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EX-31.2 - EXHIBIT 31.2 - GCI, LLCexhibit31-2.htm
EX-10.190 - EXHIBIT 10.190 - GCI, LLCexhibit10-190.htm

 
 

 

         

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 June 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. 0-5890

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

 
State of Alaska
 
91-1820757
 
 
(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 o
Non-accelerated filer x (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

 
1

 

GCI, INC.
A WHOLLY-OWNED SUBSIDIARY OF GENERAL COMMUNICATION, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 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 (unaudited) as of June 30, 2011
  and December 31, 2010
   
4
           
   
Consolidated Statements of Operations for the three and six months ended June 30, 2011 (unaudited) and 2010 (unaudited)
   
6
           
   
Consolidated Statements of Cash Flows for the six months ended
  June 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
   
21
           
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
   
38
           
 
Item 4.
Controls and Procedures
   
38
           
Part II.  OTHER INFORMATION
     
           
 
Item 1.
Legal Proceedings
   
39
           
 
Item 6.
Exhibits
   
40
           
 
Other items are omitted, as they are not applicable.
     
           
SIGNATURES
 
41
 

 
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
 
 
 
 
   
 
 
GCI, INC. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
 
(Unaudited)
 
 
 
 
   
 
 
(Amounts in thousands)
 
 
   
 
 
 
 
June 30,
   
December 31,
 
ASSETS
 
2011
   
2010
 
 
 
 
   
 
 
Current assets:
 
 
   
 
 
Cash and cash equivalents
  $ 24,369       31,777  
 
               
Receivables
    155,632       132,856  
Less allowance for doubtful receivables
    7,530       9,189  
Net receivables
    148,102       123,667  
 
               
Deferred income taxes
    10,145       10,145  
Prepaid expenses
    9,141       5,950  
Inventories
    6,523       5,804  
Other current assets
    3,734       3,940  
Total current assets
    202,014       181,283  
 
               
Property and equipment in service, net of depreciation
    766,051       798,278  
Construction in progress
    77,549       31,144  
Net property and equipment
    843,600       829,422  
 
               
Cable certificates
    191,635       191,635  
Goodwill
    73,932       73,932  
Wireless licenses
    25,967       25,967  
Other intangible assets, net of amortization
    16,435       17,717  
Deferred loan and senior notes costs, net of amortization
    13,418       13,661  
Other assets
    16,333       16,850  
Total other assets
    337,720       339,762  
Total assets
  $ 1,383,334       1,350,467  
 
               
See accompanying condensed notes to interim consolidated financial statements.
 
 
               
 
               
 
               
 
         
(Continued)
 

 
4

 


GCI, INC. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
 
(Unaudited)
 
(Continued)
 
 
 
 
   
 
 
(Amounts in thousands)
 
 
   
 
 
 
 
June 30,
   
December 31,
 
LIABILITIES AND STOCKHOLDER'S EQUITY
 
2011
   
2010
 
 
 
 
   
 
 
Current liabilities:
 
 
   
 
 
Current maturities of obligations under long-term debt and
  capital leases
  $ 7,693       7,652  
Accounts payable
    39,496       35,589  
Deferred revenue
    18,160       17,296  
Accrued payroll and payroll related obligations
    20,792       22,132  
Accrued interest
    7,326       13,456  
Accrued liabilities
    12,910       12,557  
Subscriber deposits
    1,222       1,271  
Total current liabilities
    107,599       109,953  
 
               
Long-term debt, net
    830,595       779,201  
Obligations under capital leases, excluding current maturities
    81,433       84,144  
Obligation under capital lease due to related party
    1,890       1,885  
Deferred income taxes
    101,845       102,401  
Long-term deferred revenue
    56,645       49,175  
Other liabilities
    22,921       24,495  
Total liabilities
    1,202,928       1,151,254  
 
               
Commitments and contingencies
               
Stockholder's equity:
               
Class A common stock (no par). Authorized 10 shares;
               
issued and outstanding 0.1 shares at June 30, 2011 and December 31, 2010
    206,622       206,622  
Paid-in capital
    57,551       54,574  
Retained earnings
    (83,767 )     (61,983 )
Total stockholder's equity
    180,406       199,213  
Total liabilities and stockholder's equity
  $ 1,383,334       1,350,467  
 
               
See accompanying condensed notes to interim consolidated financial statements.
 

 
5

 
 
GCI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
 
(Unaudited)
 
 
 
 
   
 
   
 
   
 
 
 
 
 
   
 
   
 
   
 
 
 
 
Three Months Ended
   
Six Months Ended
 
 
 
June 30,
   
June 30,
 
(Amounts in thousands)
 
2011
   
2010
   
2011
   
2010
 
Revenues
  $ 168,089       162,326       332,866       314,745  
Cost of goods sold (exclusive of depreciation and
                               
amortization shown separately below)
    57,314       51,754       111,070       100,661  
Selling, general and administrative expenses
    57,697       54,704       116,590       107,961  
Depreciation and amortization expense
    30,632       30,820       62,352       61,946  
 Operating income
    22,446       25,048       42,854       44,177  
 
                               
Other income (expense):
                               
Interest expense (including amortization of deferred
                               
loan fees)
    (17,294 )     (17,729 )     (34,746 )     (35,409 )
Loss on extinguishment of debt
    (9,111 )     -       (9,111 )     -  
Interest income
    4       76       8       137  
Other
    (9 )     -       (33 )     -  
 Other expense, net
    (26,410 )     (17,653 )     (43,882 )     (35,272 )
   Income (loss) before income tax (expense) benefit
    (3,964 )     7,395       (1,028 )     8,905  
Income tax (expense) benefit
    2,007       (5,465 )     556       (5,301 )
 
                               
   Net income (loss)
  $ (1,957 )     1,930       (472 )     3,604  
 
                               
See accompanying condensed notes to interim consolidated financial statements
         
 
                               

 
6

 
 
GCI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
SIX MONTHS ENDED JUNE 30, 2011 AND 2010
 
(Unaudited)
 
 
 
 
   
 
 
 
 
 
   
 
 
(Amounts in thousands)
 
2011
   
2010
 
Cash flows from operating activities:
 
 
   
 
 
Net income (loss)
  $ (472 )     3,604  
Adjustments to reconcile net income (loss) to net cash provided by
               
operating activities:
               
Depreciation and amortization expense
    62,352       61,946  
Loss on extinguishment of debt
    9,111       -  
Deferred income tax expense (benefit)
    (556 )     5,301  
Share-based compensation expense
    2,840       2,446  
Other noncash income and expense items
    4,563       3,824  
Change in operating assets and liabilities
    (27,996 )     (6,434 )
Net cash provided by operating activities
    49,842       70,687  
Cash flows from investing activities:
               
Purchases of property and equipment
    (71,892 )     (41,943 )
Purchases of other assets and intangible assets
    (3,247 )     (1,694 )
Purchase of businesses, net of cash received
    -       (5,545 )
Purchase of marketable securities
    -       (182 )
Proceeds from sale of marketable securities
    -       178  
Other
    233       -  
Net cash used in investing activities
    (74,906 )     (49,186 )
Cash flows from financing activities:
               
Issuance of 2021 Notes
    325,000       -  
Borrowing on Senior Credit Facility
    68,000       -  
Repayment of debt and capital lease obligations
    (348,873 )     (4,824 )
Distribution to General Communication, Inc.
    (21,312 )     (1,318 )
Payment of Senior Notes call premiums
    (4,728 )     -  
Issuance of other long-term debt
    2,841       4,532  
Payment of debt issuance costs
    (3,272 )     (2,182 )
Net cash provided by (used in) financing activities
    17,656       (3,792 )
Net increase (decrease) in cash and cash equivalents
    (7,408 )     17,709  
Cash and cash equivalents at beginning of period
    31,777       48,142  
Cash and cash equivalents at end of period
  $ 24,369       65,851  
 
               
See accompanying condensed notes to interim consolidated financial statements.
 
 
         

 
7

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


The accompanying unaudited interim consolidated financial statements include the accounts of GCI, Inc. 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, Inc. and its direct and indirect subsidiaries are referred to as “we,” “us” and “our.”

Basis of Presentation
We were incorporated in Alaska in 1997 to affect the issuance of Senior Notes.  As a wholly-owned subsidiary of General Communication, Inc. ("GCI"), we received through our initial capitalization all ownership interests in subsidiaries previously held by GCI.  The GCI and GCI, Inc. interim consolidated financial statements include substantially the same account activity.

 
(a)
Business
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, Inc. and its wholly-owned subsidiaries.   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)
Recently Issued Accounting Pronouncements
In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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
 
(Continued)
 
8

GCI, INC. AND SUBSIDIARIES
Condensed Notes to Interim Consolidated Financial Statements
(Unaudited)
 
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 statement of operations, financial position or cash flows.

 
(d)
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 statement of operations, 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 statement of operations, 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 statement of operations, financial position, cash flows or related disclosures.

 
(e)
Regulatory Accounting and Regulation
 
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.
 
(Continued)
 
9

GCI, INC. AND SUBSIDIARIES
Condensed Notes to Interim Consolidated Financial Statements
(Unaudited)
 
 
(f)
Earnings per Common Share
We are a wholly-owned subsidiary of GCI and, accordingly, are not required to present earnings per share.  Our common stock is not publicly traded.

(g)      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 three and six months ended June 30, 2010.

(h)      Income Taxes
 
GCI, Inc., as a wholly-owned subsidiary and member of the GCI controlled group of corporations, files its income tax returns as part of the consolidated group of corporations under GCI.  Accordingly, all discussions regarding income taxes reflect the consolidated group's activity.  Our income tax expense and deferred income tax assets and liabilities are presented herein using the separate-entity method.

(i)       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 Statement of Operations for the three and six months ended June 30, 2011 and 2010 (amounts in thousands):

 
 
Three Months Ended
   
Six Months Ended
 
 
 
June 30,
   
June 30,
 
 
 
2011
   
2010
   
2011
   
2010
 
Surcharges reported gross
  $ 1,376       1,416       2,800       2,751  
 
 
(Continued)
 
10

GCI, INC. AND SUBSIDIARIES
Condensed Notes to Interim Consolidated Financial Statements
(Unaudited)
 
(2)
Consolidated Statements of Cash Flows Supplemental Disclosures
 
Changes in operating assets and liabilities consist of (amounts in thousands):

Six month period ended June 30,
 
2011
   
2010
 
Increase in accounts receivable
  $ (27,245 )     (7,534 )
Increase in prepaid expenses
    (3,191 )     (2,903 )
(Increase) decrease in inventories
    (719 )     3,609  
Decrease in other current assets
    206       314  
Decrease in other assets
    1,857       1,022  
Increase in accounts payable
    2,361       867  
Increase in deferred revenues
    864       1,040  
Decrease in accrued payroll and payroll related obligations
    (1,559 )     (2,893 )
Increase in accrued liabilities
    134       3,472  
Decrease in accrued interest
    (6,130 )     (1,393 )
Decrease in subscriber deposits
    (49 )     (191 )
Increase (decrease) in long-term deferred revenue
    7,470       (1,282 )
Decrease in components of other long-term liabilities
    (1,995 )     (562 )
 
  $ (27,996 )     (6,434 )

The following items are for the six months ended June 30, 2011 and 2010 (amounts in thousands):
 
Net cash paid or received:
 
2011
   
2010
 
Interest paid, net of amounts capitalized
  $ 40,614       35,740  
Income tax refund received
  $ -       1,163  

The following items are non-cash investing and financing activities for the six months ended June 30, 2011 and 2010 (amounts in thousands):
 
 
 
2011
   
2010
 
Non-cash additions for purchases of property and equipment
  $ 9,388       5,842  
Asset retirement obligation additions to property and equipment
  $ 123       570  
Asset retirement obligation reductions to property and equipment for revisions to previous estimates
  $ 294       -  
Write-off of original issue discount on 2014 Notes
  $ 1,530       -  

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

 
 
Three Months Ended
   
Six Months Ended
 
 
 
June 30,
   
June 30,
 
 
 
2011
   
2010
   
2011
   
2010
 
Amortization expense
  $ 1,583       1,586       3,156       3,297  

(Continued)
 
11

GCI, INC. AND SUBSIDIARIES
Condensed Notes to Interim Consolidated Financial Statements
(Unaudited)
 
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 
  $ 5,877  
2012 
    4,059  
2013 
    3,001  
2014 
    2,141  
2015 
    1,414  

(4)     Long-Term Debt

2021 Notes
On May 20, 2011 (“Closing Date”), we 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 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 carried on our Consolidated Balance Sheet.

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 as of the Closing Date, 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 us and certain of our 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 July 7, 2011, we launched an exchange offer pursuant to which we offered new 2021 Notes identical to the original notes except that the new 2021 Notes will have been registered under the Securities Act.  The exchange offer is expected to close on or about August 13, 2011.

(Continued)
 
12

GCI, 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 Statement of Operations.  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.

Our Senior Credit Facility, which includes the Supplement No. 1 as discussed above, includes a $25.0 million term loan and a $75.0 million revolving credit facility with a $25.0 million sublimit for letters of credit.  A total of $63.0 million is outstanding as of June 30, 2011.  The term loan is fully drawn as of June 30, 2011.  Under the revolving portion of the Senior Credit Facility, we have borrowed $38.0 million and have $2.7 million of letters of credit outstanding, which leaves $34.3 million available for borrowing as of June 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 June 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 June 30, 2011 and December 31, 2010 follow (amounts in thousands):

 
 
June 30,
   
December 31,
 
 
 
2011
   
2010
 
 
 
Carrying Amount
   
Fair Value
   
Carrying Amount
   
Fair Value
 
Current and long-term debt and capital lease obligations
  $ 921,611       957,100       872,882       908,286  
Other liabilities
    79,242       78,372       73,309       72,065  

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.
 
(Continued)
 
13

GCI, INC. AND SUBSIDIARIES
Condensed Notes to Interim Consolidated Financial Statements
(Unaudited)
 
Fair Value Measurements
Assets measured at fair value on a recurring basis as of June 30, 2011 and December 31, 2010 were as follows (amounts in thousands):

 
 
Fair Value Measurement at Reporting Date Using
 
June 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)
  $ 1,713       -       -  
Total assets at fair value
  $ 1,713       -       -  
 
                       
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
GCI’s 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.

The fair value of restricted stock awards is determined based on the number of shares granted and the quoted price of GCI’s Class A 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 six months ended June 30, 2010 was $2.84 per share.  There were no options granted during the six months ended June 30, 2011. The total fair value of options vesting during the six months ended June 30, 2011 and 2010 was $97,000 and $82,000, respectively.
 
(Continued)
 
14

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

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

 
 
2011
   
2010
 
Employee share-based compensation expense
  $ 2,968       2,285  
Adjustment to fair value of liability classified awards
    (128 )     161  
  Total share-based compensation expense
  $ 2,840       2,446  

Share-based compensation expense is classified as selling, general and administrative expense in our Consolidated Statement of Operations.  Unrecognized share-based compensation expense was $6.4 million relating to 2.5 million restricted stock awards and $490,000 relating to 308,000 unvested stock options as of June 30, 2011.  We expect to recognize share-based compensation expense over a weighted average period of 1.3 years for stock options and restricted stock awards.

A summary of option activity under the Stock Option Plan for the six months ended June 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
    (37 )   $ 7.66  
 
 
 
 
Outstanding at June 30, 2011
    1,212     $ 7.06  
3.9 years
  $ 6,082  
Exercisable at June 30, 2011
    904     $ 7.32  
2.6 years
  $ 4,309  

A summary of nonvested restricted stock award activity under the Stock Option Plan for the six months ended June 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 )   $ 6.61  
Nonvested at June 30, 2011
    2,480     $ 6.12  

At June 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 six months ended June 30, 2011 and 2010 were $155,000 and $48,000, respectively. We received $285,000 and $111,000 in cash from stock option exercises during the six months ended June 30, 2011 and 2010, respectively.

(Continued)
 
15

GCI, INC. AND SUBSIDIARIES
Condensed Notes to Interim Consolidated Financial Statements
(Unaudited)
 
The following is a summary of activity for stock option grants that were not made pursuant to the Stock Option Plan for the six months ended June 30, 2010 and 2011 (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 June 30, 2010 and 2011
    -          
Available for grant at June 30, 2011
    -          

In January 2001 we entered into an aircraft operating lease agreement with a company owned by GCI’s 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.

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 six months ended June 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 six months ended June 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 six months ended June 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.
 
(Continued)
 
16

GCI, INC. AND SUBSIDIARIES
Condensed Notes to Interim Consolidated Financial Statements
(Unaudited)
 
 
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 six months ended June 30, 2011 and 2010 follows (amounts in thousands):

Three months ended June 30,
 
Consumer
   
Network Access
   
Commercial
   
Managed Broadband
   
Regulated Operations
   
Total Reportable Segments
 
2011 
 
 
   
 
   
 
   
 
   
 
   
 
 
Revenues:
 
 
   
 
   
 
   
 
   
 
   
 
 
Intersegment
  $ -       -       1,416       -       44       1,460  
External
    88,554       25,151       34,216       14,639       5,529       168,089  
Total revenues
  $ 88,554       25,151       35,632       14,639       5,573       169,549  
Adjusted EBITDA
  $ 28,258       12,344       7,401       5,709       1,221       54,933  
 
                                               
2010 
                                               
Revenues:
                                               
Intersegment
  $ -       (5 )     1,326       -       48       1,369  
External
    87,149       27,112       32,071       10,387       5,607       162,326  
Total revenues
  $ 87,149       27,107       33,397       10,387       5,655       163,695  
Adjusted EBITDA
  $ 31,255       13,187       8,044       3,148       1,717       57,351  

Six months ended June 30,
 
Consumer
   
Network Access
   
Commercial
   
Managed Broadband
   
Regulated Operations
   
Total Reportable Segments
 
2011 
 
 
   
 
   
 
   
 
   
 
   
 
 
Revenues:
 
 
   
 
   
 
   
 
   
 
   
 
 
Intersegment
  $ -       -       2,825       -       113       2,938  
External
    176,971       50,248       66,045       28,634       10,968       332,866  
Total revenues
  $ 176,971       50,248       68,870       28,634       11,081       335,804  
Adjusted EBITDA
  $ 56,651       24,224       14,063       11,420       1,921       108,279  
 
                                               
2010 
                                               
Revenues:
                                               
Intersegment
  $ -       1       2,656       -       88       2,745  
External
    167,517       53,295       59,794       22,472       11,667       314,745  
Total revenues
  $ 167,517       53,296       62,450       22,472       11,755       317,490  
Adjusted EBITDA
  $ 57,207       25,178       14,401       8,063       3,560       108,409  

 
(Continued)
 
17

GCI, INC. AND SUBSIDIARIES
Condensed Notes to Interim Consolidated Financial Statements
(Unaudited)
 
A reconciliation of reportable segment revenues to consolidated revenues follows (amounts in thousands):

 
 
Three Months Ended
   
Six Months Ended
 
 
 
June 30,
   
June 30,
 
 
 
2011
   
2010
   
2011
   
2010
 
Reportable segment revenues
  $ 169,549       163,695       335,804       317,490  
Less intersegment revenues eliminated in consolidation
    1,460       1,369       2,938       2,745  
Consolidated revenues
  $ 168,089       162,326       332,866       314,745  

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

 
 
Three Months Ended
   
Six Months Ended
 
 
 
June 30,
   
June 30,
 
 
 
2011
   
2010
   
2011
   
2010
 
Reportable segment Adjusted EBITDA
  $ 54,933       57,351       108,279       108,409  
Less depreciation and amortization
  expense
    (30,632 )     (30,820 )     (62,352 )     (61,946 )
Less share-based compensation expense
    (1,670 )     (1,643 )     (2,840 )     (2,446 )
Plus other expense
    9       160       33       160  
Less accretion expense
    (194 )     -       (266 )     -  
Consolidated operating income
    22,446       25,048       42,854       44,177  
Less other expense, net
    (26,410 )     (17,653 )     (43,882 )     (35,272 )
Consolidated income (loss) before income tax (expense) benefit
  $ (3,964 )     7,395       (1,028 )     8,905  

(8)
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
 
(Continued)
 
18

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

 
·  
In August 2010, a GCI, Inc.-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 started construction on TERRA-SW in 2010 and expects to complete the project in 2012 or earlier if possible.  We have borrowed $2.8 million in loan funds, leaving $41.4 million remaining loan funds available as of June 30, 2011 for our TERRA-SW project.  We have received $2.8 million in grant funds, leaving $41.2 million remaining grant funds available as of June 30, 2011 for our TERRA-SW project.

Universal Service
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.  More recently, a number of industry consensus plans have been proposed to the FCC that would substantially change the methodology for distributing USF high cost support, as well as the access charge regime.  We cannot predict at this time the outcome of this proceeding, the prospects for adoption of these or other reforms, the effect on high cost support available to us, or how our access charge revenues and payments would be affected; however, our revenue for providing wireline and wireless local services in these areas would be materially adversely affected by the reduction of USF support.

(9)     Related Party Transaction
In January 2001 we entered into an aircraft operating lease agreement with a company owned by GCI’s 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.


(10)
Subsequent Events
On July 22, 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.

(Continued)
 
19

GCI, INC. AND SUBSIDIARIES
Condensed Notes to Interim Consolidated Financial Statements
(Unaudited)
On July 20, 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 $36.0 million and $35.8 million in loan and grant funds available, respectively.


 
20

 

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

In the following discussion, GCI, Inc. 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.”

GCI, Inc. was incorporated under the laws of the State of Alaska in 1997 to affect the issuance of Senior Notes.  GCI, Inc., a wholly-owned subsidiary of GCI, received through its initial capitalization all ownership interests in subsidiaries previously held by GCI.  Shares of GCI's Class A common stock are traded on the Nasdaq National Market tier of the Nasdaq Stock Market under the symbol of GNCMA.  Shares of GCI's Class B common stock are traded on the Over-the-Counter market.  Shares of GCI, Inc.'s common stock are wholly-owned by GCI and are not publicly traded.  The GCI and GCI, Inc. interim consolidated financial statements include substantially the same account activity.

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.

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
 
 
21

 
 
services.  More recently, a number of industry consensus plans have been proposed to the FCC that would substantially change the methodology for distributing USF high cost support, as well as the access charge regime.  We cannot predict at this time the outcome of this proceeding, the prospects for adoption of these or other reforms, the effect on high cost support available to us, or how our access charge revenues and payments would be affected; however, our revenue for providing wireline and wireless local services in these areas would be materially adversely affected by the reduction of USF support.

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 do not expect the future net impact on us to be material.

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
 
 

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
 
 
 
 
Three Months Ended
Change
Six Months Ended
Change
 
 
 
 
June 30,
2011 
June 30,
2011 
 
 
 
 
2011 
2010 
vs. 2010
2011 
2010 
vs. 2010
(Unaudited)
 
 
 
 
 
 
Statements of Operations Data:
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
Consumer segment
53%
54%
2%
53%
53%
6%
 
 
Network Access segment
15%
17%
(7%)
15%
17%
(6%)
 
 
Commercial segment
20%
20%
7%
20%
19%
10%
 
 
Managed Broadband segment
9%
6%
41%
9%
7%
27%
 
 
Regulated Operations segment
3%
3%
(1%)
3%
4%
(6%)
 
 
 
Total revenues
100%
100%
4%
100%
100%
6%
 
Selling, general and
 
 
 
 
 
 
 
 
administrative expenses
34%
34%
5%
35%
34%
8%
 
Depreciation and amortization
 
 
 
 
 
 
 
 
expense
18%
19%
(1%)
19%
20%
1%
 
 
22

 
 
 
Operating income
13%
15%
(10%)
13%
14%
(3%)
 
Other expense, net
16%
11%
50%
13%
11%
24%
 
Income (loss) before income tax (expense) benefit
(2%)
5%
(154%)
0%
3%
(112%)
 
Net income (loss)
(1%)
1%
(201%)
0%
1%
(113%)
 
 
 
 
 
 
 
 
 
 
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 (Loss) Before Income Taxes.

Three Months Ended June 30, 2011 (“second quarter of 2011”) Compared to Three Months Ended June 30, 2010 (“second quarter of 2010”)

Overview of Revenues and Cost of Goods Sold
Total revenues increased 4% from $162.3 million in the second quarter of 2010 to $168.1 million in the second quarter of 2011.  Revenue increases in our Consumer, Commercial and Managed Broadband segments were partially off-set by decreases in our Network Access and Regulated Operations segments.  See the discussion below for more information by segment.

Total Cost of Goods Sold increased 11% from $51.8 million in the second quarter of 2010 to $57.3 million in the second 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 53% of second quarter of 2011 consolidated revenues. The components of Consumer segment revenue are as follows (amounts in thousands):

 
 
Second Quarter of
   
Percentage
 
 
 
2011
   
2010
   
Change
 
Voice
  $ 13,625       15,254       (11 %)
Video
    29,546       29,352       1 %
Data
    17,257       14,608       18 %
Wireless
    28,126       27,935       1 %
Total Consumer segment revenue
  $ 88,554       87,149       2 %

Consumer segment Cost of Goods Sold represented 49% of second quarter of 2011 consolidated Cost of Goods Sold. The components of Consumer segment Cost of Goods Sold are as follows (amounts in thousands):

 
 
Second Quarter of
   
Percentage
 
 
 
2011
   
2010
   
Change
 
Voice
  $ 2,711       3,168       (14 %)
Video
    13,453       12,569       7 %
Data
    1,488       924       61 %
Wireless
    10,359       9,531       9 %
Total Consumer segment Cost of Goods Sold
  $ 28,011       26,192       7 %

 
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Consumer segment Adjusted EBITDA, representing 52% of second quarter of 2011 consolidated Adjusted EBITDA, is as follows (amounts in thousands):

 
 
Second Quarter of
   
Percentage
 
 
 
2011
   
2010
   
Change
 
Consumer segment Adjusted EBITDA
  $ 28,258       31,255       (10 %)

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 (loss) before income taxes.

Selected key performance indicators for our Consumer segment follow:

   
June 30,
   
Percentage
 
   
2011
   
2010
   
Change
 
 Voice:
 
 
   
 
   
 
 
Long-distance subscribers
    84,600       90,200       (6 %)
Long-distance minutes carried (in millions)
    23.2       26.7       (13 %)
Total local access lines in service
    82,300       85,100       (3 %)
Local access lines in service on GCI facilities
    75,900       77,100       (2 %)
 Video:
                       
Basic subscribers
    126,900       131,200       (3 %)
Digital programming tier subscribers
    77,400       80,600       (4 %)
HD/DVR converter boxes
    87,700       86,500       1 %
Homes passed
    239,000       234,700       2 %
Average monthly gross revenue per subscriber
  $ 76.47     $ 74.54       3 %
 Data:
                       
Cable modem subscribers
    105,400       103,500       2 %
 Wireless:
                       
Wireless lines in service
    126,400       119,000       6 %
Average monthly gross revenue per subscriber
  $ 70.52     $ 75.07       (6 %)
                         
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.
 

 
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Consumer Segment Revenues
The decrease in voice revenue is primarily due to a $1.3 million or 30% decrease in USAC support.  We accrue estimated high cost support revenue quarterly and adjust our revenue as we obtain new information that changes the variables used to calculate our estimate. The decrease in USF high cost support is due to changes in the rates used to calculate our estimate and a decrease in the number of local subscribers.

The increase in data revenue is primarily due to a 17% increase in cable modem revenue to $15.1 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 $1.4 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; and
·  
A $1.3 million increase in plan fee revenue to $10.6 million primarily due to an increase in the number of wireless subscribers and our subscribers’ selection of plans that offer more usage.

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

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

The wireless Cost of Goods Sold increase is primarily due to a change in the allocation of network maintenance costs which resulted in an increase to our Consumer segment and a decrease to our Network Access, Commercial and Managed Broadband segments and increased costs for wireless handset equipment sales associated with the increased number of wireless subscribers and an increased number of premium wireless handsets which have higher costs.  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. We expect this block of minutes to expire in the first quarter of 2012 at which time we expect a material increase to our wireless Cost of Goods Sold estimated at $5.0 million to $6.0 million for the year ended December 31, 2012.

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 decreases were partially offset by increased revenue as described above in "Consumer Segment Revenues.”

Network Access Segment Overview
Network Access segment revenue represented 15% of second quarter of 2011 consolidated revenues. The components of Network Access segment revenue are as follows (amounts in thousands):
 
 
25

 

 
 
 
Second Quarter of
   
Percentage
 
 
 
2011
   
2010
   
Change
 
Voice
  $ 5,441       7,176       (24 %)
Data
    15,023       15,823       (5 %)
Wireless
    4,687       4,113       14 %
Total Network Access segment revenue
  $ 25,151       27,112       (7 %)

Network Access segment Cost of Goods Sold represented 11% of second quarter of 2011 consolidated Cost of Goods Sold. The components of Network Access segment Cost of Goods Sold are as follows (amounts in thousands):

 
 
Second Quarter of
   
Percentage
 
 
 
2011
   
2010
   
Change
 
Voice
  $ 3,131       3,216       (3 %)
Data
    3,164       2,855       11 %
Wireless
    281       308       (9 %)
Total Network Access segment Cost of Goods Sold
  $ 6,576       6,379       3 %

Network Access segment Adjusted EBITDA, representing 23% of second quarter of 2011 consolidated Adjusted EBITDA, is as follows (amounts in thousands):

 
 
Second Quarter of
   
Percentage
 
 
 
2011
   
2010
   
Change
 
Network Access segment Adjusted EBITDA
  $ 12,344       13,187       (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 (loss) before income taxes.

Selected key performance indicators for our Network Access segment follow:

   
June 30,
   
Percentage
 
   
2011
   
2010
   
Change
 
 Voice:
 
 
   
 
   
 
 
Long-distance minutes carried (in millions)
    187.5       201.3       (7 %)
 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 decreases in our average rate per minute on billable minutes carried for our common carrier customers, the transition of voice traffic to dedicated networks and a decrease in minutes carried. Voice revenue continues to decline as expected due to increased competition in the Network Access business. The increased competition will continue to compress the rates we may charge our customers and, therefore, we expect a continued decline in Network Access segment voice revenue.

Network Access Segment Cost of Goods Sold
The increase in data Cost of Goods Sold is primarily due to an increase in off-network capacity purchased by our common carrier customers.

Network Access Segment Adjusted EBITDA
The Adjusted EBITDA decrease is primarily due to decreased revenues as described above in “Network Access Segment Revenues,” and an increase in Cost of Goods Sold as described above in “Network Access
 
 
26

 
 
Segment Cost of Goods Sold.”  These changes were 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 second 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):

 
 
Second Quarter of
   
Percentage
 
 
 
2011
   
2010
   
Change
 
Voice
  $ 7,340       8,448       (13 %)
Video
    2,936       2,639       11 %
Data
    21,518       18,831       14 %
Wireless
    2,422       2,153       12 %
Total Commercial segment revenue
  $ 34,216       32,071       7 %

Commercial segment Cost of Goods Sold represented 30% of second quarter of 2011 consolidated Cost of Goods Sold. The components of Commercial segment Cost of Goods Sold are as follows (amounts in thousands):

 
 
Second Quarter of
   
Percentage
 
 
 
2011
   
2010
   
Change
 
Voice
  $ 3,622       3,902       (7 %)
Video
    549       532       3 %
Data
    11,681       9,712       20 %
Wireless
    1,080       951       14 %
Total Commercial segment Cost of Goods Sold
  $ 16,932       15,097       12 %

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

 
 
Second Quarter of
   
Percentage
 
 
 
2011
   
2010
   
Change
 
Commercial segment Adjusted EBITDA
  $ 7,401       8,044       (8 %)

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 (loss) before income taxes.

Selected key performance indicators for our Commercial segment follow:

   
June 30,
   
Percentage
 
   
2011
   
2010
   
Change
 
 Voice:
 
 
   
 
   
 
 
Long-distance subscribers
    9,100       9,400       (3 %)
Long-distance minutes carried (in millions)
    28.0       29.4       (5 %)
Total local access lines in service
    49,100       48,000       2 %
Local access lines in service on GCI facilities
    25,600       20,600       24 %
 Data:
                       
Cable modem subscribers
    11,000       10,800       2 %
 Wireless:
                       
Wireless lines in service
    14,600       12,200       20 %
                         
 
 
27

 
 
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 Revenues
The increase in data revenue is primarily due to a $1.6 million or 16% 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 $1.2 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 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 and increased Cost of Goods Sold as described above in “Commercial Segment Cost of Goods Sold.”  These decreases are partially off-set by increased revenues 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 10% of second 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 41% to $14.6 million in the second quarter of 2011 as compared to the second 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 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 45% to $4.6 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 81% to $5.7 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.”

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 (loss) before income taxes.

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

 
28

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

   
June 30,
   
Percentage
 
   
2011
   
2010
   
Change
 
 Voice:
 
 
   
 
   
 
 
Total local access lines in service on GCI facilities
    9,400       10,600       (11 %)
                         
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 decreased from $5.6 million in the second quarter of 2010 to $5.5 million in the second quarter of 2011.

Regulated Operations Segment Cost of Goods Sold
Regulated Operations segment Cost of Goods Sold increased from $926,000 in the second quarter of 2010 to $1.2 million in the second quarter of 2011.

Regulated Operations Segment Adjusted EBITDA
Regulated Operations segment Adjusted EBITDA decreased 29% to $1.2 million in the second quarter of 2011 primarily due to increased 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 (loss) before income taxes.

Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 5% to $57.7 million in the second quarter of 2011.  Individually significant items contributing to the increase include:

·  
A $708,000 increase in health care costs, and
·  
A $520,000 increase in labor costs.

The remainder of the increase is comprised of individually insignificant items.  These increases were partially off-set by a $773,000 decrease in our company-wide success sharing bonus accrual.

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

Depreciation and Amortization Expense
Depreciation and amortization expense decreased 1% to $30.6 million in the second quarter of 2011.

Other Expense, Net
Other expense, net of other income, increased 50% to $26.4 million in the second quarter of 2011 primarily due to a $9.1 million loss on extinguishment of debt.  On May 20, 2011, GCI, Inc., our wholly-owned subsidiary, completed an offering of $325.0 million in aggregate principal amount of senior unsecured notes due 2021 (“2021 Notes”).  We used the net proceeds from this offering to repay and retire all of our outstanding senior unsecured notes due 2014 (“2014 Notes”).

Income Tax Expense
GCI, Inc., as a wholly-owned subsidiary and member of the GCI controlled group of corporations, files its income tax return as part of the consolidated group of corporations under GCI.  Accordingly, all discussions regarding income taxes reflect the consolidated group's activity.  Our income tax expense and deferred income tax assets and liabilities are presented herein using the separate-entity method.

Income tax expense (benefit) totaled $(2.0) million and $5.5 million in the second quarters of 2011 and 2010, respectively. Our effective income tax rate decreased from 74% in 2010 to 51% in 2011 primarily due to a
 
 
29

 
decrease in the amount of estimated permanent differences as compared to our estimated income before income tax expense in 2011 as compared to 2010.

At June 30, 2011, we have (1) tax net operating loss carryforwards of $273.4 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 $112.4 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 52% to 56% in the year ended December 31, 2011.

Six Months Ended June 30, 2011 (“2011”) Compared to Six Months Ended June 30, 2010 (“2010”)

Overview of Revenues and Cost of Goods Sold
Total revenues increased 6% from $314.7 million in 2010 to $332.9 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.