant tosubsection 9.9, with full power of substitution, as its true and lawfulattorney-in-fact with full power and authority in the name of each Grantor, suchLender, the Administrative Agent, the Term Loan B Administrative Agent, or suchTerm Loan B Lender or in the Collateral Agent's own name, from time to time inthe Collateral Agent's discretion, to take any and all appropriate actionpermitted hereunder and under the Security Agreements and to execute any and alldocuments and instruments which may be necessary or desirable to carry out theterms of this Collateral Agent Agreement and the Security Agreements andaccomplish the purposes hereof and thereof and, without limiting the generalityof the foregoing, each of the Lenders, the Term Loan B Lenders, the Borrower,the Administrative Agent, and the Term Loan B Administrative Agent hereby givesthe Collateral Agent the power and rights on behalf of each of the Lenders, theAdministrative Agent, the Term Loan B Lenders and the Term Loan B AdministrativeAgent, without notice to or further assent of any of such parties to do thefollowing: (i) to ask for, demand, sue for, collect, receive and give acquittance for any and all moneys due or to become due upon, or in connection with, the Collateral; (ii) to receive, take, endorse, assign and deliver any and all checks, notes, drafts, acceptances, documents and other negotiable and non-negotiable instruments taken or received by the Collateral Agent as, or in connection with, the Collateral; (iii) to commence, prosecute, defend, settle, compromise or adjust any claim, suit, action or proceeding with respect to, or in connection with, the Collateral; (iv) to sell, transfer, release, assign or otherwise deal in or with the Collateral or any part thereof as fully and effectively as if the Collateral Agent were the absolute owner thereof; and A-18 (v) to do, at its option, at any time or from time to time, all acts and things which the Collateral Agent deems necessary to protect or preserve the Collateral and to realize upon the Collateral. Said attorney, the Collateral Agent, is hereby granted and given full power and authority to do and perform every act necessary and proper to be donein the exercise of any of the foregoing powers. Understanding that powers ofattorney are strictly construed, each of the Term Loan B Lenders, Lenders, theAdministrative Agent, the Term Loan B Administrative Agent, and Grantorsdeclares that it is its expressed intention that this power of attorney shall beliberally construed to give the fullest effect to the powers granted herein. (b) All distributions upon or with respect to the Term Loan BObligations or the Obligations which are received by Grantors, any Lender, anyTerm Loan B Lender, the Administrative Agent, or the Term Loan B AdministrativeAgent on account of any security interests, liens, pledges of stock or otherencumbrances contrary to the provisions of this Collateral Agent Agreement shallbe received in trust for the benefit of the Lenders and Term Loan B Lenders,shall be segregated from other funds and property held by the party receivingsame, and shall be forthwith paid over to the Collateral Agent in the same formas so received (with any necessary endorsement) to be applied (in the case ofcash) to or held as collateral (in the case of non-cash property or securities)for the payment or prepayment of the Obligations and Term Loan B Obligations inaccordance with the terms of the Credit Agreement and Term Loan B Agreement. 8.3 No Commencement of Any Proceeding. Each of the Term Loan B Lenders,the Lenders, the Administrative Agent, and the Term Loan B Administrative Agentagrees that, so long as any of the Obligations and the Term Loan B Obligationsshall remain unpaid, it will not exercise any right, power or remedy referred toin subsection 8.2(a) hereof with respect to the Collateral, without the consentof the Collateral Agent. 8.4 Obligations Hereunder Not Affected. All rights and interests of theLenders, Term Loan B Lenders, the Administrative Agent, and the Term Loan BAdministrative Agent hereunder, and all agreements and obligations of Grantorsunder this Collateral Agent Agreement, shall remain in full force and effectirrespective of: (a) any lack of validity or enforceability of the Credit Agreement,this Collateral Agent Agreement, the Term Loan B Agreement, or the SecurityAgreements. (b) any change in the time, manner or place of payment of, or in anyother term of, all or any of the Obligations or Term Loan B Obligations, or anyother amendment or waiver of or any consent to departure from the CreditAgreement, this Collateral Agent Agreement, the Term Loan B Agreement, or theSecurity Agreements. (c) any exchange, release or non-perfection of any Collateral, or anyrelease or amendment or waiver of or consent to departure from any guaranty, forall or any of the Obligations or Term Loan B Obligations. (d) any other circumstance which might otherwise constitute a defenseavailable to, or a discharge of, any Grantor in respect of the Obligations orTerm Loan B Obligations or A-19Grantors in respect of this Collateral Agent Agreement. This Collateral AgentAgreement shall continue to be effective or be reinstated, as the case may be,if at any time any payment of any of the Obligations or Term Loan B Obligationsis rescinded or must otherwise be returned by the Collateral Agent upon theinsolvency, bankruptcy or reorganization of any of the Grantors or otherwise,all as though such payment had not been made. 8.5 Waiver. The Lenders, Term Loan B Lenders, the Term Loan BAdministrative Agent, Administrative Agent and Grantors each hereby waivepromptness, diligence, notice of acceptance and any other notice with respect toany of the Obligations or the Term Loan B Obligations and this Collateral AgentAgreement and any requirement that the Collateral Agent protect, secure, perfector insure any security interest or Lien or any property subject thereto orexhaust any right or take any action against Grantors or any other Person or entity or any Collateral. SECTION 9 MISCELLANEOUS 9.1 Notices. Unless otherwise provided herein, all notices, requests,consents and demands shall be in writing and shall be personally delivered ormailed by certified mail, postage prepaid, to the respective addresses specifiedherein, or, as to any party, to such other address as may be designated by it inwritten notice to all other parties. All notices, requests, consents and demandshereunder will be effective when personally delivered or mailed by certifiedmail, postage prepaid, addressed as aforesaid. 9.2 No Waivers. No failure on the part of the Collateral Agent, theAdministrative Agent, the Term Loan B Administrative Agent, any Term Loan BLender or any Lender to exercise, no course of dealing with respect to, and nodelay in exercising, any right, power or privilege under this Collateral AgentAgreement or any Security Agreement shall operate as a waiver thereof nor shallany single or partial exercise of any such right, power or privilege precludeany other or further exercise thereof or the exercise of any other right, poweror privilege. 9.3 Amendments, Supplements and Waivers. The provisions of thisCollateral Agent Agreement may not be amended, modified or waived except by thewritten agreement of the Term Loan B Administrative Agent, Administrative Agent,and the Collateral Agent. The provisions of each Security Agreement may not beamended, modified or waived, except in accordance with the terms thereof andwith the written consent of the Collateral Agent. Any such supplementalagreements shall be binding upon each Grantor, the Administrative Agent, theTerm Loan B Administrative Agent, the Lenders, the Collateral Agent, the TermLoan B Lenders, and their respective successors and assigns. 9.4 Headings. The headings of Sections and subsections have beenincluded herein and in the Security Agreements for convenience only and shouldnot be considered in interpreting this Collateral Agent Agreement or theSecurity Agreements. A-20 9.5 Severability. Any provision of this Collateral Agent Agreement,which is prohibited or unenforceable in any jurisdiction, shall not invalidatethe remaining provisions hereof, and any such prohibition or unenforceability inany jurisdiction shall not invalidate or render unenforceable such provision inany other jurisdiction. 9.6 Successors and Assigns. This Collateral Agent Agreement shall bebinding upon and inure to the benefit of each of the parties hereto and shallinure to the benefit of each of the Lenders, the Term Loan B Lenders, theAdministrative Agent, the Term Loan B Administrative Agent, and their respectivesuccessors and assigns, and nothing herein is intended or shall be construed togive any other Person any right, remedy or claim under, to or in respect of thisCollateral Agent Agreement or any Collateral. 9.7 GOVERNING LAW. THIS COLLATERAL AGENT AGREEMENT SHALL BE GOVERNEDBY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OFTEXAS. WITHOUT EXCLUDING ANY OTHER JURISDICTION, THE GRANTORS, LENDERS,ADMINISTRATIVE AGENT, COLLATERAL AGENT, THE TERM LOAN B ADMINISTRATIVE AGENT,TERM LOAN B LENDERS AND GRANTORS AGREE THAT THE COURTS OF TEXAS SHALL HAVEJURISDICTION OVER THE PROCEEDINGS IN CONNECTION WITH THIS COLLATERAL AGENTAGREEMENT. 9.8 Counterparts. This Collateral Agent Agreement may be signed in anynumber of counterparts with the same effect as if the signatures thereto andhereto were upon the same instrument. 9.9 Termination. Upon receipt by the Collateral Agent from theAdministrative Agent and the Term Loan B Administrative Agent of a writtendirection to cause the Collateral Agent's interest in all of the Liens by theSecurity Agreements of the Lenders and Term Loan B Lenders to be released anddischarged, this Collateral Agent Agreement shall terminate with respect to theCollateral Agent, Administrative Agent, the Term Loan B Administrative Agent,the Term Loan B Lenders, and Lenders; and the security interests of theCollateral Agent as secured party created by subsection 5.7 and by the SecurityAgreements shall be released; provided, that the provisions of subsections 5.3,5.4, 5.5, 5.6 and 7.11 shall not be affected by any such termination. 9.10 Grantors Jointly and Severally Liable. All of the obligations ofthe Grantors under this Collateral Agent Agreement shall be deemed to be jointand several obligations of all of the Grantors. 9.11 Control. Notwithstanding anything contained herein which may be tothe contrary, this agreement and the transactions contemplated hereby do not andwill not constitute, create, or have the effect of constituting or creating,directly or indirectly, actual or practical ownership of the Grantors by theLenders or the Term Loan B Lenders, or control, affirmative or negative, director indirect, by the Lenders or the Term Loan B Lenders, over the management, orany other aspect of the day-to-day operation of Grantors, which control remainsin Grantors, its shareholders and boards of directors. A-21 9.12 ENTIRE AGREEMENT. THIS WRITTEN AGREEMENT AND THE OTHER DOCUMENTSREFERENCED HEREIN OR CONTEMPLATED HEREBY REPRESENT THE FINAL AGREEMENT AMONG THEPARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS ORSUBSEQUENT ORAL AGREEMENTS OF THE PARTIES HERETO. THERE ARE NO UNWRITTEN ORALAGREEMENTS AMONG THE PARTIES. A-22 IN WITNESS WHEREOF, the parties hereto have caused this CollateralAgent Agreement to be duly executed by their respective authorized officers asof the day and year first written above. A-23GRANTORS:COLLATERAL AGENT: BANK OF AMERICA, N.A. By: Title:BORROWER: GCI HOLDINGS, INC. By: Title:GRANTORS: GCI, INC. By: Its: GCI COMMUNICATION CORP. By: Title: GCI CABLE, INC. By: Title: A-24 GCI AMERICAN CABLESYSTEMS, INC. By: Title: GCI CABLESYSTEMS OF ALASKA, INC. By: Title: GCI FIBER COMMUNICATION CO., INC. By: Title:ADMINISTRATIVE AGENTAND LENDER: BANK OF AMERICA, N.A. By: Title:TERM LOAN B ADMINISTRATIVE AGENT: BANK OF AMERICA, N.A. By: Title: A-25 STATEMENT OF STOCK DESIGNATION ------------------------------------------------------------- Setting forth a copy of a resolution creating and authorizing the issuance of a series of preferred stock designated as "Series C Convertible Redeemable Accreting Preferred Stock" adopted by the board of directors of General Communication, Inc. ------------------------------------------------------------- Pursuant to AS 10.06.315 and 10.06.320 of the Alaska Statutes ------------------------------------------------------------- We, the undersigned officers of General Communication, Inc., an Alaskacorporation ("Company"), hereby state and otherwise certify that, on November16, 2000 the board of directors of the Company, pursuant to authority vested init by Article IV of the Company's Restated Articles of Incorporation and inaccordance with AS 10.06.315 and 10.06.318 of the Alaska Statutes, duly adoptedthe following resolution creating a series of preferred stock designated as"Series C Convertible Redeemable Accreting Preferred Stock": RESOLUTION "WHEREAS, General Communication, Inc. is authorized through itsRestated Articles of Incorporation to issue up to 100 million shares of Class ACommon Stock, 10 million shares of Class B Common Stock, and up to 1 millionshares of Preferred Stock, issuable from time to time in one or more series; WHEREAS, the Board of Directors of the Company is authorized, withinthe limitations and restrictions contained in the Restated Articles ofIncorporation, to fix or alter the dividend rate, conversion rate, votingrights, redemption prices, and liquidation preferences of any wholly unissuedseries of Preferred Stock, the number of shares constituting any such series,the designation of such series, and other terms and conditions of the issuanceof such stock; WHEREAS, the Company, through its Board of Directors, approved astatement of stock designation pursuant to Article IV of the Restated Articlesof Incorporation and that statement was filed of record with the AlaskaDepartment of Community and Economic Development on or about April 28, 1999 pursuant to authority set forth in AS 10.06.315,10.06.318, and 10.06.320 of the Alaska Statutes, and the board subsequentlyauthorized the issuance of up to 35,000 shares of Series B Preferred Stock underthat designation, and the Company does not presently have outstanding any othershares of its Preferred Stock; RESOLVED, that, pursuant to authority granted to and vested in theBoard of Directors by Article IV of the Restated Articles of Incorporation ofthe Company and in accordance with AS 10.06.315 and 10.06.318 of the AlaskaStatutes, the board hereby approves and otherwise directs the designation, fromthe shares of Preferred Stock authorized under those Articles, of a new seriesof Preferred Stock of the Company to consist of 15,000 shares to be known asSeries C Convertible Redeemable Accreting Preferred Stock ("Series C PreferredStock") and hereby fixes the designation, rights, preferences, privileges, andrestrictions of the shares of that series, in addition to the designation,rights, preferences, privileges and restrictions set forth in those articleswhich are directly applicable to the Preferred Stock as follows: Preface. Series C Convertible Redeemable Accreting Preferred Stock. Of the 1,000,000 shares of Preferred Stock, authorized pursuant toArticle IV of the Restated Articles of Incorporation of the Company, 15,000shall be designated Series C Convertible Redeemable Accreting Preferred Stock,with the rights, preferences, privileges and restrictions set forth in thisparagraph. Section 1. Definitions. For purposes of the followingSections, the following definitions shall apply: "Bankruptcy Event" shall mean the occurrence of any of thefollowing: (i) a court or governmental agency having appropriate jurisdictionshall enter a decree or order for relief in respect of the Company in aninvoluntary case under any applicable bankruptcy, insolvency or other similarlaw now or hereafter in effect, or appointing a receiver, liquidator, assignee,custodian, trustee, sequestrator (or similar official) of the Company or for anysubstantial part of its property or ordering the winding up or liquidation ofits affairs; (ii) there shall be commenced against the Company an involuntarycase under any applicable bankruptcy, insolvency or other similar law now orhereafter in effect, or any case, proceeding or other action for the appointmentof a receiver, liquidator, assignee, custodian, trustee, sequestrator (orsimilar official) of the Company or for any substantial part of its property orfor the winding up or liquidation of its affairs, and such involuntary case orother case, proceeding or other action shall remain undismissed, undischarged orunbonded for a period of sixty (60) consecutive days; (iii) the Company shallcommence a voluntary case under any applicable bankruptcy, insolvency or othersimilar law now or hereafter in effect, or consent to the entry of an order forrelief in an involuntary case under any such law, or consent to the appointmentor taking possession by a receiver, liquidator, assignee, custodian, trustee,sequestrator (or similar official) of the Company or for any substantial part ofits property or make any general assignment for the benefit of creditors; or(iv) the Company shall be unable to, or shall admit in writing to its inabilityto, pay its debts generally as they become due. "Board" shall mean the Board of Directors of the Company. 2 "Business Day" shall mean a day on which banks and foreignexchange markets are open for the transaction of business in New York, New Yorkas relevant to the determination to be made or action to be taken. "Change of Control" shall mean the occurrence of one or moreof the following events: (a) the acquisition by any person (other than Ronald A.Duncan or WorldCom, Inc.), or two or more persons acting in concert, of sharesrepresenting greater than 33% of the total combined voting power of the Company,(b) prior to the second anniversary of the Issue Date Ronald A. Duncan resignsor is removed from his position as Chief Executive Officer of the Company, otherthan as a result of death or disability, and is not replaced within sixty (60)days of such resignation or removal with a person acceptable to the holders of amajority of the outstanding Series C Preferred Stock; or (c) prior to the secondanniversary of the Issue Date, Ronald A. Duncan or his heirs transfers, sells orin any way disposes of a material amount of the capital stock of the Companyowned by him as of the date hereof such that his beneficial ownership (asdetermined under Rule 13d-3 of the United States Securities and ExchangeCommission, or any successor rule) falls below 1.93% of the Common Stock of theCompany or 4.7% of the voting power of the Company. A Change of Control shall bedeemed to occur as of the effective date of the first event, action ortransaction leading to one of the results described above. "Class A Common Stock" shall mean the Class A Common Stock ofthe Company. "Class B Common Stock" shall mean the Class B Common Stock ofthe Company. "Common Stock" shall mean, collectively, the Class A CommonStock and Class B Common Stock of the Company. "Company" shall mean General Communication, Inc. "Conversion Price" shall have the meaning ascribed to suchterm in Section 7(b) hereof. "Distribution" shall mean the declaration or payment of anydividend (whether in cash, shares of Series B Preferred Stock, or otherwise) onor in respect of any shares of any class of capital stock of any person, otherthan dividends payable solely in shares of common stock of such person; thepurchase, redemption, or other retirement of any shares of any class of capitalstock of any person, directly or indirectly through a subsidiary or otherwise;the return of capital by any person to its shareholders as such; or any otherdistribution on or in respect of any shares of any class of capital stock of anyperson. "Issue Date" shall mean the first date upon which shares ofSeries C Preferred Stock are issued. 3 "Junior Securities" shall mean the Common Stock and othershares of capital stock of the Company, whether presently outstanding orhereafter issued, which by its terms is junior to the Series C Preferred Stock.A class or series of Junior Securities shall rank junior to the Series CPreferred Stock as to dividend rights or rights on liquidation if the holders ofshares of Series C Preferred Stock shall be entitled to dividend payments orpayments of amounts distributable upon liquidation, dissolution or winding up ofthe affairs of this Company, as the case may be, in preference or priority tothe holders of shares of such class or series. "Lien" shall mean any mortgage, lien, pledge, charge, securityinterest, or other encumbrance of any kind, whether or not filed, recorded orotherwise perfected under applicable law (including, any conditional sale orother title retention agreement and any lease deemed to constitute a securityinterest and any option or other agreement to give any security interest). "Liquidation Preference" shall have the meaning set forth inSection 3(a) hereof. "Mandatory Redemption Date" shall have the meaning ascribedthereto in Section 4(b) hereof. "Parity Securities" shall mean any class or series of stock ofthis Company, whether now existing or hereafter created, ranking on a paritybasis with the Series C Preferred Stock as to dividend rights or rights onliquidation. Stock of any class or series shall rank on a parity basis as todividend rights or rights on liquidation with the Series C Preferred Stock,whether or not the dividend rates, dividend payment dates or liquidation pricesper share are different from those of the Series C Preferred Stock, if theholders of shares of such class or series shall be entitled to dividend paymentsor payments of amounts distributable upon liquidation, dissolution or winding upof the affairs of this Company, as the case may be, in proportion to theirrespective accumulated and accrued and unpaid dividends or liquidation prices,respectively, without preference or priority, one over the other, as between theholders of shares of such class or series and the holders of Series C PreferredStock. No class or series of capital stock that ranks junior to the Series CPreferred Stock as to rights on liquidation shall rank or be deemed to rank on aparity basis with the Series C Preferred Stock as to dividend rights unless theinstrument creating or evidencing such class or series of capital stockotherwise expressly provides. "Payment Date" shall have the meaning ascribed thereto inSection 4(c) and Section 4(d) hereof. "Redemption Price" shall have the meaning ascribed thereto inSection 4(e) hereof. "Senior Securities" shall mean the Series B Preferred Stockand other shares of capital stock of the Company which by its terms is senior tothe Series C Preferred Stock. Stock of any class or series shall rank senior tothe Series C Preferred Stock as to dividend rights or rights on liquidation ifthe holders of shares of such class or series shall be entitled to dividendpayments or payments of amounts distributable upon dissolution, liquidation orwinding up of the affairs of this Company, as the case may be, in preference orpriority to the holders of shares 4of Series C Preferred Stock. No class or series of capital stock that ranks on aparity basis with or junior to the Series C Preferred Stock as to rights onliquidation shall rank or be deemed to rank prior to the Series C PreferredStock as to dividend rights, notwithstanding that the dividend rate or dividendpayment dates thereof are different from those of the Series C Preferred Stock,unless the instrument creating or evidencing such class or series of capitalstock otherwise expressly provides. "Series B Preferred Stock" shall mean the Series B ConvertibleRedeemable Accreting Preferred Stock of the Company. "Series C Preferred Stock" shall mean the Series C ConvertibleRedeemable Accreting Preferred Stock of the Company. "Subsidiary" of a person shall mean (i) any corporation ofwhich 51% percent or more of the Voting Stock, or any partnership of which 51%or more of outstanding partnership interests, is at any time owned by theperson, or by one or more Subsidiaries of such person, or by such person and oneor more Subsidiaries of such person, and (ii) any other entity which iscontrolled or capable of being controlled by such person or by one or moreSubsidiaries of such person or by such person and one or more Subsidiaries ofsuch person. "Triggering Event" shall mean (i) a Change of Control, (ii) aBankruptcy Event, (iii) the liquidation or dissolution of the Company, or (iv)the merger of the Company with or into, or the consolidation of the Company withany other entity or the sale by the Company of all or substantially all of theassets of the Company, where the terms of such merger, consolidation or salewould significantly and adversely affect the rights and preferences of theSeries C Preferred Stock. "Voting Stock" shall mean any shares having general votingpower in electing the board of directors of any person (irrespective of whetheror not at the time stock of any other class or classes has or might have votingpower by reason or the happening of any contingency). Section 2. Dividends. (a) Right to Dividends. Dividends on each share of Series CPreferred Stock shall accumulate and accrue from the Issue Date and shall accruefrom day to day thereafter, compounding quarterly (to the extent unpaid),whether or not earned or declared, at a rate of 6.0% per annum on the statedamount of $1,000 per share until paid, subject to Section 4(i) hereof. Subjectto the prior preferences and other rights of any Senior Securities, Dividendsaccruing pursuant to this Section 2(a) shall be payable quarterly in arrearsupon declaration by the Board in cash, on the last day of each of March, June,September and December. Dividends shall be cumulative so that, if all accrueddividends shall not have been paid, such accrued and unpaid dividends shallfirst be fully paid before any dividend or other distribution shall be paid ordeclared and set apart for any Junior Securities. 5 (b) Priority. Until such time as all current and accrueddividends on the Series C Preferred Stock and any Parity Securities for allperiods from and after the Issue Date shall have been paid (i) no dividendwhatsoever (other than a dividend payable solely in Common Stock) shall be paidor declared, and no Distribution shall be made, on any Junior Securities, and(ii) no shares of Junior Securities shall be purchased, redeemed or acquired bythe Company, and no monies shall be paid into or set aside or made available fora sinking fund for the purchase, redemption or acquisition thereof other thanshares of Junior Securities purchased, redeemed or acquired by the Company tofund the Company's deferred compensation arrangements. Section 3. Liquidation Rights of Series C Preferred Stock. (a) Preference. In the event of any liquidation, dissolutionor winding up of the Company, whether voluntary or involuntary, the holders ofthe then-outstanding shares of Series C Preferred Stock shall be entitled to bepaid out of the assets of the Company available for distribution to itsshareholders, whether such assets are capital, surplus or earnings, in an amount(the "Liquidation Preference") equal to $1,000 per share plus an amount equal toall accrued and unpaid dividends thereon, whether or not earned or declared, toand including the date full payment shall be tendered to the holders of thethen-outstanding shares of Series C Preferred Stock with respect to suchliquidation, dissolution or winding up, and no more. The Liquidation Preferenceat the date of payment of all shares of Series C Preferred Stock outstandingshall be paid (i) before any distribution or payment upon any such liquidation,dissolution or winding up of this Company is made upon any Junior Securities,(ii) on a pari passu basis with any such payment made to the holders of anyParity Securities, and (iii) after any such payment is made upon any SeniorSecurities. The holders of Series C Preferred Stock shall be entitled to noother or further distribution of or participation in any remaining assets ofthis Company after receiving the full preferential amounts provided for in thepreceding sentence. If upon any liquidation, dissolution, or winding up of theCompany, whether voluntary or involuntary, the assets to be distributed to theholders of the then-outstanding shares of Series C Preferred Stock and anyParity Securities shall be insufficient to permit the payment to suchshareholders of the full preferential amounts to which they are entitled, then,after payment to holders of Senior Securities, all of the remaining assets ofthe Company shall be distributed ratably to the holders of the then-outstandingshares of Series C Preferred Stock and any Parity Securities on the basis of thefull preferential amounts to which the shares of Series C Preferred Stock andsuch Parity Securities would otherwise respectively be entitled. The (i) mergeror consolidation of the Company with or into any other entity or entities wherethe Company is not the surviving entity (other than a merger solely for thepurpose of changing the Company's state of incorporation) or in which in excessof 50% of the Company's voting power is transferred, or (ii) the sale ortransfer by the Company of all or substantially all of its assets, shall bedeemed to be a liquidation, dissolution and winding up of the Company within themeaning of this Section 3. (b) Remaining Assets. After the payment or distribution to theholders of the then-outstanding shares of Series C Preferred Stock and anyParity Securities of the full preferential amounts to which they are entitled,the holders of the then-outstanding shares of Junior Securities shall beentitled to receive ratably all remaining assets of the Company. 6 Section 4. Redemption. (a) Optional Redemption. At any time after the Issue Date, theCompany may, at its option, upon provision of written notice at least sixty (60)days prior to the date set for redemption, redeem the Series C Preferred Stock,in whole but not in part, at the Redemption Price hereinafter specified. (b) Mandatory Redemption. The Company shall redeem all outstanding shares of Series C Preferred Stock at the Redemption Pricehereinafter specified (i) at any time after the fourth anniversary of the IssueDate, at the option of holders of 80% of the outstanding shares of the Series CPreferred Stock, exercised by giving written notice to the Company or (ii) uponthe occurrence of a Triggering Event (the date of receipt of written notice, orthe date of a Triggering Event being the, "Mandatory Redemption Date"). (c) Optional Redemption Notice. The Company shall, not lessthan sixty (60) days prior to the Payment Date for an optional redemptionpursuant to Section 4(a), give written notice to each holder of record of sharesof Series C Preferred Stock that the Company has determined to exercise itsoptional redemption rights hereunder. This notice shall state the number ofthen-outstanding shares of Series C Preferred Stock to be redeemed, theRedemption Price, including the amount of dividends included in such price andthe calculation thereof, the Payment Date and the time, place and manner inwhich the holder is to surrender to the Company the certificate or certificatesrepresenting the shares of Series C Preferred Stock to be redeemed. "PaymentDate," for purposes of this Section 4(c), shall mean the date set by the Companywith respect to an optional redemption designated by the Company for payment ofthe Redemption Price. (d) Mandatory Redemption Notice. The Company shall provideprompt, but in no event later than two (2) Business Days after the MandatoryRedemption Date, notice to the holders of the Series C Preferred Stock of theMandatory Redemption Date. Such notice shall state the Redemption Price,including the amount of dividends included in such price and the calculationthereof, and the Payment Date, place and manner in which the holders are tosurrender to the Company the certificates representing shares of Series CPreferred Stock to be redeemed. "Payment Date," for purposes of this Section4(d), shall mean the date no later than the tenth (10th) Business Day after theMandatory Redemption Date designated by the Company for payment of theRedemption Price. (e) Redemption Price. In all events, the Redemption Price ofthe Series C Preferred Stock (the "Redemption Price") shall be an amount pershare equal to $1,000 plus the amount of all accrued and unpaid dividendsthereon, whether or not earned or declared, to and including the Payment Date. (f) Payment of Redemption Price and Surrender of Stock. On thePayment Date, the Redemption Price of the Series C Preferred Stock shall be paidto the holders of the Series C Preferred Stock. On or before the Payment Date,each holder of shares of Series C Preferred Stock to be redeemed shall surrenderthe certificate or certificates representing such 7shares to the Company, duly endorsed, together with such other instruments asthe Company may reasonably require to insure that such shares of Series CPreferred Stock are duly and validly transferred to the Company, free of allLiens, and on the Payment Date the Redemption Price for such shares shall bepayable to the order of the person whose name appears on such certificate orcertificates as the owner thereof, and each surrendered certificate shall becanceled and retired. (g) Insufficient Funds. If the funds of the Company legallyavailable for redemption of Series C Preferred Stock on the Payment Date withrespect to a Mandatory Redemption Date are insufficient to redeem all of theSeries C Preferred Stock that are subject to redemption pursuant to Section 4(b)and any Parity Securities being redeemed on such date, those funds that are soavailable will be used to redeem the maximum possible number of such shares ofthe Series C Preferred Stock and any Parity Securities ratably among the holdersthereof on the basis of the liquidation preference of such securities. At theearliest time thereafter as additional funds of the Company are legallyavailable for redemption of Series C Preferred Stock in the manner providedabove, such funds will be immediately used to redeem the balance of such SeriesC Preferred Stock and any Parity Securities subject to redemption. (h) Deposit of Funds. At least three (3) Business Days priorto a Payment Date, the Company shall deposit with any bank or trust company inthe United States, having a capital and surplus of at least $700,000,000 as atrust fund, a sum equal to the aggregate Redemption Price, with irrevocableinstructions and authority to the bank or trust company to pay, on or after thePayment Date, the Redemption Price to the respective holders of then-outstandingshares of Series C Preferred Stock upon the surrender of their sharecertificates. The deposit shall constitute full payment of the shares to theirholders; provided, that, until all shares of Series C Preferred Stock areredeemed and full payment made therefor, the holders thereof shall continue tobe considered shareholders with respect to such shares and shall have all rightswith respect thereto, including the right to receive from the bank or trustcompany payment of the Redemption Price of the shares, without interest, uponsurrender of their certificates therefor. Any monies so deposited and unclaimedat the end of one year from the Payment Date shall be released or repaid to theCompany, after which the holders of shares of Series C Preferred Stock calledfor redemption shall be entitled to receive payment of the Redemption Price onlyfrom the Company. (i) Accrual of Dividends. Unless the Company defaults inmaking the payment of the Redemption Price in accordance with Section 4(h)hereof, dividends on Series C Preferred Stock subject to redemption will ceaseto accrue on and after the Payment Date. (j) Waiver. At any time after receiving notice of MandatoryRedemption and prior to two Business Days before the Payment Date, the holdersof Series C Preferred Stock may, by written consent of holders of at least 80%of the then outstanding Series C Preferred Stock, waive the redemption of theSeries C Preferred Stock as to such mandatory redemption event in which case theCompany shall not be obligated to redeem the shares of Series C Preferred Stockas to such redemption event. Upon receipt of any such waiver, the Company shallpromptly provide written notice to all holders of Series C Preferred Stock. 8 Section 5. Voting Rights. The holders of shares of Series C Preferred Stock shall nothave any voting rights. Section 6. Restrictions and Limitations. So long as any shares of Series C Preferred Stock remainoutstanding, the Company shall not, directly or indirectly, without the writtenconsent of the holders of 80% of the then-outstanding shares of Series CPreferred Stock: (a) Purchase, redeem or otherwise acquire for value (or payinto or set aside as a sinking fund for such purpose) any Junior Securities orany warrant, option or right to purchase any Junior Securities, other thanpurchases of shares of Junior Securities for the purpose of funding deferredcompensation arrangements; (b) Declare or pay any dividends on or declare or make anyother Distribution, direct or indirect (other than a dividend payable solely inshares of Class A Common Stock), on account of Junior Securities or set apartany sum for any such purpose; (c) Amend its Articles of Incorporation in any manner thatwould significantly and adversely affect the rights or preferences of the SeriesC Preferred Stock, provided, however, the foregoing shall not restrict thecompany from issuing additional series of preferred stock, senior to the SeriesC Preferred Stock, without the consent of holders of the Series C PreferredStock; or (d) Issue any additional shares of Series C Preferred Stock after the Issue Date. Section 7. Conversion. The holders of Series C Preferred Stock shall have thefollowing conversion rights: (a) Right to Convert. Each share of Series C Preferred Stockshall be convertible, at any time at the option of the holder thereof, intofully paid and nonassessable shares of Class A Common Stock. Such conversionright shall continue to apply to any share of Series C Preferred Stock calledfor redemption pursuant to Section 4 hereof until the close of business on theBusiness Day immediately preceding the applicable Payment Date. (b) Conversion Price. Each share of Series C Preferred Stockshall initially be convertible into that number of shares of Class A CommonStock determined by dividing the then Liquidation Preference of such share ofSeries C Preferred Stock by the then conversion price, as adjusted pursuant tothis Section 7, which conversion price shall initially be equal to $12.00 pershare (the "Conversion Price"). 9 (c) Mechanics of Conversion. Each holder of Series C PreferredStock who desires to convert the same into shares of Class A Common Stock shallsurrender the certificate or certificates therefor, duly endorsed, at the officeof the Company or of any transfer agent for the Series C Preferred Stock orClass A Common Stock, and shall give written notice to the Company at suchoffice that such holder elects to convert the same and shall state therein thenumber of shares of Series C Preferred Stock being converted. Thereupon theCompany shall promptly issue and deliver to such holder a certificate orcertificates for the number of shares of Class A Common Stock to which suchholder is entitled. Such conversion shall be deemed to have been madeimmediately prior to the close of business on the date of such surrender of thecertificate representing the shares of Series C Preferred Stock to be converted,and the person entitled to receive the shares of Class A Common Stock issuableupon such conversion shall be treated for all purposes as the record holder ofsuch shares of Class A Common Stock on such date. (d) Adjustment for Stock Splits and Combinations. If theCompany at any time or from time to time after the Issue Date effects asubdivision of the outstanding Class A Common Stock, the Conversion Price thenin effect immediately before that subdivision shall be proportionatelydecreased, and, conversely, if the Company at any time or from time to timeafter the Issue Date combines the outstanding shares of Class A Common Stockinto a smaller number of shares, the Conversion Price then in effect immediatelybefore that combination shall be proportionately increased. Any adjustment underthis subsection (d) shall become effective at the open of business on the datethe subdivision or combination becomes effective. (e) Adjustment for Certain Dividends and Distributions. If theCompany at any time or from time to time after the Issue Date makes, or fixes arecord date for the determination of holders of Class A Common Stock entitled toreceive, a dividend or other Distribution payable in additional shares of ClassA Common Stock, then and in each such event the Conversion Price then in effectshall be reset as of the time of such issuance or, in the event such record dateis fixed, as of the open of business on such record date, by multiplying theConversion Price then in effect by a fraction (1) the numerator of which is thetotal number of shares of Class A Common Stock issued and outstandingimmediately prior to the time of such issuance or the close of business on suchrecord date, and (2) the denominator of which shall be the total number ofshares of Class A Common Stock issued and outstanding immediately prior to thetime of such issuance or the close of business on such record date plus thenumber of shares of Class A Common Stock issuable in payment of such dividend orDistribution; provided, however, that if such record date is fixed and suchdividend is not fully paid or if such Distribution is not fully made on the datefixed therefor, the Conversion Price shall be recomputed accordingly as of the close of business on such record date and thereafter the Conversion Price shallbe adjusted pursuant to this subsection (e) as of the time of actual payment ofsuch dividends or Distributions. (f) Adjustments for Other Dividends and Distributions. In theevent the Company at any time or from time to time after the Issue Date makes,or fixes, a record date for the determination of holders of Class A Common Stockentitled to receive, a dividend or other Distribution payable in securities ofthe Company other than shares of Common Stock, then and in each such eventprovision shall be made so that the holders of Series C Preferred Stock shall 10receive upon conversion thereof, in addition to the number of shares of CommonStock receivable thereupon, the amount of securities of the Company which theywould have received had their Series C Preferred Stock been converted into ClassA Common Stock on the date of such event and had they thereafter, during theperiod from the date of such event to and including the conversion date,retained such securities receivable by them as aforesaid during such period,subject to all other adjustments called for during such period under thisSection 7 with respect to the rights of the holders of the Series C PreferredStock. (g) Adjustment for Reclassification, Exchange andSubstitution. In the event that at any time or from time to time after the IssueDate, the Class A Common Stock issuable upon the conversion of the Series CPreferred Stock is changed into the same or a different number of shares of anyclass or classes of stock, whether by recapitalization, reclassification orotherwise (other than a subdivision or combination of shares or stock dividendor a reorganization, merger, consolidation or sale of assets, provided forelsewhere in this Section 7), then and in any such event each holder of Series CPreferred Stock shall have the right thereafter to convert such stock into thekind and amount of stock and other securities and property receivable upon suchrecapitalization, reclassification or other change, by holders of the maximumnumber of shares of Class A Common Stock into which such shares of Series CPreferred Stock could have been converted immediately prior to suchrecapitalization, reclassification or change, all subject to further adjustmentas provided herein. (h) Reorganizations, Mergers, Consolidations or Sales ofAssets. If at any time or from time to time after the Issue Date there is acapital reorganization of the Class A Common Stock (other than arecapitalization, subdivision, combination, reclassification or exchange ofshares provided for elsewhere in this Section 7) or a merger or consolidation ofthe Company with or into another corporation, or the sale of all orsubstantially all of the Company's properties and assets to any other person,then, as a part of such reorganization, merger, consolidation or sale, provisionshall be made so that the holders of the Series C Preferred Stock shallthereafter be entitled to receive upon conversion of the Series C PreferredStock the number of shares of stock or other securities or property to which aholder of the number of shares of Class A Common Stock deliverable uponconversion would have been entitled on such capital reorganization, merger,consolidation, or sale. In any such case, appropriate adjustment shall be madein the application of the provisions of this Section 7 with respect to therights of the holders of the Series C Preferred Stock after the reorganization,merger, consolidation or sale to the end that the provisions of this Section 7(including adjustment of the Conversion Price then in effect and the number ofshares purchasable upon conversion of the Series C Preferred Stock) shall beapplicable after that event and be as nearly equivalent as may be practicable. (i) Accountants' Certificate of Adjustment. In each case of anadjustment or readjustment of the Conversion Price, the Company, at its expense,shall cause independent public accountants of recognized standing selected bythe Company (who may be the independent public accountants then auditing thebooks of the Company) to compute such adjustment or readjustment in accordancewith the provisions hereof and prepare a certificate showing such adjustment or readjustment, and shall mail such certificate, by first class mail, postageprepaid, to each registered holder of the Series C Preferred Stock at theholder's address 11as shown in the Company's books. The certificate shall setforth such adjustment or readjustment, showing in detail the facts upon whichsuch adjustment or readjustment is based, including a statement of (1) theConversion Price at the time in effect, and (2) the type and amount, if any, ofother property which at the time would be received upon conversion of the SeriesC Preferred Stock. (j) Notices of Record Date. In the event of (i) any taking bythe Company of a record of the holders of any class of securities for thepurpose of determining the holders thereof who are entitled to receive anydividend or other Distribution, or (ii) any capital reorganization of theCompany, any reclassification or recapitalization of the capital stock of theCompany, any merger or consolidation of the Company with or into any othercorporation, or any transfer of all or substantially all of the assets of theCompany to any other person or any voluntary or involuntary dissolution,liquidation or winding up of the Company, the Company shall mail to each holderof Series C Preferred Stock at least ten (10) days prior to the record datespecified therein, a notice specifying (1) the date on which any such record isto be taken for the purpose of such dividend or Distribution and a descriptionof such dividend or Distribution, (2) the date on which any such reorganization,reclassification, transfer, consolidation, merger, dissolution, liquidation orwinding up is expected to become effective, and (3) the date, if any, that is tobe fixed, as to when the holders of record of Class A Common Stock (or othersecurities) shall be entitled to exchange their shares of Class A Common Stock(or other securities) for securities or other property deliverable upon suchreorganization, reclassification, transfer, consolidation, merger, dissolution,liquidation or winding up. Section 8. No Reissuance of Series C Preferred Stock. No share of Series C Preferred Stock acquired by the Companyupon conversion, by reason of redemption, purchase, or otherwise shall bereissued, and all such shares shall be canceled, retired and eliminated from theshares which the Company shall be authorized to issue. RESOLVED FURTHER, that the president of the Company or any vicepresident designated by him and the secretary of the Company or any assistantsecretary of the Company are hereby authorized and directed to take those stepsnecessary to cause the issuance and sale of the Series C Preferred Stockincluding to execute a statement to be filed in accordance with the requirementsof AS 10.06.320 of the Alaska Statutes." 12 IN WITNESS WHEREOF, the Company has caused this Statement of StockDesignation to be duly executed on its behalf at Anchorage, Alaska as of this9th day of April, 2001. GENERAL COMMUNICATION, INC. By: /s/ Ronald A. Duncan Its: President By: /s/ John M. Lowber Its: Secretary Exhibit 21.1 SUBSIDIARIES OF THE REGISTRANT Jurisdiction of Entity Organization Name Under Which Subsidiary Does Business------------------------------------------------ ------------------- ------------------------------------------------------- Alaska United Fiber System Partnership Alaska Alaska United Fiber System Partnership, Alaska United Fiber System, Alaska UnitedFiber 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 CompanyPotter View Development Co., Inc. Alaska Potter View Development Co., Inc.GCI Cablesystems of Alaska, Inc. Alaska GCI Cablesystems of Alaska, Inc., Rogers CableGCI American Cablesystems, Inc. Delaware GCI American Cablesystems, Inc.GCI Fiber Communication, Co., Inc. Alaska GCI Fiber Communication, Co., Inc., GFCC, Kanas (85% ownership) Exhibit 23.1 INDEPENDENT AUDITORS' CONSENTThe 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 and (No. 333-82712) on Form S-3 ofGeneral Communication, Inc. of our report dated March 8, 2002, with respect tothe consolidated balance sheets of General Communication, Inc. and Subsidiariesas of December 31, 2001 and 2000, and the related consolidated statements ofoperations, stockholders' equity and cash flows for each of the years in thethree-year period ended December 31, 2001, and the related schedule, whichreport appears in the December 31, 2001, annual report on Form 10-K of GeneralCommunication, Inc. /s/ KPMG LLPAnchorage, AlaskaMarch 29, 2002 ROGERS AMERICAN CABLESYSTEMS, INC. BY-LAWS ARTICLE I - STOCKHOLDERS Section 1. Annual Meeting. An annual meeting of the stockholders, for the election ofdirectors to succeed those whose terms expire and for the transaction of suchother business as may properly come before the meeting, shall be held at suchplace, on such date, and at such time as the Board of Directors shall each yearfix, which date shall be within thirteen (13) months subsequent to the later ofthe date of incorporation or the last annual meeting of stockholders. Section 2. Special Meetings. Special meetings of the stockholders, for any purpose orpurposes prescribed in the notice of the meeting, may be called by the Board ofDirectors or the chief executive officer and shall be held at such place, onsuch date, and at such time as they or he or she shall fix. Section 3. Notice of Meetings. Written notice of the place, date, and time of all meetings ofthe stockholders shall be given, not less than ten (10) nor more than sixty (60)days before the date on which the meeting is to be held, to each stockholderentitled to vote at such meeting, except as otherwise provided herein orrequired by law (meaning, here and hereinafter, as required -1-from time to time by the Delaware General Corporation Law or the Certificate ofIncorporation of the Corporation). When a meeting is adjourned to another place, date or time,written notice need not be given of the adjourned meeting if the place, date andtime thereof are announced at the meeting at which the adjournment is taken;provided, however, that if the date of any adjourned meeting is more than thirty(30) days after the date for which the meeting was originally noticed, or if anew record date is fixed for the adjourned meeting, written notice of the place,date, and time of the adjourned meeting shall be given in conformity herewith.At any adjourned meeting, any business may be transacted which might have beentransacted at the original meeting. Section 4. Quorum. At any meeting of the stockholders, the holders of a majorityof all of the shares of the stock entitled to vote at the meeting, present inperson or by proxy, shall constitute a quorum for all purposes, unless or exceptto the extent that the presence of a larger number may be required by law. Wherea separate vote by a class or classes is required, a majority of the shares ofsuch class or classes present in person or represented by proxy shall constitutea quorum entitled to take action with respect to that vote on that matter. If a quorum shall fail to attend any meeting, the chairman ofthe meeting or the holders of a majority of the shares of stock entitled to votewho are present, in person or -2-by proxy, may adjourn the meeting to another place, date, or time. If a notice of any adjourned special meeting of stockholdersis sent to all stockholders entitled to vote thereat, stating that it will beheld with those present constituting a quorum, then except as otherwise requiredby law, those present at such adjourned meeting shall constitute a quorum, andall matters shall be determined by a majority of the votes cast at such meeting. Section 5. Organization. The Chairman of the Board of Directors or, in the absence ofthe Chairman, the chief executive officer of the Corporation or, in his or her absence, such person as may be chosen by the holders of a majority of the sharesentitled to vote who are present, in person or by proxy, shall call to order anymeeting of the stockholders and act as chairman of the meeting. In the absenceof the Secretary of the Corporation, the secretary of the meeting shall be suchperson as the chairman appoints. Section 6. Conduct of Business. The chairman of any meeting of stockholders shall determinethe order of business and the procedure at the meeting, including suchregulation of the manner of voting and the conduct of discussion as seem to himor her in order. -3- Section 7. Proxies and Voting. At any meeting of the stockholders, every stockholder entitledto vote may vote in person or by proxy authorized by an instrument in writingfiled in accordance with the procedure established for the meeting. Each stockholder shall have one (1) vote for every share ofstock entitled to vote which is registered in his or her name on the record datefor the meeting, except as otherwise provided herein or required by law. All voting, including on the election of directors butexcepting where otherwise required by law, may be by a voice vote; provided,however, that upon demand therefore by a stockholder entitled to vote or by hisor her proxy, a stock vote shall be taken. Every stock vote shall be taken byballots, each of which shall state the name of the stockholder or proxy votingand such other information as may be required under the procedure establishedfor the meeting. Every vote taken by ballots shall be counted by an inspector orinspectors appointed by the chairman of the meeting. All elections shall be determined by a plurality of the votescast, and except as otherwise required by law, all other matters shall bedetermined by a majority of the votes cast. Section 8. Stock List. A complete list of stockholders entitled to vote at anymeeting of stockholders, arranged in alphabetical order -4-for each class of stock and showing the address of each such stockholder and thenumber of shares registered in his or her name, shall be open to the examinationof any such stockholder, for any purpose germane to the meeting, during ordinarybusiness hours for a period of at least ten (10) days prior to the meeting,either at a place within the city where the meeting is to be held, which placeshall be specified in the notice of the meeting, or if not so specified, at theplace where the meeting is to be held. The stock list shall also be kept at the place of the meetingduring the whole time thereof and shall be open to the examination of any suchstockholder who is present. This list shall presumptively determine the identityof the stockholders entitled to vote at the meeting and the number of sharesheld by each of them. Section 9. Consent of Stockholders in Lieu of Meeting. Any action required to be taken at any annual or specialmeeting of stockholders of the Corporation, or any action which may be taken atany annual or special meeting of the stockholders, may be taken without ameeting, without prior notice and without a vote, if a consent or consents inwriting, setting forth the action so taken, shall be signed by the holders ofoutstanding stock having not less than the minimum number of votes that would benecessary to authorize .or take such action at a meeting at which all sharesentitled to vote thereon were present and voted and shall be delivered -5-to the Corporation by delivery to its registered office in Delaware, its principal place of business, or an officer or agent of the Corporation havingcustody of the book in which proceedings of meetings of stockholders arerecorded. Delivery made to the Corporation's registered office shall be made byhand or by certified or registered mail, return receipt requested. Every written consent shall bear the date of signature of eachstockholder who signs the consent and no written consent shall be effective totake the corporate action referred to therein unless, within sixty (60) days ofthe date the earliest dated consent is delivered to the Corporation, a writtenconsent or consents signed by a sufficient number of holders to take action aredelivered to the Corporation in the manner prescribed in the first paragraph ofthis Section. ARTICLE II - BOARD OF DIRECTORS Section 1. Number and Term of Office. The number of directors who shall constitute the whole Boardshall be such number as the Board of Directors shall from time to time havedesignated, except that in the absence of any such designation, such numbershall be nine (9). Each director shall be elected for a term of one year anduntil his or her successor is elected and qualified, except as otherwiseprovided herein or required by law. Whenever the authorized number of directors is increasedbetween annual meetings of the stockholders, a -6-majority of the directors then in office shall have the power to elect such newdirectors for the balance of a term and until their successors are elected andqualified. Any decrease in the authorized number of directors shall not becomeeffective until the expiration of the term of the directors then in officeunless, at the time of such decrease, there shall be vacancies on the boardwhich are being eliminated by the decrease. Section 2. Vacancies. If the office of any director becomes vacant by reason ofdeath, resignation, disqualification, removal or other cause, a majority of thedirectors remaining in office, although less than a quorum, may elect asuccessor for the unexpired term and until his or her successor is elected andqualified. Section 3. Regular Meetings. Regular meetings of the Board of Directors shall be held atsuch place or places, on such date or dates, and at such time or times as shallhave been established by the Board of Directors and publicized among alldirectors. A notice of each regular meeting shall not be required. Section 4. Special Meetings. Special meetings of the Board of Directors may be called byone--third (1/3) of the directors then in office (rounded up to the nearestwhole number) or by the chief executive officer and shall be held at such place,on such -7-date, and at such time as they or he or she shall fix. Notice of the place,date, and time of each such special meeting shall be given each director by whomit is not waived by mailing written notice not less than five (5) days beforethe meeting or by telegraphing or telexing or by facsimile transmission of thesame not less than twenty-four (24) hours before the meeting. Unless otherwiseindicated in the notice thereof, any and all business may be transacted at aspecial meeting. Section 5. Quorum. At any meeting of the Board of Directors, a majority of thetotal number of the whole Board shall constitute a quorum for all purposes. If a quorum shall fail to attend any meeting, a majority of those present may adjournthe meeting to another place, date, or time, without further notice or waiverthereof. Section 6. Participation in Meetings By Conference Telephone. Members of the Board of Directors, or tee thereof, mayparticipate in a meeting of committee by means of conference telephone orsimilar communications equipment by means of which all persons in the meetingcan hear each other and such shall constitute presence in person at suchmeeting. Section 7. Conduct of Business. At any meeting of the Board of Directors, business shall betransacted in such order and manner as the Board may -8-from time to time determine, and all matters shall be determined by the vote ofa majority of the directors present, except as otherwise provided herein orrequired by law. Action may be taken by the Board of Directors without a meetingif all members thereof consent thereto in writing, and the writing or writingsare filed with the minutes of proceedings of the Board of Directors. Section 8. Powers. The Board of Directors may, except as otherwise required bylaw, exercise all such powers and do all such acts and things as may beexercised or done by the Corporation, including, without limiting the generalityof the foregoing, the unqualified power: (1) To declare dividends from time to time in accordance with law; (2) To purchase or otherwise acquire any property, rights or privileges on such terms as it shall determine; (3) To authorize the creation, making and issuance, in such form as it may determine, of written obligations of every kind, negotiable or non-negotiable, secured or unsecured, and to do all things necessary in connection therewith; (4) To remove any officer of the Corporation with or without cause, and from time to time to devolve the powers and duties of any officer upon any other person for the time being; -9- (5) To confer upon any officer of the Corporation the power to appoint, remove and suspend subordinate officers, employees and agents; (6) To adopt from time to time such stock, option, stock purchase, bonus or other compensation plans for directors, officers, employees and agents of the Corporation and its subsidiaries as it may determine; (7) To adopt from time to time such insurance, retirement, and other benefit plans for directors, officers, employees and agents of the Corporation and its subsidiaries as it may determine; and, (8) To adopt from time to time regulations, not inconsistent with these By-laws, for the management of the Corporation's business and affairs. Section 9. Compensation of Directors. Directors, as such, may receive, pursuant to resolution of theBoard of Directors, fixed fees and other compensation for their services asdirectors, including, without limitation, their services as members ofcommittees of the Board of Directors. ARTICLE III - COMMITTEES Section 1. Committees of the Board of Directors. The Board of Directors, by a vote of a majority of the wholeBoard, may from time to time designate committees of the Board, with suchlawfully delegable powers and duties as -10-it thereby confers, to serve at the pleasure of the Board and shall, for thosecommittees and any others provided for herein, elect a director or directors toserve as the member or members, designating, if it desires, other directors asalternate members who may replace any absent or disqualified member at anymeeting of the committee. Any committee so designated may exercise the power andauthority of the Board of Directors to declare a dividend, to authorize theissuance of stock or to adopt a certificate of ownership and merger pursuant toSection 253 of the Delaware General Corporation Law if the resolution whichdesignates the committee or a supplemental resolution of the Board of Directorsshall so provide. In the absence or disqualification of any member of anycommittee and any alternate member in his or her place, the member or members ofthe committee present at the meeting and not disqualified from voting, whetheror not he or she or they constitute a quorum, may by unanimous vote appointanother member of the Board of Directors to act at the meeting in the place ofthe absent or disqualified member. Section 2. Conduct of Business.Each committee may determine the procedural rules for meeting and conducting itsbusiness and shall act in accordance therewith, except as otherwise providedherein or required by law. Adequate provision shall be made for notice tomembers of all meetings; one-third (1/3) of the members shall constitute aquorum unless the committee shall consist -11-of one (1) or two (2) members, in which event one (1) member shall constitute aquorum; and all matters shall be determined by a majority vote of the memberspresent. Action may be taken by any committee without a meeting if all membersthereof consent thereto in writing, and the writing or writings are filed withthe minutes of the proceedings of such committee. ARTICLE IV -- OFFICERS Section 1. Generally. The officers of the Corporation shall consist of a Chairman ofthe Board, a President, one or more Vice Presidents, a Secretary, a Treasurerand such other officers as may from time to time be appointed by the Board ofDirectors. Officers shall be elected by the Board of Directors, which shallconsider that subject at its first meeting after every annual meeting ofstockholders. Each officer shall hold office until his or her successor iselected and qualified or until his or her earlier resignation or removal. Anynumber of offices may be held by the same person. Section 2. Chairman of the Board. The Chairman of the Board of Directors of the Corporationshall act in a general executive capacity and, subject to the direction of theBoard of Directors, shall have general responsibility for the supervision of thepolicies and affairs of the Corporation and the effective administration of theCorporation's business. The Board of Directors also may appoint a Vice Chairmanof the Board who shall have and may -12-exercise the powers of the Chairman of the Board in the absence or disability ofthe Chairman. Section 3. President. The President shall be the chief executive officer of theCorporation. Subject to the provisions of these By--laws and to the direction ofthe Board of Directors, he or she shall have the responsibility for the generalmanagement and control of the business and affairs of the Corporation and shallperform all duties and have all powers which are commonly incident to the officeof chief executive or which are delegated to him or her by the Board ofDirectors. He or she shall have power to sign all stock certificates, contractsand other instruments of the Corporation which are authorized and shall havegeneral supervision and direction of all of the other officers, employees andagents of the Corporation. Section 4. Vice President. Each Vice President shall have such powers and duties as maybe delegated to him or her by the Board of Directors. One (1) Vice Presidentshall be designated by the Board to perform the duties and exercise the powersof the President in the event of the President's absence or disability. Section 5. Treasurer. The Treasurer shall have the responsibility for maintainingthe financial records of the Corporation. He or she shall make suchdisbursements of the funds of the Corporation as are authorized and shall renderfrom time to time an -13-account of all such transactions and of the financial condition of theCorporation. The Treasurer shall also perform such other duties as the Board ofDirectors may from time to time prescribe. Section 6. Secretary. The Secretary shall issue all authorized notices for, andshall keep minutes of, all meetings of the stockholders and the Board ofDirectors. He or she shall have charge of the corporate books and shall performsuch other duties as the Board of Directors may from time to time prescribe. Section 7. Delegation of Authority. The Board of Directors may from time to time delegate thepowers or duties of any officer to any other officers or agents, notwithstandingany provision hereof. Section 8. Removal. Any officer of the Corporation may be removed at any time,with or without cause, by the Board of Directors. Section 9. Action with Respect to Securities of Other Corporations. Unless otherwise directed by the Board of Directors, thePresident or any officer of the Corporation authorized by the President shallhave power to vote and otherwise act on behalf of the Corporation, in person orby proxy, at any meeting of stockholders of or with respect to any action ofstockholders of any other corporation in which this Corporation may holdsecurities and otherwise to exercise any and all rights and powers which thisCorporation may possess by reason of its ownership of securities in such othercorporation. -14- ARTICLE V - STOCK Section 1. Certificates of Stock. Each stockholder shall be entitled to a certificate signed by,or in the name of the Corporation by, the Chairman of the Board or any ViceChairman of the Board, or by the President or a Vice President, and by theSecretary or an Assistant Secretary, or the Treasurer or an Assistant Treasurer,certifying the number of shares owned by him or her. Any or all of thesignatures on the certificate may be by facsimile. Section 2. Transfers of Stock. Transfers of stock shall be made only upon the transfer booksof the Corporation kept at an office of the Corporation or by transfer agentsdesignated to transfer shares of the stock of the Corporation. Except where acertificate is issued in accordance with Section 4 of Article V of these Bylaws,an outstanding certificate for the number of shares involved shall besurrendered for cancellation before a new certificate is issued therefor. Section 3. Record Date. In order that the Corporation may determine the stockholdersentitled to notice of or to vote at any meeting of stockholders, or to receivepayment of any dividend or other distribution or allotment of any rights or toexercise any rights in respect of any change, conversion or exchange of stock orfor the purpose of any other lawful action, the Board -15-of Directors may fix a record date, which record date shall not precede the dateon which the resolution fixing the record date is adopted and which record dateshall not be more than sixty (60) nor less than ten (10) days before the date ofany meeting of stockholders, nor more than sixty (60) days prior to the time forsuch other action as hereinbefore described; provided, however, that if norecord date is fixed by the Board of Directors, the record date for determiningstockholders entitled to notice of or to vote at a meeting of stockholders shallbe at the close of business on the day next preceding the day on which notice isgiven or, if notice is waived, at the close of business on the day nextpreceding the day on which the meeting is held, and, for determiningstockholders entitled to receive payment of any dividend or other distributionor allotment of rights or to exercise any rights of change, conversion orexchange of stock or for any other purpose, the record date shall be at theclose of business on the day on which the Board of Directors adopts a resolutionrelating thereto. A determination of stockholders of record entitled to noticeof or to vote at a meeting of stockholders shall apply to any adjournment of themeeting; provided~ however, that the Board of Directors may fix a new recorddate for the adjourned meeting. In order that the Corporation may determine the stockholdersentitled to consent to corporate action in writ- -16-ing without a meeting, the Board of Directors may fix a record date, which shallnot precede the date upon which the resolution fixing the record date is adoptedby the Board of Directors, and which record date shall be not more than ten (10)days after the date upon which the resolution fixing the record date is adopted.If no record date has been fixed by the Board of Directors and no prior actionby the Board of Directors is required by the Delaware General Corporation Law,the record date shall be the first date on which a signed written consentsetting forth the action taken or proposed to be taken is delivered to theCorporation in the manner prescribed by Article I, Section 9 hereof. If norecord date has been fixed by the Board of Directors and prior action by theBoard of Directors is required by the Delaware General Corporation Law withrespect to the proposed action by written consent of the stockholders, therecord date for determining stockholders entitled to consent to corporate actionin writing shall be at the close of business on the day on which the Board ofDirectors adopts the resolution taking such prior action. Section 4. Lost, Stolen or Destroyed Certificates. In the event of the loss, theft or destruction of anycertificate of stock, another may be issued in its place pursuant to suchregulations as the Board of Directors may establish concerning proof of suchloss, theft or destruction and concerning the giving of a satisfactory bond orbonds of indemnity. -17- Section 5. Regulations. The issue, transfer, conversion and registration ofcertificates of stock shall be governed by such other regulations as the Boardof Directors may establish. ARTICLE VI - NOTICES Section 1. Notices. Except as otherwise specifically provided herein or requiredby law, all notices required to be given to any stockholder, director, officer,employee or agent shall be in writing and may in every instance be effectivelygiven by hand delivery to the recipient thereof, by depositing such notice inthe mails, postage paid, or by sending such notice by prepaid telegram ormailgram. Any such notice shall be addressed to such stockholder, director,officer, employee or agent at his or her last known address as the same appearson the books of the Corporation. The time when such notice is received, if handdelivered, or dispatched, if delivered through the mails or by telegram ormailgram, shall be the time of the giving of the notice. Section 2. Waivers. A written waiver of any notice, signed by a stockholder,director, officer, employee or agent, whether before or after the time of theevent for which notice is to be given, shall be deemed equivalent to the noticerequired to be given to such stockholder, director, officer, employee or agent.Neither the business nor the purpose of any meeting need be specified in such awaiver. -18- ARTICLE VII - MISCELLANEOUS Section 1. Facsimile Signatures. In addition to the provisions for use of facsimile signatureselsewhere specifically authorized in these By-laws, facsimile signatures of anyofficer or officers of the Corporation may be used whenever and as authorized bythe Board of Directors or a committee thereof. Section 2. Corporate Seal. The Board of Directors may provide a suitable seal, containingthe name of the Corporation, which seal shall be in the charge of the Secretary.If and when so directed by the Board of Directors or a committee thereof,duplicates of the seal may be kept and used by the Treasurer or by an AssistantSecretary or Assistant Treasurer. Section 3. Reliance upon Books, Reports and Records. Each director, each member of any committee designated by theBoard of Directors, and each officer of the Corporation shall, in theperformance of his or her duties, be fully protected in relying in good faithupon the books of account or other records of the Corporation and upon suchinformation, opinions, reports or statements presented to the Corporation by anyof its officers or employees, or committees of the Board of Directors sodesignated, or by any other person as to matters which such director orcommittee member reasonably believes are within such other person's professionalor expert competence and who has been selected with reasonable care by or onbehalf of the Corporation. -19- Section 4. Fiscal Year. The fiscal year of the Corporation shall be as fixed by theBoard of Directors. Section 5. Time Periods. In applying any provision of these By--laws which requiresthat an act be done or not be done a specified number of days prior to an eventor that an act be done during a period of a specified number of days prior to anevent, calendar days shall be used, the day of the doing of the act shall beexcluded, and the day of the event shall be included. ARTICLE VIII - INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 1. Right to Indemnification. Each person who was or is made a party or is threatened to bemade a party to or is otherwise involved in any action, suit or proceeding,whether civil, criminal, administrative or investigative (hereinafter a"proceeding"), by reason of the fact that he or she is or was a director or anofficer of the Corporation or is or was serving at the request of theCorporation as a director, officer, employee or agent of another corporation orof a partnership, joint venture, trust or other enterprise, including servicewith respect to an employee benefit plan (hereinafter an "indemnitee"), whetherthe basis of such proceeding is alleged action in an official capacity as adirector, officer, employee or agent or in any other capacity while serving as adirector, officer, employee or agent, shall be indemnified and held harmless by -20-the Corporation to the fullest extent authorized by the Delaware GeneralCorporation Law, as the same exists or may hereafter be amended (but, in thecase of any such amendment, only to the extent that such amendment permits theCorporation to provide broader indemnification rights than such law permittedthe Corporation to provide prior to such amendment), against all expense,liability and loss (including attorneys fees, judgments, fines, ERISA excisetaxes or penalties and amounts paid in settlement) reasonably incurred orsuffered by such indemnitee in connection therewith; provided, however, that,except as provided in Section 3 of this ARTICLE VIII with respect to proceedingsto enforce rights to indemnification, the Corporation shall indemnify any suchindemnitee in connection with a proceeding (or part thereof) initiated by suchindemnitee only if such proceeding (or part thereof) was authorized by the Boardof Directors of the Corporation. Section 2. Right to Advancement of Expenses. The right to indemnification conferred in Section 1 of thisARTICLE VIII shall include the right to be paid by the Corporation the expensesincurred in defending any such proceeding in advance of its final disposition(hereinafter an `advancement of expenses"); provided, however, that, if theDelaware General Corporation Law requires, an advancement of expenses incurredby an indemnitee in his or her capacity as a director or officer (and not in anyother capacity in which service was or is rendered by such indemnitee,including, -21-without limitation, service to an employee benefit plan) shall be made only upondelivery to the Corporation of an undertaking (hereinafter an "undertaking"), byor on behalf of such indemnitee, to repay all amounts so advanced if it shallultimately be determined by final judicial decision from which there is nofurther right to appeal (hereinafter a "final adjudication") that suchindemnitee is not entitled to be indemnified for such expenses under thisSection 2 or otherwise. The rights to indemnification and to the advancement ofexpenses conferred in Sections 1 and 2 of this ARTICLE VIII shall be contractrights and such rights shall continue as to an indemnitee who has ceased to be adirector, officer, employee or agent and shall inure to the benefit of theindemnitee's heirs, executors and administrators. Section 3. Right of Indemnitee to Bring Suit. If a claim under Section 1 or 2 of this ARTICLE VIII is not paid in full by theCorporation within sixty (60) days after a written claim has been received bythe Corporation, except in the case of a claim for an advancement of expenses,in which case the applicable period shall be twenty (20) days, the indemniteemay at any time thereafter bring suit against the Corporation to recover theunpaid amount of the claim. If successful in whole or in part in any such suit,or in a suit brought by the Corporation to recover an advancement of expensespursuant to the terms of an undertaking, the indemnitee shall be entitled to bepaid also the expense of prose- -22-cuting or defending such suit. In (i) any suit brought by the indemnitee toenforce a right to indemnification hereunder (but not in a suit brought by theindemnitee to enforce a right to an advancement of expenses) it shall be adefense that, and (ii) in any suit brought by the Corporation to recover anadvancement of expenses pursuant to the terms of an undertaking, the Corporationshall be entitled to recover such expenses upon a final adjudication that, theindemnitee has not met any applicable standard for indemnification set forth inthe Delaware General Corporation Law. Neither the failure of the Corporation(including its Board of Directors, independent legal counsel, or itsstockholders) to have made a determination prior to the commencement of suchsuit that indemnification of the indemnitee is proper in the circumstancesbecause the indemnitee has met the applicable standard of conduct set forth inthe Delaware General Corporation Law, nor an actual determination by theCorporation (including its Board of Directors, independent legal counsel, or itsstockholders) that the indemnitee has not met such applicable standard ofconduct, shall create a presumption that the indemnitee has not met theapplicable standard of conduct or, in the case of such a suit brought by theindemnitee, be a defense to such suit. In any suit brought by the indemnitee toenforce a right to indemnification or to an advancement of expenses hereunder,or brought by the Corporation to recover an advancement of expenses pursuant tothe terms of an under- -23-taking, the burden of proving that the indemnitee is not entitled to beindemnified, or to such advancement of expenses, under this ARTICLE VIII orotherwise shall be on the Corporation. Section 4. Non-Exclusivity of Rights. The rights to indemnification and to the advancement ofexpenses conferred in this ARTICLE VIII shall not be exclusive of any otherright which any person may have or hereafter acquire under any statute, theCorporation's Certificate of Incorporation, By--laws, agreement, vote ofstockholders or disinterested directors or otherwise. Section 5. Insurance. The Corporation may maintain insurance, at its expense, toprotect itself and any director, officer, employee or agent of the Corporationor another corporation, partnership, joint venture, trust or other enterpriseagainst any expense, liability or loss, whether or not the Corporation wouldhave the power to indemnify such person against such expense, liability or lossunder the Delaware General Corporation Law. Section 6. Indemnification of Employees and Agents of the Corporation. The Corporation may, to the extent authorized from time totime by the Board of Directors, grant rights to indemnification and to theadvancement of expenses to any employee or agent of the Corporation to thefullest extent of the provisions of this Article with respect to theindemnification -24- and advancement of expenses of directors and officers of the Corporation. ARTICLE IX - AMENDMENTS These By-laws may be amended or repealed by the Board ofDirectors at any meeting or by the stockholders at any meeting. -25- CERTIFICATE OF INCORPORATION OF ROGERS AMERICAN CABLESYSTEMS, INC. FIRST: The name of the corporation is Rogers AmericanCablesystems, Inc. SECOND: The address of the corporation's registered office inthe State of Delaware is 1201 North Market Street, Post Office Box 1347, in theCity of Wilmington, County of New Castle. The name of the corporation'sregistered agent at such address is Delaware Corporation Organizers, Inc. THIRD: The purpose of the corporation is to engage in any lawfulact or activity for which corporations may be organized under the DelawareGeneral Corporation Law. FOURTH: The total number of shares of stock which thecorporation is authorized to issue is One Thousand (1,000) shares of commonstock, having a par value of one cent ($.0l) per share. FIFTH: The business and affairs of the corporation shall bemanaged by or under the direction of the board of directors, and the directorsneed not be elected by ballot unless required by the bylaws of the corporation. SIXTH: In furtherance and not in limitation of the powersconferred by the laws of the State of Delaware, the board of directors isexpressly authorized to make, amend and repeal the bylaws. -1- SEVENTH: A director of the corporation shall not be personallyliable to the corporation or its stockholders for monetary damages for breach offiduciary duty as a director, except for liability (i) for any breach of thedirector's duty of loyalty to the corporation or its stockholders, (ii) for actsor omissions not in good faith or which involve intentional misconduct or aknowing violation of law, (iii) under Section 174 of the Delaware GeneralCorporation Law, or (iv) for any transaction from which the director derived animproper personal benefit. If the Delaware General Corporation Law is amended toauthorize corporate action further eliminating or limiting the personalliability of directors, then the liability of a director of the corporationshall be eliminated or limited to the fullest extent permitted by the DelawareGeneral Corporation Law, as so amended. Any repeal or modification of thisprovision shall not adversely affect any right or protection of a director ofthe corporation existing at the time of such repeal or modification. EIGHTH: The corporation reserves the right to amend and repealany provision contained in this Certificate of Incorporation in the manner fromtime to time prescribed by the laws of the State of Delaware. All rights hereinconferred are granted subject to this reservation. NINTH: The incorporator is Karin S. Mandel, whose mailingaddress is P.O. Box 1347, Wilmington, Delaware 19899. -2- I, THE UNDERSIGNED, being the incorporator, for the purpose offorming a corporation under the laws of the State of Delaware do make, file andrecord this Certificate of Incorporation, and, accordingly, have hereto set myhand this 18th day of January, 1990. /s/ Karin J. Mandel -3- TABLE OF CONTENTS BYLAWS OF ROGERS CABLESYSTEMS OF ALASKA, INC. Article and Section Page ------------------- ---- I. OFFICES 1II. SEAL 1III. MEETINGS:Section 1 -- Annual Meeting 1Section 2 -- Special Meetings 1Section 3 -- Place of Meeting 2Section 4 -- Notice of Meeting 2Section 5 -- Closing Transfer Books or Fixing Record Date 2Section 6 -- Voting Lists 3Section 7 -- Quorum 3Section 8 -- Proxies 3Section 9 -- Voting of Shares 4Section 10 -- Voting of Shares by Certain Holders 4Section 11 -- Informal Action by Shareholders 5Section 12 -- Cumulative Voting 5Section 13 -- Shareholders' Right to Financial Statements 5Section 14 -- Shareholders' Right to Books and Records 5IV. BOARD OF DIRECTORS:Section 1 -- General Powers 5Section 2 -- Number, Tenure, and Qualifications 5Section 3 -- Regular Meetings 6Section 4 -- Special Meetings 6Section 5 -- Notice 6Section 6 -- Quorum 7Section 7 -- Manner of Acting 7Section 8 -- Action Without a Meeting 7Section 9 -- Vacancies 7Section 10 -- Compensation 8Section 11 -- Board Powers 8Section 12 -- Records 10Section 13 -- Director Reliance 10Section 14 -- Director Right to Inspect 10Section 15 -- Vacancy; Removal of Directors 10Section 16 -- Resignation 10Section 17 -- Director Conflicts of Interest 11Section 18 -- Director Liability 11 Article and Section Page ------------------- ---- V. OFFICERS: 11Section 1 -- Number 11Section 2 -- Election and Term of Office 11Section 3 -- Removal 11Section 4 -- Resignation 11Section 5 -- Chairman; President 11Section 6 -- The Vice Presidents 12Section 7 -- The Secretary 12Section 8 -- The Treasurer 12Section 9 -- Salaries 13Section 10 -- Reimbursement Disallowed Salaries & Payments 13Section 11 -- Reliance 13VI. CERTIFICATES OF STOCK:Section 1 -- Certificates 13Section 2 -- Transfer of Shares 14Section 3 -- Restrictions on Transfer 14Section 4 -- Corporate Option to Purchase 14Section 5 -- Responsibility 15Section 6 -- No Treasury Shares 15VII. FISCAL YEAR 15VIII. INDEMNIFICATION:Section 1 -- Nonderivative Actions 15Section 2 -- Derivative Actions 16Section 3 -- Denial of Right to Indemnification 17Section 4 -- Determination 17Section 5 -- Successful Defense 17Section 6 -- Condition Precedent to Indemnification 18Section 7 -- Insurance 18Section 8 -- Former Officers, Directors, etc. 18Section 9 -- Purpose and Exclusivity 18Section 10 -- Limitation of Liability 19IX. DIVIDENDS 19X. LOANS TO DIRECTORS, OFFICERS. AND EMPLOYEES 19XI. WAIVER OF NOTICE 19 XII. REPORTS 19XIII. AMENDMENTS 19 BYLAWS OF ROGERS CABLESYSTEMS OF ALASKA, INC. ARTICLE I. OFFICES The corporation shall maintain its principal office for thetransaction of its business in the City of Wasilla, State of Alaska. Thecorporation may have such other offices, either within or without the State ofAlaska, as the Board of Directors may designate or as the business of thecorporation may require from time to time. ARTICLE II. SEAL The Board of Directors may provide a corporate seal which shallbe circular in form and shall have inscribed thereon the name of thecorporation, the state of incorporation, and the words, "corporate seal." ARTICLE III. MEETINGS Section 1-- Annual Meeting. The annual meeting of theshareholders shall be held on the day in the month of in eachyear (unless such day is a legal holiday, in which case, the meeting shall beheld on the next succeeding business day) at the hour of O'clock .M.for the purpose of electing directors and for the transaction of such otherbusiness as may come before the meeting. If the election of directors shall notbe held on the day designated herein for any annual meeting of the shareholders,or at any adjournment thereof, the Board of Directors shall cause the electionto be held at a special meeting of the shareholders as soon thereafter asconveniently may be. Section 2-- Special Meetings. Special meetings of theshareholders, for any purpose or purposes, unless otherwise prescribed bystatute, may be called by the Chairman of the Board, the President, or the Boardof Directors, and shall be --1--called by the President at the request of the holders of not less thanone--tenth of all the outstanding shares of the corporation entitled to vote atthe meeting. Section 3 -- Place of Meeting. The Board of Directors maydesignate any place, either within or outside the State of Alaska, as the placeof meeting for any annual meeting or for any special meeting called by the Boardof Directors. A waiver of notice signed by all shareholders entitled to vote ata meeting may designate any place, either within or outside the State of Alaska,as the place for the holding of such meetings. If no designation is made, or ifa special meeting be otherwise called, the place of meeting shall be theprincipal office of the corporation in the State of Alaska. Section 4 -- Notice of Meeting. Written notice stating theplace, day, and hour of the meeting and, in case of a special meeting, thepurpose or purposes for which the meeting is called, shall be delivered not lessthan 20 nor more than 60 days before the date of the meeting, either personallyor by mail, by or at the direction of the President or the Secretary, or thepersons calling the meeting, to each shareholder of record entitled to vote atsuch meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail addressed to the shareholder at his addressas it appears on the stock transfer books of the corporation, with postagethereon prepaid or, if the shareholder has filed with the Secretary a writtenrequest that notice be mailed to a different address, addressed to theshareholder at the new address. Section 5 -- Closing of Transfer Books or Fixing of Record Date.For the purpose of determining shareholders entitled to notice of or to vote atany meeting of shareholders, or any adjournment thereof, or shareholdersentitled to receive payment of any dividend, or in order to make a determinationof shareholders for any other proper purpose, the Board of Directors of thecorporation may provide that the stock transfer books shall be closed for astated period but not to exceed, in any case, 70 days. If the stock transferbooks shall be closed for the purpose of determining shareholders entitled tonotice of or to vote at a meeting of shareholders, such books shall be closedfor at least 20 days immediately preceding such meeting. In lieu of closing thestock transfer books, the Board of Directors may fix in advance a date as therecord date for any such determination of shareholders, such date in any case tobe not more than 60 days and, in case of a meeting of shareholders, --2--not less than 20 days prior to the date on which the particular action,requiring such determination of shareholders, is to be taken. If the stocktransfer books are not closed and no record date is fixed for the determinationof shareholders entitled to notice of or to vote at a meeting of shareholders,or shareholders entitled to receive payment of a dividend, the date on whichnotice of the meeting is mailed or the date on which the resolution of the Boardof Directors declaring such dividend is adopted, as the case may be, shall bethe record date for such determination of shareholders. When a determination ofshareholders entitled to vote at any meeting of shareholders has been made asprovided in this section, such determination shall apply to any adjournmentthereof. Section 6 -- Voting Lists. The officer or agent having charge ofthe stock transfer books for shares of the corporation shall make a completelist of the shareholders entitled to vote at each meeting of shareholders or anyadjournment thereof, arranged in alphabetical order, with the address of and thenumber of shares held by each. Such list shall be made at least 20 days prior tothe meeting, shall be available for inspection by shareholders during businesshours for a period of 20 days prior to the meeting, shall be kept open at thetime and place of the meeting, and shall be subject to the inspection of anyshareholder during the whole time of the meeting for the purposes thereof. Section 7 -- Quorum. A majority of the outstanding shares of thecorporation entitled to vote, represented in person or by proxy, shallconstitute a quorum at a meeting of shareholders. If less than a majority of theoutstanding shares are represented at a meeting, a majority of the shares sorepresented may adjourn the meeting from time to time without further notice. Atan adjourned meeting at which a quorum was present or represented, any businessmay be transacted which might have been transacted at the meeting as originallynotified. The shareholders present at a duly organized meeting may continue totransact business until adjournment, notwithstanding the withdrawal of enoughshareholders to leave less than a quorum, if any action is approved while aquorum is present. Section 8 -- Proxies. At all meetings of shareholders, ashareholder may vote in person or by proxy executed in writing by theshareholder or by his duly authorized attorney--in--fact. Such proxy shall befiled with the Secretary of the corporation --3--before or at the time of the meeting. The provisions of AS 10.16.418 areincorporated by reference. Section 9 -- Voting of Shares. Subject to the provisions ofSection 12 of this Article III and any provision in the Articles ofIncorporation, each outstanding share entitled to vote shall be entitled to onevote upon each matter submitted to a vote at a meeting of shareholders. Section 10-- Voting of Shares by Certain Holders. Shares standing in the name of another corporation may be votedby such officer, agent, or proxy as the bylaws of such corporation may prescribeor, in the absence of such provision, as the board of directors of suchcorporation may determine. Shares held by an administrator, executor, guardian, orconservator may be voted by that person either in person or by proxy, without atransfer of such shares into the name of that person, Shares standing in thename of a trustee may be voted by the trustee, either in person or by proxy, buta trustee is not be entitled to vote shares held by the trustee without atransfer of such shares into the name of the trustee. Shares standing in the name of a receiver may be voted by suchreceiver, and shares held by or under the control of a receiver may be voted bythe receiver without the transfer thereof into the name of the receiver ifauthority to transfer the shares is contained in an appropriate order of thecourt by which such receiver was appointed. A shareholder whose shares are pledged is entitled to vote theshares until the shares have been transferred into the name of the pledgee and,thereafter, the pledgee is entitled to vote the shares so transferred. Neither shares of its own stock held by this corporation northose held by another corporation, if a majority of the shares entitled to votefor the election of directors of such other corporation are held directly orindirectly by this corporation, shall be voted at any meeting or counted indetermining the total number of outstanding shares at any given time forpurposes of any meeting. Shares held by a nominee may be voted by the nominee either inperson or by proxy unless the nominee, in writing --4--delivered to the corporation, names the person for whom the nominee holds theshares; and, in such event, such person shall vote the shares either in personor by proxy. Section 11 -- Informal Action by Shareholders. Any actionrequired to be taken at a meeting of the shareholders or any other action whichmay be taken at a meeting of the shareholders, may be taken without a meeting ifa consent in writing, setting forth the action so taken, shall be signed by allof the shareholders entitled to vote with respect to the subject matter thereof. Section 12 -- Cumulative Voting, At each election for directors,every shareholder entitled to vote at such election shall have the right tovote, in person or by proxy, the number of shares owned by him for as manypersons as there are directors to be elected and for whose election he has aright to vote or to cumulate his votes by giving one candidate as many votes asthe number of such directors multiplied by the number of his shares shall equalor by distributing such votes on the same principle among any number ofcandidates. Section 13-- Shareholders' Right to Financial Statements. Theprovisions of AS 10.06.433 are incorporated herein by reference. Section 14-- Shareholders' Right to Books and Records. Theprovisions of AS 10.06.430 are incorporated herein by reference, ARTICLE IV. BOARD OF DIRECTORS Section 1-- General Powers. The business and affairs of thecorporation shall be managed by its Board of Directors. Section 2-- Number, Tenure, and Qualifications. The originalBoard of Directors shall be at least one in number. The number of directors maybe increased up to the number of eleven by the vote of the directors or theshareholders authorizing such increase or may be reduced to not less than one bya like vote of the directors or the shareholders (provided, however, that ashareholder action pertaining to the number of directors may not be overriddenby action of the directors); and the question of determining the number ofdirectors may be considered at any regular meeting, without the necessity ofpreviously giving notice of the contemplation of such change, or at any specialmeeting called for that purpose in accordance --5--with these Bylaws. The Board of Directors shall be elected at the annual meetingof the shareholders to hold office until the next succeeding annual meeting(except in the case of the classification of directors permitted by AS10.06.455). A director, including a director elected to fill a vacancy, shallhold office until the expiration of the term for which elected and until asuccessor has been elected and qualified, and the term of each director shallbegin immediately after election. Directors need not be residents of the Stateof Alaska or shareholders of the corporation. Section 3 -- Regular Meetings. A regular meeting of the Board ofDirectors shall be held without other notice than this Bylaw immediately afterand at the same place as the annual meeting of shareholders. The Board ofDirectors may provide, by resolution, the time and place, either within oroutside the State of Alaska, for the holding of additional regular meetings ofthe board or a committee of the board without other notice than such resolution. Section 4 -- Special Meetings. Regular or special meetings ofthe Board of Directors or of a committee of the board may be called by or at therequest of the Chairman of the Board, the President, a vice president, theSecretary, or a director. The person or persons authorized to call meetings mayfix any place, either within or outside the State of Alaska, as the place forholding any regular or special meeting called by them. Section 5 -- Notice. Notice of any regular or special meeting(if not earlier given in these Bylaws or a resolution of the board or acommittee of the board or at a duly constituted meeting of the board or acommittee of the board) shall be given at least 10 days previously thereto bywritten notice mailed to each member at his business address or at least 72hours previously thereto if notice is by telegram, electronic means, personalmessenger, or comparable person--to--person communication. If mailed, suchnotice shall be deemed to be delivered when deposited in the United States mailso addressed, with postage thereon prepaid. If notice be given by telegram, suchnotice shall be deemed to be delivered when the telegram is delivered to thetelegraph company. Any member may waive notice of any meeting. The attendance ofa member at a meeting shall constitute a waiver of notice of such meeting,except where a member attends a meeting for the express purpose of objecting tothe transaction of any business because the meeting is not lawfully called orconvened. Neither the business to be --6--transacted at nor the purpose of any regular or special meeting of the Board ofDirectors or a committee of the board need be specified in the notice or waiverof notice of such meeting. Section 6 - Quorum. A majority of the number of members shallconstitute a quorum for the transaction of business at any meeting of the Boardof Directors or a committee of the board but, if less than such majority ispresent at a meeting, a majority of the members present may adjourn the meeting from time to time without further notice. Once a quorum is established and anyaction is approved, the quorum may not thereafter be broken by the departure ofa member. Section 7 -- Manner of Acting. The act of the majority of themembers present at a meeting at which a quorum is present shall be the act ofthe Board of Directors or a committee of the board. A member present when actionon a corporate matter is taken is presumed to have assented to the action unlessthe member's dissent is entered in the minutes of the meeting or unless themember who did not vote in favor of the action files a written dissent with theSecretary before adjournment or by certified mail immediately after adjournment.The members may meet by telephone or other similar communications equipment. Section 8 -- Action Without a Meeting. Any action that may betaken by the Board of Directors or a committee of the board at a meeting may betaken without a meeting if written consents identical in content shall be signedby all of the members. The business transacted at any meeting of the Board ofDirectors or a committee of the board, however called and noticed and whereverheld, shall be as valid as though had at a meeting duly held after regular calland notice if a quorum be present at such meeting and if, before or after themeeting or approval of the minutes thereof, each of the members not present signa written waiver of notice or a consent to holding such meeting or approval ofthe minutes thereof and all such waivers, consents, or approvals shall be made apart of the minutes of the meeting. Section 9 -- Vacancies. Any vacancy occurring in the Board ofDirectors (other than by removal of a director ---- see Section 15) may befilled by the affirmative vote of a majority of the remaining directors thoughless than a quorum of the Board of Directors. A director elected to fill avacancy shall be elected for the unexpired term of his predecessor in office.Any directorship to be filled by reason of an increase in the number ofdirectors may be filled by election by the Board of --7--Directors for a term off office continuing only until the next election ofdirectors by the shareholders. A vacancy shall be filled within six months orthe next annual meeting, whichever occurs first. Section 10 -- Compensation. By resolution of the Board ofDirectors, each member may be paid expenses, if any, for attendance at eachmeeting of the Board of Directors or a committee of the board and may be paid astated fee as a member or a fixed sum for attendance at each meeting or both. Nosuch payment shall preclude any member from serving the corporation in any othercapacity and receiving compensation therefor.AS 10.06.230(4). Section 11 - Board Powers. Without limiting the general powersconferred by these Bylaws and provided by law, the Board of Directors shallhave, in addition to such powers, the following powers, namely: (a) From time to time, to make and change rules and regulations not inconsistent with law, or with these Bylaws, for the management and control of the business of the corporation and its affairs, and of its officers, agents, and employees; to lease, purchase, or otherwise to acquire, in any lawful manner, for and in the name of the corporation, any and all real estate, personal property, letters patent, concessions, licenses, inventions, and other property rights or privileges whatsoever deemed necessary or convenient for the prosecution of its business and which the corporation is authorized to acquire, and generally, upon such terms and conditions as they think fit and in their discretion to pay therefor, either wholly or partially, in any stocks, bonds, debentures, or other securities of the corporation. (b) To sell or otherwise to dispose of any real estate, personal property, patents, licenses, inventions, property rights, or privileges belonging to the corporation, whenever, in their opinion, its interest would be thereby promoted. --8-- (c) To enter into agreements and contracts with individuals, groups of individuals, corporations, or governments for any lawful purpose, including shareholder agreements as described in AS 10.06.424, .425. (d) To supervise and direct the officers, agents, and employees of the corporation and to see that their duties are properly performed. (e) To appoint and remove, at its pleasure, any and all officers, agents, and employees of the corporation and to prescribe their duties in a manner not inconsistent with these Bylaws and to fix their compensation. (f) To borrow money and otherwise to incur indebtedness, to enter the terms and amount of such indebtedness in the minutes of the Board of Directors, to evidence such indebtedness by the note of the corporation, to mortgage the property of the corporation, and otherwise give security for the payment of such indebtedness. (g) By resolution adopted by a majority of the entire Board, the Board of Directors may designate from among its members an executive committee or other committees of the Board, and the Board may delegate to an executive committee or otherwise, all pursuant to AS 10.06.468. Persons other than directors may be appointed members of a committee, without vote. (h) To amend, alter, and repeal these Bylaws or any part thereof at any regular or special meeting of the Board of Directors. (i) In addition to the powers and authorities expressly conferred upon the Board of Directors by these Bylaws, the Board of Directors may exercise all such other lawful powers of the corporation and do all such lawful acts and things in the furtherance of the corporations business as are not by --9-- statute or by the Articles of Incorporation or by these Bylaws directed or required to be exercised or done by the shareholders. Section 12 -- Records. The Board of Directors shall cause to bekept a complete record of all their minutes and acts and of the proceedings ofthe shareholders and of shareholders meetings. Section 13 -- Director Reliance. In acting for the corporation,and unless the director has knowledge concerning the matter in question thatmakes reliance unwarranted, directors may rely upon information, opinions,reports, or statements, including financial statements and data prepared by (1)officers, employees, and agents of the corporation whom the director believes tobe reliable and competent in the matters presented, (2) counsel, publicaccountants, or other persons, as to matters that the director reasonablybelieves to be within the persons professional or expert competence, and (3)committees of the board, as to matters within the authority of the committeewhich the director believes to merit confidence. Section 14 -- Director Right to Inspect. Directors have an absolute right, at a reasonable time, to inspect and copy all books, records,and documents of the corporation and to inspect the physical properties of thecorporation pursuant to AS 10.06.450(d). Section 15 -- Vacancy; Removal of Directors. The board maydeclare vacant the office of a director who has been declared of unsound mind bya court order. The board may remove a director without reason if the removal isapproved by the outstanding shares in accordance with AS 10.06.460. Vacanciesoccurring in the board by reason of removal of directors may be filled only byapproval of the shareholders. Section 16 -- Resignation. A director may resign upon givingwritten notice to the Chairman of the Hoard, the President, the Secretary, orthe board. Upon such resignation (which is effective upon delivery of suchnotice unless the notice specifies a later time) and notwithstanding that asuccessor has not been elected or qualified, the office resigned is vacant. Ifthe resignation is effective at a future time, a successor may be elected totake office when the resignation becomes effective. --10-- Section 17 -- Director Conflicts of Interest. Directors shalldisclose any conflict of interest in any contract or other transaction betweenthe corporation and the director or a corporation, firm, or association in whichone or more of the directors has a material financial interest. Such contractsor other transactions may be approved pursuant to AS 10.06.478. Section 18-- Director Liability. The provisions of AS 10.06.480are incorporated by reference. ARTICLE V. OFFICERS Section 1 -- Number. The officers of the corporation shall beChairman of the Board, President, one or more Vice Presidents (the numberthereof to be determined by the Board of Directors), a Secretary, and aTreasurer, each of whom shall be elected by the Board of Directors. Such otherofficers and assistant officers as may be deemed necessary may be elected orappointed by the Board of Directors. Any two or more offices may be held by thesame person except the offices of President and Secretary; provided, however,that a sole shareholder of the corporation may hold all or any combination ofoffices. Section 2 -- Election and Term of Office. The officers of thecorporation shall be chosen by the Board of Directors and shall serve at thepleasure of the Board of Directors. Section 3-- Removal. Any officer or agent may be removed by theBoard of Directors, subject to contract rights, if any. Section 4 -- Resignation. An officer may resign at any time uponwritten notice to the corporation without prejudice to the rights, if any, ofthe corporation under contract to which the officer is a party. Section 5 -- Chairman; President. The Chairman of the Board or,in his absence, the President shall be the principal executive officer of thecorporation and, subject to the control of the Hoard of Directors, shall, ingeneral, supervise and control all of the business and affairs of thecorporation. He shall, when present, preside at all meetings of the shareholdersand of the Board of Directors. He may sign with the Secretary or any otherproper officer of the corporation thereunto authorized by the Hoard of Directorscertificates for shares of the corporation, any deeds, mortgages, bonds,contracts, or other instruments except in cases where the signing and --11--execution thereof shall be expressly delegated by the Board of Directors or by these Bylaws to some other officer or agent of the corporation or shall berequired by law to be otherwise signed or executed and, in general, shallperform all duties incident to the office of Chairman of the Board or Presidentand such other duties as may be prescribed by the Board of Directors from timeto time. Section 6 - The Vice Presidents. In the absence of the Presidentor in the event of his death, inability, or refusal to act, the Vice President(in the event there be more than one Vice President, the Vice Presidents in theorder designated at the time of their election or, in the absence of anydesignation, in the order of their election) shall perform the duties of thePresident and, when so acting, shall have all the powers of and be subject toall the restrictions upon the President. Any Vice President may sign with theSecretary or an Assistant Secretary certificates for shares of the corporationand shall perform such other duties as, from time to time, may be assigned tohim by the Chairman of the Board, the President, or the Board of Directors. Section 7-- The Secretary. The Secretary shall:(a) keep the minutes of the proceedings of the shareholders and of the Board ofDirectors in one or more books provided for that purpose; (b) see that allnotices are duly given in accordance with the provisions of these Bylaws or asrequired by law; (c) be custodian of the corporate records; (d) if thecorporation has a seal, be custodian of the seal of the corporation and see thatthe seal of the corporation is affixed to all documents the execution of whichon behalf of the corporation under its seal is duly authorized; (e) keep aregister of the post office address of each shareholder which shall be furnishedto the Secretary by such shareholder; (f) sign with the Chairman of the Board,the President, or a Vice President certificates for shares of the corporation,the issuance of which shall have been authorized by resolution of the Board ofDirectors; (g) have general charge of the stock transfer books of thecorporation; and (h) in general, perform all duties incident to the office ofSecretary and such other duties as, from time to time, may be assigned to him bythe President or by the Board of Directors. Section 8 - The Treasurer. The Treasurer shall:(a) have charge and custody of and be responsible for all funds and securitiesof the corporation; (b) receive and give receipts for moneys due and payable tothe corporation from any source whatsoever and shall deposit all such moneys inthe name of the --12--corporation in such banks, trust companies, or other depositories as shall beselected; and (c) in general, perform all of the duties incident to the officeof Treasurer and such other duties as, from time to time, may be assigned to himby the Chairman of the Board, the President, or by the Board of Directors. Ifrequired by the Board of Directors, the Treasurer shall give a bond for thefaithful discharge of his duties in such sum and with such surety or sureties asthe Board of Directors shall determine. Section 9 -- Salaries. The salaries of the officers, if any,shall be fixed from time to time by the Board of Directors, and no officer shallbe prevented from receiving such salary by reason of the fact that he is also adirector of the corporation. Section 10 -- Reimbursement of Disallowed Salaries and Payments.Any payments made to an officer of the corporation, such as a salary,commission, bonus, interest, rent, or entertainment expense incurred by himwhich shall be disallowed in whole or in part as a deductible expense by theInternal Revenue Service or the Alaska Department of Revenue, shall bereimbursed by such officer to the corporation to the full extent of suchdisallowance. It shall be the duty of the directors, as a board, to enforcepayment of each such amount disallowed. In lieu of payment by the officer,subject to the determination of the directors, proportionate amounts may bewithheld from his future compensation payments until the amount owed to thecorporation has been recovered. Section 11 -- Reliance. An officer is entitled to rely on information, opinions, reports, or statements, including financial statementsand other financial data in each case prepared or presented by legal counsel orpublic accountants, unless the officer has knowledge concerning the matter inquestion that makes reliance unwarranted. ARTICLE VI. CERTIFICATES OF STOCK Section 1 Certificates for Shares. Certificates representingshares of the corporation shall be in such form as shall be determined by theBoard of Directors but shall contain notices thereon of any restriction intransfer thereof. Such certificates shall be signed by the President or a VicePresident and by the Secretary or an Assistant Secretary and may be sealed withthe corporate seal or a facsimile thereof. The signatures of such officers upona certificate may be facsimiles if the certificate is countersigned by atransfer agent or --13--registered by a registrar other than the corporation itself or one of itsemployees. All certificates for shares shall be consecutively numbered orotherwise identified. The name and address of the person to whom the sharesrepresented thereby are issued, with the number of shares and date of issue,shall be entered on the stock transfer books of the corporation. Allcertificates surrendered to the corporation for transfer shall be cancelled andno new certificate shall be issued until the former certificate for a likenumber of shares shall have been surrendered and cancelled except that, in thecase of a lost, destroyed, or mutilated certificate, a new one may be issuedtherefor upon such terms and indemnity to the corporation as the Board ofDirectors may prescribe. The Board of Directors may issue shares withoutcertificates pursuant to AS 10.06.349. Shares shall be fully paid for beforeissuance of a certificate therefor Section 2 -- Transfer of Shares. Transfer of shares of thecorporation shall be made only on the stock transfer books of the corporation bythe holder of record thereof, by his legal representative, who shall furnishproper evidence of authority to transfer, or by his attorney thereuntoauthorized by power of attorney duly executed and filed with the Secretary ofthe corporation, and upon surrender for cancellation of the certificate for suchshares. The person in whose name shares stand on the books of the corporationshall be deemed by the corporation to be the owner thereof for all purposes. Section 3 -- Restrictions on Transfer. Transfer of stock in thiscorporation is or may be restricted (a) by law, and particularly by provisionsof federal and state securities laws, (b) by agreement between the corporationand its shareholders or agreement between shareholders, a copy of which shall bemaintained by the Secretary and made available for reasonable inspection andcopying by persons with a pecuniary interest therein, and (c) by provision ofthese Bylaws. Section 4 -- Corporate Option to Purchase, If no agreementexists between the corporation and its shareholders, then no stock of thiscorporation shall be sold or transferred to any person other than thecorporation or a shareholder of the corporation (excluded person) without saidstock first having been offered for sale to the corporation for redemption andthen to the other of the shareholders of the corporation as follows: --14-- Should any of the shareholders of the corporation desire to sellor transfer stock or any interest therein, to any excluded person, theshareholder shall first offer, in writing, such stock to the corporation andthen to the other shareholders of the corporation, in the ratio and proportionthat the other shareholders hold stock in the corporation, at a price to be setforth in the notice. The corporation, after receiving such notice, shall havethirty days within which to purchase the interest of the selling shareholderand, should the corporation fail or refuse to purchase said stock within thethirty--day period after the receipt of the notice, then the selling shareholder shall give a like written notice and a like period of time to the continuingshareholders to purchase the interest of the selling shareholder at the priceset forth in the notice. The shareholders receiving such notice shall havethirty days within which to purchase the interest of the selling shareholderand, should the continuing shareholders or any part of them refuse or fail topurchase their proportionate interest in the stock being offered for sale by theselling shareholder within the thirty--day period after receipt of the notice,then the selling shareholder shall be at liberty to sell said stock to anyexcluded person. In no event, however, shall said stock be sold to excludedpersons at a price less than the price offered to the corporation and to theother shareholders, without first having offered the stock for sale to thecorporation and the other shareholders at a like price and under similar termsor conditions. Section 5 -- Responsibility. It shall be the responsibility ofthe transferring shareholder, before any transfer of the stock on the books ofthe corporation, to make satisfactory proof to the Secretary or transferringagent of compliance with law, applicable agreement, and these Bylaws. Section 6 -- No Treasury Shares. Any stock in the corporationpurchased, redeemed, or otherwise acquired by the corporation is restored to thestatus of authorized but unissued. ARTICLE VII. FISCAL YEAR The fiscal year of the corporation shall begin on the day of and end on the day of in each year. ARTICLE VIII. INDEMNIFICATION Section 1 - Nonderivative Actions. Subject to the provisions ofSections 3, 4, 5, and 6 below, the corporation --15--shall defend, indemnify, and hold financially harmless any person who was or isa party or is threatened to be made a party to any threatened, pending, orcompleted action, suit, or proceeding whether civil, criminal, administrative,or investigative (other than an action by or in the right of the corporation) byreason of or arising from the fact that the person is or was a director,officer, employee, or agent of the corporation or is or was serving at therequest of the corporation as a director, officer, employee, agent, partner, ortrustee of another corporation, partnership, joint venture, trust, or otherenterprise, against costs and expenses (including attorney's fees) of said suit,action, or proceeding, judgments, fines, and amounts paid in settlement actuallyand reasonably incurred in connection with the action, suit, or proceeding if(i) the person acted in good faith and in a manner the person reasonablybelieved to be in or not opposed to the best interests of the corporation and,with respect to a criminal action or proceeding, did not know and had noreasonable cause to believe the conduct was unlawful or (ii) the person's act oromission giving rise to such action, suit, or proceeding is ratified, adopted,or confirmed by the corporation or the benefit thereof received by thecorporation. The termination of any action, suit, or proceeding by judgment,order, settlement, conviction, or upon a plea of nolo contendere or itsequivalent shall not, of itself, create a presumption, and settlement shall notconstitute any evidence, that the person did not act in good faith and in amanner which the person reasonably believed to be in or not opposed to the bestinterests of the corporation and, with respect to a criminal action orproceeding, did not know and had no reasonable cause to believe that the conductwas unlawful. Section 2 -- Derivative Actions. Subject to the provisions ofSections 3, 4, 5, and 6 below, the corporation shall defend, indemnify, and holdfinancially harmless any person who was or is a party or is threatened to bemade a party to any threatened, pending, or completed action or suit by or inthe right of the corporation to procure a judgment in its favor by reason of or arising from the fact that the person is or was a director, officer, employee,or agent of the corporation or is or was serving at the request of thecorporation as a director, officer, employee, agent, partner, or trustee ofanother corporation, partnership, joint venture, trust, or other enterpriseagainst costs and expenses (including attorney's fees) actually and reasonablyincurred in connection with the defense or settlement of such action or suit if(i) the person acted in good faith and in a manner the person reasonablybelieved to be in or not opposed to the best interests of the --16--corporation or (ii) the person's act or omission giving rise to such action orsuit is ratified, adopted, or confirmed by the corporation or the benefitthereof received by the corporation; provided, however, that no indemnificationshall be made in respect of any claim, issue, or matter as to which such personshall have been adjudged to be liable for gross negligence or deliberatemisconduct in the performance of the person's duty to the corporation unless,and only to the extent that, the court in which the action or suit was broughtshall determine upon application that, despite the adjudication of liability butin view of all the circumstances of the case, the person is fairly andreasonably entitled to indemnity for the expenses which the court considersproper. Section 3 -- Denial of Right to Indemnification. Subject to theprovisions of Sections 5 and 6 below, defense and indemnification under Sections1 and 2 of this article automatically shall be made by the corporation unless itis expressly determined that defense and indemnification of the person is notproper under the circumstances because the person has not met the applicablestandard of conduct set forth in Sections 1 or 2 of this article. The personshall be afforded a fair opportunity to be heard as to such determination.Defense and indemnification payment may be made, in the case of any challenge tothe propriety thereof, subject to repayment upon ultimate determination thatindemnification is not proper. Section 4-- Determination. The determination described inSection 3 shall be made: (1) by the Board of Directors by a majority vote of a quorumconsisting of directors who were not parties to the action or proceeding; or (2) if such quorum is not obtainable or, even if obtainable, aquorum of disinterested directors so directs, by independent legal counsel in awritten opinion; or (3) by a majority vote of the outstanding shares, including anyshares held by the person or by any person who is not disinterested. Section 5 -- Successful Defense. Notwithstanding any otherprovisions of Sections 1, 2, 3, or 4 of this article but subject to theprovisions of Section 6 below, if a person is successful on the merits orotherwise in defense of any action, suit, or proceeding referred to in Sections1 or 2 of this article or in defense of any claim, issue, or matter therein, --17--the person shall be indemnified against costs and expenses (including attorney'sfees) actually and reasonably incurred in connection therewith. Section 6 -- Condition Precedent to Indemnification. Any personwho desires to receive defense and indemnification under this article shallnotify the corporation reasonably promptly that the person has been named adefendant to an action, suit, or proceeding of a type referred to in Sections 1or 2 and that the person intends to rely upon the right of indemnificationdescribed in this article. The notice shall be in writing and mailed viaregistered or certified mail, return receipt requested, to the President of thecorporation at the executive offices of the corporation or, in the event the notice is from the President, to the registered agent of the corporation. Noticeneed not be given when the corporation is otherwise notified by being named aparty to the action. Section 7 -- Insurance. At the discretion of the Board ofDirectors, the corporation may purchase and maintain insurance on behalf of anyperson who is or was a director, officer, employee, or agent of the corporationor is or was serving at the request of the corporation as a director, officer,employee, agent, partner, or trustee of another corporation, partnership, jointventure, trust, or other enterprise against any liability asserted against orincurred by the person in any such capacity or arising out of the person'sstatus as such whether or not the corporation would have the power to defend andindemnify the person against such liability under the provisions of thisarticle. Section 8 -- Former Officers, Directors, etc. Theindemnification provisions of this article shall be extended to a person who hasceased to be a director, officer, employee, or agent as described above andshall inure to the benefit of the heirs, personal representatives, executors,and administrators of such person. Section 9-- Purpose and Exclusivity. The defense andindemnification referred to in the various sections of this article shall bedeemed to be in addition to and not in lieu of any other rights to which thosedefended and indemnified may be entitled under any statute, rule of law orequity, agreement, vote of the shareholders or Board of Directors, or otherwise.The purpose of this article is to augment, pursuant to AS 10.06.490(f) and theother provisions of AS 10.06.490. --18-- Section 10 -- Limitation of Liability. If set forth in theArticles of Incorporation, no director of this corporation shall have anypersonal liability to the corporation or its shareholders for monetary damagesfor the breach of fiduciary duty as a director except as provided in ASl0.06.210(1)(M). ARTICLE IX. DIVIDENDS Dividends upon the capital stock of the corporation may bedeclared by the Board of Directors at any regular or special meeting. Beforepaying any dividend or making any distribution, the directors shall ascertaincompliance with the provisions of AS lO.06.358--.373. ARTICLE X. LOANS TO DIRECTORS, OFFICERS, AND EMPLOYEES No loan shall be made to a director, officer, or employee of thecorporation except pursuant to AS 10.06.485. ARTICLE XI. WAIVER OF NOTICE Whenever any notice is required to be given to any shareholderor director of the corporation under the provisions of these Bylaws, theArticles of Incorporation, or the Alaska Corporations Code, a waiver thereof inwriting signed by the person or persons entitled to such notice, whether beforeor after the time stated therein, or attendance at a meeting without protestingbefore the meeting or at its commencement the lack of notice, shall be deemedequivalent to such notice. ARTICLE XII. REPORTS The corporation is exempt, as allowed underAS 10.06.432, from the reporting requirements set forth in AS 10.06.433(a) and(b) but shall comply with the provisions of AS 10.06.433(c)--(g). The Hoard ofDirectors shall give timely notice of change in directors, officers, fivepercent shareholder, registered agent, or office. ARTICLE XIII. AMENDMENTS These Bylaws may be altered, amended, or repealed and new Bylawsmay be adopted by the Board of Directors at any regular or special meeting ofthe Board of Directors. --19-- KNOW ALL MEN BY THESE PRESENTS: That the undersigned Secretaryof Rogers Cablesystems of Alaska, Inc. does hereby certify that the above andforegoing Bylaws were duly adopted by the Board of Directors as the Bylaws ofthe corporation on the 29th day of March, 1990. /s/ Secretary --20-- ARTICLES OF INCORPORATION OF ROGERS CABLESYSTEMS OF ALASKA, INC. KNOW ALL MEN BY THESE PRESENTS: That the undersigned, beingover eighteen years of age, has formed a business corporation under and pursuantto the laws of the State of Alaska and does hereby certify: ARTICLE I The name of this corporation is Rogers Cablesystems of Alaska,Inc. ARTICLE II The object and purposes for which this corporation is I formedare as follows: (a) This corporation shall have all the powers to do andtransact any and all actions and have all of the powers mentioned and set forthdirectly or by inference in the Alaska Statutes, Title 10, Chapter 6, includingAS 10.06.010. (b) Without in any manner intending to limit the powersspecified in the Alaska Statutes, this corporation, at its inception and as itsmain corporate purpose, shall engage in the business of providing cabletelevision service. ARTICLE III The authorized capital stock of this corporation shall be100,000 shares of nonassessable common stock fully voting, fully participating. ARTICLE IV To the extent available, both retained earnings and paid--incapital may be used for the purchase and redemption of common stock issued bythis corporation. No holder of any stock of this corporation shall be entitled,as a matter of right, to purchase, subscribe for or otherwise acquire any new oradditional shares of stock of the corporation of any class, or any options orwarrants to purchase, subscribe for or otherwise acquire any such new or additional share,or any shares, bonds, notes, debentures or other securities convertible into orcarrying options or warrants to purchase, subscribe for or otherwise acquire anysuch new or additional shares. During any time that the corporation shall be bound byprovision in its Bylaws or by an agreement with its shareholders restrictingtransfer of shares, no person may acquire shares in the corporation except inaccordance with the terms of such Bylaws or agreement, a copy of which shall beavailable for inspection at the office of the corporation. The provisions ofsuch Bylaws or agreement, as amended, are hereby incorporated by reference. ARTICLE V To the full extent permitted by law and subject only to thoselimitations expressly stated in AS l0.O6.2l0(1)(M), no director of thiscorporation shall have any personal liability to the corporation or itsshareholders for monetary damages for the breach of fiduciary duty as adirector. This provision shall apply in addition to, and not in substitution for, indemnification provisions contained in this corporation's Bylaws orprovided by contract. ARTICLE VI The name and address of each alien affiliate is: Rogers Finance Company Limited Camlyn Hastings Christ Chuch Barbados, 14. I. Rogers Canadian Holdings Inc. Suite 2600 Commercial Union Tower Toronto Dominion Centre P.0. Box 249 Toronto, ON M5K lJ5 Rogers Communications Inc. Suite 2600 Commercial Union Tower Toronto Dominion Centre P.0. Box 249 Toronto, ON M5K 1J5 -2- ARTICLE VII The address of the corporation's initial registered office is: Rogers Cablesystems of Alaska, Inc. do Hughes, Thorsness, Gantz, Powell & Brundin 509 West Third Avenue Anchorage Alaska 99501 The name of the corporation's initial registered agent is: Mary K. Hughes. ARTICLE VIII The management of the affairs and concerns of this corporationis hereby vested in its Board of Directors. The number of directors shall befixed from time to time by the Bylaws. The names and addresses of the initialBoard of Directors are: John C. Frank One Sealaska Plaza, Suite 303 Juneau, Alaska 99801 Mary Hughes 509 West Third Avenue Anchorage, Alaska 99501 Jayne Gilbert One Sealaska Plaza. Suite 303 Juneau, Alaska 99801 -3- IN WITNESS WHEREOF, the undersigned, being the original incorporatorhereinabove named, has signed these Articles of Incorporation, in duplicate,this 19 day of January, 1990. /s/ Mary K. Hughes VERIFICATIONSTATE OF ALASKA ) ) ss.THIRD JUDICIAL DISTRICT ) I, Mary K. Hughes, say on oath or affirm that I have read theforegoing Articles of Incorporation and believe all statements made therein aretrue. /s/ Mary K. Hughes SUBSCRIBED AND SWORN TO or affirmed before me at Anchorage,Alaska, this 19th day of January, 1990. /s/ NOTARY PUBLIC in and for Alaska My Commission Expires: -4- ARTICLES OF AMENDMENT TO THE ARTICLES OF INCORPORATION OF ROGERS CABLESYSTEMS OF ALASKA. INC. Pursuant to the provisions of the Alaska Business CorporationAct, the undersigned corporation adopts the following Articles of Amendment toits Articles of Incorporation: FIRST: The following amendment of the Articles ofIncorporation was adopted by the board of directors of the corporation on the8th day of 1February, 1990, in the manner prescribed by the Alaska BusinessCorporation Act: RESOLVED, that the Articles of Incorporation, specifically Article VIII, be amended to delete the names and addresses of the initial Board of Directors and to state the names and addresses of the initial Board of Directors are: Edward S. Rogers Suite 2600, Commercial Union Tower P.O. Box 249, Toronto Dominion Centre Toronto, Ontario MSK 135 Cohn 0. Watson Suite 2600, Commercial Union Tower P.O. Box 249, Toronto Dominion Centre Toronto, Ontario M5K 1.35 Graham W. Savage Suite 2600, Commercial Union Tower P.O. Box 249, Toronto Dominion Centre Toronto, Ontario M51( 135 Philip B. Lind Suite 2600, commercial Union Tower P.O. Box 249, Toronto Dominion Centre Toronto, Ontario M5K 135 SECOND: The number of shares of the corporation authorized atthe time of such adoption was 100,000; however, said shares have not beenissued. THIRD: No shares were entitled to vote thereon. FOURTH: The amendment does not change the amount statedcapital of the corporation. DATED this 8th day of February, 1990. ROGERS CAELESYSTEMS OF ALASKA, INC. By: /s/ Mary K. Hughes President By: /s/ John G. Frank SecretarySTATE OF ALASKA ) )ss.THIRD JUDICIAL DISTRICT ) I, Mary K. Hughes, President of Rogers Cablesystems ofAlaska, Inc., say on oath or affirm that I have read the foregoing Articles ofAmendment to the Articles of Incorporation and believe all statements madetherein are true. /s/ Mary K. Hughes SUBSCRIBED AND SWORN TO OR AFFIRM before me this 8th day ofFebruary, 1990, at Anchorage, Alaska. /s/ Notary Public, State of Alaska My Commission Expires: 05-13-93 BYLAWS OF KANAS TELECOM, INC. ARTICLE I OFFICESSection 1 REGISTERED OFFICE The corporation shall maintain a registered office in theState of Alaska, as required by law.Section 2. OTHER OFFICES The corporation may have offices at such other places, bothwithin the State of Alaska, as the Board of Directors may from time to time orthe business of the corporation may require. ARTICLE II SHAREHOLDERS: MEETING AND VOTING PLACE OF MEETINGSSection 1. PLACE OF MEETINGS Meetings of the shareholders shall be held at the principaloffice of business of the corporation, or at such other place, either within theState of Alaska, as the Board of Directors may designate.Section 2. ANNUAL MEETING The annual meeting of the shareholders shall be held in themonth of of each year, at the principal office of the corporation, or atsuch other place that the President of the corporation may reasonably designate.At the annual meeting, the shareholders shall elect, by vote, a Board ofDirectors, consider reports of the affairs of the corporation and transact suchother business as may be properly brought before the meeting. In the event thatthe annual meeting is not held on the date herein provided for such meeting, theDirectors shall cause a meeting in lieu thereof to be held as soon thereafter asmay be convenient. Such meeting shall be called in the same manner as the annualmeeting, and any business transacted or elections held at such meeting shall beas valid as if transacted or held at the annual meeting. -1-Section 3. SPECIAL MEETINGS Special meetings of the shareholders may be called by thePresident or the Board of Directors and shall be called by the Secretary at therequest in writing of holders of not less than one-tenth of all the sharesentitled to vote at such meeting. Such request shall state the purpose of theproposed meeting.Section 4. NOTICE OF MEETINGS (a) Written or printed notice stating the place, day and hourof the meeting and, in the case of a special meeting, the purpose or purposesfor which the meeting is called, shall be delivered not less than twenty (20),nor more than sixty (60), days before the date of the meeting, eitherpersonally, by mail or delivery service, or by facsimile, by or at the directionof the President, the Secretary or the officer or persons calling the meeting,to each shareholder of record entitled to vote at such meeting. If mailed, suchnotice shall be deemed to be delivered when deposited in the United States mailaddressed to the shareholder at his address as it appears on the stock transferbooks of the corporation, with postage thereon prepaid. (b) Notice of any regular or special meeting may be waived bywritten consent, whether executed before or subsequent to such meetings. Theattendance of any shareholder in person, or his representation by proxy, at anyregular or special meetings shall be deemed a waiver of the notice herebyprescribed, except where a shareholder attends a meeting for the express purposeof objecting to the transaction of any business because the meeting is notlawfully called or convened. (c) When a meeting is adjourned for thirty (30) days or more,or when a redetermination of the persons entitled to receive notice of theadjourned meeting is required by law, notice of the adjourned meeting shall begiven as for an original meeting. In all other cases, no notice of theadjournment or of the business to be transacted at the adjourned meeting need begiven other than by announcement at the meeting at which such adjournment istaken.Section 5. QUORUM (a) At any meeting of the shareholders, the holders of amajority of the shares entitled to vote being present in person or representedby proxy, shall constitute a quorum for the transaction of business.Shareholders may not take any action that would violate the terms of aShareholders' Agreement entered into between the Shareholders on or about June19, 1996. (b) In the absence of a quorum, a majority of those present inperson or represented by proxy may adjourn the meeting from time to time until aquorum shall attend. Any business which might have been transacted -2-at the original meeting may be transacted at the adjourned meeting if a quorum exists. (c) If a quorum is present, the affirmative vote of a majorityof the shares represented at the meeting shall be the act of the shareholdersunless the vote of a greater number of shares is required by law, the Articlesof Incorporation, or the Shareholders' Agreement entered into between theShareholders on or about June 19, 1996.Section 6. VOTING OF SHARES a) Each outstanding share is entitled to one vote on eachmatter submitted to a vote at a meeting of shareholders, except to the extentthat the voting rights of the shares of a class are limited or denied by theArticles of Incorporation. (b) A shareholder may vote its shares either in person or byproxy, executed in writing by the shareholder or by his duly authorizedattorney-in-fact and filed with the Secretary before being voted. Except forproxies that are irrevocable at law or under a Shareholders' Agreement, no proxyshall be valid after eleven (11) months from the date of its execution, unlessotherwise provided in the proxy. (c) At all elections of Directors, the Shareholders' shallelect directors pursuant to the terms of the Agreement entered into between theShareholders on or about June 19, 1996.Section 7. VOTING RIGHTS The persons entitled to receive a notice of, and to vote at,any shareholders meeting shall be determined from the records of the corporationon the date of mailing of the notice, or on such other date not more than sixty(60) nor less than (10) days before such meeting as shall be fixed in advanceby the Board of Directors. Section 8. VOTING OF SHARES BY CERTAIN HOLDERS (a) Shares standing in the name of another corporation may bevoted by such officer, agent or proxy as the Bylaws of such corporation mayprescribe, or, in the absence of such provision, as the Board of Directors ofsuch corporation may determine. (b) Shares held by any administrator, executor, guardian orconservator may be voted by him, either in person or by proxy, without atransfer of such shares into his name. Shares standing in the name of a trusteemay be voted by him, either in person or by proxy, but no trustee shall -3-be entitled to vote shares held by him without a transfer of such shares intohis name. (c) Shares standing in the name of a receiver may be voted bysuch receiver, and shares held by or under the control of a receiver may bevoted by such receiver without the transfer thereof into his name if authorityto do so be contained in an appropriate order of the court by which suchreceiver was appointed. (d) A shareholder whose shares are pledged shall be entitledto vote such shares until the shares have been transferred into the name of thepledgee, and thereafter the pledgee shall be entitled to vote the shares sotransferred.Section 9. VOTING LISTS The officer or agent having charge of the stock transfer booksfor shares of the corporation shall make, at least twenty (20) days before eachmeeting of shareholders, a complete list of the shareholders entitled to vote atsuch meeting, or any adjournment thereof arranged in alphabetical order, withthe address of, and the number of shares held by each, which list, for a periodof twenty (20) days prior to such meeting, shall be kept on file at theregistered office of the corporation and shall be subject to inspection by anyshareholder during the whole time of the meeting. The original stock transferbook shall be Prima facie evidence as to who are the shareholders entitled toexamine such list or transfer books or to vote at any meeting of shareholders.Failure to comply with the requirements of this section shall not affect thevalidity of any action taken at such meeting.Section 10. ACTION WITHOUT A MEETING Any action which the law, the Articles of Incorporation, orthe Bylaws require or permit the shareholders to take at a meeting may be takenwithout a meeting if a consent in writing, setting forth the action so taken, issigned by all of the shareholders entitled to vote on the matter. The consent,which shall have the same effect as a unanimous vote of the shareholders, shallbe filed in the records of minutes of the corporation. ARTICLE III DIRECTORS: MANAGEMENTSection 1. POWERS The business and affairs of the corporation shall be managedby a Board of Directors which shall exercise, or direct the exercise of, allcorporate powers except to the extent shareholder authorization is required bylaw, the Articles of Incorporation or these Bylaws. -4-Section 2. NUMBER The Board of Directors shall consist of four members until thenumber be changed by the Board of Directors or the shareholders by amendment ofthese Bylaws. No reduction of the number of Directors shall have the effect ofremoving any Director prior to the expiration of his term of office. Directorsneed not be residents of the State of Alaska nor shareholders of thecorporation.Section 3. ELECTION AND TENURE OF OFFICE The Directors shall be elected at the annual meeting of theshareholders, to serve for one (1) year, or until their successors are electedand qualified. Their term of office shall begin immediately after election. TheDirectors may be removed at any time, and without cause, by a majority vote ofthe shareholders; provided, however, that no such removal shall be effective ifthe votes cast against such removal would have been sufficient to elect suchDirector if then cumulatively voted at an election of the entire Board ofDirectors.Section 4. VACANCIES (a) A vacancy in the Board of Directors shall exist upon thedeath, resignation or removal of any Director. (b) Vacancies in the Board of Directors may be filled by amajority of the remaining Directors, though less than a quorum, or by a soleremaining Director, pursuant to the provisions of that Shareholders Agreemententered into by and between the Shareholders of this Corporation on or about May23, 1996. Each Director so elected shall hold office for the balance of theunexpired term of his predecessor and until his successor is elected andqualified. (c) The shareholders may, at any time, elect a Director tofill any vacancy not filled by the Directors pursuant to the provisions of thatShareholders Agreement entered into by and between the Shareholders of thisCorporation on or about May 23, 1996, and shall elect the additional Directorsin the event an amendment of the Bylaws is adopted increasing the number ofDirectors. (d) If the Board of Directors accepts the resignation of aDirector tendered to take effect at a future time, a successor may be elected totake office when the resignation becomes effective, pursuant to the provisionsof that Shareholders Agreement entered into by and between the Shareholders ofthis Corporation on or about May 23, 1996. -5-Section 5. MEETINGS (a) Meetings of the Board of Directors shall be held at suchplace as may be designated from time to time by the Board of Directors or othersuch persons calling the meeting. (b) Annual meetings of the Board of Directors shall be heldwithout notice immediately following the adjournment of the annual meetings ofthe shareholders. (c) Special meetings of the Board of Directors for any purposeor purposes may be called at any time by the President, or in his absence, bythe Vice President, or by any two Directors. (d) The Board of Directors or a committee designated by theBoard may conduct a meeting by communicating simultaneously with each other bymeans of conference telephones or similar communications equipment.Section 6. NOTICE OF SPECIAL MEETINGS (a) Notice of the time and place of special meetings shall begiven orally or delivered in writing personally, by mail or deliver service, orfacsimile at least 24 hours before the meeting. Notice shall be sufficient ifactually received at the required time or if mailed or sent by facsimile notless than three (3) days before the meeting. Notice mailed or sent by facsimileshall be directed to the Directors actual address ascertained by the persongiving the notice. (b) Notice of the time and place of holding of an adjournedmeeting need not be given if such time and place is fixed at the meetingadjourned. (c) Notice of any special meeting may be waived by writtenconsent, whether executed before, or subsequent to, such meeting. Attendance ofa Director at a meeting shall constitute a waiver of notice of such meetingexcept where a Director attends a meeting for the express purpose of objectingto the transaction of any business because the meeting is not lawfully called orconvened.Section 7. QUORUM AND VOTE (a) A majority of the Directors shall constitute a quorum forthe transaction of business. A minority of the Directors, in the absence of aquorum, may adjourn from time to time but may not transact any business. (b) The action of a majority of the Directors present at anymeeting at which there is a quorum shall be the act of the Board of Directors,unless the act of a greater number is required by law, by the Articles ofIncorporation or these Bylaws. -6-Section 8. DEADLOCK In the event a deadlock occurs about the management of theCorporation that cannot be resolved, and the deadlock is such that thecorporation could be involuntarily dissolved under the Alaska Corporations Codeor any successor statute, the disputes about the management of the corporationwhich created the deadlock shall be submitted to dispute resolution as set forthin a Shareholders Agreement entered into by and between the parties dated on orabout May 23, 1996.Section 9. DIRECTOR EXPENSES The Board of Directors shall adopt by resolution areimbursement policy under which the Directors are reimbursed for all reasonabletravel expenses incurred in attending meetings of the Board of Directors. ARTICLE IV OFFICERSSection 1. DESIGNATION: ELECTION: QUALIFICATION (a) The officers of the corporation shall be a President, aVice President, a Secretary and a Treasurer and such other officers as the Boardof Directors shall from time to time appoint. The officers shall be elected by,and serve at the pleasure of, the Board of Directors. Two or more offices,except the offices of President and Secretary, may be held by the same person. (b) The Board of Directors, at its first meeting after eachannual meeting, shall elect a President, and shall choose a Vice President, aSecretary and a Treasurer, none of whom need be a member of the Board. Noofficer need be a shareholder. (c) The Board of Directors, in its discretion, may elect fromamong its members a Chairman of the Board of Directors who, when present, shall preside at all meetings of the Board of Directors and who shall have such otherpowers as the Board may prescribe. (d) Any vacancy occurring in any office of the corporationshall be filled by the Board of Directors.Section 2. COMPENSATION AND TERM OF OFFICE (a) The compensation and term of office of all the officers ofthe corporation shall be fixed by the Board of Directors. -7- (b) Any officer may be removed, either with or without cause,by action of the Board of Directors. (c) Any officer may resign at any time by giving writtennotice to the Board of Directors, the President or the Secretary of thecorporation. Any such resignation shall take effect upon receipt of such noticeor at any later time specified therein. Unless otherwise specified therein, theacceptance of such resignation shall not be necessary to make it effectiveprovided that the Board of Directors may reject any post-dated resignation bynotice in writing to the resigning officer. (d) This section shall not affect the rights of thecorporation or any officer under any express contract of employment.Section 3. PRESIDENT (a) The President shall be the chief executive officer of thecorporation and shall, subject to the control of the Board of Directors, havegeneral supervision, direction and control of the business and affairs of thecorporation. He shall preside at all meetings of the shareholders and, unless achairman of the Board of Directors has been elected and is present, shallpreside at the meetings of the Board of Directors. He shall be ax-officio amember of all the standing committees, including an executive committee, if any,shall have the general powers and duties of management usually vested in theoffice of President of a corporation, and shall have such other powers andduties as may be prescribed by the Board of Directors or the Bylaws. (b) The President shall execute bonds, mortgages and othercontracts requiring a seal, except where required or permitted by law to beotherwise signed and executed or where the signing and execution thereof shallbe expressly delegated by the Board of Directors to some other officer or agentof the corporation.Section 4. VICE PRESIDENTS The Vice President, or if there shall be more than one, theVice Presidents, in the order determined by the Board of Directors, shall, inthe absence or disability of the President, and except as specially limited byvote of the Board of Directors, perform the duties and exercise the powers ofthe President. They shall perform such other duties and shall have such otherpowers as prescribed by the Board of Directors.Section 5. SECRETARY (a) The Secretary shall attend all meetings of Directors andshareholders and shall keep, or cause to be kept, a book of minutes of allmeetings of Directors and shareholders showing the time and place of themeeting, whether it was regular or special, and if special, how authorized, the -8-notice given, the names of those present at Directors' meetings, the number of shares present or represented at shareholders meetings and the proceedingsthereof. (b) The Secretary shall keep, or cause to be kept, a shareregister, or a duplicate share register, showing the names of the shareholdersand their addresses, the number and classes of shares held by each, the numberand date of certificates issued for such shares, and the number and date ofcancellation or certificates surrendered for cancellation. (c) The Secretary shall give, or cause to be given, suchnotice of the meetings of the shareholders and of the Board of Directors as isrequired by the Bylaws. He shall keep the seal of the corporation and affix itto all documents requiring a seal, and shall have such other powers and performsuch other duties as may be prescribed by the Board of Directors or the Bylaws.Section 6. TREASURER (a) The Treasurer shall have the custody of the corporatefunds, shall keep full and accurate accounts of receipts and disbursements inbooks belonging to the corporation and shall deposit all moneys and othervaluable effects in the name and to the credit of the corporation in suchdepositories as may be designated by the Board of Directors. (b) The Treasurer shall disburse funds of the corporation asmay be ordered by the Board of Directors, taking proper vouchers for suchdisbursements, and shall render the President and the Board of Directors, at itsregular meetings, or when the Board of Directors so requires, an account of allhis transactions as Treasurer and of the financial condition of the corporation.Section 7. ASSISTANTS The Board of Directors may appoint, or authorize theappointment of, assistants to the Secretary or Treasurer or both. Suchassistants may exercise the power of the Secretary or Treasurer, as the case maybe, and shall perform such duties as are prescribed by the Board of Directors.Section 8. GENERAL MANAGER Board of Directors may also appoint, or authorize theappointment of, a General Manager, who shall hold office at the pleasure of theBoard. The Board of Directors may delegate to the General Manager such executivepowers and authority as they may deem necessary to facilitate the handling andmanagement of the corporation's property and interests. -9- ARTICLE V EXECUTIVE AND OTHER COMMITTEES Subject to law, the provisions of the Articles ofIncorporation and the Bylaws, the Board of Directors may appoint an executivecommittee, and such other committees as may be necessary from time to time,consisting of such number of its members and having such powers as it maydesignate. Such committees shall hold office at the pleasure of the Board. ARTICLE VI CORPORATE RECORDS AND REPORTSSection 1. RECORDS The corporation shall maintain adequate and correct books,records and accounts of its business and properties. All of such books, recordsand accounts shall be kept at its place of business as fixed by the Board ofDirectors, except as otherwise provided by law. Section 2. INSPECTION All books and accounts of the corporation shall be open toinspection by the shareholders in the manner and to the extent required by law.Section 3. CERTIFICATION AND INSPECTION OF BYLAWS The original, or a copy, of the Bylaws and any amendmentsthereto, certified by the Secretary, shall be open to inspection by theshareholders and Directors in the manner and to the extent required by law.Section 4. CHECKS, DRAFTS, ETC. All checks, drafts or other orders for payment of money, notesand other evidences of indebtedness, issued in the name of or payable to thecorporation shall be signed or endorsed by such person or persons and in suchmanner as shall be determined by resolution of the Board of Directors. ARTICLE VII CERTIFICATES AND TRANSFER OF SHARESSection 1. CERTIFICATES FOR SHARES (a) Certificates for shares shall be in such form as the Boardof Directors may determine. The certificates shall designate the state in which -10-the corporation was incorporated, the name of the record holder of the sharesrepresented thereby, the number of the certificate, the date of issuance, thenumber of shares for which it is issued, the par value, the rights, privileges,preferences and restrictions of the shares, if any, the provisions as toredemption or conversion, if any, and shall make reference to any liens orrestrictions upon transfer or voting. (b) Every certificate for shares must be signed by thePresident or a Vice President and the Secretary or an Assistant Secretary andmay be sealed with the seal of the corporation or a facsimile thereof If thecertificate is countersigned by a transfer agent or registered by a registrarother than the corporation itself or an employee of the corporation, it may beauthenticated by facsimiles of the signatures of such officers.Section 2. REGISTERED SHAREHOLDERS The corporation shall be entitled to recognize the exclusiveright of a person registered on its books as the owner of shares for allpurposes, including distribution of dividends, voting and liability forassessments. The corporation shall not be bound to recognize any equitable orother claim to or interest in such shares on the part of any other person,whether or not it shall have express or other notice thereof, except asotherwise provided by law.Section 3. TRANSFER ON BOOKS Upon surrender to the corporation or the transfer agent of thecorporation of a certificate for shares duly endorsed or accompanied by properevidence of succession, assignment or authority to transfer, the corporation ortransfer agent shall issue a new certificate to the person entitled thereof,cancel the old certificate and record the transaction on its books.Section 4. RESTRICTIONS ON TRANSFER No securities of this corporation or certificates representingsuch securities shall be transferred in violation of any law or of anyrestriction on such transfer set forth in the Articles of Incorporation or amendments thereof the Bylaws or Shareholders' Agreement, any buy and sellagreement, right of first refusal, or other agreement restricting such transferwhich has been filed with the corporation if reference to any such restrictionsis made on the certificates representing such securities. The corporation shallnot be bound by any restriction not so filed and noted. The corporation may relyin good faith upon the opinion of its counsel as to such legal or contractualviolation with respect to any such restrictions unless the issue has beenfinally determined by a court of competent jurisdiction. The corporation, andany party to any such agreement, shall have the right to have a restrictivelegend imprinted upon any such certificate and any certificates issued inreplacement or exchange therefor or with respect thereto. -11-Section 5 LOST, STOLEN OR DESTROYED CERTIFICATES In the event a certificate is represented to be lost, stolenor destroyed, a new certificate shall be issued in place thereof upon proof ofthe loss, theft or destruction and upon the giving of such bond or othersecurity as may be required by the Board of Directors.Section 6. TRANSFER AGENTS AND REGISTRARS The Board of Directors may from time to time appoint one ormore transfer agents and one or more registrars for the shares of thecorporation who shall have such powers and duties as the Board of Directorsshall specify.Section 7. CLOSING STOCK TRANSFER BOOKS (a) The Board of Directors may close the transfer books for astated period not exceeding sixty (60) days to determine the shareholdersentitled to notice of or to vote at a meeting of shareholders, or entitled toreceive payment of a dividend, or in order to make a determination ofshareholders for any proper purpose. If the stock transfer books are closed todetermine shareholders entitled to notice of or to vote at a meeting ofshareholders, they shall be closed for at least twenty (20) days immediatelypreceding the meeting. (b) In lieu of closing the stock transfer books, the Board ofDirectors may fix, in advance, a date as the record date for the determinationof shareholders. This record date shall not be more than sixty (60) days and, incase of a meeting of shareholders, not less than twenty (20) days before thedate on which the particular action requiring the determination of shareholdersis to be taken. If the stock transfer books are not closed and no record date isfixed for the determination of shareholders entitled to notice of or to vote ata meeting of shareholders, or shareholders entitled to receive payment of adividend, the date on which notice of the meeting is mailed or the date on whichthe resolution of the Board of Directors declaring the dividend is adopted is,as the case may be, the record date for the determination of shareholders. ARTICLE VIII DIVIDENDS AND WORKING CAPITALSection 1. DIVIDENDS Dividends may be declared by the Board of Directors from timeto time out of the surplus or net profits of the corporation and shall bepayable at such time or times as the Board of Directors shall determine, subjectto preferences and provisions set forth in the Articles of Incorporation andstatutes. -12-Section 2. WORKING CAPITAL Before the payment of any dividends or the making or any distributionsof the net profits, there may be set aside out of the net profits of thecorporation such sum or sums as the Directors may from time to time, in theirdiscretion, think proper, as a working capital or as a reserve fund to meetcontingencies. Subject to the terms of any Shareholders' Agreement, the Board ofDirectors may, from time to time, increase, diminish or vary such capital orsuch reserve fund in their judgment and discretion. ARTICLE IX GENERAL PROVISIONSSection 1. FISCAL YEAR The fiscal year of the corporation shall be fixed byresolution of the Board of Directors.Section 2. SEAL The corporate seal shall be circular in form, and shall haveinscribed thereon the name of the corporation and the words "Corporate Seal" and"State of Alaska."Section 3. AMENDMENT OF BYLAWS (a) Except as otherwise provided by law, the Board ofDirectors may amend or repeal these Bylaws or adopt new Bylaws. (b) Whenever an amendment or new bylaw is adopted, it shall becopied in the minute book with the original Bylaws in the appropriate place. Ifany bylaw is repealed, the fact of repeal and the date on which the repealoccurred shall be stated in such book and place.Section 4. INDEMNIFICATION (a) The corporation shall indemnify any person who was or is aparty or is threatened to be made a party to any threatened, pending orcompleted action, suit or proceeding, whether civil, criminal, administrative,or investigative, by reason of the fact that such person is or was a director oran officer of the corporation against expenses (including attorneys' fees),judgments, fines, and amounts paid in settlement actually and reasonablyincurred by the person in connection with such action, suit or proceeding to thefullest extent and in the manner set forth in and permitted by, and subject tothe limitations and conditions precedent imposed by, the Alaska CorporationsCode, as amended, and any other applicable law, if any, as from time to time ineffect. Such right of indemnification shall not be deemed -13-exclusive of any other rights to which directors of officers may be entitledapart from the foregoing provision. The foregoing provisions of this subsection(a) and the relevant provisions of the Alaska Corporations Code and otherapplicable law, if any, are in effect, and any repeal or modification thereofshall not affect any rights or obligations then existing, with respect to anystate of facts then or theretofore existing, or any action, suit or proceedingstheretofore, or thereafter brought or threatened based in whole or in part uponsuch state of facts. (b) Subject to the discretion of the board of directors, thecorporation may indemnify any person who was or is a party or is threatened tobe made a party to any threatened, pending or completed action, suit orproceeding, whether civil, criminal, administrative, or investigative, by reasonof the fact that such person is or was an employee or agent of the corporationor is or was serving at the request of the corporation as a director, officer,employee or agent of another corporation, partnership, joint venture, trust orother enterprise against expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred by the person inconnection with such action, suit or proceeding to the extent and in the mannerset forth in and permitted by, and subject to the limitations and conditionsprecedent imposed by, the Alaska Corporations Code, as amended, and any otherapplicable law, if any, as from time to time in effect. Such right ofindemnification shall not be deemed exclusive of any other rights to which anysuch person may be entitled apart from the foregoing provisions. (c) Notwithstanding any other provisions of subsections (a)and (b), of this Section, if a Director, officer, employee or agent of thecorporation is successful on the merits or otherwise in defense of any action,suit or proceeding referred to in subsections (a) or (b) of this Section, or inthe defense of any claim, issue or matter therein, such person shall beindemnified against expenses (including attorneys' fees), actually andreasonably incurred by such person in connection with the defense. (d) At the discretion of the Board of Directors, thecorporation may purchase and maintain insurance on behalf of any person who isor was a Director, officer, employee or agent of the corporation, or is or wasserving at the request of the corporation as a Director, officer, employee oragent of another corporation, partnership, joint venture, trust or otherenterprise against any liability asserted against him/her and incurred byhim/her in any such capacity or arising out of his/her status as such, whetheror not the corporation would have the power to indemnify him/her against suchliability under the provisions of this article.Section 5. CONFLICT OF INTEREST TRANSACTIONS No contract or transaction of the corporation shall be void orvoidable by reason of the interest a shareholder may have in such contract ortransaction, or by reason of the fact that one or more of the corporation's -14-officers, directors or agents who negotiated or participated in or approved ofsuch transactions also holds a position as officer, director or agent with theother party to the contract or transaction. Such contracts or transactions shallbe valid and binding on the corporation so long as: (1) each contract ortransaction is duly approved by the Board of Directors of this corporationwithout counting the vote of any common director, although such common directormay be present at the meeting and counted for purposes of a quorum; (2) theinterest of the shareholder in the contract or transaction, or the position ofthe officer, director or agent with the other party to the contract ortransaction, is disclosed to or otherwise known to the Board of Directors; and(3) the material facts of the contract or other transaction are disclosed to orotherwise known to the Board of Directors. `Where a common director's vote isnecessary to the entering of such contract or transaction, the contract ortransaction shall not be void or voidable if it is fair to this corporation orits shareholders at the time it is authorized or approved. ADOPTED THIS 18th day of June 1996. /s/ Patrick M. Anderson It's PresidentReviewed and approved for entry this 18th day of June, 1996./s/Patrick M. Anderson, Director -15- ARTICLES OF INCORPORATION OF KANAS TELECOM, INC. The undersigned natural person of the age of eighteen years or more,acting as incorporator of a corporation under the Alaska Corporations Code(Alaska Statutes 10.06 et. seq.), adopts the following Articles ofIncorporation: ARTICLE I The name of the corporation is: KANAS TELECOM, INC. ARTICLE II The purpose for which the corporation is organized is to engage in anylawful business allowed under the Alaska Corporations Code, other than bankingand finance. ARTICLE III The duration of the corporation shall be perpetual. ARTICLE IV The authorized capital stock of the corporation shall consist of100,000 nonassessable, voting common shares without par value. ARTICLE V The internal affairs of the corporation shall be governed by by-lawshereafter adopted. ARTICLE VI The initial registered office address of the corporation is: P.O. Box 649 Glennallen, Alaska 99588 ARTICLE VII The name of the initial registered agent at that address is: Roy S. Ewan Page 1 ARTICLE VIII The name and address of the incorporator is: Patrick M. Anderson One Sealaska Plaza, Suite 302 Juneau, Alaska 99801 ARTICLE IX The initial Board of Directors shall consist of one person. The nameand address of the person who shall serve as Director until the first annualmeeting of shareholders, or until his successor shall be elected and qualified,is: Patrick M. Anderson One Sealaska Plaza, Suite 302 Juneau, Alaska 99801 ARTICLE X There are no affiliates of this corporation who are nonresident aliensor corporations whose place of incorporation is outside of the United States. EXECUTED in duplicate originals at Juneau, Alaska on this 13th day ofMay, 1996. /s/ Patrick M. Anderson, IncorporatorSTATE OF ALASKA ) )ss.FIRST JUDICIAL DISTRICT ) Patrick M. Anderson says on oath or affirms that he has read theforegoing document and believes all statements made in the document are true. /s/ Patrick M. Anderson, Incorporator SUBSCRIBED AND SWORN to or affirmed before me at Juneau, Alaska on this13th day of May, 1996. /s/ NOTARY PUBLIC FOR ALASKA My Commission Expires: ARTICLES OF AMENDMENTThe undersigned corporation adopts the following Articles of Amendment to itsArticles of Incorporation pursuant to the provisions of Alaska Statute10.06.510:1. The name of the corporation is: KANAS TELECOM, INC.2. Resolved that Article I of the Articles of Incorporation be amended to read as follows: "The name of the corporation is: GCI FIBER COMMUNICATION CO., INC."3. The amendment to the Articles of Incorporation was adopted as of July 19, 2001, by unanimous vote of all of the outstanding shares and all of the corporation's Directors. The number of shares outstanding is: 50,000 The number of shares entitled to vote is: 50,000 The number of shares that voted for the amendment: 50,000 The number of shares that voted against the amendment: 0Dated as of July 19, 2001 KANAS TELECOM, INC.By: /s/ By: /s/ Wilson Hughes Ronald A. Duncan President Chief Executive Officer Subscribed and sworn to before me this 23rd day of July, 2001. /s/ Tammy M. Webber Notary Public in and for Alaska My Commission Expires: 01/08/03