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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. 0-5890

 
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 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
      23
         
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
      41
         
Item 4.
Controls and Procedures
      41
         
Part II.  OTHER INFORMATION
     
         
Item 1.
Legal Proceedings
      42
         
Item 6.
Exhibits
      43
         
Other items are omitted, as they are not applicable.
 
         
SIGNATURES        44

 
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)
 
 
   
 
 
 
 
September 30,
   
December 31,
 
ASSETS
 
2011
   
2010
 
 
 
 
   
 
 
Current assets:
 
 
   
 
 
Cash and cash equivalents
  $ 32,515       31,777  
 
 
 
 
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
    225,268       181,283  
 
               
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
  $ 1,449,253       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)
 
 
   
 
 
 
 
September 30,
   
December 31,
 
LIABILITIES AND STOCKHOLDER'S 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
               
Stockholder's equity:
               
Class A common stock (no par). Authorized 10 shares;
               
issued and outstanding 0.1 shares at September 30, 2011 and December 31, 2010
    206,622       206,622  
Paid-in capital
    58,776       54,574  
Retained earnings
    (94,447 )     (61,983 )
Total GCI, Inc. stockholder's equity
    170,951       199,213  
Noncontrolling interest
    16,546       -  
Total stockholder's equity
    187,497       199,213  
Total liabilities and stockholder's equity
  $ 1,449,253       1,350,467  
 
               
See accompanying condensed notes to interim consolidated financial statements.
 

 
5

 
 
GCI, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
 
(Unaudited)
 
 
 
 
   
 
   
 
   
 
 
 
 
 
   
 
   
 
   
 
 
 
 
Three Months Ended
   
Nine Months Ended
 
 
 
September 30,
   
September 30,
 
(Amounts in thousands)
 
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  
 
                               
See accompanying condensed notes to interim consolidated financial statements
         
 
                               

 
6

 
GCI, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
 
NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
 
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 (Amount 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       -  
Distribution to General Communication, Inc.
      (39,202 )     (1,347 )
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 )
Net cash provided by (used in) financing activities
      3,654       (4,756 )
Net increase in cash and cash equivalents
      738       30,016  
Cash and cash equivalents at beginning of period
      31,777       48,142  
Cash and cash equivalents at end of period
  $   32,515       78,158  
 
 
 
 
 
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 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.
 
 
8

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

 
 
(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.

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.

 
9

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

 
(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 are a wholly-owned subsidiary of GCI and, accordingly, are not required to present earnings per share.  Our common stock is not publicly traded.
 
(h)      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.

(i)       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.

 
10

GCI, 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 )

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  

 
11

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

(4)
Long-Term Debt

2021 Notes
On May 20, 2011, 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 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:

 
 
12

GCI, INC. AND SUBSIDIARIES
Condensed Notes to Interim Consolidated Financial Statements
(Unaudited)
 
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 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 August 15, 2011, we closed an exchange offer pursuant to which we offered new 2021 Notes identical to the original notes except that the new 2021 Notes were registered under the Securities Act.

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.

 
13

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

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
 
14

GCI, INC. AND SUBSIDIARIES
Condensed Notes to Interim Consolidated Financial Statements
(Unaudited)
 
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
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 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.
 
 
15

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 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  

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.

 
16

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 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 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 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.
 
 
17

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 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  
 
                                               

Three months ended September 30,    Consumer      Network Access      Commercial      Managed Broadband      Regulated Operations      Total Reportable Segments  
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  

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  
 
 
18

GCI, 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   
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 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.


 
19

GCI, 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:

 
 
Assets
 
Equity
(in thousands)
 
Carrying Value
       Classification  
Carrying Value
 
Classification
New Markets Tax Credit Financing
  $ 16,546         Restricted cash   $ 16,546  
Noncontrolling interest
 
 
20

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

 
21

GCI, 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.

 
22

 


 
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.

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.
 
 
23

 
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.

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.

 
24

 
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
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.
 
 
 
 
 
 

 
25

 
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.

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 %)
 
 
26

 
 
 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 %
 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.

 
27

 
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 %

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:
 
 
28

 

 
·  
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.

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 %

 
29

 
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 %

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 i