UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q

(Mark One)

 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 
SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2011
 
OR
 
 
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 
SECURITIES EXCHANGE ACT OF 1934

For the transition period from           to
 
Commission File No. 0-15279

 
GENERAL COMMUNICATION, INC.
 
 
(Exact name of registrant as specified in its charter)
 

 
State of Alaska
 
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) 868-5600

 
Not Applicable
 
 
Former name, former address and former fiscal year, if changed since last report
 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)  Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer", "accelerated filer” and "smaller reporting company" in Rule 12b-2 of the Exchange Act:

Large accelerated filer o
Accelerated filer x
Non-accelerated filer o (Do not check if a smaller reporting company)
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x

The number of shares outstanding of the registrant's classes of common stock as of October 31, 2011 was:

40,965,884 shares of Class A common stock; and
3,171,917 shares of Class B common stock.

 
1

 

GENERAL COMMUNICATION, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2011

TABLE OF CONTENTS

         
Page No.
           
Cautionary Statement Regarding Forward-Looking Statements
  3
           
Part I.  FINANCIAL INFORMATION
 
           
 
Item I.
Financial Statements
     
           
   
Consolidated Balance Sheets as of September 30, 2011 (unaudited)
  and December 31, 2010 (unaudited)
      4
           
   
Consolidated Income Statements for the three and nine months ended September 30, 2011 (unaudited) and 2010 (unaudited)
      6
           
   
Consolidated Statements of Cash Flows for the nine months ended
  September 30, 2011 (unaudited) and 2010 (unaudited)
      7
           
   
Condensed Notes to Interim Consolidated Financial Statements (unaudited)
      8
           
 
Item 2.
Management’s Discussion and Analysis of Financial Condition
     
   
  and Results of Operations
      26
           
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
      43
           
 
Item 4.
Controls and Procedures
      44
           
Part II.  OTHER INFORMATION
     
           
 
Item 1.
Legal Proceedings
      44
           
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
      45
           
 
Item 6.
Exhibits
      46
           
 
Other items are omitted, as they are not applicable.
   
           
SIGNATURES
      47

 
2

 

Cautionary Statement Regarding Forward-Looking Statements

 
You should carefully review the information contained in this Quarterly Report, but should particularly consider any risk factors that we set forth in this Quarterly Report and in other reports or documents that we file from time to time with the Securities and Exchange Commission (“SEC”). In this Quarterly Report, in addition to historical information, we state our future strategies, plans, objectives or goals and our beliefs of future events and of our future operating results, financial position and cash flows. In some cases, you can identify these so-called “forward-looking statements” by words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “project,” or “continue” or the negative of these words and other comparable words. All forward-looking statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance, achievements, plans and objectives to differ materially from any future results, performance, achievements, plans and objectives expressed or implied by these forward-looking statements. In evaluating these statements, you should specifically consider various factors, including those identified under “Risk Factors” in Item 1A of our December 31, 2010 annual report on Form 10-K.  Those factors may cause our actual results to differ materially from any of our forward-looking statements. For these forward looking statements, we claim the protection of the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995.

You should not place undue reliance on any such forward-looking statements. Further, any forward-looking statement, and the related risks, uncertainties and other factors speak only as of the date on which they were originally made and we expressly disclaim any obligation or undertaking to update or revise any forward-looking statement to reflect any change in our expectations with regard to these statements or any other change in events, conditions or circumstances on which any such statement is based. New factors emerge from time to time, and it is not possible for us to predict what factors will arise or when. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

 
3

 

 
 
 
   
 
 
PART I. FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
 
 
 
   
 
 
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
 
(Unaudited)
 
 
 
 
   
 
 
(Amounts in thousands)
 
 
   
 
 
 
 
September 30,
   
December 31,
 
ASSETS
 
2011
   
2010
 
 
 
 
   
 
 
Current assets:
 
 
   
 
 
Cash and cash equivalents
  $ 34,634       33,070  
 
               
Receivables
    168,840       132,856  
Less allowance for doubtful receivables
    6,273       9,189  
Net receivables
    162,567       123,667  
 
               
Deferred income taxes
    10,145       10,145  
Prepaid expenses
    8,434       5,950  
Inventories
    7,949       5,804  
Other current assets
    3,658       3,940  
Total current assets
    227,387       182,576  
 
               
Property and equipment in service, net of depreciation
    762,170       798,278  
Construction in progress
    108,692       31,144  
Net property and equipment
    870,862       829,422  
 
               
Cable certificates
    191,635       191,635  
Goodwill
    73,932       73,932  
Wireless licenses
    25,967       25,967  
Restricted cash
    16,546       -  
Other intangible assets, net of amortization
    16,549       17,717  
Deferred loan and senior notes costs, net of amortization
    13,223       13,661  
Other assets
    15,271       16,850  
Total other assets
    353,123       339,762  
Total assets
  $ 1,451,372       1,351,760  
 
               
See accompanying condensed notes to interim consolidated financial statements.
 
 
               
 
               
 
               
 
         
(Continued)
 

 
4

 


GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
 
(Unaudited)
 
(Continued)
 
 
 
 
   
 
 
(Amounts in thousands)
 
 
   
 
 
 
 
September 30,
   
December 31,
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
2011
   
2010
 
 
 
 
   
 
 
Current liabilities:
 
 
   
 
 
Current maturities of obligations under long-term debt and
  capital leases
  $ 8,042       7,652  
Accounts payable
    49,726       35,589  
Deferred revenue
    18,583       17,296  
Accrued payroll and payroll related obligations
    20,313       22,132  
Accrued interest
    21,969       13,456  
Accrued liabilities
    11,370       12,557  
Subscriber deposits
    1,304       1,271  
Total current liabilities
    131,307       109,953  
 
               
Long-term debt, net
    852,374       779,201  
Obligations under capital leases, excluding current maturities
    80,031       84,144  
Obligation under capital lease due to related party
    1,893       1,885  
Deferred income taxes
    109,804       102,401  
Long-term deferred revenue
    63,914       49,175  
Other liabilities
    22,433       24,495  
Total liabilities
    1,261,756       1,151,254  
 
               
Commitments and contingencies
               
Stockholders’ equity:
               
Common stock (no par):
               
Class A. Authorized 100,000 shares; issued 40,966 and
               
44,213 shares at September 30, 2011 and December 31, 2010, respectively; outstanding 40,712 and 43,958 shares at September 30, 2011 and December 31, 2010, respectively
    31,535       69,396  
Class B. Authorized 10,000 shares; issued and
               
outstanding 3,172 and 3,178 shares at September 30, 2011 and December 31, 2010, respectively; convertible on a share-per-share basis into Class A common stock
    2,680       2,677  
Less cost of 254 and 255 Class A common shares
               
held in treasury at September 30, 2011 and December 31, 2010, respectively
    (2,240 )     (2,249 )
Paid-in capital
    40,750       37,075  
Retained earnings
    100,345       93,607  
Total General Communication, Inc. stockholders’ equity
    173,070       200,506  
Noncontrolling interest
    16,546       -  
Total stockholders' equity
    189,616       200,506  
Total liabilities and stockholders’ equity
  $ 1,451,372       1,351,760  
 
               
See accompanying condensed notes to interim consolidated financial statements.
 

 
5

 
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES

CONSOLIDATED INCOME STATEMENTS
 
(Unaudited)
 
 
 
 
   
 
   
 
   
 
 
 
 
 
   
 
   
 
   
 
 
 
 
Three Months Ended
   
Nine Months Ended
 
 
 
September 30,
   
September 30,
 
(Amounts in thousands, except per share amounts)
 
2011
   
2010
   
2011
   
2010
 
Revenues
  $ 177,703       171,509       510,569       486,254  
Cost of goods sold (exclusive of depreciation and
                               
amortization shown separately below)
    60,664       52,486       171,734       153,147  
Selling, general and administrative expenses
    54,453       58,532       171,043       166,493  
Depreciation and amortization expense
    30,702       30,288       93,054       92,234  
 Operating income
    31,884       30,203       74,738       74,380  
 
                               
Other income (expense):
                               
Interest expense (including amortization of deferred
                               
loan fees)
    (16,678 )     (17,760 )     (51,424 )     (53,169 )
Loss on extinguishment of debt
    -       -       (9,111 )     -  
Interest income
    22       99       30       236  
Other
    (59 )     -       (92 )     -  
 Other expense, net
    (16,715 )     (17,661 )     (60,597 )     (52,933 )
   Income before income tax expense
    15,169       12,542       14,141       21,447  
Income tax expense
    (7,959 )     (4,959 )     (7,403 )     (10,260 )
 
                               
   Net income
  $ 7,210       7,583       6,738       11,187  
 
                               
Basic net income per Class A common share
  $ 0.16       0.14       0.15       0.20  
 
                               
Basic net income per Class B common share
  $ 0.16       0.14       0.15       0.20  
 
                               
Diluted net income per Class A common share
  $ 0.15       0.14       0.13       0.20  
 
                               
Diluted net income per Class B common share
  $ 0.15       0.14       0.13       0.20  
 
                               
See accompanying condensed notes to interim consolidated financial statements
         

 
6

 
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
 
NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
 
(Unaudited)
 
 
 
 
   
 
 
 
 
 
   
 
 
(Amounts in thousands)
 
2011
   
2010
 
Cash flows from operating activities:
 
 
   
 
 
Net income
  $ 6,738       11,187  
Adjustments to reconcile net income to net cash provided by
               
operating activities:
               
Depreciation and amortization expense
    93,054       92,234  
Loss on extinguishment of debt
    9,111       -  
Deferred income tax expense
    7,403       10,260  
Share-based compensation expense
    3,224       4,696  
Other noncash income and expense items
    7,195       5,712  
Change in operating assets and liabilities
    (30,199 )     (11,933 )
Net cash provided by operating activities
    96,526       112,156  
Cash flows from investing activities:
               
Purchases of property and equipment
    (126,900 )     (68,813 )
Restricted cash
    16,546       -  
Grant proceeds
    15,314       -  
Purchases of other assets and intangible assets
    (4,635 )     (3,002 )
Purchase of businesses, net of cash received
    -       (5,545 )
Purchase of marketable securities
    -       (202 )
Proceeds from sale of marketable securities
    -       178  
Other
    233       -  
Net cash used in investing activities
    (99,442 )     (77,384 )
Cash flows from financing activities:
               
Repayment of debt and capital lease obligations
    (414,733 )     (7,315 )
Issuance of 2021 Notes
    325,000       -  
Borrowing on Senior Credit Facility
    142,000       -  
Purchase of treasury stock to be retired
    (39,291 )     (1,306 )
Investment by noncontrolling interest
    (16,546 )     -  
Issuance of other long-term debt
    15,375       6,206  
Payment of Senior Notes call premiums
    (4,728 )     -  
Payment of debt issuance costs
    (3,512 )     (2,300 )
Other
    915       167  
Net cash provided by (used in) financing activities
    4,480       (4,548 )
Net increase in cash and cash equivalents
    1,564       30,224  
Cash and cash equivalents at beginning of period
    33,070       48,776  
Cash and cash equivalents at end of period
  $ 34,634       79,000  
 
               
See accompanying condensed notes to interim consolidated financial statements.
 

 
7

 
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Condensed Notes to Interim Consolidated Financial Statements
(Unaudited)


The accompanying unaudited interim consolidated financial statements include the accounts of General Communication, Inc. (“GCI”) and its direct and indirect subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. They should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2010, filed with the SEC on March 15, 2011 as part of our annual report on Form 10-K.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of operations for interim periods are not necessarily indicative of the results that may be expected for an entire year or any other period.

(1)      Business and Summary of Significant Accounting Principles
In the following discussion, GCI and its direct and indirect subsidiaries are referred to as “we,” “us” and “our.”

 
(a)
Business
GCI, an Alaska corporation, was incorporated in 1979. We offer the following services:
·  
Origination and termination of traffic in Alaska for certain common carriers,
·  
Cable television services throughout Alaska,
·  
Competitive local access services throughout Alaska,
·  
Incumbent local access services in areas of rural Alaska,
·  
Long-distance telephone service,
·  
Sale of postpaid and prepaid wireless telephone services and sale of wireless telephone handsets and accessories,
·  
Data network services,
·  
Internet access services,
·  
Wireless roaming for certain wireless carriers,
·  
Broadband services, including our SchoolAccess® offering to rural school districts, our ConnectMD® offering to rural hospitals and health clinics, and managed video conferencing,
·  
Managed services to certain commercial customers,
·  
Sales and service of dedicated communications systems and related equipment, and
·  
Lease, service arrangements and maintenance of capacity on our fiber optic cable systems used in the transmission of voice and data services within Alaska and between Alaska and the remaining United States and foreign countries.

 
(b)
Principles of Consolidation
 
 
The consolidated financial statements include the consolidated accounts of GCI and its wholly-owned subsidiaries, as well as a variable interest entity (“VIE”) in which we were the primary beneficiary, when on August 30, 2011, we provided certain loans and guarantees to Terra GCI Investment Fund, LLC (“TIF”).  We account for non-controlling interests in consolidated subsidiaries for which our ownership is less than 100 percent.  All significant intercompany transactions between non-regulated affiliates of our company are eliminated.   Intercompany transactions generated between regulated and non-regulated affiliates of the company are not eliminated in consolidation.

 
(c)
Noncontrolling Interest
Noncontrolling interests represent the equity ownership interests in consolidated subsidiaries not owned by us.  Noncontrolling interest is adjusted for contributions, distributions, and earnings (loss) attributable to the noncontrolling interest partners of the consolidated entities.  Income and loss is allocated to the noncontrolling interest based on the respective partnership agreements.

 
(d)
Recently Issued Accounting Pronouncements
In September 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-08, “Intangibles – Goodwill and Other (Topic 350)”.  The amendments in this update will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under these amendments, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment.  This pronouncement is effective for fiscal years beginning after December 15, 2011.  The adoption of ASU 2011-08 is not expected to have a material impact on our income statements, financial position or cash flows.

 
8

GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Condensed Notes to Interim Consolidated Financial Statements
(Unaudited)
 
 
In May 2011, the FASB issued ASU 2011-04 “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”)” which amends current guidance to achieve common fair value measurement and disclosure requirements in GAAP and IFRS.  The amendments generally represent clarification of FASB ASC Topic 820, but also include instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed.  This pronouncement is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  The adoption of ASU 2011-04 is not expected to have a material impact on our income statements, financial position or cash flows.

 
(e)
Recently Adopted Accounting Pronouncements
FASB ASU 2009-13 addresses the accounting for multiple deliverable arrangements to enable vendors to account for products or services (“deliverables”) separately rather than as a combined unit. Specifically, this guidance amends the criteria in Subtopic 605-25, “Revenue Recognition - Multiple-Element Arrangements”, for separating consideration in multiple-deliverable arrangements. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on: (a) vendor-specific objective evidence; (b) third-party evidence; or (c) estimates. This guidance also eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. In addition, this guidance significantly expands required disclosures related to a vendor's multiple-deliverable revenue arrangements. The adoption of ASU 2009-13 on January 1, 2011, did not have a material impact on our income statements, financial position or cash flows.

Under ASU 2010-28 “Intangibles—Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts”, if the carrying amount of a reporting unit is zero or negative, an entity must assess whether it is more likely than not that goodwill impairment exists. To make that determination, an entity should consider whether there are adverse qualitative factors that could impact the amount of goodwill, including those listed in ASC 350-20-35-30. As a result of the new guidance, an entity can no longer assert that a reporting unit is not required to perform the second step of the goodwill impairment test because the carrying amount of the reporting unit is zero or negative, despite the existence of qualitative factors that indicate goodwill is more likely than not impaired.  The adoption of ASU 2010-28 on January 1, 2011, did not have a material impact on our income statements, financial position or cash flows.

ASU 2010-29 “Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations” specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments in this update also expand the supplemental pro forma disclosures under Topic 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings.  The adoption of ASU 2010-29 on January 1, 2011, did not have a material impact on our income statements, financial position, cash flows or related disclosures.
 
 
9

GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Condensed Notes to Interim Consolidated Financial Statements
(Unaudited)
 

 
 
(f)
Regulatory Accounting
 
We account for our regulated operations in accordance with the accounting principles for regulated enterprises.  This accounting recognizes the economic effects of rate regulation by recording cost and a return on investment as such amounts are recovered through rates authorized by regulatory authorities.  Accordingly, plant and equipment is depreciated over lives approved by regulators and certain costs and obligations are deferred based upon approvals received from regulators to permit recovery of such amounts in future years.  Our cost studies and depreciation rates for our regulated operations are subject to periodic audits that could result in a change to recorded revenues.

 
(g)
Earnings per Common Share
 
We compute net income per share of Class A and Class B common stock using the “two class” method.  Therefore, basic net income per share is computed by dividing net income applicable to common stockholders by the weighted average number of common shares outstanding during the period.  Diluted net income per share is computed by dividing net income by the weighted average number of common and dilutive common equivalent shares outstanding during the period.  The computation of the dilutive net income per share of Class A common stock assumes the conversion of Class B common stock to Class A common stock, while the dilutive net income per share of Class B common stock does not assume the conversion of those shares. Additionally in applying the “two-class” method, undistributed earnings are allocated to both common shares and participating securities. Our restricted stock grants are entitled to dividends and meet the criteria of a participating security.

 
Undistributed earnings for each year are allocated based on the contractual participation rights of Class A and Class B common shares as if the earnings for the year had been distributed.  In accordance with our Articles of Incorporation which provide that, if and when dividends are declared on our common stock in accordance with Alaska corporate law, equivalent dividends shall be paid with respect to the shares of Class A and Class B common stock. Both classes of common stock have identical dividend rights and would therefore share equally in our net assets in the event of liquidation. As such, we have allocated undistributed earnings on a proportionate basis.

Earnings per common share (“EPS”) and common shares used to calculate basic and diluted EPS consist of the following (amounts in thousands, except per share amounts):

 
 
Three Months Ended
 
 
 
September 30,
 
 
 
2011
   
2010
 
 
 
Class A
   
Class B
   
Class A
   
Class B
 
Basic net income per share:
 
 
   
 
   
 
   
 
 
Numerator:
 
 
   
 
   
 
   
 
 
Allocation of undistributed earnings
  $ 6,701       509     $ 7,142       441  
 
                               
Denominator:
                               
Weighted average common shares outstanding
    41,768       3,175       51,496       3,183  
Basic net income per share
  $ 0.16       0.16     $ 0.14       0.14  
 
                               
Diluted net income per share:
                               
Numerator:
                               
Allocation of undistributed earnings for
   basic computation
  $ 6,701       509     $ 7,142       441  
 
 
10

GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Condensed Notes to Interim Consolidated Financial Statements
(Unaudited)
 
 
Reallocation of undistributed earnings as a
  result of conversion of Class B to Class A
  shares
    509       -       441       -  
Reallocation of undistributed earnings as a
  result of conversion of Class B to Class A
  shares outstanding
    -       (40 )     -       (2 )
Effect of share based compensation that may
  be settled in cash or shares
    (495 )     -       -       -  
Net income adjusted for allocation of
  undistributed earnings and effect of share based
  compensation that may be settled in cash or
  shares
  $ 6,715       469     $ 7,583       439  
 
                               
Denominator:
                               
Number of shares used in basic computation
    41,768       3,175       51,496       3,183  
Conversion of Class B to Class A common shares
  outstanding
    3,175       -       3,183       -  
Unexercised stock options
    304       -       261       -  
Effect of share based compensation that may
  be settled in cash or shares
    217       -       -       -  
Number of shares used in per share
  computations
    45,464       3,175       54,940       3,183  
Diluted net income per share
  $ 0.15       0.15     $ 0.14       0.14  

 
 
Nine Months Ended
 
 
 
September 30,
 
 
 
2011
   
2010
 
 
 
Class A
   
Class B
   
Class A
   
Class B
 
Basic net income per share:
 
 
   
 
   
 
   
 
 
Numerator:
 
 
   
 
   
 
   
 
 
Allocation of undistributed earnings
  $ 6,274       464     $ 10,536       651  
 
                               
Denominator:
                               
Weighted average common shares
  outstanding
    42,940       3,177       51,521       3,184  
Basic net income per share
  $ 0.15       0.15     $ 0.20       0.20  
 
                               
Diluted net income per share:
                               
Numerator:
                               
Allocation of undistributed earnings for
  basic computation
  $ 6,274       464     $ 10,536       651  
Reallocation of undistributed earnings as a
  result of conversion of Class B to Class A
  shares
    464       -       651       -  
Reallocation of undistributed earnings as a
  result of conversion of Class B to Class A
  shares outstanding
    -       (44 )     -       (1 )
 
 
11

GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Condensed Notes to Interim Consolidated Financial Statements
(Unaudited)
 
Effect of share based compensation that
  may be settled in cash or shares
    (571 )     -       -       -  
Net income adjusted for allocation of
  undistributed earnings and effect of share
  based compensation that may be settled in
  cash or shares
  $ 6,167       420     $ 11,187       650  
 
                               
Denominator:
                               
Number of shares used in basic computation
    42,940       3,177       51,521       3,184  
Conversion of Class B to Class A common
  shares outstanding
    3,177       -       3,184       -  
Unexercised stock options
    348       -       103       -  
Effect of share based compensation that may
  be settled in cash or shares
    217       -       -       -  
Number of shares used in per share computations
    46,682       3,177       54,808       3,184  
Diluted net  income per share
  $ 0.13       0.13     $ 0.20       0.20  

Weighted average shares associated with outstanding share awards for the three and nine months ended September 30, 2011 and 2010, which have been excluded from the computations of diluted EPS, because the effect of including these share awards would have been anti-dilutive, consist of the following (shares, in thousands):

 
Three Months Ended
   
Nine Months Ended
 
 
September 30,
   
September 30,
 
 
2011
   
2010
   
2011
   
2010
 
Shares associated with anti-dilutive unexercised
  stock options
    95       169       39       955  
Share-based compensation that may be settled
  in cash or shares, the effect of which is
  anti-dilutive
    -       233       -       233  

Additionally, 50,000 weighted average shares associated with contingent awards were excluded from the computation of diluted EPS for the three and nine months ended September 30, 2011 because the contingencies of these awards have not been met at September 30, 2011.

 
(h)
Common Stock
 
Following are the changes in issued common stock for the nine months ended September 30, 2011 and 2010 (shares, in thousands):

 
 
Class A
   
Class B
 
Balances at December 31, 2009
    51,899       3,186  
Class B shares converted to Class A
    5       (5 )
Shares issued upon stock option exercises
    41       -  
Share awards issued
    211       -  
Shares retired
    (132 )     -  
Other
    (2 )     -  
Balances at September 30, 2010
    52,022       3,181  
 
 
12

GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Condensed Notes to Interim Consolidated Financial Statements
(Unaudited)
 
 
 
               
Balances at December 31, 2010
    44,213       3,178  
Class B shares converted to Class A
    6       (6 )
Shares issued upon stock option exercises
    157       -  
Share awards issued
    417       -  
Shares retired
    (3,802 )     -  
Other
    (25 )     -  
Balances at September 30, 2011
    40,966       3,172  

GCI’s Board of Directors has authorized a common stock buyback program for the repurchase of GCI’s Class A and Class B common stock in order to reduce the outstanding shares of Class A and Class B common stock.  We are authorized to increase our repurchase limit $5.0 million per quarter indefinitely and to use stock option exercise proceeds to repurchase additional shares.  If stock repurchases are less than the total approved quarterly amount the difference may be carried forward and used to repurchase additional shares in future quarters.

Under the stock buyback program, we repurchased 1.9 million shares of our Class A and B common stock at a cost of $17.9 million during the three months ended September 30, 2011.  There were no repurchases during the three months ended September 30, 2010.  During the nine months ended September 30, 2011 and 2010 we repurchased 3.8 million and 224,000 shares, respectively, of our Class A and B common stock at a cost of $39.0 million and $1.3 million, respectively.  The cost of the repurchased common stock reduced Common Stock on our Consolidated Balance Sheets.  The 2011 repurchases reduced the amount available under the stock buyback program to $101.5 million at September 30, 2011.  The repurchased stock was constructively retired as of September 30, 2011.

We expect to continue the repurchases for an indefinite period dependent on leverage, liquidity, company performance, market conditions and subject to continued oversight by GCI’s Board of Directors. The open market repurchases have complied and will continue to comply with the restrictions of Rule 10b-18 under the Securities Exchange Act of 1934, as amended.

(i)       Use of Estimates
 
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to estimates and assumptions include the allowance for doubtful receivables, unbilled revenues, accrual of the Universal Service Fund (“USF”) high cost area program support, share-based compensation, inventory reserves, reserve for future customer credits, valuation allowances for deferred income tax assets, depreciable and amortizable lives of assets, the carrying value of long-lived assets including goodwill, cable certificates and wireless licenses, purchase price allocations, deferred lease expense, asset retirement obligations, the accrual of Cost of Goods Sold (exclusive of depreciation and amortization) and the accrual of contingencies and litigation. Actual results could differ from those estimates.

The accounting estimates related to revenues from the high cost USF program are dependent on various inputs including current line counts, the most current rates paid to us, and our assessment of the impact of new Federal Communications Commission (“FCC”) regulations, and the potential outcome of FCC proceedings.  Some of the inputs are subjective and based on our judgment regarding the outcome of certain variables and are subject to upward or downward adjustment in subsequent periods. 

Effective in the second quarter of 2010, we changed our USF high-cost area program support accrual methodology due to a change in our estimate of the current amounts expected to be paid to us.  The effect of this change in estimate was a revenue increase of $4.7 million, a net income increase of $3.1 million, and a basic and diluted net income per share increase of $0.06 for the nine months ended September 30, 2010.

 
13

GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Condensed Notes to Interim Consolidated Financial Statements
(Unaudited)
 
(j)       Guarantees
Certain of our customers have guaranteed levels of service.  If an interruption in service occurs we do not recognize revenue for any portion of the monthly service fee that will be refunded to the customer or not billed to the customer due to these service level agreements.

Additionally, we have provided certain guarantees to U.S. Bancorp Community Development Corporation (“US Bancorp”), our tax credit investor in TIF.  We have guaranteed the delivery of $30.7 million of New Markets Tax Credits (“NMTC”) to US Bancorp, as well as certain loan and management fee payments between our subsidiaries and the VIE, of which we are the primary beneficiary.  In the event that the tax credits are not delivered or certain payments not made, we are obligated to provide prompt and complete payment of these obligations.   Please refer to Note 9 for more information about our NMTC transaction.

(k)      Classification of Taxes Collected from Customers
We report sales, use, excise, and value added taxes assessed by a governmental authority that are directly imposed on a revenue-producing transaction between us and a customer on a net basis in our income statement.  Following are certain surcharges reported on a gross basis in our Consolidated Income Statements for the three and nine months ended September 30, 2011 and 2010 (amounts in thousands):

 
 
Three Months Ended
   
Nine Months Ended
 
 
 
September 30,
   
September 30,
 
 
 
2011
   
2010
   
2011
   
2010
 
Surcharges reported gross
  $ 1,300       1,272       4,100       4,023  

(2)
Consolidated Statements of Cash Flows Supplemental Disclosures
 
Changes in operating assets and liabilities consist of (amounts in thousands):

Nine month period ended September 30,
 
2011
   
2010
 
 Increase in accounts receivable
  $ (42,901 )     (23,482 )
 Increase in prepaid expenses
    (2,484 )     (1,563 )
 (Increase) decrease in inventories
    (2,145 )     1,343  
 Decrease in other current assets
    282       646  
 Decrease in other assets
    2,617       2,193  
 Increase in accounts payable
    10,517       5,430  
 Increase in deferred revenues
    1,287       1,057  
 Increase (decrease) in accrued payroll and payroll related obligations
    (2,057 )     96  
 Increase (decrease) in accrued liabilities
    (1,338 )     3,030  
 Increase in accrued interest
    8,513       2,093  
 Increase (decrease) in subscriber deposits
    33       (344 )
 Decrease in long-term deferred revenue
    (575 )     (1,932 )
 Decrease in components of other long-term
  liabilities
    (1,948 )     (500 )
 
  $ (30,199 )     (11,933 )

 
14

GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Condensed Notes to Interim Consolidated Financial Statements
(Unaudited)
 
The following items are for the nine months ended September 30, 2011 and 2010 (amounts in thousands):

Net cash paid or received:
 
2011
   
2010
 
Interest paid, net of amounts capitalized
  $ 42,654       49,363  
Income tax refund received
  $ -       1,163  

The following items are non-cash investing and financing activities for the nine months ended September 30, 2011 and 2010 (amounts in thousands):

 
 
2011
   
2010
 
Non-cash additions for purchases of property and
  equipment
  $ 11,481       3,547  
Asset retirement obligation additions to property and
  equipment
  $ 222       657  
Asset retirement obligation reductions to property and
  equipment for revisions to previous estimates
  $ 294       -  

(3)     Intangible Assets
Amortization expense for amortizable intangible assets was as follows (amounts in thousands):

 
 
Three Months Ended
   
Nine Months Ended
 
 
 
September 30,
   
September 30,
 
 
 
2011
   
2010
   
2011
   
2010
 
Amortization expense
  $ 1,517       1,557       4,673       4,854  

Amortization expense for amortizable intangible assets for each of the five succeeding fiscal years is estimated to be (amounts in thousands):

Years Ending December 31,
 
 
 
2011 
  $ 5,991  
2012 
    4,341  
2013 
    3,284  
2014 
    2,424  
2015 
    1,697  


 
15

 
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Condensed Notes to Interim Consolidated Financial Statements
(Unaudited)


(4)
Long-Term Debt

2021 Notes
On May 20, 2011, GCI, Inc. our wholly-owned subsidiary, completed an offering of $325.0 million in aggregate principal amount of 6 3/4% Senior Notes due 2021 (“2021 Notes”) at an issue price of 100% to qualified institutional buyers in reliance on Rule 144A under the Securities Act of 1933, as amended (“Securities Act”), and to persons outside the United States in accordance with Regulation S under the Securities Act.  We used the net proceeds from this offering to repay and retire all $320.0 million of our outstanding senior unsecured notes due 2014 (“2014 Notes”).

The 2021 Notes are not redeemable prior to June 1, 2016. At any time on or after June 1, 2016, the 2021 Notes are redeemable at our option, in whole or in part, on not less than 30 nor more than 60 days’ notice, at the following redemption prices (expressed as percentages of principal amount), plus accrued and unpaid interest (if any) to the date of redemption:

If redeemed during the 12-month period commencing June 1 of the year indicated:

Year
 
Redemption Price
 
2016 
    103.375 %
2017 
    102.250 %
2018 
    101.125 %
2019 and thereafter
    100.000 %

The 2021 Notes mature on June 1, 2021.  Semi-annual interest payments are payable on June 1 and December 1, beginning on December 1, 2011.

The 2021 Notes are senior unsecured obligations which rank equally in right of payment with our existing and future senior unsecured debt, including our 8 5/8% Senior Notes due 2019, and senior in right of payment to all future subordinated indebtedness.

The 2021 Notes were issued pursuant to an Indenture, dated May 20, 2011, between us and Union Bank, N.A., as trustee.

We are not required to make mandatory sinking fund payments with respect to the 2021 Notes.

Upon the occurrence of a change of control, each holder of the 2021 Notes will have the right to require us to purchase all or any part (equal to $1,000 or an integral multiple thereof, except that no 2021 Note will be purchased in part if the remaining portion thereof would not be at least $2,000) of such holder’s 2021 Notes at a purchase price equal to 101% of the principal amount of such 2021 Notes, plus accrued and unpaid interest on such 2021 Notes, if any.  If we or certain of our subsidiaries engage in asset sales, we must generally either invest the net cash proceeds from such sales in our business within a period of time, prepay debt under any outstanding credit facility, or make an offer to purchase a principal amount of the 2021 Notes equal to the excess net cash proceeds, with the purchase price equal to 100% of their principal amount, plus accrued and unpaid interest, if any.

The covenants in the Indenture restrict GCI, Inc. and certain of its subsidiaries from incurring additional debt, but permits debt under the Senior Credit Facility and vendor financing as long as our leverage ratio, as defined, does not exceed 5.5 to one; or enter into sale and leaseback transactions; pay dividends or distributions on capital stock or repurchase capital stock; issue stock of subsidiaries; make certain investments; create liens on assets to secure debt; enter into transactions with affiliates; merge or consolidate with another company; and transfer and sell assets.  These covenants are subject to a number of limitations and exceptions, as further described in the Indenture.

On August 15, 2011, GCI, Inc. closed an exchange offer pursuant to which it offered new 2021 Notes identical to the original notes except that the new 2021 Notes were registered under the Securities Act.

 
16

GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Condensed Notes to Interim Consolidated Financial Statements
(Unaudited)
 
We paid closing costs totaling $3.5 million in connection with the offering, which were recorded as deferred loan costs and are being amortized over the term of the 2021 Notes. We recorded a $9.1 million Loss on Extinguishment of Debt on our Consolidated Income Statement for the nine months ended September 30, 2011.  Included in the loss was $2.9 million in unamortized deferred loan costs, $1.5 million for the unamortized portion of the original issue discount and $4.7 million in call premium payments to redeem our 2014 Notes.
 
Senior Credit Facility
 
In June 2011, GCI Holdings, Inc. (“Holdings”), our wholly owned subsidiary, entered into an Add-On Term Loan Supplement No. 1 (“Supplement No. 1”) to our Senior Credit Facility. The Supplement No. 1 provided for an additional $25.0 million term loan with an initial interest rate of LIBOR plus 2.5%, payable in accordance with the terms of our Senior Credit Facility.  Holdings used $20.0 million of the loan proceeds to pay down outstanding revolving loans under our Senior Credit Facility, thus increasing availability under the revolving portion of our Senior Credit Facility.  The remaining $5.0 million was used for general corporate purposes.

In July 2011, Holdings entered into an Add-On Term Loan Supplement No. 2 (“Supplement No. 2”) to our Senior Credit Facility. The Supplement No. 2 provided for an additional $25.0 million term loan with an initial interest rate of LIBOR plus 2.5%, payable in accordance with the terms of our Senior Credit Facility.  Holdings used $15.0 million to pay down outstanding revolving loans under our Senior Credit Facility, thus increasing availability under the revolving portion of our Senior Credit Facility.  The remaining $10.0 million was used for general corporate purposes.

Our Senior Credit Facility, including Supplements No. 1 and No. 2 as discussed above, now consist of a $50.0 million term loan and a $75.0 million revolving credit facility with a $25.0 million sublimit for letters of credit.  The term loan is fully drawn and a total of $73.0 million is outstanding as of September 30, 2011.  Under the revolving portion of the Senior Credit Facility, we have borrowed $23.0 million and have $349,000 of letters of credit outstanding, which leaves $51.7 million available for borrowing as of September 30, 2011.  The Senior Credit Facility will mature on January 29, 2015.
 
(5)
Financial Instruments

Fair Value of Financial Instruments
The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties. At September 30, 2011 and December 31, 2010, the fair values of cash and cash equivalents, net receivables, accounts payable, accrued payroll and payroll related obligations, accrued interest, accrued liabilities, and subscriber deposits approximate their carrying value due to the short-term nature of these financial instruments. The carrying amounts and estimated fair values of our financial instruments at September 30, 2011 and December 31, 2010 follow (amounts in thousands):

 
 
September 30,
   
December 31,
 
 
 
2011
   
2010
 
 
 
Carrying Amount
   
Fair Value
   
Carrying Amount
   
Fair Value
 
Current and long-term debt and
  capital lease obligations
  $ 942,340       941,804       872,882       908,286  
Other liabilities
    86,044       84,518       73,309       72,065  

 
17

GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Condensed Notes to Interim Consolidated Financial Statements
(Unaudited)
 
The following methods and assumptions were used to estimate fair values:

 
Current and long-term debt and capital lease obligations:  The fair values of our 2021 Notes, 2019 Notes, 2014 Notes, Rural Utilities Service (“RUS”) debt, CoBank mortgage note payable, and capital leases are based upon quoted market prices for the same or similar issues or on the current rates offered to us for the same remaining maturities.  The fair value of our Senior Credit Facility is estimated to approximate the carrying value because this instrument is subject to variable interest rates.

 
Other Liabilities:  Lease escalation liabilities are valued at the discounted amount of future cash flows using quoted market prices on current rates offered to us. Deferred compensation liabilities are carried at fair value, which is the amount payable as of the balance sheet date. Asset retirement obligations are recorded at their fair value and, over time, the liability is accreted to its present value each period. Our non-employee share-based compensation awards are reported at their fair value at each reporting period.

Fair Value Measurements
Assets measured at fair value on a recurring basis as of September 30, 2011 and December 31, 2010 were as follows (amounts in thousands):

 
 
Fair Value Measurement at Reporting Date Using
 
September 30, 2011 Assets
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
   
Significant Other Observable Inputs (Level 2)
   
Significant Unobservable Inputs (Level 3)
 
Deferred compensation plan assets
  (mutual funds)
  $ 1,494       -       -  
Total assets at fair value
  $ 1,494       -       -  
 
                       
December 31, 2010 Assets
                       
Deferred compensation plan assets
  (mutual funds)
  $ 1,678       -       -  
Total assets at fair value
  $ 1,678       -       -  

The valuation of our mutual funds is determined using quoted market prices in active markets utilizing market observable inputs.

(6)      Share-Based Compensation
Our Amended and Restated 1986 Stock Option Plan ("Stock Option Plan"), provides for the grant of options and restricted stock awards (collectively "award") for a maximum of 15.7 million shares of GCI Class A common stock, subject to adjustment upon the occurrence of stock dividends, stock splits, mergers, consolidations or certain other changes in corporate structure or capitalization. If an award expires or terminates, the shares subject to the award will be available for further grants of awards under the Stock Option Plan. The Compensation Committee of GCI’s Board of Directors administers the Stock Option Plan. Substantially all restricted stock awards granted vest over periods of up to three years. Substantially all options vest in equal installments over a period of five years and expire ten years from the date of grant. The requisite service period of our awards is generally the same as the vesting period.  Options granted pursuant to the Stock Option Plan are only exercisable if at the time of exercise the option holder is our employee, non-employee director, or a consultant or advisor working on our behalf. New shares of GCI Class A common stock are issued when stock option agreements are exercised or restricted stock awards are granted.

 
18

GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Condensed Notes to Interim Consolidated Financial Statements
(Unaudited)
 
The fair value of restricted stock awards is determined based on the number of shares granted and the quoted price of our common stock.  We use a Black-Scholes-Merton option pricing model to estimate the fair value of stock options issued.  The Black-Scholes-Merton option pricing model incorporates various and highly subjective assumptions, including expected term and expected volatility. We have reviewed our historical pattern of option exercises and have determined that meaningful differences in option exercise activity existed among employee job categories. Therefore, we have categorized these awards into two groups of employees for valuation purposes.

The weighted average grant date fair value of options granted during the nine months ended September 30, 2010 was $2.84 per share.  There were no options granted during the nine months ended September 30, 2011. The total fair value of options vesting during the nine months ended September 30, 2011 and 2010 was $153,000 and $151,000, respectively.


 
 
The following is a summary of our share-based compensation expense for the nine months ended September 30, 2011 and 2010 (in thousands):
 


 
 
2011
   
2010
 
Employee share-based compensation expense
  $ 4,193       3,982  
Adjustment to fair value of liability classified awards
    (969 )     714  
  Total share-based compensation expense
  $ 3,224       4,696  

Share-based compensation expense is classified as selling, general and administrative expense in our Consolidated Income Statements.  Unrecognized share-based compensation expense was $5.1 million relating to 2.5 million restricted stock awards and $379,000 relating to 293,000 unvested stock options as of September 30, 2011.  We expect to recognize share-based compensation expense over a weighted average period of 1.0 years for stock options and restricted stock awards.

A summary of option activity under the Stock Option Plan for the nine months ended September 30, 2011 follows (share amounts in thousands):

 
 
 
   
 
 
Weighted
 
 
 
 
 
 
   
Weighted
 
Average
 
Aggregate
 
 
 
 
   
Average
 
Remaining
 
Intrinsic
 
 
 
 
   
Exercise
 
Contractual
 
Value
 
 
 
Shares
   
Price
 
Term
 
(in thousands)
 
Outstanding at December 31, 2010
    1,249     $ 7.08  
 
 
 
 
Exercised
    (157 )   $ 5.84  
 
 
 
 
Outstanding at September 30, 2011
    1,092     $ 7.26  
3.9 years
  $ 1,317  
Exercisable at September 30, 2011
    799     $ 7.64  
2.4 years
  $ 720  

A summary of nonvested restricted stock award activity under the Stock Option Plan for the nine months ended September 30, 2011, follows (share amounts in thousands):

 
 
 
   
Weighted
 
 
 
 
   
Average
 
 
 
 
   
Grant Date
 
 
 
Shares
   
Fair Value
 
Nonvested at December 31, 2010
    2,196     $ 5.29  
Granted
    417     $ 12.30  
Vested
    (121 )   $ 12.31  
Forfeited
    (12 )   $ 6.85  
Nonvested at September 30, 2011
    2,480     $ 6.12  

 
19

GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Condensed Notes to Interim Consolidated Financial Statements
(Unaudited)
 
At September 30, 2011, 3.8 million shares were available for grant under the Stock Option Plan.

The total intrinsic values, determined as of the date of exercise, of options exercised during the nine months ended September 30, 2011 and 2010 were $264,000 and $116,000, respectively. We received $915,000 and $207,000 in cash from stock option exercises during the nine months ended September 30, 2011 and 2010, respectively.

The following is a summary of activity for stock option grants that were not made pursuant to the Stock Option Plan for the nine months ended September 30, 2011 and 2010 (share amounts in thousands):

 
 
 
   
Weighted
 
 
 
 
   
Average
 
 
 
 
   
Exercise
 
 
 
Shares
   
Price
 
Outstanding at December 31, 2009
    150     $ 6.50  
Options forfeited and retired
    (150 )   $ 6.50  
Outstanding at September 30, 2010 and 2011
    -          
Available for grant at September 30, 2011
    -          

In January 2001 we entered into an aircraft operating lease agreement with a company owned by our President and Chief Executive Officer.  The lease was amended several times, most recently on May 9, 2011.  Upon signing the lease in January 2001, the lessor was granted an option to purchase 250,000 shares of GCI Class A common stock at $6.50 per share, of which 100,000 shares were exercised during the year ended December 31, 2006 and the remaining 150,000 shares expired on March 31, 2010.

(7)
Industry Segments Data
Our reportable segments are business units that offer different products and are each managed separately.

A description of our reportable segments follows:

Consumer - We offer a full range of voice, video, data and wireless services to residential customers.

Network Access - We offer a full range of voice, data and wireless services to common carrier customers.

Commercial - We offer a full range of voice, video, data and wireless services to small businesses, local, national and global businesses, governmental entities and public and private educational institutions.

Managed Broadband - We offer data services to rural school districts, hospitals and health clinics through our SchoolAccess® and ConnectMD® initiatives and managed video conferencing.

 
20

GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Condensed Notes to Interim Consolidated Financial Statements
(Unaudited)
 
Regulated Operations - We offer voice and data services to residential, business, and governmental customers in areas of rural Alaska.

 
Corporate related expenses including engineering, information technology, accounting, legal and regulatory, human resources, and other general and administrative expenses for the three and nine months ended September 30, 2011 and 2010 are allocated to our segments using segment margin for the years ended December 31, 2010 and 2009, respectively.  Bad debt expense for the three and nine months ended September 30, 2011 and 2010 is allocated to our segments using a combination of specific identification and allocations based upon segment revenue for the three and nine months ended September 30, 2011 and 2010, respectively.  Corporate related expenses and bad debt expense are specifically identified for our Regulated Operations segment, and therefore are not included in the allocations.

 
We evaluate performance and allocate resources based on earnings before depreciation and amortization expense, net interest expense, income taxes, share-based compensation expense, accretion expense and non-cash contribution adjustment (“Adjusted EBITDA”). Management believes that this measure is useful to investors and other users of our financial information in evaluating operating profitability as an analytical indicator of income generated to service debt and fund capital expenditures.  In addition, multiples of current or projected EBITDA are used to estimate current or prospective enterprise value.  The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies in note 1 in the “Notes to Consolidated Financial Statements” included in Part II of our December 31, 2010 annual report on Form 10-K. Intersegment sales are recorded at cost plus an agreed upon intercompany profit.

 
We earn all revenues through sales of services and products within the United States. All of our long-lived assets are located within the United States of America, except approximately 82% of our undersea fiber optic cable systems which transit international waters and all of our satellite transponders.

Summarized financial information for our reportable segments for the three and nine months ended September 30, 2011 and 2010 follows (amounts in thousands):

Three months ended September 30,
 
Consumer
   
Network Access
   
Commercial
   
Managed Broadband
   
Regulated Operations
   
Total Reportable Segments
 
2011 
 
 
   
 
   
 
   
 
   
 
   
 
 
Revenues:
 
 
   
 
   
 
   
 
   
 
   
 
 
Intersegment
  $ -       -       1,382       -       4       1,386  
External
    89,267       29,467       35,572       17,407       5,990       177,703  
Total revenues
  $ 89,267       29,467       36,954       17,407       5,994       179,089  
Adjusted EBITDA
  $ 30,373       13,729       9,117       8,844       1,038       63,101  
 
                                               
2010 
                                               
Revenues:
                                               
Intersegment
  $ -       (1 )     1,386       -       44       1,429  
External
    88,713       28,204       35,449       13,548       5,595       171,509  
Total revenues
  $ 88,713       28,203       36,835       13,548       5,639       172,938  
Adjusted EBITDA
  $ 31,212       15,028       9,125       5,826       1,550       62,741  
 
 
21

GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Condensed Notes to Interim Consolidated Financial Statements
(Unaudited)
 

 
Nine months ended September 30,
 
Consumer
   
Network Access
   
Commercial
   
Managed Broadband
   
Regulated Operations
   
Total Reportable Segments
 
2011 
 
 
   
 
   
 
   
 
   
 
   
 
 
Revenues:
 
 
   
 
   
 
   
 
   
 
   
 
 
Intersegment
  $ -       -       4,207       -       117       4,324  
External
    266,238       79,715       101,617       46,041       16,958       510,569  
Total revenues
  $ 266,238       79,715       105,824       46,041       17,075       514,893  
Adjusted EBITDA
  $ 87,024       37,953       23,180       20,264       2,959       171,380  
 
                                               

Nine months ended September 30,
 
Consumer
   
Network Access
   
Commercial
   
Managed Broadband
   
Regulated Operations
   
Total Reportable Segments
 
2010 
 
 
   
 
   
 
   
 
   
 
   
 
 
Revenues:
 
 
   
 
   
 
   
 
   
 
   
 
 
Intersegment
  $ -       -       4,042       -       132       4,174  
External
    256,230       81,499       95,243       36,020       17,262       486,254  
Total revenues
  $ 256,230       81,499       99,285       36,020       17,394       490,428  
Adjusted EBITDA
  $ 88,420       40,206       23,526       13,888       5,110       171,150  

A reconciliation of reportable segment revenues to consolidated revenues follows (amounts in thousands):

 
 
Three Months Ended
   
Nine Months Ended
 
 
 
September 30,
   
September 30,
 
 
 
2011
   
2010
   
2011
   
2010
 
Reportable segment revenues
  $ 179,089       172,938       514,893       490,428  
Less intersegment revenues eliminated in
  consolidation
    1,386       1,429       4,324       4,174  
Consolidated revenues
  $ 177,703       171,509       510,569       486,254  

A reconciliation of reportable segment Adjusted EBITDA to consolidated income before income taxes follows (amounts in thousands):

 
 
Three Months Ended
   
Nine Months Ended
 
 
 
September 30,
   
September 30,
 
 
 
2011
   
2010
   
2011
   
2010
 
Reportable segment Adjusted EBITDA
  $ 63,101       62,741       171,380       171,150  
Less depreciation and amortization
  expense
    (30,702 )     (30,288 )     (93,054 )     (92,234 )
Less share-based compensation expense
    (384 )     (2,250 )     (3,224 )     (4,696 )
Plus other expense
    59       -       92       160  
Less accretion expense
    (190 )     -       (456 )     -  
Consolidated operating income
    31,884       30,203       74,738       74,380  
Less other expense, net
    (16,715 )     (17,661 )     (60,597 )     (52,933 )
Consolidated income before
  income tax expense
  $ 15,169       12,542       14,141       21,447  

 (8)     Related Party Transaction
In January 2001 we entered into an aircraft operating lease agreement with a company owned by our President and CEO. The lease was amended several times, most recently on May 9, 2011.  The amended lease agreement added the lease of a second aircraft.  The lease term of the original aircraft may be terminated at any time upon 90 days written notice. The monthly lease rate of the original aircraft is $45,000. The lease term of the second aircraft may be terminated at any time upon 12 months’ written notice. The monthly lease rate of the second aircraft is $132,000.  In 2001, we paid a deposit of $1.5 million in connection with the lease. The deposit will be repaid to us no later than six months after the agreement terminates.

 
22

GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Condensed Notes to Interim Consolidated Financial Statements
(Unaudited)
 
 (9)     NMTC Program
On August 30, 2011, we entered into an arrangement under the NMTC program with US Bancorp to help fund a $34.5 million project to extend terrestrial broadband service for the first time to rural Northwestern Alaska communities via a high capacity hybrid fiber optic and microwave network.  When completed, the project, called TERRA-Northwest (“TERRA-NW”), will connect to the TERRA-SW network and provide a high capacity backbone connection from the served communities to the Internet.  Please refer to Note 10 for more information about TERRA-SW.  The NMTC program was provided for in the Community Renewal Tax Relief Act of 2000 (the “Act”) to induce capital investment in qualified lower income communities.  The Act permits taxpayers to claim credits against their federal income taxes for up to 39% of qualified investments in the equity of community development entities (“CDEs”).  CDEs are privately managed investment institutions that are certified to make qualified low-income community investments.

In connection with the NMTC transaction we loaned $58.3 million to TIF, a special purpose entity created to effect the financing arrangement, at 1% interest due August 30, 2041.  Simultaneously, US Bancorp invested $22.4 million in TIF, and as such, is entitled to substantially all of the benefits derived from the NMTCs. TIF then contributed US Bancorp’s contribution and the loan proceeds to certain CDEs.  The CDEs, in turn, loaned the $76.8 million in funds less payment of placement fees, at interest rates varying from 1% to 3.96%, to Unicom, Inc. (“Unicom”), our wholly-owned subsidiary, as partial financing for TERRA-NW.  The loan proceeds to Unicom, net of syndication and arrangement fees, are restricted for use on TERRA-NW.  Restricted cash of $16.5 million held by Unicom at September 30, 2011, is included in our Consolidated Balance Sheet.  We plan to begin construction on TERRA-NW in 2012 and expect to complete the project in 2014 or earlier if possible.

This transaction includes a put/call provision whereby we may be obligated or entitled to repurchase US Bancorp’s interest in TIF. We believe that US Bancorp will exercise the put option in August 2018 at the end of the compliance period.  The NMTC is subject to 100% recapture for a period of seven years as provided in the Internal Revenue Code.  We are required to be in compliance with various regulations and contractual provisions that apply to the NMTC arrangement.  Non-compliance with applicable requirements could result in projected tax benefits not being realized by US Bancorp.  We have indemnified US Bancorp for any loss or recapture of NMTCs until such time as our obligation to deliver tax benefits is relieved.  We do not anticipate any credit recaptures will be required in connection with this arrangement.  The value attributed to the put/call is nominal.

We have determined that TIF is a VIE.  The consolidated financial statements of TIF include the CDEs discussed above.  The ongoing activities of the VIE – collecting and remitting interest and fees and NMTC compliance – were all considered in the initial design and are not expected to significantly affect economic performance throughout the life of the VIE.  Management considered the contractual arrangements that obligate us to deliver tax benefits and provide various other guarantees to US Bancorp; US Bancorp’s lack of a material interest in the underlying economics of the project; and the fact that we are obligated to absorb losses of the VIE.  We concluded that we were the primary beneficiary and consolidated the VIE in accordance with the accounting standard for consolidation.

US Bancorp’s contribution, net of syndication fees and other direct costs incurred in structuring the arrangement, is included in Noncontrolling Interest on the Consolidated Balance Sheet.  Incremental costs to maintain the structure during the compliance period are recognized as incurred to selling, general and administrative expense.

The following table summarizes the impact of the VIE consolidated as of September 30, 2011:
 
 
23

GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Condensed Notes to Interim Consolidated Financial Statements
(Unaudited)
 

 
 
 
Assets
 
Equity
(in thousands)
 
Carrying Value
 
Classification
 
Carrying Value
 
Classification
New Markets Tax Credit Financing
  $ 16,546  
Restricted cash
  $ 16,546  
Noncontrolling interest
 
       
 
       
 
(10)
Commitments and Contingencies

Litigation, Disputes, and Regulatory Matters
We are involved in various lawsuits, billing disputes, legal proceedings, and regulatory matters that have arisen from time to time 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 for the resolution of them to have a material adverse effect on our financial position, results of operations or liquidity.  In addition we are involved in the following matters:

·  
In September 2008, the FCC's Office of Inspector General ("OIG") initiated an investigation regarding Alaska DigiTel LLC’s (“Alaska DigiTel”) compliance with program rules and requirements under the Lifeline Program. The request covered the period beginning January 1, 2004 through August 31, 2008 and related to amounts received for Lifeline service.  Alaska DigiTel was an Alaska based wireless communications company of which we acquired an 81.9% equity interest on January 2, 2007 and the remaining 18.1% equity interest on August 18, 2008 and was subsequently merged with one of our wholly owned subsidiaries in April 2009. Prior to August 18, 2008, our control over the operations of Alaska DigiTel was limited as required by the FCC upon its approval of our initial acquisition completed in January 2007. We responded to this request on behalf of Alaska DigiTel and the GCI companies as affiliates. On January 18, 2011 we reached an agreement with the FCC and the Department of Justice to settle the matter, which required us to contribute $1.6 million to the United States Treasury and granted us a broad release of claims including those under the False Claims Act.  The $1.6 million contribution, of which $154,000, $661,000 and $741,000 were recognized in selling, general and administrative expense in the income statements in the years ending December 31, 2010, 2009 and 2008, respectively, was paid in January 2011; and

·  
In August 2010, a company-owned aircraft was involved in an accident resulting in five fatalities and injuries to the remaining four passengers on board.  We had aircraft and liability insurance coverage in effect at the time of the accident.  We cannot predict the likelihood or nature of the total potential claims related to the accident.

TERRA-Southwest
In January 2010, the U.S. Department of Agriculture’s RUS approved our wholly-owned subsidiary, United Utilities, Inc.’s (“UUI”) application for an $88.2 million loan/grant combination to extend terrestrial broadband service for the first time to Bristol Bay and the Yukon-Kuskokwim Delta, an area in Alaska roughly the size of the state of North Dakota.  Upon completion, this project, called TERRA-Southwest (“TERRA-SW”), will be able to serve over 9,000 households and over 700 businesses in the 65 covered communities.  The project will also be able to serve numerous public/non-profit/private community anchor institutions and entities, such as regional health care providers, school districts, and other regional and Alaska native organizations. The RUS award, consisting of a $44.2 million loan and a $44.0 million grant, is made under the RUS Broadband Initiatives Program established pursuant to the American Recovery and Reinvestment Act.  The award funds backbone network facilities that we would not otherwise be able to construct within our return-on-investment requirements.  UUI began construction on TERRA-SW in 2010 and expects to complete the project in 2011.  We have borrowed $15.4 million in loan funds, leaving $28.8 million remaining loan funds available as of September 30, 2011 for our TERRA-SW project.  We have received $15.3 million in grant funds, leaving $28.7 million remaining grant funds available as of September 30, 2011 for our TERRA-SW project.

TERRA-Northwest
In September 2011, the Regulatory Commission of Alaska approved our application for a $5.3 million grant to help fund TERRA-NW.  The NMTC arrangement, discussed in Note 9, and this grant award fund backbone network facilities that we would not otherwise be able to construct within our return-on-investment requirements.  We plan to begin construction on TERRA-NW in 2012 and expect to complete the project in 2014 or earlier if possible.

 
24

GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Condensed Notes to Interim Consolidated Financial Statements
(Unaudited)
 
Universal Service
On October 27, 2011, the FCC adopted an Order and Further Notice of Proposed Rulemaking that is expected to reform the methodology for distributing Universal Service Fund (“USF”) high cost support for voice and broadband services, as well as to the access charge regime for terminating traffic between carriers, and seeking comment on further implementation matters.  Though the Order and Further Notice has not yet been released, the changes described in the publicly released “Executive Summary” are likely to alter how telecommunications providers, including us, will be compensated for providing telecommunications services in high cost areas.

We recorded USF high cost support revenue of $13.6 million and $15.1 million during the three months ended September 30, 2011 and 2010, respectively.    We recorded USF high cost support revenue of $39.7 million and $40.9 million during the nine months ended September 30, 2011 and 2010, respectively.  We recorded USF high cost support revenue of $51.7 million during the year ended December 31, 2010.   At September 30, 2011, we have $44.1 million in accounts receivable related to the USF high cost program.

Changes to the USF high cost support programs that we participate in could result in a material decrease in revenue and accounts receivable, which could have an adverse effect on our business, financial position, results of operations or liquidity.

(11)
Subsequent Event
On October 21, 2011, we borrowed an additional $5.4 million under the loan portion of the TERRA-SW RUS award and received an additional $5.4 million under the grant portion of the award.  After consideration of these transactions, we have $23.4 million and $23.3 million in loan and grant funds available, respectively.

 
25

 


 
PART I.
ITEM 2.
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

In the following discussion, General Communication, Inc. (“GCI”) and its direct and indirect subsidiaries are referred to as “we,” “us” and “our.”
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles (“GAAP”). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate our estimates and judgments, including those related to the allowance for doubtful receivables, unbilled revenues, accrual of the Universal Service Fund (“USF”) high cost area program support, share-based compensation, reserve for future customer credits, valuation allowances for deferred income tax assets, depreciable and amortizable lives of assets, the carrying value of long-lived assets including goodwill, cable certificates and wireless licenses, our effective tax rate, purchase price allocations, the accrual of cost of goods sold (exclusive of depreciation and amortization expense ("Cost of Goods Sold")), depreciation, and contingencies and litigation. We base our estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. See also our “Cautionary Statement Regarding Forward-Looking Statements.”

General Overview
Through our focus on long-term results, acquisitions, and strategic capital investments, we strive to consistently grow our revenues and expand our margins. We have historically met our cash needs for operations, regular capital expenditures and maintenance capital expenditures through our cash flows from operating activities. Historically, cash requirements for significant acquisitions and major capital expenditures have been provided largely through our financing activities.

The national economy continues to see persistent unemployment and slow economic growth and even once stabilized is not expected to return quickly to a period of strong growth.  Should the national economy deteriorate further, it could lead to reductions in consumer spending which could impact our revenue growth.  We believe the Alaska economy continues to perform well compared to most other states at the current time. The State of Alaska has large cash reserves that should enable it to maintain its budget for at least the short-term. This cash reserve is important for Alaska’s economy as the State is the largest employer and second largest source of gross state product. The majority of our revenue is driven by the strength of the Alaska economy which appears to have weathered the recessionary pressures relatively well to date. Nonetheless we cannot predict the impact the nation’s future economic situation may have on us in the future.

As part of an agreement signed in December 2007 with AT&T Mobility, AT&T Mobility has provided to us a large block of wireless network usage at no charge that we use for roaming.  For the year ended December 31, 2011, on an annualized basis, we estimate our Cost of Goods Sold would have been approximately $9.0 million higher had this block of minutes not been available.  We expect this block of minutes to expire in the first quarter of 2012 at which time we expect an increase to our wireless Cost of Goods Sold.  Our future wireless Cost of Goods Sold will depend on several factors including: the impact and timing of our wireless network build-out, the pattern of usage by our wireless subscribers, and negotiated rates with our roaming partners.
 
On March 16, 2010, the FCC staff released the National Broadband Plan, including among its topics a proposal to transition existing USF high cost support from voice to broadband networks over a ten year period. On April 21, 2010, the FCC initiated a proceeding to consider interim and long-term USF reforms, including a five year phase-out of support to competitive ETCs.  On February 8, 2011, the FCC issued a Notice of Proposed Rulemaking to consider adopting reforms to its high cost support program, including, among other things, the proposed competitive ETC phase-out and ways to fund and distribute support for broadband services.  Subsequently, a number of industry consensus plans were proposed to the FCC that would substantially change the methodology for distributing USF high cost support, as well as the access charge regime.  We separately submitted a USF and access charge plan for Alaska, and on August 3, 2011, the FCC sought further comment on this plan and the industry consensus plans, among other proposals.

 
26

 
On October 27, 2011, the FCC adopted an Order and Further Notice of Proposed Rulemaking, that is expected to reform the methodology for distributing USF high cost support for voice and broadband services, as well as to the access charge regime for terminating traffic between carriers, and seeking comment on further implementation matters.  Though the Order and Further Notice has not yet been released, the changes described in the publicly released “Executive Summary” are likely to alter how telecommunications providers, including us, will be compensated for providing telecommunications services in high cost areas and to provide new potential funding sources for providing broadband services.

Putting aside any potential impact from the Order, we expect to record approximately $54 million of USF high cost support revenue in the year ended December 31, 2011.  We recorded USF high cost support revenue of $13.6 million and $15.1 million during the three months ended September 30, 2011 and 2010, respectively.  We recorded USF high cost support revenue of $39.7 million and $40.9 million during the nine months ended September 30, 2011 and 2010, respectively.  We recorded USF high cost support revenue of $51.7 million during the year ended December 31, 2010.  At September 30, 2011, we have $44.1 million in accounts receivable related to the USF high cost area program.

We currently believe that the FCC order will change the USF high cost support available to us starting in 2012.  Although the detailed order has not yet been released, we anticipate that changes to the USF program will reduce our high cost support revenue approximately $5 million per year in both 2012 and 2013.  Until the FCC Order has been released, we cannot predict the effect on high cost support available to us upon implementation, the timing for or transition path or how our access charge revenues and payments would be affected.  If the FCC did not recognize the unique challenges of serving rural Alaska and applied the national framework to the distribution of USF in the State, our revenue for providing wireline and wireless local services in these areas would likely be materially adversely affected by the reduction of USF support.  As described in the FCC’s Executive Summary, we do not expect a material adverse effect on our net revenues from the changes adopted to the access charge regime for terminating traffic.  Once the order has been released and fully analyzed, we will re-evaluate our on-going program of reinvestment in light of the potential impact of the regulatory changes on our cash flow.

In November 2010, Verizon Wireless (“Verizon”) acquired a license for 700 MHz wireless spectrum covering Alaska.  The license is conditional on Verizon meeting applicable build-out requirements no later than June 13, 2013.  We cannot predict the potential impact this new competition may have on us in the future.

In March 2011, AT&T, Inc. announced plans to acquire T-Mobile USA.  The acquisition is subject to regulatory approval which is currently underway.  Should the acquisition be completed, we expect a decrease to our Network Access segment wireless revenue estimated at $4.0 million to $6.0 million on an annualized basis.

 
Following are our segments and the services and products each offers to its customers:

 
 
Reportable Segments
Services and Products
Consumer
Network Access
Commercial
Managed Broadband
Regulated Operations
Voice:
 
 
 
 
 
 
Long-distance
X
X
X
 
X
 
Local Access
X
X
X
 
X
 
 
 
 
 
 
 
Video
X
 
X
 
 
 
 
 
 
 
 
 
Data:
 
 
 
 
 
 
Internet
X
X
X
X
X
 
Data Networks
 
X
X
X
 
 
Managed Services
 
 
X
X
 
 
Managed Broadband Services
 
 
 
X
 
 
 
 
 
 
 
 
Wireless
X
X
X
 
 

 
27

 
Results of Operations

The following table sets forth selected financial data as a percentage of total revenues for the periods indicated (underlying data rounded to the nearest thousands):

 
 
 
 
 
 
Percentage
 
 
Percentage
 
 
 
s
Three Months Ended
Change
Nine Months Ended
Change
 
 
 
 
September 30,
2011 
September 30,
2011 
 
 
 
 
2011 
2010 
vs. 2010
2011 
2010 
vs. 2010
(Unaudited)
 
 
 
 
 
 
Selected Financial Data:
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
Consumer segment
50%
52%
1%
52%
53%
4%
 
 
Network Access segment
17%
16%
4%
16%
17%
(2%)
 
 
Commercial segment
20%
21%
0%
20%
20%
7%
 
 
Managed Broadband segment
10%
8%
28%
9%
7%
28%
 
 
Regulated Operations segment
3%
3%
7%
3%
3%
(2%)
 
 
 
Total revenues
100%
100%
4%
100%
100%
5%
 
Selling, general and
 
 
 
 
 
 
 
 
administrative expenses
31%
34%
(7%)
34%
34%
3%
 
Depreciation and amortization
 
 
 
 
 
 
 
 
expense
17%
18%
1%
18%
19%
1%
 
Operating income
18%
18%
6%
15%
15%
0%
 
Other expense, net
9%
10%
(5%)
12%
11%
14%
 
Income before income tax expense
9%
7%
21%
3%
4%
(34%)
 
Net income
4%
4%
(5%)
1%
2%
(40%)
 
 
 
 
 
 
 
 
 
 
Percentage change in underlying data.
 
 
 
 
 
 

We evaluate performance and allocate resources based on earnings before depreciation and amortization expense, net interest expense, income taxes, share-based compensation expense, accretion expense and non-cash contribution adjustment (“Adjusted EBITDA”). Management believes that this measure is useful to investors and other users of our financial information in evaluating operating profitability as an analytical indicator of income generated to service debt and fund capital expenditures. In addition, multiples of current or projected EBITDA are used to estimate current or prospective enterprise value. See note 7 to the accompanying consolidated financial statements for a reconciliation of Adjusted EBITDA to Consolidated Income Before Income Taxes.

Three Months Ended September 30, 2011 (“third quarter of 2011”) Compared to Three Months Ended September 30, 2010 (“third quarter of 2010”)

Overview of Revenues and Cost of Goods Sold
Total revenues increased 4% from $171.5 million in the third quarter of 2010 to $177.7 million in the third quarter of 2011.  Revenue increased in all of our segments.  See the discussion below for more information by segment.

 
28

 
Total Cost of Goods Sold increased 16% from $52.5 million in the third quarter of 2010 to $60.7 million in the third quarter of 2011. Cost of Goods Sold increased in all of our segments.  See the discussion below for more information by segment.

Consumer Segment Overview
Consumer segment revenue represented 50% of third quarter of 2011 consolidated revenues. The components of Consumer segment revenue are as follows (amounts in thousands):

 
 
Third Quarter of
   
Percentage
 
 
 
2011
   
2010
   
Change
 
Voice
  $ 13,164       14,601       (10 %)
Video
    29,155       29,720       (2 %)
Data
    18,088       15,797       15 %
Wireless
    28,860       28,595       1 %
Total Consumer segment revenue
  $ 89,267       88,713       1 %

Consumer segment Cost of Goods Sold represented 45% of third quarter of 2011 consolidated Cost of Goods Sold. The components of Consumer segment Cost of Goods Sold are as follows (amounts in thousands):

 
 
Third Quarter of
   
Percentage
 
 
 
2011
   
2010
   
Change
 
Voice
  $ 2,555       2,724       (6 %)
Video
    12,994       12,662       3 %
Data
    1,351       972       39 %
Wireless
    10,536       9,016       17 %
Total Consumer segment Cost of Goods Sold
  $ 27,436       25,374       8 %

Consumer segment Adjusted EBITDA, representing 48% of third quarter of 2011 consolidated Adjusted EBITDA, is as follows (amounts in thousands):

 
 
Third Quarter of
   
Percentage
 
 
 
2011
   
2010
   
Change
 
Consumer segment Adjusted EBITDA
  $ 30,373       31,212       (3 %)

See note 7 in the "Condensed Notes to Interim Consolidated Financial Statements" included in Part I of this quarterly report on Form 10-Q for a reconciliation of consolidated Adjusted EBITDA, a non-GAAP financial measure, to consolidated income before income taxes.

Selected key performance indicators for our Consumer segment follow:

   
September 30,
   
Percentage
 
   
2011
   
2010
   
Change
 
 Voice:
 
 
   
 
   
 
 
Long-distance subscribers
    81,700       89,000       (8 %)
Long-distance minutes carried (in millions)
    22.3       25.6       (13 %)
Total local access lines in service
    79,100       84,700       (7 %)
Local access lines in service on GCI facilities
    73,200       77,100       (5 %)
 Video:
                       
Basic subscribers
    126,400       130,500       (3 %)
Digital programming tier subscribers
    76,700       80,600       (5 %)
HD/DVR converter boxes
    87,400       87,500       0 %
Homes passed
    239,800       234,900       2 %
Average monthly gross revenue per subscriber
  $ 76.85     $ 75.85       1 %
 Data:
                       
Cable modem subscribers
    106,800       104,400       2 %
 
 
29

 
 
 Wireless:
                       
Wireless lines in service
    125,800       122,900       2 %
Average monthly gross revenue per subscriber
  $ 72.60     $ 74.61       (3 %)
                         
A long-distance subscriber is defined as a customer account that is invoiced a monthly long-distance plan fee or has made a long-distance call during the month.
 
A local access line in service is defined as a revenue generating circuit or channel connecting a customer to the public switched telephone network.
 
A basic cable subscriber is defined as one basic tier of service delivered to an address or separate subunits thereof regardless of the number of outlets purchased.
 
A digital programming tier subscriber is defined as one digital programming tier of service delivered to an address or separate subunits thereof regardless of the number of outlets or digital programming tiers purchased. Digital programming tier subscribers are a subset of basic subscribers.
 
A high definition/digital video recorder (“HD/DVR”) converter box is defined as one box rented by a digital programming or basic tier subscriber. A digital programming or basic tier subscriber is not required to rent an HD/DVR converter box to receive service.
 
Quarter-to-date average monthly consumer video revenues divided by the average of consumer video basic subscribers at the beginning and end of each month in the period.
 
A cable modem subscriber is defined by the purchase of cable modem service regardless of the level of service purchased. If one entity purchases multiple cable modem service access points, each access point is counted as a subscriber. Cable modem subscribers may also be video basic subscribers though basic cable service is not required to receive cable modem service.
 
A wireless line in service is defined as a revenue generating wireless device.
 
Quarter-to-date average monthly consumer wireless revenues divided by the average of consumer wireless subscribers at the beginning and end of each month in the period.
 

Consumer Segment Revenues
The increase in data revenue is primarily due to a 19% increase in cable modem revenue to $16.1 million due to increased subscribers, rate increases in August 2010 and in May 2011 and our subscribers’ selection of plans that offer higher speeds.

Consumer Segment Cost of Goods Sold
The wireless Cost of Goods Sold increase is primarily due to increased costs for wireless handset equipment sales and a change in the allocation of network maintenance costs.  The increased wireless handset equipment sale costs are associated with the increased number of wireless subscribers and an increased number of premium wireless handsets which have higher costs.  The change in allocation of network maintenance costs resulted in an increase to our Consumer segment and a decrease to our Network Access, Commercial and Managed Broadband segments.

 
Consumer Segment Adjusted EBITDA
The decrease in Adjusted EBITDA is primarily due to increased Cost of Goods Sold as described above in “Consumer Segment Cost of Goods Sold.”  This decrease was partially offset by increased revenue as described above in "Consumer Segment Revenues” and a decrease in the selling, general and administrative expense that was allocated to our Consumer segment primarily due to a decrease in consolidated selling, general and administrative expense.

Network Access Segment Overview
Network Access segment revenue represented 17% of third quarter of 2011 consolidated revenues. The components of Network Access segment revenue are as follows (amounts in thousands):

 
 
Third Quarter of
   
Percentage
 
 
 
2011
   
2010
   
Change
 
Voice
  $ 6,213       8,636       (28 %)
Data
    17,140       14,208       21 %
Wireless
    6,114       5,360       14 %
Total Network Access segment revenue
  $ 29,467       28,204       4 %

 
30

 
Network Access segment Cost of Goods Sold represented 16% of third quarter of 2011 consolidated Cost of Goods Sold. The components of Network Access segment Cost of Goods Sold are as follows (amounts in thousands):

 
 
Third Quarter of
   
Percentage
 
 
 
2011
   
2010
   
Change
 
Voice
  $ 3,460       4,437       (22 %)
Data
    5,697       680       738 %
Wireless
    374       430       (13 %)
Total Network Access segment Cost of Goods Sold
  $ 9,531       5,547       72 %

Network Access segment Adjusted EBITDA, representing 22% of third quarter of 2011 consolidated Adjusted EBITDA, is as follows (amounts in thousands):

 
 
Third Quarter of
   
Percentage
 
 
 
2011
   
2010
   
Change
 
Network Access segment Adjusted EBITDA
  $ 13,729       15,028       (9 %)

See note 7 in the "Condensed Notes to Interim Consolidated Financial Statements" included in Part I of this quarterly report on Form 10-Q for a reconciliation of consolidated Adjusted EBITDA, a non-GAAP financial measure, to consolidated income before income taxes.

Selected key performance indicators for our Network Access segment follow:

   
September 30,
   
Percentage
 
   
2011
   
2010
   
Change
 
 Voice:
 
 
   
 
   
 
 
Long-distance minutes carried (in millions)
    202.5       205.4       (1 %)
 Data:
                       
Total Internet service provider access lines in service
    1,600       1,700       (6 %)
                         
An Internet service provider access line in service is defined as a revenue generating circuit or channel connecting a customer to the public switched telephone network.
 

Network Access Segment Revenues
The decrease in voice revenue is primarily due to a $2.6 million revenue classification change.  Prior to the fourth quarter of 2010 certain revenues were classified as voice revenue.  Beginning in the fourth quarter of 2010 these revenues were reclassified to Network Access segment data revenue for a more accurate presentation.

The increase in data revenue is primarily due to:

·  
A $2.6 million revenue classification change.  Prior to the fourth quarter of 2010 certain revenues were classified as Network Access segment voice revenue.  Beginning in the fourth quarter of 2010 these revenues were reclassified to data revenue for a more accurate presentation, and
·  
$1.9 million in revenue due to special project work for a new customer.

Network Access Segment Cost of Goods Sold
The decrease in voice Cost of Goods Sold is primarily due to a $1.6 million Cost of Goods Sold classification change.  Prior to the fourth quarter of 2010 certain Cost of Goods Sold were classified as voice Cost of Goods Sold.  Beginning in the fourth quarter of 2010 these Cost of Goods Sold were reclassified to Network Access segment data Cost of Goods Sold for a more accurate presentation.

 
31

 
The increase in data Cost of Goods Sold is primarily due to:

·  
$1.8 million in Cost of Goods Sold related to the special project work revenue described above in “Network Access Segment Revenues”,
·  
A $1.6 million Cost of Goods Sold classification change.  Prior to the fourth quarter of 2010 certain Cost of Goods Sold were classified as Network Access segment voice Cost of Goods Sold.  Beginning in the fourth quarter of 2010 these Cost of Goods Sold were reclassified to data Cost of Goods Sold for a more accurate presentation, and
·  
The absence of a $724,000 favorable adjustment in 2010 based upon refunds from several vendors.  In the course of business we estimate unbilled data services Cost of Goods Sold based upon minutes of use processed through our network and established rates.  Such estimates are revised when subsequent billings are received, payments are made, billing matters are researched and resolved, tariffed billing periods lapse, or when disputed charges are resolved.

Network Access Segment Adjusted EBITDA
The Adjusted EBITDA decrease is primarily due to an increase in Cost of Goods Sold as described above in “Network Access Segment Cost of Goods Sold.”  This change was partially off-set by increased revenues as described above in “Network Access Segment Revenues” and a decrease in the selling, general and administrative expense that was allocated to our Network Access segment primarily due to a decrease in consolidated selling, general and administrative expense.

Commercial Segment Overview
Commercial segment revenue represented 20% of third quarter of 2011 consolidated revenues. Commercial segment data revenue is comprised of monthly recurring charges for data services and charges billed on a time and materials basis largely for personnel providing on-site customer support.  This latter category can vary significantly based on project activity.  The components of Commercial segment revenue are as follows (amounts in thousands):

 
 
Third Quarter of
   
Percentage
 
 
 
2011
   
2010
   
Change
 
Voice
  $ 7,137       8,025       (11 %)
Video
    2,830       2,953       (4 %)
Data
    23,040       22,211       4 %
Wireless
    2,565       2,260       13 %
Total Commercial segment revenue
  $ 35,572       35,449       0 %

Commercial segment Cost of Goods Sold represented 29% of third quarter of 2011 consolidated Cost of Goods Sold. The components of Commercial segment Cost of Goods Sold are as follows (amounts in thousands):

 
 
Third Quarter of
   
Percentage
 
 
 
2011
   
2010
   
Change
 
Voice
  $ 3,001       3,486       (14 %)
Video
    542       520       4 %
Data
    12,522       11,752       7 %
Wireless
    1,167       973       20 %
Total Commercial segment Cost of Goods Sold
  $ 17,232       16,731       3 %

Commercial segment Adjusted EBITDA, representing 14% of third quarter of 2011 consolidated Adjusted EBITDA, is as follows (amounts in thousands):

 
 
Third Quarter of
   
Percentage
 
 
 
2011
   
2010
   
Change
 
Commercial segment Adjusted EBITDA
  $ 9,117       9,125       0 %

 
32

 
See note 7 in the "Condensed Notes to Interim Consolidated Financial Statements" included in Part I of this quarterly report on Form 10-Q for a reconciliation of consolidated Adjusted EBITDA, a non-GAAP financial measure, to consolidated income before income taxes.

Selected key performance indicators for our Commercial segment follow:

   
September 30,
   
Percentage
 
   
2011
   
2010
   
Change
 
 Voice:
 
 
   
 
   
 
 
Long-distance subscribers
    8,600       9,300       (8 %)
Long-distance minutes carried (in millions)
    28.4       29.8       (5 %)
Total local access lines in service
    49,200       48,100       2 %
Local access lines in service on GCI facilities
    25,800       20,900       23 %
 Data:
                       
Cable modem subscribers
    11,100       10,800       3 %
 Wireless:
                       
Wireless lines in service
    14,900       13,600       10 %
                         
A long-distance subscriber is defined as a customer account that is invoiced a monthly long-distance plan fee or has made a long-distance call during the month.
 
A local access line in service is defined as a revenue generating circuit or channel connecting a customer to the public switched telephone network.
 
A cable modem subscriber is defined by the purchase of cable modem service regardless of the level of service purchased. If one entity purchases multiple cable modem service access points, each access point is counted as a subscriber.
 
A wireless line in service is defined as a revenue generating wireless device.
 

Commercial Segment Cost of Goods Sold
The increase in data Cost of Goods Sold is primarily due to the absence of a $312,000 favorable adjustment in 2010 based upon refunds from several vendors.  In the course of business we estimate unbilled data services Cost of Goods Sold based upon minutes of use processed through our network and established rates.  Such estimates are revised when subsequent billings are received, payments are made, billing matters are researched and resolved, tariffed billing periods lapse, or when disputed charges are resolved.

Commercial Segment Adjusted EBITDA
The Adjusted EBITDA decrease is primarily due to increased Cost of Goods Sold as described above in “Commercial Segment Cost of Goods Sold.”  This increase is almost entirely off-set by a decrease in the selling, general and administrative expense that was allocated to our Commercial segment primarily due to a decrease in consolidated selling, general and administrative expense.

Managed Broadband Segment Overview
Managed Broadband segment revenue, Cost of Goods Sold and Adjusted EBITDA represented 10%, 7% and 14% of third quarter of 2011 consolidated revenues, Cost of Goods Sold and Adjusted EBITDA, respectively.

Managed Broadband Segment Revenues
Managed Broadband segment revenue, which includes data products only, increased 28% to $17.4 million in the third quarter of 2011 as compared to the third quarter of 2010. The increase is primarily due to increased monthly contract revenue due to increased data network capacity purchased by our ConnectMD® and SchoolAccess® customers.

Managed Broadband Segment Cost of Goods Sold
Managed Broadband segment Cost of Goods Sold increased 28% to $4.5 million primarily due to the increase in data network capacity described above in “Managed Broadband Segment Revenues.

Managed Broadband Segment Adjusted EBITDA
Managed Broadband segment Adjusted EBITDA increased 52% to $8.8 million in 2011 primarily due to increased revenues as described above in “Managed Broadband Segment Revenues,” partially off-set by increased Cost of Goods Sold as described above in “Managed Broadband Segment Cost of Goods Sold.”

 
33

 
See note 7 in the "Condensed Notes to Interim Consolidated Financial Statements" included in Part I of this quarterly report on Form 10-Q for a reconciliation of consolidated Adjusted EBITDA, a non-GAAP financial measure, to consolidated income before income taxes.

Regulated Operations Segment Overview
Regulated Operations segment revenue, Cost of Goods Sold and Adjusted EBITDA represented 3%, 3% and 2% of third quarter of 2011 consolidated revenues, Cost of Goods Sold and Adjusted EBITDA, respectively.

The selected key performance indicator for our Regulated Operations segment follows:

   
September 30,
   
Percentage
 
   
2011
   
2010
   
Change
 
 Voice:
 
 
   
 
   
 
 
Total local access lines in service on GCI facilities
    9,300       10,200       (9 %)
                         
A local access line in service is defined as a revenue generating circuit or channel connecting a customer to the public switched telephone network.
 

Regulated Operations Segment Revenues
Regulated Operations segment revenues increased from $5.6 million in the third quarter of 2010 to $6.0 million in the third quarter of 2011.

Regulated Operations Segment Cost of Goods Sold
Regulated Operations segment Cost of Goods Sold increased from $1.3 in the third quarter of 2010 to $1.9 million in the third quarter of 2011.

Regulated Operations Segment Adjusted EBITDA
 
Regulated Operations segment Adjusted EBITDA decreased 33% to $1.0 million in the third quarter of 2011 primarily due to increased Cost of Goods Sold as described above in “Regulated Operations Segment Cost of Goods Sold” partially offset by an increase in revenue as described above in “Regulated Operations Segment Revenues.”
 
See note 7 in the "Condensed Notes to Interim Consolidated Financial Statements" included in Part I of this quarterly report on Form 10-Q for a reconciliation of consolidated Adjusted EBITDA, a non-GAAP financial measure, to consolidated income before income taxes.

Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased 7% to $54.5 million in the third quarter of 2011.  Individually significant items contributing to the decrease include:

·  
A $2.6 million decrease in our company-wide success sharing bonus accrual,
·  
A $1.8 million decrease in costs, including workers compensation expense, related to an accident involving our company-owned aircraft in August 2010, and
·  
A $1.7 million decrease in share-based compensation expense.

These decreases were partially off-set by an $815,000 increase in bad debt expense primarily due to the absence of settlements which resulted in the release of credit reserves in the third quarter of 2010.

As a percentage of total revenues, selling, general and administrative expense was 31% in the third quarter of 2011 and 34% in the third quarter of 2010.

Depreciation and Amortization Expense
Depreciation and amortization expense increased 1% to $30.7 million in the third quarter of 2011.

Other Expense, Net
Other expense, net of other income, decreased 5% to $16.7 million in the third quarter of 2011 primarily due to an $847,000 decrease in interest expense to $16.4 million.  The interest expense decrease is primarily due to the issuance of the 2021 Notes in May 2011, which have a lower interest rate than the interest rate paid on our 2014 Notes.  The proceeds from the issuance of the 2021 Notes were used to repay and retire the outstanding amount due on our 2014 Notes.

 
34

 
Income Tax Expense
Income tax expense totaled $8.0 million and $5.0 million in the third quarters of 2011 and 2010, respectively.  Our effective income tax rate increased from 40% in 2010 to 52% in 2011 primarily due to an increase in the amount of estimated permanent tax differences when compared to our estimated income before income tax expense in 2011 and 2010.

At September 30, 2011, we have (1) tax net operating loss carryforwards of $262.6 million that will begin expiring primarily in 2019 if not utilized, and (2) alternative minimum tax credit carryforwards of $1.9 million available to offset regular income tax payable in future years.

We have recorded deferred tax assets of $107.7 million associated with income tax net operating losses that were generated from 1996 to 2011, and that primarily expire from 2018 to 2031, and with charitable contributions that were converted to net operating losses in 2004 through 2011, and that expire in 2024 through 2031, respectively.

Tax benefits associated with recorded deferred tax assets are considered to be more likely than not realizable through future reversals of existing taxable temporary differences and future taxable income. The amount of deferred tax asset considered realizable, however, could be reduced if estimates of future taxable income during the carryforward period are reduced which would result in additional income tax expense.  We estimate that our effective annual income tax rate for financial statement purposes will be 51% to 55% in the year ended December 31, 2011.

Nine Months Ended September 30, 2011 (“2011”) Compared to Nine Months Ended September 30, 2010 (“2010”)

Overview of Revenues and Cost of Goods Sold
Total revenues increased 5% from $486.3 million in 2010 to $510.6 million in 2011.  Revenue increases in our Consumer, Commercial and Managed Broadband segments were partially off-set by decreased revenue in our Network Access and Regulated Operations segments.  See the discussion below for more information by segment.

Total Cost of Goods Sold increased 12% from $153.1 million in 2010 to $171.7 million in 2011. Cost of Goods Sold increased in all of our segments.  See the discussion below for more information by segment.

Consumer Segment Overview
Consumer segment revenue represented 52% of 2011 consolidated revenues. The components of Consumer segment revenue are as follows (amounts in thousands):

 
 
 
   
Percentage
 
 
 
2011
   
2010
   
Change
 
Voice
  $ 40,541       43,711       (7 %)
Video
    89,040       88,096       1 %
Data
    52,046       44,531       17 %
Wireless
    84,611       79,892       6 %
Total Consumer segment revenue
  $ 266,238       256,230       4 %

Consumer segment Cost of Goods Sold represented 48% of 2011 consolidated Cost of Goods Sold. The components of Consumer segment Cost of Goods Sold are as follows (amounts in thousands):

 
 
 
   
Percentage
 
 
 
2011
   
2010
   
Change
 
Voice
  $ 8,194       9,227       (11 %)
Video
    39,982       38,128       5 %
Data
    4,265       2,795       53 %
Wireless
    30,314       27,049       12 %
Total Consumer segment Cost of Goods Sold
  $ 82,755       77,199       7 %

 
35

 
Consumer segment Adjusted EBITDA, representing 51% of 2011 consolidated adjusted EBITDA, is as follows (amounts in thousands):

 
 
 
   
Percentage
 
 
 
2011
   
2010
   
Change
 
Consumer segment Adjusted EBITDA
  $ 87,024       88,420       (2 %)

See note 7 in the "Condensed Notes to Interim Consolidated Financial Statements" included in Part I of this quarterly report on Form 10-Q for a reconciliation of consolidated Adjusted EBITDA, a non-GAAP financial measure, to consolidated income before income taxes.

Selected key performance indicators for our Consumer segment follow:

   
September 30,
   
Percentage
 
   
2011
   
2010
   
Change
 
 Voice:
 
 
   
 
   
 
 
Long-distance minutes carried (in millions)
    70.0       80.6       (13 %)
 Video:
                       
Average monthly gross revenue per subscriber
  $ 77.06     $ 74.80       3 %
 Wireless:
                       
Average monthly gross revenue per subscriber
  $ 70.89     $ 70.51       1 %
                         
Year-to-date average monthly consumer video revenues divided by the average of consumer video basic subscribers at the beginning and end of each month in the period.
 
Year-to-date average monthly consumer wireless revenues divided by the average of consumer wireless subscribers at the beginning and end of each month in the period.
 

Please refer to our three-month results of operations discussion for additional selected key performance indicators for the third quarters of 2011 and 2010.

Consumer Segment Revenues
The increase in data revenue is primarily due to a 19% increase in cable modem revenue to $46.2 million due to increased subscribers, rate increases in May and August 2010 and in May 2011 and our subscribers’ selection of plans that offer higher speeds.

The increase in wireless revenue is primarily due to the following:

·  
A $4.1 million increase in plan fee revenue to $31.8 million primarily due to an increase in the number of wireless subscribers and our subscribers’ selection of plans that offer more usage; and
·  
A $3.5 million increase in USF high cost support. We accrue estimated USF high cost support revenue quarterly and adjust our revenue as we obtain new information that changes the variables used to calculate our estimate. The increase in USF high cost support is due to changes in the rates used to calculate our estimate and an increase in the number of wireless subscribers.

These increases are partially offset by the absence of a $2.9 million change in estimate for high cost support recorded in 2010.

Consumer Segment Cost of Goods Sold
The increase in video Cost of Goods Sold is primarily due to increased channels offered to our subscribers, increased rates paid to programmers and increased costs associated with delivery of digital services offered through our HD/DVR converter boxes.

The wireless Cost of Goods Sold increase is primarily due to increased costs for wireless handset equipment sales and a change in the allocation of network maintenance costs.  The increased wireless handset equipment sale costs are associated with the increased number of wireless subscribers and an increased number of premium wireless handsets which have higher costs.  The change in allocation of network maintenance costs resulted in an increase to our Consumer segment and a decrease to our Network Access, Commercial and Managed Broadband segments.

 
36

 
Consumer Segment Adjusted EBITDA
The decrease in Adjusted EBITDA is primarily due to increased Cost of Goods Sold as described above in “Consumer Segment Cost of Goods Sold” and an increase in the selling, general and administrative expense that was allocated to our Consumer segment due to an increase in the 2010 segment margin upon which the selling, general and administrative expense allocation is based and an increase in consolidated selling, general and administrative expense.  These increases are partially off-set by increased revenue as described above in "Consumer Segment Revenues.”

Network Access Segment Overview
Network access segment revenue represented 16% of 2011 consolidated revenues. The components of Network Access segment revenue are as follows (amounts in thousands):

 
 
 
   
Percentage
 
 
 
2011
   
2010
   
Change
 
Voice
  $ 18,124       22,471       (19 %)
Data
    47,135       46,360       2 %
Wireless
    14,456       12,668       14 %
Total Network Access segment revenue
  $ 79,715       81,499       (2 %)

Network Access segment Cost of Goods Sold represented 13% of 2011 consolidated Cost of Goods Sold. The components of Network Access segment Cost of Goods Sold are as follows (amounts in thousands):

 
 
 
   
Percentage
 
 
 
2011
   
2010
   
Change
 
Voice
  $ 9,841       11,137       (12 %)
Data
    12,055       6,288       92 %
Wireless
    876       1,029       (15 %)
Total Network Access segment Cost of Goods Sold
  $ 22,772       18,454       23 %

Network Access segment Adjusted EBITDA, representing 22% of 2011 consolidated Adjusted EBITDA, is as follows (amounts in thousands):
 
 
 
 
   
Percentage
 
 
 
2011
   
2010
   
Change
 
Network Access segment Adjusted EBITDA
  $ 37,953       40,206       (6 %)

See note 7 in the "Condensed Notes to Interim Consolidated Financial Statements" included in Part I of this quarterly report on Form 10-Q for a reconciliation of consolidated Adjusted EBITDA, a non-GAAP financial measure, to consolidated income before income taxes.

Selected key performance indicators for our Network Access segment follow:

   
September 30,
   
Percentage
 
   
2011
   
2010
   
Change
 
 Voice:
 
 
   
 
   
 
 
Long-distance minutes carried (in millions)
    580.9       600.3       (3 %)

Please refer to our three-month results of operations discussion for additional selected key performance indicators for the third quarters of 2011 and 2010.

Network Access Segment Cost of Goods Sold
The increase in data Cost of Goods Sold is primarily due to:
 
 
37

 

 
·  
A $2.2 million increase in off-network capacity purchased by our common carrier customers,
·  
$1.8 million in Cost of Goods Sold related to the special project work revenue described above in “Network Access Segment Revenues”,
·  
A $1.6 million Cost of Goods Sold classification change.  Prior to the fourth quarter of 2010 certain Cost of Goods Sold were classified as Network Access segment voice Cost of Goods Sold.  Beginning in the fourth quarter of 2010 these Cost of Goods Sold were reclassified to data Cost of Goods Sold for a more accurate presentation, and
·  
The absence of a $724,000 favorable adjustment in 2010 based upon refunds from several vendors.  In the course of business we estimate unbilled data services Cost of Goods Sold based upon minutes of use processed through our network and established rates.  Such estimates are revised when subsequent billings are received, payments are made, billing matters are researched and resolved, tariffed billing periods lapse, or when disputed charges are resolved.

Network Access Segment Adjusted EBITDA
The Adjusted EBITDA decrease is primarily due to decreased revenue as described above in “Network Access Segment Revenues” and increased Cost of Goods Sold as described above in “Network Access Segment Cost of Goods Sold.”  These changes are partially off-set by a decrease in the selling, general and administrative expense that was allocated to our Network Access segment primarily due to a decrease in the 2010 segment margin upon which the selling, general and administrative expense allocation is based.

Commercial Segment Overview
Commercial segment revenue represented 20% of 2011 consolidated revenues. Commercial segment data revenue is comprised of monthly recurring charges for data services and charges billed on a time and materials basis largely for personnel providing on-site customer support.  This latter category can vary significantly based on project activity.  The components of Commercial segment revenue are as follows (amounts in thousands):

 
 
 
   
Percentage
 
 
 
2011
   
2010
   
Change
 
Voice
  $ 22,050       24,316       (9 %)
Video
    8,606       7,909       9 %
Data
    63,653       56,544       13 %
Wireless
    7,308       6,474       13 %
Total Commercial segment revenue
  $ 101,617       95,243       7 %

Commercial segment Cost of Goods Sold represented 29% of 2011 consolidated Cost of Goods Sold. The components of Commercial segment Cost of Goods Sold are as follows (amounts in thousands):

 
 
 
   
Percentage
 
 
 
2011
   
2010
   
Change
 
Voice
  $ 10,514       11,626       (10 %)
Video
    1,581       1,550       2 %
Data
    33,660       28,276       19 %
Wireless
    3,275       2,747       19 %
Total Commercial segment Cost of Goods Sold
  $ 49,030       44,199       11 %

Commercial segment Adjusted EBITDA, representing 13% of 2011 consolidated Adjusted EBITDA, is as follows (amounts in thousands):

 
 
 
   
Percentage
 
 
 
2011
   
2010
   
Change
 
Commercial segment Adjusted EBITDA
  $ 23,180       23,526       (1 %)

See note 7 in the "Condensed Notes to Interim Consolidated Financial Statements" included in Part I of this quarterly report on Form 10-Q for a reconciliation of consolidated Adjusted EBITDA, a non-GAAP financial measure, to consolidated income before income taxes.

 
38

 
Selected key performance indicators for our Commercial segment follow:

   
September 30,
   
Percentage
 
   
2011
   
2010
   
Change
 
 Voice:
 
 
   
 
   
 
 
Long-distance minutes carried (in millions)
    84.8       88.8       (5 %)

Please refer to our three-month results of operations discussion for additional selected key performance indicators for the third quarters of 2011 and 2010.

Commercial Segment Revenues
The increase in data revenue is primarily due to a $4.3 million or 14% increase in managed services project revenue due to special project work.

Commercial Segment Cost of Goods Sold
The increase in data Cost of Goods Sold is primarily due to a $3.3 million or 15% increase in managed services project Cost of Goods Sold related to the increased revenue described above in “Commercial Segment Revenues.”

Commercial Segment Adjusted EBITDA
The Adjusted EBITDA decrease is primarily due to increased Cost of Goods Sold as described above in “Commercial Segment Cost of Goods Sold” and an increase in the selling, general and administrative expense that was allocated to our Commercial segment primarily due to an increase in consolidated selling, general and administrative expense.  These increases were partially off-set by increased revenue as described above in “Commercial Segment Revenues.”

Managed Broadband Segment Overview
Managed Broadband segment revenue, Cost of Goods Sold and Adjusted EBITDA represented 9%, 8% and 12% of 2011 consolidated revenues, Cost of Goods Sold and Adjusted EBITDA, respectively.

Please refer to our three-month results of operations discussion for selected key performance indicators for the third quarters of 2011 and 2010.

Managed Broadband Segment Revenues
Managed Broadband segment revenue, which includes data products only, increased 28% to $46.0 million in 2011 as compared to 2010. The increase is primarily due to increased monthly contract revenue due to increased data network capacity purchased by our ConnectMD® and SchoolAccess® customers and absence of $1.7 million in denied funding from the USAC for one ConnectMD® customer for the funding year July 2008 to June 2009. We received the funding commitment letter, which outlined the denied portion, in the second quarter of 2010.  The denial has been appealed to the FCC and we cannot predict the likelihood of success.

Managed Broadband Segment Cost of Goods Sold
Managed Broadband segment Cost of Goods Sold increased from $9.9 million in 2010 to $13.0 million in 2011 primarily due to the increase in data network capacity described above in “Managed Broadband Segment Revenues.

Managed Broadband Segment Adjusted EBITDA
Managed Broadband segment Adjusted EBITDA increased 46% to $20.3 million in 2011 primarily due to an increase in revenue as described above in "Managed Broadband Segment Revenues," partially off-set by an increase in the Cost of Goods Sold as described above in “Managed Broadband Segment Cost of Goods Sold,” and an increase in the selling, general and administrative expense that was allocated to our Managed Broadband segment.  The increase in selling, general and administrative expense is primarily due to an increase in the consolidated selling, general and administrative expense.

See note 7 in the "Condensed Notes to Interim Consolidated Financial Statements" included in Part I of this quarterly report on Form 10-Q for a reconciliation of consolidated Adjusted EBITDA, a non-GAAP financial measure, to consolidated income before income taxes.

 
39

 
Regulated Operations Segment Overview
Regulated Operations segment revenue, Cost of Goods Sold and Adjusted EBITDA represented 3%, 2% and 2% of 2011 consolidated revenues, Cost of Goods Sold and Adjusted EBITDA, respectively.

Please refer to our three-month results of operations discussion for selected key performance indicators for the third quarters of 2011 and 2010.

Regulated Operations Segment Revenues
Regulated Operations segment revenues decreased from $17.3 million in 2010 to $17.0 million in 2011.

Regulated Operations Segment Cost of Goods Sold
Regulated Operations segment Cost of Goods Sold increased from $3.4 million in 2010 to $4.1 million in 2011.

Regulated Operations Segment Adjusted EBITDA
Regulated Operations segment Adjusted EBITDA decreased 42% to $3.0 million in 2011 primarily due to a decrease in revenue as described above in “Regulated Operations Segment Revenues” and an increase in Cost of Goods Sold as described above in “Regulated Operations Segment Cost of Goods Sold.”
 
See note 7 in the "Condensed Notes to Interim Consolidated Financial Statements" included in Part I of this quarterly report on Form 10-Q for a reconciliation of consolidated Adjusted EBITDA, a non-GAAP financial measure, to consolidated income before income taxes.

Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $4.6 million to $171.0 million in 2011.  Individually significant items contributing to the increase include:

·  
A $1.6 million increase in bad debt expense primarily due to absence of settlements which resulted in the release of credit reserves in the third quarter of 2010,
·  
A $1.5 million increase in health benefit costs, and
·  
A $935,000 increase in labor costs.

These increases were partially off-set by a $2.5 million decrease in our company-wide success sharing bonus accrual and a $1.4 million decrease in share-based compensation expense.  The remainder of the increase is comprised of individually insignificant items.

As a percentage of total revenues, selling, general and administrative expenses were 34% in 2011 and 2010.

Depreciation and Amortization Expense
Depreciation and amortization expense increased $820,000 to $93.1 million in 2011.

Other Expense, Net
Other expense, net of other income, increased 14% to $60.6 million in 2011 primarily due to a $9.1 million loss on extinguishment of debt.  On May 23, 2011, GCI, Inc., our wholly-owned subsidiary, completed an offering of $325.0 million in aggregate principal amount of 2021 Notes.  We used the net proceeds from this offering to repay and retire all of our outstanding 2014 Notes.  This increase was partially offset by a $1.3 million decrease in interest expense to $50.3 million.  The interest expense decrease is primarily due to the issuance of the 2021 Notes, which have a lower interest rate than the interest rate paid on our 2014 Notes.

Income Tax Expense
Income tax expense totaled $7.4 million and $10.3 million in 2011 and 2010, respectively. Our effective income tax rate increased from 48% in 2010 to 52% in 2011 primarily due to an increase in the amount of estimated permanent tax differences when compared to our estimated income before income tax expense in 2011 and 2010.

Liquidity and Capital Resources
Our principal sources of current liquidity are cash and cash equivalents. We believe, but can provide no assurances, that we will be able to meet our current and long-term liquidity, capital requirements and fixed charges through our cash flows from operating activities, existing cash, cash equivalents, credit facilities, and other external financing and equity sources. Should operating cash flows be insufficient to support additional borrowings and principal payments scheduled under our existing credit facilities, capital expenditures will likely be reduced.

 
40

 
In January 2010 the U.S. Department of Agriculture’s Rural Utilities Service (“RUS”) approved our wholly-owned subsidiary, United Utilities, Inc.’s (“UUI”) application for an $88.2 million loan/grant combination to extend terrestrial broadband service for the first time to Bristol Bay and the Yukon-Kuskokwim Delta, an area in Alaska roughly the size of the state of North Dakota. Upon completion, this project, called TERRA-Southwest (“TERRA-SW”), will be able to serve over 9,000 households and over 700 businesses in the 65 covered communities. The project will also be able to serve numerous public/nonprofit/private community anchor institutions and entities, such as regional health care providers, school districts, and other regional and Alaska Native organizations. The RUS award, consisting of a $44.2 million loan and a $44.0 million grant, is made under the RUS Broadband Initiatives Program established pursuant to the American Recovery and Reinvestment Act. The award funds backbone network facilities that we would not otherwise be able to construct within our return-on-investment requirements. UUI began construction on TERRA-SW in 2010 and expects to complete the project in 2011.

On May 20, 2011, GCI, Inc., our wholly-owned subsidiary, completed an offering of $325.0 million in aggregate principal amount of 6 3/4% Senior Notes due 2021 (“2021 Notes”) at an issue price of 100%.  We used the net proceeds from this offering to repay and retire all $320.0 million of our senior unsecured notes due 2014 (“2014 Notes”).

In June 2011, GCI Holdings, Inc. (“Holdings”), our wholly owned subsidiary, entered into an Add-On Term Loan Supplement No. 1 (“Supplement No. 1”) to our Senior Credit Facility. The Supplement No. 1 provided for an additional $25.0 million term loan with an initial interest rate of LIBOR plus 2.5%, payable in accordance with the terms of our Senior Credit Facility.  Holdings used $20.0 million of the term loan proceeds to pay down outstanding revolving loans under our Senior Credit Facility, thus increasing availability under the revolving portion of our Senior Credit Facility.  The remaining $5.0 million was used for general corporate purposes.

In July 2011, Holdings entered into an Add-On Term Loan Supplement No. 2 (“Supplement No. 2”) to our Senior Credit Facility. The Supplement No. 2 provided for an additional $25.0 million term loan with an initial interest rate of LIBOR plus 2.5%, payable in accordance with the terms of our Senior Credit Facility.  Holdings used $15.0 million of the term loan proceeds to pay down outstanding revolving loans under our Senior Credit Facility, thus increasing availability under the revolving portion of our Senior Credit Facility.  The remaining $10.0 million was used for general corporate purposes.

On August 30, 2011, we entered into a financing arrangement under the New Markets Tax Credit (“NMTC”) program that provided $16.5 million in net cash to help fund the extension of terrestrial broadband service for the first time to rural Northwestern Alaska communities via a high capacity hybrid fiber optic and microwave network.  When completed, the project, called TERRA-Northwest (“TERRA-NW”), will connect to the TERRA-SW network and provide a high capacity backbone connection from the served communities to the Internet.

In September 2011, the Regulatory Commission of Alaska approved our application for a $5.3 million grant to help fund TERRA-NW.  The NMTC arrangement discussed above and this grant award fund backbone network facilities that we would not otherwise be able to construct within our return-on-investment requirements.  We plan to begin construction on TERRA-NW in 2012 and expect to complete the project in 2014 or earlier if possible.
 
While our short-term and long-term financing abilities are believed to be adequate as a supplement to internally generated cash flows to fund capital expenditures and acquisitions as opportunities arise, turmoil in the global financial markets may negatively impact our ability to further access the capital markets in a timely manner and on attractive terms, which may have a negative impact on our ability to grow our business.

We monitor the third-party depository institutions that hold our cash and cash equivalents. Our emphasis is primarily on safety of principal and secondarily on maximizing yield on those funds.

 
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Our net cash flows provided by and (used for) operating, investing and financing activities, as reflected in the Consolidated Statements of Cash Flows for 2011 and 2010, are summarized as follows (amounts in thousands):

 
 
2011
   
2010
 
Operating activities
  $ 96,526       112,156  
Investing activities
    (99,442 )     (77,384 )
Financing activities
    4,480       (4,548 )
Net increase in cash and cash equivalents
  $ 1,564       30,224  

Operating Activities
The decrease in cash flows provided by operating activities is due primarily to an increase in accounts receivable in 2011 as compared to 2010 due to timing of receipt of payments.

Investing Activities
Net cash used in investing activities consists primarily of cash paid for capital expenditures.  Our most significant recurring investing activity has been capital expenditures and we expect that this will continue in the future.  A significant portion of our capital expenditures is based on the level of customer growth and the technology being deployed.  The increase in cash flows used for investing activities is due primarily to capital expenditures for our TERRA-SW project.

Our cash expenditures for property and equipment, including construction in progress, totaled $126.9 million and $68.8 million during 2011 and 2010, respectively.  Our capital expenditures increased in 2011 primarily due to our TERRA-SW project.  We expect to recover a substantial portion of our TERRA-SW capital expenditures in subsequent periods through grant funds and loan draws under our TERRA-SW RUS award.  We expect our 2011 expenditures for property and equipment for our core operations, including construction in progress, to total $110.0 million to $120.0 million, depending on available opportunities and the amount of cash flow we generate during 2011, and excluding capital expenditures related to our TERRA-SW project.

Under our TERRA-SW RUS award, we have total available grant funds of $44.0 million.  We have received $15.3 million in grant funds during the nine months ended September 30, 2011, leaving $28.7 million remaining grant funds available as of September 30, 2011.  We have a $3.5 million grant fund receivable recorded as of September 30, 2011.  On October 21, 2011, we received an additional $5.4 million under the grant portion of the award.  After consideration of this transaction, we have $23.3 million remaining grant funds available.

We received $16.5 million in cash as part of entering into an NMTC financing transaction.  The cash is restricted for use on construction of TERRA-NW.

Financing Activities
Net cash provided by financing activities in 2011 consists primarily of proceeds from the issuance of our 2021 Notes and Supplements No. 1 and No. 2 under our Senior Credit Facility and borrowing under the revolving portion of our Senior Credit Facility.  These proceeds were off-set by retirement of our 2014 Notes and repayments under the revolving portion of our Senior Credit Facility, payment of debt issuance costs and repurchases of our common stock.  Proceeds from borrowings fluctuate from year to year based on our liquidity needs.  We may use excess cash to make optional repayments on our debt or repurchase our common stock depending on various factors, such as market conditions.

Available Borrowings Under Senior Credit Facility
Our Senior Credit Facility, which at September 30, 2011 includes the Supplements No. 1 and No. 2 as discussed above, includes a $50.0 million term loan and a $75.0 million revolving credit facility with a $25.0 million sublimit for letters of credit.  The term loan is fully drawn and a total of $73.0 million is outstanding as of September 30, 2011.  Under the revolving portion of the Senior Credit Facility, we have borrowed $23.0 million and have $349,000 of letters of credit outstanding, which leaves $51.7 million available for borrowing as of September 30, 2011.

Available TERRA-SW Borrowings Under RUS
Under our TERRA-SW RUS award, we have total available loan funds of $44.2 million.  We have borrowed $15.4 million in loan funds, leaving $28.8 million remaining loan funds available as of September 30, 2011.  On October 21, 2011, we received an additional $5.4 million under the loan portion of the award.  After consideration of this transaction, we have $23.4 million remaining loan funds available.

 
42

 
Debt Covenants
We are subject to covenants and restrictions set forth in the indentures governing our 2019 and 2021 Notes, Senior Credit Facility, RUS loans, and CoBank loans.  We are in compliance with the covenants, and we believe that neither the covenants nor the restrictions in our indentures or loan documents will limit our ability to operate our business.

Share Repurchases
GCI’s Board of Directors has authorized a common stock buyback program for the repurchase of GCI Class A and Class B common stock in order to reduce the outstanding shares of Class A and Class B common stock.  Under this program, we are currently authorized to make up to $114.4 million of repurchases as of September 30, 2011. We are authorized to increase our repurchase limit $5.0 million per quarter indefinitely and to use stock option exercise proceeds to repurchase additional shares.  If stock repurchases are less than the total approved quarterly amount the difference may be carried forward and applied against future stock repurchases. During 2011 we repurchased 3.8 million shares of GCI common stock under the stock buyback program at a cost of $39.0 million. The common stock buyback program is expected to continue for an indefinite period dependent on leverage, liquidity, company performance, market conditions and subject to continued oversight by GCI’s Board of Directors. The open market repurchases have and will continue to comply with the restrictions of SEC Rule 10b-18.

Critical Accounting Policies
Our accounting and reporting policies comply with GAAP. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. The financial position and results of operations can be affected by these estimates and assumptions, which are integral to understanding reported results. Critical accounting policies are those policies that management believes are the most important to the portrayal of our financial condition and results, and require management to make estimates that are difficult, subjective or complex. Most accounting policies are not considered by management to be critical accounting policies. Several factors are considered in determining whether or not a policy is critical in the preparation of financial statements. These factors include, among other things, whether the estimates are significant to the financial statements, the nature of the estimates, the ability to readily validate the estimates with other information including third parties or available prices, and sensitivity of the estimates to changes in economic conditions and whether alternative accounting methods may be utilized under GAAP. For all of these policies, management cautions that future events rarely develop exactly as forecast, and the best estimates routinely require adjustment. Management has discussed the development and the selection of critical accounting policies with our Audit Committee.

Those policies considered to be critical accounting policies for 2011 are revenue recognition related to revenues from high cost, rural health and school and libraries USF programs, the allowance for doubtful receivables, impairment and useful lives of intangible assets, accruals for unbilled costs, and the valuation allowance for net operating loss deferred tax assets.  A complete discussion of our critical accounting policies can be found in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our December 31, 2010 annual report on Form 10-K.

Other significant accounting policies, not involving the same level of measurement uncertainties as those discussed above, are nevertheless important to an understanding of the financial statements. A complete discussion of our significant accounting policies can be found in note 1 in the accompanying “Condensed Notes to Interim Consolidated Financial Statements” and in Part II of our December 31, 2010 annual report on Form 10-K.

Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to various types of market risk in the normal course of business, including the impact of interest rate changes.  Our Senior Credit Facility carries interest rate risk.  Amounts borrowed under this Agreement bear interest at LIBOR plus 4.0% or less depending upon our Total Leverage Ratio (as defined) for the revolving portion and LIBOR plus 2.5% for the term portion.  Should the LIBOR rate change, our interest expense will increase or decrease accordingly.  As of September 30, 2011, we have borrowed $73.0 million subject to interest rate risk.  On this amount, each 1% increase in the LIBOR interest rate would result in $730,000 of additional gross interest cost on an annualized basis.  All of our other material borrowings have a fixed interest rate.  We do not hold derivatives for trading purposes.

 
43

 
Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 (“Exchange Act”) is recorded, processed, summarized, accumulated and communicated to our management, including our principal executive and financial officers, to allow timely decisions regarding required financial disclosure, and reported as specified in the SEC’s rules and forms. As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation of the effectiveness of the design and operation of our “disclosure controls and procedures” (as defined in Exchange Act Rule 13a - 15(e)) under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer.  Based on that evaluation, our management, including our Chief Executive Officer and our Chief Financial Officer, concluded that our disclosure controls and procedures were not effective as of September 30, 2011.

The certifications attached as Exhibits 31 and 32 to this report should be read in conjunction with the disclosures set forth herein.
 
Changes in Internal Control over Financial Reporting
In the second quarter of 2010 we identified a material weakness associated with inadequately designed internal controls in our financial reporting process related to the USF high cost program support revenue accrual.  We began remediation in the third quarter of 2010 by strengthening the design and operation of our controls over the preparation and review of the USF high cost program support revenue accrual.  Our remediation efforts continued in the fourth quarter of 2010 and the first three quarters of 2011 and will continue in the fourth quarter of 2011.

Except as described above there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) identified in connection with the evaluation of our controls performed during the quarter ended September 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.  A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Internal control over financial reporting has inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures.  Internal control over financial reporting also can be circumvented by collusion or improper management override.  Because of such limitations, there is a risk that material misstatements will not be prevented or detected on a timely basis by internal control over financial reporting.  However, these inherent limitations are known features of the financial reporting process.  Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

We may enhance, modify, and supplement internal controls and disclosure controls and procedures based on experience.

PART II – OTHER INFORMATION
Item 1. Legal Proceedings
Except as set forth in this item, neither the Company, its property nor any of its subsidiaries or their property is a party to or subject to any material pending legal proceedings. We are parties to various claims and pending litigation as part of the normal course of business. We are also involved in several administrative proceedings and filings with the Federal Communications Commission (“FCC”) and state regulatory authorities. In the opinion of management, the nature and disposition of these matters are considered routine and arising in the ordinary course of business.  In addition we are involved in the following matters:
 
 
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·  
In September 2008, the FCC's Office of Inspector General ("OIG") initiated an investigation regarding Alaska DigiTel LLC’s (“Alaska DigiTel”) compliance with program rules and requirements under the Lifeline Program. The request covered the period beginning January 1, 2004 through August 31, 2008 and related to amounts received for Lifeline service.  Alaska DigiTel was an Alaska based wireless communications company of which we acquired an 81.9% equity interest on January 2, 2007 and the remaining 18.1% equity interest on August 18, 2008 and was subsequently merged with one of our wholly owned subsidiaries in April 2009. Prior to August 18, 2008, our control over the operations of Alaska DigiTel was limited as required by the FCC upon its approval of our initial acquisition completed in January 2007. We responded to this request on behalf of Alaska DigiTel and the GCI companies as affiliates. On January 18, 2011 we reached an agreement with the FCC and the Department of Justice to settle the matter, which required us to contribute $1.6 million to the United States Treasury and granted us a broad release of claims including those under the False Claims Act.  The $1.6 million contribution, of which $154,000, $661,000 and $741,000 were recognized in selling, general and administrative expense in the income statements in the years ending December 31, 2010, 2009 and 2008, respectively, was paid in January 2011; and
·  
In August 2010, a company-owned aircraft was involved in an accident resulting in five fatalities and injuries to the remaining four passengers on board.  We had aircraft and liability insurance coverage in effect at the time of the accident.  We cannot predict the likelihood or nature of the total potential claims related to the accident.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a)  Not applicable.

(b)  Not applicable.

(c)  The following table provides information about repurchases of shares of our Class A and Class B common stock during the quarter ended September 30, 2011:

 
       
 
         
(d) Maximum
 
 
       
 
   
(c) Total
   
Number (or
 
 
       
 
   
Number of
   
approximate
 
 
       
 
   
Shares
   
Dollar Value) of
 
 
       
 
   
Purchased as
   
Shares that May
 
 
 
(a) Total
   
 
   
Part of Publicly
   
Yet Be
 
 
 
Number of
   
(b) Average
   
Announced
   
Purchased Under
 
 
 
Shares
   
Price Paid per
   
Plans or
   
the Plan or
 
   
Purchased1
   
Share
   
Programs2
   
Programs3
 
 July 1, 2011 to
       
 
             
 July 31, 2011
    356,056     $ 11.90       356,056     $ 115,184,822  
 August 1, 2011 to
                               
 August 31, 2011
    963,455     $ 8.99       963,455     $ 106,519,799  
 September 1, 2011 to
                               
 September 30, 2011
    600,389     $ 8.32       600,236     $ 101,522,015  
Total
    1,919,900                          
 
                               
Consists of 1,919,734 shares from open market purchases made under our publicly announced repurchase
 
 plan, 13 shares from private purchases made under our publicly announced repurchase plan and 153 shares
 
 from private purchases made to settle the minimum statutory tax-withholding requirements pursuant to
 
 restricted stock award vesting.
 
The repurchase plan was publicly announced on November 3, 2004. Our plan does not have an expiration
 
 date, however transactions pursuant to the plan are subject to periodic approval by our Board of Directors.
 
 We expect to continue the repurchases for an indefinite period dependent on leverage, liquidity, company
 
 performance, market conditions and subject to continued oversight by our Board of Directors.
 
The total amount approved by our Board of Directors for repurchase under our publicly announced
 
 repurchase plan was $290.2 million through September 30, 2011 consisting of $285.2 million through
 
 June 30, 2011 and an additional $5.0 million during the three months ended September 30, 2011. We have
 
 made total repurchases under the program of $188.7 million through September 30, 2011. If stock
 
 repurchases are less than the total approved quarterly amount the difference may be carried forward and
 
 used to repurchase additional shares in future quarters, subject to Board approval.
 
 
                               
 
                               
 
                               

 
45

 
Item 6. Exhibits

Exhibit No.
Description
 
31.1 
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
 
 
 
Section 302 of the Sarbanes-Oxley Act of 2002 by our President and Director *
 
31.2 
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
 
 
 
Section 302 of the Sarbanes-Oxley Act of 2002 by our Senior Vice President,
 
 
 
Chief Financial Officer, Secretary and Treasurer *
 
32.1 
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
 
 
 
Section 906 of the Sarbanes-Oxley Act of 2002 by our President and Director *
 
32.2 
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
 
 
 
Section 906 of the Sarbanes-Oxley Act of 2002 by our Senior Vice President,
 
 
 
Chief Financial Officer, Secretary and Treasurer *
 
10.192 
Credit Agreement dated August 30, 2011 by and between Unicom, Inc. as borrower
 
 
 
and Northern Development Fund VIII, LLC as Lender and Travois New Markets
 
 
 
Project CDE X, LLC as Lender and Waveland Sub CDE XVI, LLC as Lender and
 
 
 
Alaska Growth Capital Bidco, Inc. as Disbursing Agent (1)
 
101 
The following materials from General Communication, Inc.'s Quarterly Report on Form
 
 
 
10-Q for the quarter ended September 30, 2011 formatted in XBRL (eXtensible Business
 
 
 
Reporting Language): (i) Consolidated Balance Sheets; (ii) Consolidated Statements
 
 
 
of Operations; (iii) Consolidated Statements of Cash Flows; and (iv) Condensed
 
 
 
Notes to Interim Consolidated Financial Statements.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
*
Filed herewith.
 
(1)
Incorporated by reference to the Company's Current Report on Form 8-K dated September 6, 2011
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
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SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

GENERAL COMMUNICATION, INC.

Signature
 
Title
 
Date
         
         
  /s/ Ronald A. Duncan  
President and Director
    November 3, 2011
Ronald A. Duncan
 
(Principal Executive Officer)
   
         
  /s/ John M. Lowber  
Senior Vice President, Chief Financial
    November 3, 2011
John M. Lowber
 
Officer, Secretary and Treasurer
(Principal Financial Officer)
   
         
  /s/ Lynda L. Tarbath  
Vice President, Chief Accounting
    November 3, 2011
Lynda L. Tarbath
 
Officer (Principal Accounting Officer)
   


 
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