XNAS:GNCMA General Communication Class A Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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 June 30, 2012
 
OR
 
 
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 
SECURITIES EXCHANGE ACT OF 1934

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

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

 
State of Alaska
 
92-0072737
 
 
(State or other jurisdiction of
 
(I.R.S Employer
 
 
incorporation or organization)
 
Identification No.)
 

 
2550 Denali Street
     
 
Suite 1000
     
 
Anchorage, Alaska
 
99503
 
 
(Address of principal
executive offices)
 
(Zip Code)
 

 
Registrant’s telephone number, including area code: (907) 868-5600

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

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

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

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

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

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

The number of shares outstanding of the registrant's classes of common stock as of July 31, 2012, was:

38,686,825 shares of Class A common stock; and
3,169,699 shares of Class B common stock.

 
1

 

GENERAL COMMUNICATION, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2012

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, 2012
 and December 31, 2011
      4
           
   
Consolidated Statements of Operations (unaudited) for the three and six months ended June 30, 2012 and 2011
      6
           
   
Consolidated Statements of Stockholders’ Equity (unaudited) for the three and six months ended June 30, 2012 and 2011
      7
           
   
Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2012 and 2011
      8
           
   
Condensed Notes to Interim Consolidated Financial Statements (unaudited)
      9
           
 
Item 2.
Management’s Discussion and Analysis of Financial Condition
     
   
  and Results of Operations
      29
           
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
      47
           
 
Item 4.
Controls and Procedures
      47
           
Part II.  OTHER INFORMATION
     
           
 
Item 1.
Legal Proceedings
      48
           
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
      48
           
 
Item 6.
Exhibits
      49
           
 
Other items are omitted, as they are not applicable.
   
           
SIGNATURES
      50


 
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, 2011 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 I. FINANCIAL STATEMENTS
 
 
 
 
   
 
 
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
 
(Unaudited)
 
 
 
 
   
 
 
(Amounts in thousands)
 
 
   
 
 
 
 
June 30,
   
December 31,
 
ASSETS
 
2012
   
2011
 
 
 
 
   
 
 
Current assets:
 
 
   
 
 
Cash and cash equivalents
  $ 22,116       29,387  
 
               
Receivables
    161,840       141,827  
Less allowance for doubtful receivables
    3,199       5,796  
Net receivables
    158,641       136,031  
 
               
Deferred income taxes
    15,555       15,555  
Prepaid expenses
    9,302       7,899  
Inventories
    16,023       7,522  
Other current assets
    3,366       3,631  
Total current assets
    225,003       200,025  
 
               
Property and equipment in service, net of depreciation
    822,859       849,121  
Construction in progress
    71,668       42,918  
Net property and equipment
    894,527       892,039  
 
               
Cable certificates
    191,635       191,635  
Goodwill
    74,883       74,883  
Wireless licenses
    25,967       25,967  
Restricted cash
    14,804       15,910  
Other intangible assets, net of amortization
    16,344       15,835  
Deferred loan and senior notes costs, net of amortization
  of $3,697 and $2,880 at June 30, 2012 and December
  31, 2011, respectively
    11,917       12,812  
Other assets
    14,777       17,214  
Total other assets
    350,327       354,256  
Total assets
  $ 1,469,857       1,446,320  
 
               
See accompanying condensed notes to interim consolidated financial statements.
 
 
               
 
               
 
               
 
         
(Continued)
 

 
4

 


GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
 
(Unaudited)
 
(Continued)
 
 
 
 
   
 
 
 
 
 
   
 
 
(Amounts in thousands)
 
 
   
 
 
 
 
June 30,
   
December 31,
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
2012
   
2011
 
 
 
 
   
 
 
Current liabilities:
 
 
   
 
 
Current maturities of obligations under long-term debt and
  capital leases
  $ 7,612       8,797  
Accounts payable
    39,382       41,353  
Deferred revenue
    25,018       22,003  
Accrued payroll and payroll related obligations
    21,533       22,126  
Accrued interest
    6,753       6,680  
Accrued liabilities
    15,216       11,423  
Subscriber deposits
    1,346       1,250  
Total current liabilities
    116,860       113,632  
 
               
Long-term debt, net
    874,505       858,031  
Obligations under capital leases, excluding current maturities
    75,777       78,605  
Obligation under capital lease due to related party, excluding
  current maturity
    1,893       1,893  
Deferred income taxes
    119,350       114,234  
Long-term deferred revenue
    86,096       81,822  
Other liabilities
    24,082       24,456  
Total liabilities
    1,298,563       1,272,673  
 
               
Commitments and contingencies
               
Stockholders’ equity:
               
Common stock (no par):
               
Class A. Authorized 100,000 shares; issued 38,843 and
               
39,296 shares at June 30, 2012 and December 31, 2011, respectively; outstanding 38,650 and 39,043 shares at June 30, 2012 and December 31, 2011, respectively
    25,909       26,179  
Class B. Authorized 10,000 shares; issued and
               
outstanding 3,171 shares each at June 30, 2012 and December 31, 2011; convertible on a share-per-share basis into Class A common stock
    2,678       2,679  
Less cost of 193 and 253 Class A common shares held
               
in treasury at June 30, 2012 and December 31, 2011, respectively
    (1,707 )     (2,225 )
Paid-in capital
    25,138       32,795  
Retained earnings
    103,322       97,911  
Total General Communication, Inc. stockholders' equity
    155,340       157,339  
Non-controlling interest
    15,954       16,308  
Total stockholders’ equity
    171,294       173,647  
Total liabilities and stockholders’ equity
  $ 1,469,857       1,446,320  
 
               
See accompanying condensed notes to interim consolidated financial statements.
 

 
5

 

GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
(Unaudited)
 
 
 
 
   
 
   
 
   
 
 
 
 
 
   
 
   
 
   
 
 
 
 
Three Months Ended
   
Six Months Ended
 
 
 
June 30,
   
June 30,
 
(Amounts in thousands, except per share amounts)
 
2012
   
2011
   
2012
   
2011
 
Revenues
  $ 176,104       168,089       348,011       332,866  
Cost of goods sold (exclusive of depreciation and
                               
amortization shown separately below)
    58,073       57,314       114,933       111,070  
Selling, general and administrative expenses
    60,048       57,697       123,030       116,590  
Depreciation and amortization expense
    33,350       30,779       65,730       62,645  
 Operating income
    24,633       22,299       44,318       42,561  
Other income (expense):
                               
Interest expense (including amortization
                               
of deferred loan fees)
    (16,948 )     (17,294 )     (34,103 )     (34,746 )
Loss on extinguishment of debt
    -       (9,111 )     -       (9,111 )
Interest income
    4       4       6       8  
Other
    84       (9 )     (47 )     (33 )
 Other expense, net
    (16,860 )     (26,410 )     (34,144 )     (43,882 )
   Income (loss) before income tax (expense) benefit
    7,773       (4,111 )     10,174       (1,321 )
Income tax (expense) benefit
    (3,968 )     2,067       (5,117 )     676  
   Net income (loss)
    3,805       (2,044 )     5,057       (645 )
Net loss attributable to non-controlling interest
    177       -       354       -  
  Net income (loss) attributable to General
   Communication, Inc.
  $ 3,982       (2,044 )     5,411       (645 )
Basic net income (loss) attributable to General
  Communication, Inc. common stockholders per Class A
  common share
  $ 0.10       (0.04 )     0.13       (0.01 )
Basic net income (loss) attributable to General
  Communication, Inc. common stockholders per Class B
  common share
  $ 0.10       (0.04 )     0.13       (0.01 )
Diluted net income (loss) attributable to General
  Communication, Inc. common stockholders per Class A
  common share
  $ 0.09       (0.04 )     0.13       (0.02 )
Diluted net income (loss) attributable to General
  Communication, Inc. common stockholders per Class B
  common share
  $ 0.09       (0.04 )     0.13       (0.02 )
 
                               
See accompanying condensed notes to interim consolidated financial statements.
                 

 
6

 

GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
SIX MONTHS ENDED JUNE 30, 2012 AND 2011
 
 
 
 
   
 
   
 
   
 
   
 
   
 
   
 
 
 
 
 
   
 
   
 
   
 
   
 
   
 
   
 
 
(Amounts in thousands)
 
Class A
Common
Stock
   
Class B
Common
Stock
   
Class A
and B
Shares
Held in
Treasury
   
Paid-in
Capital
   
Retained
Earnings
   
Non-
controlling
Interest
   
Total
Stockholders’
Equity
 
Balances at January 1, 2011
  $ 69,396       2,677       (2,249 )     37,075       92,200       -       199,099  
Net loss
    -       -       -       -       (645 )     -       (645 )
Common stock repurchases and
  retirements
    (21,390 )     -       -       -       -       -       (21,390 )
Share-based
  compensation expense
    -       -       -       2,968       -       -       2,968  
Shares issued under stock
  option plan
    285       -       -       -       -       -       285  
Issuance of restricted stock awards
    511       -       -       (511 )     -       -       -  
Other
    (6 )     6       9       -       -       -       9  
Balances at June 30, 2011
  $ 48,796       2,683       (2,240 )     39,532       91,555       -       180,326  
 
                                                       
Balances at January 1, 2012
  $ 26,179       2,679       (2,225 )     32,795       97,911       16,308       173,647  
Net income (loss)
    -       -       -       -       5,411       (354 )     5,057  
Common stock repurchases and
  retirements
    (12,184 )     -       -       -       -       -       (12,184 )
Share-based compensation
  expense
    -       -       -       2,831       -       -       2,831  
Shares issued under stock
  option plan
    1,356       -       -       -       -       -       1,356  
Issuance of restricted stock
  awards
    10,557       -       -       (10,557 )     -       -       -  
Issuance of treasury shares
  related to deferred compensation
  payout
    -       -       511       69       -       -       580  
Other
    1       (1 )     7       -       -       -       7  
Balances at June 30, 2012
  $ 25,909       2,678       (1,707 )     25,138       103,322       15,954       171,294  
 
                                                       
See accompanying condensed notes to interim consolidated financial statements.
 

 
7

 

GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
SIX MONTHS ENDED JUNE 30, 2012 AND 2011
 
(Unaudited)
 
 
 
 
 
 
   
 
 
(Amounts in thousands)
 
 
   
 
 
 
 
2012
   
2011
 
Cash flows from operating activities:
 
 
   
 
 
Net income (loss)
  $ 5,057       (645 )
Adjustments to reconcile net income (loss) to net cash
               
provided by operating activities:
               
Depreciation and amortization expense
    65,730       62,645  
Deferred income tax expense (benefit)
    5,117       (676 )
Share-based compensation expense
    2,595       2,840  
Loss on extinguishment of debt
    -       9,111  
Other noncash income and expense items
    3,695       4,563  
Change in operating assets and liabilities
    (29,054 )     (27,996 )
Net cash provided by operating activities
    53,140       49,842  
Cash flows from investing activities:
               
Purchases of property and equipment
    (59,950 )     (71,892 )
Purchases of other assets and intangible assets
    (3,274 )     (3,247 )
Restricted cash
    1,106       -  
Other
    -       233  
Net cash used in investing activities
    (62,118 )     (74,906 )
Cash flows from financing activities:
               
Borrowing on Senior Credit Facility
    30,000       68,000  
Repayment of debt and capital lease obligations
    (20,790 )     (348,873 )
Purchase of treasury stock to be retired
    (12,184 )     (21,390 )
Borrowing of other long-term debt
    3,249       2,841  
Proceeds from stock options
    1,356       -  
Issuance of 2021 Notes
    -       325,000  
Payment of Senior Notes call premiums
    -       (4,728 )
Payment of debt issuance costs
    -       (3,272 )
Other
    76       285  
Net cash provided by financing activities
    1,707       17,863  
Net decrease in cash and cash equivalents
    (7,271 )     (7,201 )
Cash and cash equivalents at beginning of period
    29,387       33,070  
Cash and cash equivalents at end of period
  $ 22,116       25,869  
 
               
See accompanying condensed notes to interim consolidated financial statements.
 
 
               

 
8

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


The accompanying unaudited interim consolidated financial statements include the accounts of General Communication, Inc. (“GCI”) and its direct and indirect subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. They should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2011, filed with the SEC on March 9, 2012, as part of our annual report on Form 10-K.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of operations for interim periods are not necessarily indicative of the results that may be expected for an entire year or any other period.

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

 
 (a)
Business
GCI, an Alaska corporation, was incorporated in 1979. We offer the following services primarily in Alaska:

·  
Postpaid and prepaid wireless telephone services and sale of wireless telephone handsets and accessories,
·  
Video services throughout Alaska,
·  
Internet access services,
·  
Wireless roaming for certain wireless carriers and origination and termination of wireline traffic in Alaska for certain common carriers,
·  
Competitive and incumbent local access services throughout Alaska,
·  
Long-distance telephone service,
·  
Data network services,
·  
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 also include in our consolidated financial statements 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 our company are not eliminated in consolidation.

 
(c)
Non-controlling Interest
       Non-controlling interests represent the equity ownership interests in consolidated subsidiaries not owned by us.  Non-controlling interest is adjusted for contributions, distributions, and earnings (loss) attributable to
       the non-controlling interest partners of the consolidated entities.  Income and loss is allocated to the non-controlling interest based on the respective partnership agreements.
 
 
9

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

    (d)       Recently Adopted Accounting Pronouncements
Accounting Standards Update (“ASU”) 2011-08, “Intangibles – Goodwill and Other (Topic 350)”   allows 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.   The adoption of ASU 2011-08 on January 1, 2012 did not have a material impact on our income statements, financial position or cash flows.

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”)” amended current guidance to achieve common fair value measurement and disclosure requirements in GAAP and IFRS.  The amendments generally represent clarification of FASB Accounting Standards Codification 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.   The adoption of ASU 2011-04 on January 1, 2012 did not have a material impact on our income statements, financial position or cash flows.

 
(e)
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.

 
(f)
Earnings per Common Share
      We compute net income (loss) per share of Class A and Class B common stock using the “two class” method.  Therefore, basic net income (loss) per share is computed by dividing net income (loss) applicable to
      common stockholders by the weighted average number of common shares outstanding during the period.  Diluted net income (loss) per share is computed by dividing net income (loss) by the weighted average
         number of common and dilutive common equivalent shares outstanding during the period.  The computation of the dilutive net income (loss) per share of Class A common stock assumes the conversion of Class B
         common stock to Class A common stock, while the dilutive net income (loss) per share of Class B common stock does not assume the conversion of those shares. Additionally in applying the “two-class” method,
         undistributed earnings are allocated to both common shares and participating securities. Our restricted stock grants are entitled to dividends and meet the criteria of a participating security.  
 
      Undistributed earnings for each year are allocated based on the contractual participation rights of Class A and Class B common shares as if the earnings for the year had been distributed.  In accordance with our
        Articles of Incorporation which provide that, if and when dividends are declared on our common stock in accordance with Alaska corporate law, equivalent dividends shall be paid with respect to the shares of
          Class A and Class B common stock. Both classes of common stock have identical dividend rights and would therefore share equally in our net assets in the event of liquidation. As such, we have allocated
          undistributed earnings on a proportionate basis.


 
10

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


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

 
 
Three Months Ended June 30,
 
 
 
2012
   
2011
 
 
 
Class A
   
Class B
   
Class A
   
Class B
 
Basic net income (loss) per share:
 
 
   
 
   
 
   
 
 
Numerator:
 
 
   
 
   
 
   
 
 
Allocation of undistributed earnings (loss)
  $ 3,679       303     $ (1,904 )     (140 )
 
                               
Denominator:
                               
Weighted average common shares
  outstanding
    38,516       3,171       43,098       3,178  
Basic net income (loss) attributable to GCI
  common stockholders per common share
  $ 0.10       0.10     $ (0.04 )     (0.04 )
 
                               
Diluted net income (loss) per share:
                               
Numerator:
                               
Allocation of undistributed earnings (loss) for
  basic computation
  $ 3,679       303     $ (1,904 )     (140 )
Reallocation of undistributed earnings (loss) as a
  result of conversion of Class B to Class A
  shares
    303       -       (140 )     -  
Effect of share based compensation that may
  be settled in cash or shares
    (33 )     -       -       -  
Reallocation of undistributed earnings (loss) as a
  result of conversion of Class B to Class A
  shares outstanding
    -       (4 )     -       1  
Net income (loss) adjusted for allocation of
  undistributed earnings (loss) and effect of
  share based compensation that may be settled
  in cash or shares
  $ 3,949       299     $ (2,044 )     (139 )
 
                               
Denominator:
                               
Number of shares used in basic computation
    38,516       3,171       43,098       3,178  
Conversion of Class B to Class A common
  shares outstanding
    3,171       -       3,178       -  
Unexercised stock options
    304       -       -       -  
Effect of share based compensation that may
  be settled in cash or shares
    158       -       -       -  
Number of shares used in per share computations
    42,149       3,171       46,276       3,178  
Diluted net income (loss) attributable to GCI
  common stockholders per common share
  $ 0.09       0.09     $ (0.04 )     (0.04 )


 
11

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



 
 
Six Months Ended June 30,
 
 
 
2012
   
2011
 
 
 
Class A
   
Class B
   
Class A
   
Class B
 
Basic net income (loss) per share:
 
 
   
 
   
 
   
 
 
Numerator:
 
 
   
 
   
 
   
 
 
Allocation of undistributed earnings (loss)
  $ 5,001       410     $ (601 )     (44 )
 
                               
Denominator:
                               
Weighted average common shares
  outstanding
    38,629       3,171       43,536       3,178  
Basic net income (loss) attributable to GCI
  common stockholders per common share
  $ 0.13       0.13     $ (0.01 )     (0.01 )
 
                               
Diluted net income (loss) per share:
                               
Numerator:
                               
Allocation of undistributed earnings (loss) for
  basic computation
  $ 5,001       410     $ (601 )     (44 )
Reallocation of undistributed earnings (loss) as a
  result of conversion of Class B to Class A
  shares
    410       -       (44 )     -  
Effect of share based compensation that may
  be settled in cash or shares
    (118 )     -       (75 )     -  
Reallocation of undistributed earnings (loss) as a
  result of conversion of Class B to Class A
  shares outstanding
    -       (10 )     -       (5 )
Net income (loss) adjusted for allocation of
  undistributed earnings (loss) and effect of
  share based compensation that may be settled
  in cash or shares
  $ 5,293       400     $ (720 )     (49 )
 
                               
Denominator:
                               
Number of shares used in basic computation
    38,629       3,171       43,536       3,178  
Conversion of Class B to Class A common
  shares outstanding
    3,171       -       3,178       -  
Unexercised stock options
    272       -       -       -  
Effect of share based compensation that may
  be settled in cash or shares
    158       -       -       -  
Number of shares used in per share computations
    42,230       3,171       46,714       3,178  
Diluted net income (loss) attributable to GCI
  common stockholders per common share
  $ 0.13       0.13     $ (0.02 )     (0.02 )


 
12

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

 
Weighted average shares associated with outstanding share awards for the three and six months ended June 30, 2012 and 2011, which have been excluded from the computations of diluted EPS, because the effect of including these share awards would have been anti-dilutive, consist of the following (shares in thousands):
 
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Shares associated with anti-dilutive
  unexercised stock options
    35       36       13       14  
Share based compensation that may
  be settled in cash or shares, the effect
  of which is anti-dilutive
    -       515       -       524  

Weighted average shares associated with contingent awards for the three and six months ended June 30, 2012 and 2011, which have been excluded from the computations of diluted EPS because the contingencies of these awards have not been met at June 30, 2012 and 2011, consist of the following (shares in thousands):


   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Shares associated with contingent awards
    58       50       58       50  

 
(g)
Common Stock
Following are the changes in issued common stock for the six months ended June 30, 2012 and 2011 (shares in thousands):

 
 
 
Class A
   
Class B
 
Balances at December 31, 2010
    44,213       3,178  
Class B shares converted to Class A
    2       (2 )
Shares issued upon stock option exercises
    37       -  
Share awards issued
    416       -  
Shares retired
    (1,881 )     -  
Other
    (25 )     -  
 
Balances at June 30, 2011
    42,762       3,176  
 
 
               
Balances at December 31, 2011
    39,296       3,171  
Shares issued upon stock option exercises
    188       -  
Share awards issued
    520       -  
Shares retired
    (869 )     -  
Shares acquired to settle minimum statutory tax
  withholding requirements
    (291 )     -  
Other
 
    (1 )     -  
 
Balances at June 30, 2012
    38,843       3,171  

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

 
13

GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Condensed Notes to Interim Consolidated Financial Statements
(Unaudited)
 
During the three months ended June 30, 2012 and 2011, we repurchased 6,000 and 1.2 million shares, respectively, of our Class A common stock under the stock buyback program at a cost of $51,000 and $14.1 million, respectively.  During the six months ended June 30, 2012 and 2011, we repurchased 869,000 and 1.9 million shares, respectively, of our Class A common stock under the stock buyback program at a cost of $9.0 million and $21.1 million, respectively.  The amount available under the stock buyback program is $93.9 million at June 30, 2012.  The repurchased stock was constructively retired as of June 30, 2012.

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

 
(h)
Revenue Recognition
As an Eligible Telecommunications Carrier ("ETC"), we receive support from the Universal Service Fund ("USF") to support the provision of wireline local access and wireless service in high cost areas. On November 29, 2011, the Federal Communications Commission (“FCC”) published a final rule 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 (“High Cost Order”).  The High Cost Order defined the division of support to Alaska between Urban and Remote areas.  The High Cost Order was a significant program change that required a reassessment of our high cost support revenue recognition.

Prior to the High Cost Order program changes we accrued Remote and Urban estimated program revenue quarterly based on current line counts, the most current rates paid to us, our assessment of the impact of current FCC regulations, and our assessment of the potential outcome of FCC proceedings. Our estimated accrued revenue is subject to our judgment regarding the outcome of many variables and is subject to upward or downward adjustments in subsequent periods. Our ability to collect our accrued USF support is contingent upon continuation of the USF program and upon our eligibility to participate in that program, which is subject to change by future regulatory, legislative or judicial actions. We adjust revenue and the account receivable in the period the FCC makes a program change or we assess the likelihood that such a change has increased or decreased revenue.

Remote High Cost Support
The High Cost Order mandated that as of January 1, 2012, Remote high cost support is based upon the total 2011 support disbursed to all subject Competitive Eligible Telecommunications Carriers (“CETCs”) (“Statewide Support Cap”).  On January 1, 2012, the rates paid in the Remote areas were mandated and frozen by the USF and cannot exceed $250 per line per month on a study area basis.  Line count growth that causes the Statewide Support Cap to be exceeded triggers a pro rata support payment reduction to all subject Alaska CETCs until the support is reduced down to the Statewide Support Cap amount.

The High Cost Order further mandated that on January 1, 2014, a freeze of Remote support will begin and subject CETC’s support payments will be frozen at the monthly average of 2013 annual support.  If a successor funding mechanism is operational on July 1, 2014, a 20% annual phase down will commence decreasing support 20% each annual period until no support is paid starting July 1, 2018.  If a successor funding mechanism is not operational on July 1, 2014, the phase down will not begin and the subject CETCs will continue to receive the monthly average of 2013 annual support until a successor funding mechanism is operational.  A subject CETC may not receive phase down support and support from a successor funding mechanism; one program or the other must be selected.  At this time we cannot predict the likelihood of a successor funding mechanism being operational on July 1, 2014 nor can we predict whether we can or will participate in a successor funding mechanism.

 
14

GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Condensed Notes to Interim Consolidated Financial Statements
(Unaudited)
 
As a result of the High Cost Order program changes for the areas designated Remote by the USF, beginning in the fourth quarter of 2011 we accrue estimated program revenue based on current line counts and the rates mandated and frozen by the USF, reduced as needed by our estimate of the impact of the Statewide Support Cap.  When determining the estimated program revenue accrual we also consider our assessment of the impact of current FCC regulations and of the potential outcome of FCC proceedings. Our estimated accrued revenue is subject to our judgment regarding the outcome of many variables and is subject to upward or downward adjustment in subsequent periods.

Urban High Cost Support
The High Cost Order mandated that as of January 1, 2012, Urban high cost support payments are frozen at the monthly average of the subject CETC’s 2011 annual support.  A 20% annual phase down will commence July 1, 2012, decreasing support 20% each annual period until no support is paid starting July 1, 2016.  If a successor funding mechanism is not operational on July 1, 2014, the phase down will stop at 60% and the subject CETCs will continue to receive annual support payments at the 60% level until a successor funding mechanism is operational.  Urban high cost support is no longer dependent upon line counts and line count filings are no longer required.

As a result of the High Cost Order program changes for the areas considered to be Urban by the USF we apply the proportional performance revenue recognition method to account for the impact of the declining payments while our level of service provided and associated costs remain constant.  Included in the calculation are the scheduled Urban high cost support payments from October 2011 through June 2014 net of our Urban accounts receivable balance at September 30, 2011.  An equal amount of this result is recognized as Urban support revenue each period.  At this time we cannot predict the likelihood of a successor funding mechanism being operational on July 1, 2014; therefore we have not included projected support payments beyond June 2014.

For both Remote and Urban high cost support revenue our ability to collect our accrued USF support is contingent upon continuation of the USF program and upon our eligibility to participate in that program, which is subject to change by future regulatory, legislative or judicial actions.  We adjust revenue and the account receivable in the period the FCC makes a program change or we assess the likelihood that such a change has increased or decreased revenue.  We do not recognize revenue until our ETC status has been approved by the Regulatory Commission of Alaska.

We recorded high cost support revenue under the USF program of $10.0 million and $13.7 million for the three months ended June 30, 2012 and 2011, respectively, and $21.1 million and $26.0 million for the six months ended June 30, 2012 and 2011, respectively.  At June 30, 2012, we have $31.7 million and $5.5 million in Remote and Urban high cost accounts receivable, respectively.

 
(i)
Use of Estimates
      The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and 
      liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Significant items subject to estimates and assumptions include the allowance for
      doubtful receivables, unbilled revenues, accrual of the USF high cost Remote area program support, share-based compensation, inventory at lower of cost or market, reserve for future customer credits, liability for
      incurred but not reported medical insurance claims, 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, deferred lease expense, asset retirement obligations, the accrual of Cost of Goods Sold, depreciation and the accrual of
         contingencies and litigation.  Actual results could differ from those estimates.

 
15

GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Condensed Notes to Interim Consolidated Financial Statements
(Unaudited)
 
The accounting estimates related to revenues from the USF high cost Remote area program are dependent on various inputs including our estimate of the Statewide Support Cap, our assessment of the impact of new FCC regulations, and the potential outcome of FCC proceedings.  These 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 fourth quarter of 2011, we changed our high cost support revenue recognition methodology due to the High Cost Order.  See Note 1(h) “Revenue Recognition” above for information.

 
(j)
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 Statements of
       Operations.  The following are certain surcharges reported on a gross basis in our Consolidated Statements of Operations (amounts in thousands):
 
 
 
   
 
   
 
   
 
 
 
Three Months Ended June 30,
   
Six Months Ended June 30,
 
 
2012
   
2011
   
2012
   
2011
 
Surcharges reported gross
  $ 1,399       1,376       2,880       2,800  
                                 
                                 
 
(k)
Immaterial Error Correction
During the first quarter of 2012, we identified an error in the depreciable life of one fixed asset.  The error resulted in a $146,000 quarterly or $585,000 annual understatement of depreciation expense in 2007 through 2010 and a corresponding overstatement of net property and equipment in service for the same periods.  In the first and second quarters of 2011 the error resulted in a $146,000 quarterly understatement of depreciation expense and a corresponding overstatement of net property and equipment in service for the same periods.  In the third and fourth quarters of 2011 the error resulted in a $49,000 quarterly overstatement of depreciation expense and a corresponding understatement of net property and equipment in service for the same periods.  The net annual misstatement to 2011 was a $195,000 understatement to depreciation expense and a corresponding overstatement of net property and equipment in service for the same period.    In order to assess materiality of this error we considered Staff Accounting Bulletin (“SAB”) 99, “Materiality” and SAB 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” and determined that the impact of this error on prior period consolidated financial statements was immaterial. Although the error was and continues to be immaterial to prior periods, because of the significance of the out-of-period correction in the first quarter of 2012, we revised our prior period financial statements.  The impact of the immaterial error correction adjustment for the periods presented is as follows (amounts in thousands, except per share amounts):
 
 
Consolidated Balance Sheet as of
  December 31, 2011:
 
As Previously Reported
   
Adjustment
   
As Revised
 
Property and equipment in service, net of
  depreciation
  $ 851,705       (2,584 )     849,121  
Net property and equipment
    894,623       (2,584 )     892,039  
Total assets
    1,448,904       (2,584 )     1,446,320  
Deferred income taxes
    115,296       (1,062 )     114,234  
Total liabilities
    1,273,735       (1,062 )     1,272,673  
Retained earnings
    99,433       (1,522 )     97,911  
Total GCI stockholders' equity
    158,861       (1,522 )     157,339  
Total stockholders' equity
    175,169       (1,522 )     173,647  
Total liabilities and stockholders' equity
    1,448,904       (2,584 )     1,446,320  
 
 
16

GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Condensed Notes to Interim Consolidated Financial Statements
(Unaudited)
 
 
                       
Consolidated Statements of Operations
  for the Three Months Ended
  June 30, 2011:
   As Previously Reported      Adjustment      As Revised  
Depreciation and amortization expense
    30,632       147       30,779  
Operating income
    22,446       (147 )     22,299  
Loss before income tax benefit
    (3,964 )     (147 )     (4,111 )
Income tax benefit
    (2,007 )     (60 )     (2,067 )
Net loss
    (1,957 )     (87 )     (2,044 )
 
                       
Consolidated Statements of Operations
  for the Six Months Ended June 30, 2011:
                       
Depreciation and amortization expense
    62,352       293       62,645  
Operating income
    42,854       (293 )     42,561  
Loss before income tax benefit
    (1,028 )     (293 )     (1,321 )
Income tax benefit
    (556 )     (120 )     (676 )
Net loss
    (472 )     (173 )     (645 )
Diluted net loss attributable to General
                       
  Communication, Inc. common stockholders
                       
  per Class A common share
    (0.01 )     (0.01 )     (0.02 )
Diluted net loss attributable to General
                       
  Communication, Inc. common stockholders
                       
  per Class B common share
    (0.01 )     (0.01 )     (0.02 )
 
                       
Consolidated Statement of Stockholders'
  Equity for the Six Months Ended
  June 30, 2011:
                       
Retained earnings, balance at January 1, 2011
    93,607       (1,407 )     92,200  
Net loss
    (472 )     (173 )     (645 )
Retained earnings, balance at June 30, 2011
    93,135       (1,580 )     91,555  
Total stockholders' equity, balance at
  January 1, 2011
    200,506       (1,407 )     199,099  
Total stockholders' equity, balance at
  June 30, 2011
    181,906       (1,580 )     180,326  
 
                       
Consolidated Statement of Cash Flows for the Six Months Ended June 30, 2011:
                       
Net loss
    (472 )     (173 )     (645 )
Depreciation and amortization expense
    62,352       293       62,645  
Income tax benefit
    (556 )     (120 )     (676 )
 
                       

 
17
 

GENERAL COMMUNICATION, 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 Months Ended June 30,
 
2012
   
2011
 
Increase in accounts receivable, net
  $ (24,272 )     (27,245 )
Increase in prepaid expenses
    (1,403 )     (3,191 )
Increase in inventories
    (8,501 )     (719 )
Decrease in other current assets
    265       206  
Decrease in other assets
    2,768       1,857  
Increase (decrease) in accounts payable
    (7,084 )     2,361  
Increase in deferred revenues
    3,015       864  
Decrease in accrued payroll and
  payroll related obligations
    (889 )     (1,559 )
Increase in accrued liabilities
    4,304       134  
Increase (decrease) in accrued interest
    73       (6,130 )
Increase (decrease) in subscriber deposits
    96       (49 )
Increase in long-term deferred revenue
    4,274       7,470  
Decrease in components of other
  long-term liabilities
    (1,700 )     (1,995 )
 
  $ (29,054 )     (27,996 )

The following items are for the six months ended June 30, 2012 and 2011 (amounts in thousands):

Net cash paid or received:
 
2012
   
2011
 
Interest paid, net of amounts capitalized
  $ 34,671       40,614  

The following items are non-cash investing and financing activities for the six months ended June 30, 2012 and 2011 (amounts in thousands):

 
 
2012
   
2011
 
Non-cash additions for purchases of property and
  equipment
  $ 12,680       9,388  
Deferred compensation distribution denominated in
  shares
  $ 511       -  
Asset retirement obligation additions to property and
  equipment
  $ 132       123  
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 June 30
   
Six Months Ended June 30,
 
 
 
2012
   
2011
   
2012
   
2011
 
Amortization expense
  $ 1,324       1,583       2,625       3,156  

 
18

GENERAL COMMUNICATION, 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,
 
 
 
2012 
  $ 4,722  
2013 
    3,808  
2014 
    3,036  
2015 
    1,835  
2016 
    670  

(4)
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, 2012, and December 31, 2011, 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 approximate fair values of our financial instruments at June 30, 2012, and December 31, 2011, follow (amounts in thousands):

 
 
June 30,
   
December 31,
 
 
 
2012
   
2011
 
 
 
Carrying Amount
   
Fair Value
   
Carrying Amount
   
Fair Value
 
Current and long-term debt and
  capital lease obligations
  $ 959,787       989,096       947,326       942,895  
Other liabilities
    109,785       108,893       106,002       105,173  

The following methods and assumptions were used to estimate fair values:

 
Current and long-term debt and capital lease obligations:  The fair values of the $325.0 million in aggregate principal amount of 6.75% Senior Notes due 2021 (“2021 Notes”) issued by GCI, Inc., our wholly owned subsidiary, the $425.0 million in aggregate principal amount of 8.63% Senior Notes due 2019 (“2019 Notes”) issued by GCI, Inc., Rural Utilities Service 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 $50.0 million term loan and $40.0 million revolving 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.


 
19

 
GENERAL COMMUNICATION, 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, 2012, and December 31, 2011, are as follows (amounts in thousands):

 
 
Fair Value Measurement at Reporting Date Using
 
June 30, 2012 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)
  $ 1,662       -       -  
Total assets at fair value
  $ 1,662       -       -  
 
                       
December 31, 2011 Assets
                       
Deferred compensation plan assets
  (mutual funds)
  $ 1,600       -       -  
Total assets at fair value
  $ 1,600       -       -  

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

(5)
Stockholders’ Equity
 
    Shared-Based Compensation
 
    Our Amended and Restated 1986 Stock Option Plan ("Stock Option Plan"), provides for the grant of options and restricted stock awards (collectively "award") for a maximum of 15.7 million shares of GCI Class A common
    stock, subject to adjustment upon the occurrence of stock dividends, stock splits, mergers, consolidations or certain other changes in corporate structure or capitalization. If an award expires or terminates, the shares subject
    to the award will be available for further grants of awards under the Stock Option Plan. The Compensation Committee of GCI’s Board of Directors administers the Stock Option Plan. Substantially all restricted stock awards
    granted vest over periods of up to three years. Substantially all options vest in equal installments over a period of five years and expire ten years from the date of grant. The requisite service period of our awards is generally
    the same as the vesting period.  Options granted pursuant to the Stock Option Plan are only exercisable if at the time of exercise the option holder is our employee, non-employee director, or a consultant or advisor working
    on our behalf.  New shares are issued when stock option agreements are exercised or restricted stock awards are granted.  We have 3.9 million shares available for grant under the Stock Option Plan at June 30, 2012.

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

    We estimated the expected term of options granted by evaluating the vesting period of stock options, employee’s past exercise and post-vesting employment departure behavior, and expected volatility of the price of the
    underlying shares.

 
20

GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Condensed Notes to Interim Consolidated Financial Statements
(Unaudited)
 
    We estimated the expected volatility of our common stock at the grant date using the historical volatility of our common stock over the most recent period equal to the expected stock option term and evaluated the extent to
    which available information indicated that future volatility may differ from historical volatility.

    The risk-free interest rate assumption was determined using the Federal Reserve nominal rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the award being valued. We have
    never paid any cash dividends on our common stock and we do not anticipate paying any cash dividends in the foreseeable future. Therefore, we assumed an expected dividend yield of zero.

    We estimate pre-vesting option forfeitures at the time of grant and periodically revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We record share-based compensation expense only
    for those awards expected to vest using an estimated forfeiture rate based on our historical pre-vesting forfeiture data.  We review our forfeiture estimates annually and adjust our share-based compensation expense in the
    period our estimate changes.

    A summary of option activity under the Stock Option Plan for the six months ended June 30, 2012 is presented below (share amounts in thousands):

 
 
 
   
 
 
Weighted
 
 
 
 
   
Weighted
 
Average
Aggregate
 
 
 
   
Average
 
Remaining
Intrinsic
 
 
 
   
Exercise
 
Contractual
Value
 
 
Shares
   
Price
 
Term
(in thousands)
Outstanding at January 1, 2012
    1,087     $ 7.27  
 
 
Exercised
    (188 )   $ 7.26  
 
 
Forfeited
    (5 )   $ 6.93  
 
 
Expired
    (11 )   $ 6.14  
 
 
Outstanding at June 30, 2012
    883     $ 7.29  
3.76 years
$ 1,124
Exercisable at June 30, 2012
    810     $ 7.33  
3.50 years
$ 1,008

    There were no options granted during the six months ended June 30, 2012 and 2011.  The total fair value of options vested during the six months ended June 30, 2012 and 2011, was $502,000 and $97,000, respectively.  The total
    intrinsic values, determined as of the date of exercise, of options exercised in the six months ended June 30, 2012 and 2011, were $772,000 and $155,000, respectively.  We received $1.4 million and $285,000 in cash from stock
    option exercises during the six months ended June 30, 2012 and 2011, respectively.

    A summary of nonvested restricted stock award activity under the Stock Option Plan for the six months ended June 30, 2012, follows (share amounts in thousands):
 
 
 
   
Weighted
 
 
 
 
   
Average
 
 
 
 
   
Grant Date
 
 
 
Shares
   
Fair Value
 
Nonvested at January 1, 2012
    1,556     $ 6.89  
Granted
    420     $ 10.53  
Vested
    (984 )   $ 4.87  
Forfeited
    (2 )   $ 8.80  
Nonvested at June 30, 2012
    990     $ 10.42  


 
21

 
GENERAL COMMUNICATION, 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, 2012 and 2011 (amounts in thousands):

 
 
2012
   
2011
 
Employee share-based compensation expense
  $ 2,831       2,968  
Adjustment to fair value of liability classified awards
    (236 )     (128 )
  Total share-based compensation expense
  $ 2,595       2,840  

    Share-based compensation expense is classified as Selling, General and Administrative Expense in our Consolidated Statements of Operations.  Unrecognized share-based compensation expense was $5.9 million relating to
    990,000 restricted stock awards and $169,000 relating to 67,000 unvested stock options as of June 30, 2012.  We expect to recognize share-based compensation expense over a weighted average period of 1.8 years for stock
    options and 2.0 years for restricted stock awards.

    On August 6, 2009, we filed a Tender Offer Statement on Schedule TO (“Exchange Offer”) with the SEC.  The Exchange Offer was an offer by us to eligible officers, employees and stakeholders, other than officers of GCI who
    also serve on GCI’s Board of Directors (“Participants”) to exchange, on a grant-by-grant basis, their outstanding eligible stock options that were granted under our Stock Option Plan, whether vested or unvested, for shares of
    restricted stock of GCI Class A common stock that we granted under the Stock Option Plan (“Restricted Stock”). We issued 1,908,890 shares of Restricted Stock to Participants in accordance with the terms of the Exchange
    Offer.  In accordance with the terms of the Restricted Stock agreement, one-half of the Restricted Stock received in exchange for eligible options vested on December 20, 2011, and the remainder vested on February 28, 2012.

(6)
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, 2012
    and 2011 are allocated to our segments using segment margin for the years ended December 31, 2011 and 2010, respectively.  Bad debt expense for the three and six months ended June 30, 2012 and 2011 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, 2012 and 2011, respectively.  Corporate related expenses and bad debt expense
    are specifically identified for our Regulated Operations segment and therefore, are not included in the allocations.
 
 
22

GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Condensed Notes to Interim Consolidated Financial Statements
(Unaudited)
 
    We evaluate performance and allocate resources based on earnings before depreciation and amortization, net interest expense, income taxes, share-based compensation expense, accretion expense, loss attributable to non-
    controlling interest, 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 earnings before depreciation and amortization, net interest expense, and income taxes
    (“EBITDA”) are used to estimate current or prospective enterprise value.  The accounting policies of the reportable segments are the same as those described in Note 1, “Business and Summary of Significant Accounting
    Policies” of this Form 10-Q.  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, 2012 and 2011 follows (amounts in thousands):
 
Three months ended June 30,
 
Consumer
   
Network Access
   
Commercial
   
Managed Broadband
   
Regulated Operations
   
Total Reportable Segments
 
2012 
 
 
   
 
   
 
   
 
   
 
   
 
 
Revenues:
 
 
   
 
   
 
   
 
   
 
   
 
 
Intersegment
  $ (168 )     82       1,426       -       59       1,399  
External
    88,495       26,017       34,466       21,717       5,409       176,104  
Total revenues
    88,327       26,099       35,892       21,717       5,468       177,503  
Adjusted EBITDA
  $ 24,008       13,442       8,625       12,063       1,283       59,421  
 
                                               
2011 
                                               
Revenues:
                                               
Intersegment
  $ -       -       1,416       -       44       1,460  
External
    88,554       25,151       34,216       14,639       5,529       168,089  
Total revenues