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EX-10.2 - EXHIBIT 10.2 24TH AMENDMENT TRANSPONDER - GCI, LLCexhibit102-24thamendmenttr.htm
EX-31.1 - EXHIBIT 31.1 - GCI, LLCinc09302015exhibit31-1.htm
EX-32.2 - EXHIBIT 32.2 - GCI, LLCinc09302015exhibit32-2.htm
EX-32.1 - EXHIBIT 32.1 - GCI, LLCinc09302015exhibit32-1.htm
EX-31.2 - EXHIBIT 31.2 - GCI, LLCinc09302015exhibit31-2.htm
EX-10.1 - EXHIBIT 10.1 23RD AMENDMENT TRANSPONDER - GCI, LLCexhibit101-23rdamendmenttr.htm



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

(Mark One)
 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2015
 
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from           to
 Commission File No. 0-5890
 
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.
x Yes ¨ No

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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) x Yes ¨ No

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 ¨
Accelerated filer ¨
Non-accelerated filer  x (Do not check if a smaller reporting company)
Smaller reporting company  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
¨ Yes x No


1



GCI, INC.
WHOLLY OWNED SUBSIDIARY OF GENERAL COMMUNICATION, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2015

TABLE OF CONTENTS

 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
 
 
 
 
 
 
Item 6.
 
 
 
 
 
Other items are omitted, as they are not applicable.
 
 
 
 
 

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 annual report on Form 10-K for the year ended December 31, 2014.  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
2015
 
2014
Current assets:
 
 
 
Cash and cash equivalents
$
59,683

 
15,402

 
 
 
 
Receivables (including $0 and $27,944 from a related party at September 30, 2015 and December 31, 2014, respectively)
188,914

 
212,441

Less allowance for doubtful receivables
4,695

 
4,542

Net receivables
184,219

 
207,899

 
 
 
 
Deferred income taxes
44,978

 
56,120

Prepaid expenses
13,059

 
12,179

Inventories
10,075

 
17,032

Other current assets
3,136

 
153

Total current assets
315,150

 
308,785

 
 
 
 
Property and equipment
2,433,498

 
2,341,511

Less accumulated depreciation
1,350,470

 
1,229,029

Net property and equipment
1,083,028

 
1,112,482

 
 
 
 
Goodwill
235,323

 
229,560

Cable certificates
191,635

 
191,635

Wireless licenses
86,347

 
86,347

Other intangible assets, net of amortization
65,053

 
66,015

Deferred loan and senior notes costs, net of amortization of $6,542 and $8,644 at September 30, 2015 and December 31, 2014, respectively
16,969

 
10,949

Other assets
27,791

 
52,725

Total other assets
623,118

 
637,231

Total assets
$
2,021,296

 
2,058,498

 
 
 
 
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
2015
 
2014
Current liabilities:
 
 
 
  Current maturities of obligations under long-term debt and
    capital leases
$
11,902

 
8,722

Accounts payable (including $0 and $7,447 to a related party at September 30, 2015 and December 31, 2014, respectively)
50,281

 
76,918

Deferred revenue
33,917

 
29,314

Accrued payroll and payroll related obligations
29,138

 
32,803

Accrued interest
22,975

 
6,654

Accrued liabilities
17,126

 
14,457

Subscriber deposits
1,100

 
1,212

Total current liabilities
166,439

 
170,080

 
 
 
 
Long-term debt, net
1,290,712

 
1,036,056

Obligations under capital leases, excluding current maturities (including $1,832 and $1,857 due to a related party at September 30, 2015 and December 31, 2014, respectively)
61,885

 
68,356

Deferred income taxes
177,548

 
187,872

Long-term deferred revenue
94,701

 
85,734

Other liabilities
46,318

 
43,178

Total liabilities
1,837,603

 
1,591,276

 
 
 
 
Commitments and contingencies


 


Stockholder's equity:
 

 
 

Common stock (no par):
 

 
 

Class A common stock (no par). Authorized 10 shares; issued and outstanding 0.1 at September 30, 2015 and December 31, 2014
206,622

 
206,622

Paid-in capital
136,382

 
88,802

Retained deficit
(190,378
)
 
(128,068
)
Total GCI, Inc. stockholder's equity
152,626

 
167,356

Non-controlling interests
31,067

 
299,866

Total stockholder's equity
183,693

 
467,222

Total liabilities and stockholder's equity
$
2,021,296

 
2,058,498

 
 
 
 
See accompanying condensed notes to interim consolidated financial statements.
 
 

5



GCI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(Amounts in thousands)
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
Non-related party
$
258,573

 
225,677

 
731,907

 
636,416

Related party

 
15,048

 
5,283

 
44,991

Total revenues
258,573

 
240,725

 
737,190

 
681,407

 
 
 
 
 
 
 
 
Cost of goods sold (exclusive of depreciation and amortization shown separately below):
 
 
 
 
 
 
 
Non-related party
82,717

 
73,971

 
235,860

 
212,821

Related party

 
2,930

 
881

 
8,236

Total cost of goods sold
82,717

 
76,901

 
236,741

 
221,057

 
 
 
 
 
 
 
 
Selling, general and administrative expenses:
 
 
 
 
 
 
 
Non-related party
82,579

 
71,717

 
248,885

 
211,144

Related party

 
1,066

 
540

 
3,348

Total selling, general and administrative expenses
82,579

 
72,783

 
249,425

 
214,492

 
 
 
 
 
 
 
 
Depreciation and amortization expense
45,157

 
41,705

 
135,563

 
127,843

Software impairment charge
2,571

 

 
29,839

 

Operating income
45,549

 
49,336

 
85,622

 
118,015

 
 
 
 
 
 
 
 
Other income (expense):
 

 
 

 
 
 
 
Loss on extinguishment of debt

 

 
(27,700
)
 

Interest expense (including amortization of deferred loan fees)
(19,260
)
 
(17,848
)
 
(59,713
)
 
(54,229
)
Impairment of equity method investment

 

 
(12,593
)
 

Other
1,202

 
(563
)
 
2,445

 
(1,709
)
Other expense, net
(18,058
)
 
(18,411
)
 
(97,561
)
 
(55,938
)
 
 
 
 
 
 
 
 
Income (loss) before income taxes
27,491

 
30,925

 
(11,939
)
 
62,077

Income tax expense
(7,689
)
 
(5,078
)
 
(681
)
 
(8,629
)
Net income (loss)
19,802

 
25,847

 
(12,620
)
 
53,448

 
 
 
 
 
 
 
 
Net income (loss) attributable to non-controlling interests
(116
)
 
15,932

 
330

 
36,466

  Net income (loss) attributable to GCI, Inc.
$
19,918

 
9,915

 
(12,950
)
 
16,982

 
 
 
 
 
 
 
 
See accompanying condensed notes to interim consolidated financial statements.
 
 
 
 

6



GCI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014
(Unaudited)
 
Shares of Class A
Common
Stock
 
Class A
Common
Stock
 
Paid-in
Capital
 
Retained
Deficit
 
Non-
controlling
Interests
 
Total
Stockholder's
Equity
 
(Amounts in thousands)
Balances at January 1, 2014
0.1

 
$
206,622

 
79,297

 
(128,775
)
 
300,210

 
457,354

Net income

 

 

 
16,982

 
36,466

 
53,448

Distribution to General Communication, Inc.

 

 

 
(1,972
)
 

 
(1,972
)
Contribution from General Communication, Inc.

 

 
7,190

 

 

 
7,190

Distribution to non-controlling interest

 

 

 

 
(37,500
)
 
(37,500
)
Adjustment to investment by non-controlling interest

 

 

 

 
(2,131
)
 
(2,131
)
Other

 

 

 

 
100

 
100

Balances at September 30, 2014
0.1

 
$
206,622

 
86,487

 
(113,765
)
 
297,145

 
476,489

 
 
 
 
 
 
 
 
 
 
 
 
Balances at January 1, 2015
0.1

 
$
206,622

 
88,802

 
(128,068
)
 
299,866

 
467,222

Net income (loss)

 

 

 
(12,950
)
 
330

 
(12,620
)
Distribution to General Communication, Inc.

 

 

 
(49,360
)
 

 
(49,360
)
Contribution from General Communication, Inc.

 

 
83,277

 

 

 
83,277

Distribution to non-controlling interest

 

 

 

 
(765
)
 
(765
)
Non-controlling interest acquisition

 

 
(35,467
)
 

 
(268,364
)
 
(303,831
)
Other

 

 
(230
)
 

 

 
(230
)
Balances at September 30, 2015
0.1

 
$
206,622

 
136,382

 
(190,378
)
 
31,067

 
183,693

 
 
 
 
 
 
 
 
 
 
 
 
See accompanying condensed notes to interim consolidated financial statements.

7



GCI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014
(Unaudited)
(Amounts in thousands)
 
 
 
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(12,620
)
 
53,448

Adjustments to reconcile net income (loss) to net cash
   provided by operating activities:
 

 
 

Depreciation and amortization expense
135,563

 
127,843

Loss on extinguishment of debt
27,700

 

Software impairment charge
29,839

 

Deferred income tax expense
632

 
8,629

Impairment of equity method investment
12,593

 

Share-based compensation expense
8,074

 
6,124

Other noncash income and expense items
8,060

 
7,206

Change in operating assets and liabilities
17,245

 
16,967

Net cash provided by operating activities
227,086

 
220,217

Cash flows from investing activities:
 

 
 

Purchases of property and equipment
(134,275
)
 
(124,871
)
Grant proceeds
14,007

 
1,136

Purchase of businesses, net of cash received
(10,569
)
 
(1,670
)
Proceeds from sale of investment
7,551

 

Purchases of other assets and intangible assets
(7,191
)
 
(7,735
)
Note receivable issued to an equity method investee
(3,000
)
 

Restricted cash
49

 
5,871

Purchase of investments

 
(21,409
)
Other
(4,760
)
 
49

Net cash used for investing activities
(138,188
)
 
(148,629
)
Cash flows from financing activities:
 

 
 

Repayment of debt and capital lease obligations
(492,068
)
 
(97,388
)
Issuance of 2025 Notes
445,973

 

Borrowing on Amended Senior Credit Facility
295,000

 
55,000

Purchase of noncontrolling interests
(280,505
)
 

Net contribution from (distribution to) General Communication, Inc.
25,935

 
(1,628
)
Payment of bond call premium
(20,244
)
 

Payment of debt issuance costs
(13,979
)
 

Distribution to non-controlling interest
(4,932
)
 
(37,500
)
Borrowing on other long-term debt
203

 
421

Net cash used for financing activities
(44,617
)
 
(81,095
)
Net increase (decrease) in cash and cash equivalents
44,281

 
(9,507
)
Cash and cash equivalents at beginning of period
15,402

 
44,971

Cash and cash equivalents at end of period
$
59,683

 
35,464

 
 
 
 
See accompanying condensed notes to interim consolidated financial statements.

8



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, 2014, filed with the SEC on March 5, 2015, 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 1979 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 operating activities.

(a)
Business
We provide a full range of wireless, data, video, and voice services to residential customers, businesses, governmental entities and educational institutions primarily in Alaska.
(b)
Principles of Consolidation
Our consolidated financial statements include the consolidated accounts of GCI, Inc. and its wholly owned subsidiaries, The Alaska Wireless Network, LLC ("AWN") of which we owned a two-third interest through February 2, 2015 when we purchased the remaining one-third interest, and four variable interest entities (“VIEs”) for which we are the primary beneficiary after providing certain loans and guarantees.  These VIEs are Terra GCI Investment Fund, LLC (“TIF”), Terra GCI 2 Investment Fund, LLC (“TIF 2”), Terra GCI 2-USB Investment Fund, LLC (“TIF 2-USB”) and Terra GCI 3 Investment Fund, LLC (“TIF 3”).  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 Interests
Non-controlling interests represent the equity ownership interests in consolidated subsidiaries not owned by us.  Non-controlling interests are adjusted for contributions, distributions, and income and loss attributable to the non-controlling interest partners of the consolidated entities.  Income and loss is allocated to the non-controlling interests based on the respective governing documents.


9



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


(d)
Acquisition
On February 2, 2015, we purchased Alaska Communications Systems Group, Inc.'s (“ACS”) interest in AWN ("AWN NCI Acquisition") and substantially all the assets of ACS and its affiliates related to ACS’s wireless operations (“Acquired ACS Assets”) (collectively the "Wireless Acquisition"). Under the terms of the agreement, we paid ACS $293.2 million, excluding working capital adjustments and agreed to terminate certain agreements related to the use of ACS network assets that were included as part of the original transaction that closed in July 2013. The Acquired ACS Assets include substantially all of ACS’s wireless subscriber assets, including subscriber contracts, and certain of ACS’s CDMA network assets, including fiber strands and associated cell site electronics and microwave facilities and associated electronics. We assumed from ACS post-closing liabilities of ACS and its affiliates under contracts assumed by us and liabilities with respect to the ownership by ACS of its equity interest in AWN to the extent accruing and related to the period after closing. All other liabilities were retained by ACS and its affiliates.

We have accounted for the AWN NCI Acquisition as the acquisition of a non-controlling interest in accordance with Accounting Standards Codification ("ASC") 810, Consolidation, and the Acquired ACS Assets as the acquisition of assets that do not constitute a business in accordance with ASC 805-50, Business Combinations - Related Issues. Total consideration transferred to ACS in the transaction consisted of the cash payment, settlement of working capital, and the fair market value of certain rights to receive future capacity terminated as part of the Wireless Acquisition agreement. The future capacity receivable assets transferred as consideration were adjusted to fair value as of the acquisition date resulting in a gain of $1.2 million recorded in Other Income (Expense) in our Consolidated Statements of Operations for the nine months ended September 30, 2015. We allocated the total consideration transferred to ACS between the AWN NCI Acquisition and the Acquired ACS Assets based on the relative fair values of the assets and non-controlling interest received.

The following table summarizes the allocation of total consideration transferred to ACS between the AWN NCI Acquisition and the Acquired ACS Assets excluding working capital adjustments (amounts in thousands):
Total consideration transfered to ACS
 
$
304,838

 
 
 
Allocation of consideration between wireless assets and non-controlling interest acquired:
 
 
AWN non-controlling interest
 
$
303,831

Property and equipment
 
746

Other intangible assets
 
261

Total consideration
 
$
304,838


We have accounted for the AWN NCI Acquisition as an equity transaction, with the carrying amount of the non-controlling interest adjusted to reflect the change in ownership of AWN. The difference between the fair value of consideration paid and the carrying amount of the non-controlling interest has been recognized as additional paid-in capital in our Consolidated Statement of Stockholder's Equity. The impact of the AWN NCI Acquisition is summarized in the following table (amounts in thousands):
Reduction of non-controlling interest
 
$
268,364

Additional paid-in capital
 
35,467

Fair value of consideration paid for acquisition of equity interest
 
$
303,831


Pursuant to the accounting guidance in ASC 805-50, we determined that the Acquired ACS Assets did not meet the criteria necessary to constitute a business combination and was therefore accounted for as an asset purchase. We recognized the assets acquired in our Consolidated Balance Sheets at their allocated cost on the day of acquisition.


10



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


In conjunction with the Wireless Acquisition, we amended certain agreements related to the right to use ACS network assets. We adjusted the related right to use asset to fair value as of the acquisition date resulting in a loss of $3.8 million recorded in Other Income (Expense) in our Consolidated Statements of Operations for the nine months ended September 30, 2015.

During the nine months ended September 30, 2015, we completed two immaterial business acquisitions for total cash consideration of $10.6 million, net of cash received. We accounted for the transactions using the acquisition method of accounting under ASC 805, Business Combinations. Accordingly, the assets received and liabilities assumed were recorded at their estimated fair value as of the acquisition date. We determined the estimated fair values using a combination of the discounted cash flows method and estimates made by management.

(e)
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers. This new standard provides guidance for the recognition, measurement and disclosure of revenue resulting from contracts with customers and will supersede virtually all of the current revenue recognition guidance under GAAP. In August 2015, the FASB issued ASU 2015-14, which deferred the effective date to fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The standard permits the use of either the retrospective or cumulative effect transition method. Early adoption is permitted for annual periods beginning December 15, 2016. We are currently evaluating the impact of the provisions of this new standard on our financial position and results of operations.

In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. The update is in response to accounting complexity concerns, particularly from the asset management industry. ASU 2015-02 modifies the consolidation evaluation for reporting organizations that are required to determine whether they should consolidate certain legal entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions). The ASU is effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including early adoption in an interim period. The adoption of this guidance is not expected to have a material effect on our financial position or results of operations.

In April 2015, the FASB issued ASU No. 2015-03, Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 requires an entity to present debt issuance costs related to a recognized debt liability in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update. In August 2015, the FASB issued ASU No. 2015-15, Interest - Imputed Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements which clarifies that the guidance in ASU 2015-03 does not apply to line-of-credit arrangements. According to ASU 2015-15, line-of-credit arrangements will continue to defer and present debt issuance costs as an asset and subsequently amortize the deferred debt issue costs ratably over the term of the arrangement. For public business entities, this update is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. An entity should apply the new guidance on a retrospective basis. We expect to adopt this guidance when effective, and do not expect this guidance to have a material effect on our financial position or results of operation, although it will change the financial statement classification of our debt issuance costs.

In June 2015, the FASB issued ASU No. 2015-10, Technical Corrections and Updates. The amendments in this update cover a wide range of topics in the codification and are generally categorized as follows: Amendments Related to Differences between Original Guidance and the Codification; Guidance Clarification and Reference Corrections; Simplification; and, Minor Improvements. The amendments are effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, but not required; at this time we are not early adopting. As the objectives of this standard are to clarify the codification, correct unintended application of guidance, eliminate

11



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


inconsistencies, and, to improve the codification’s presentation of guidance, the adoption of this standard is not expected to have a material effect on our financial position or results of operations.

In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory. Under ASU 2015-11, inventory will be measured at the “lower of cost and net realizable value” and options that currently exist for “market value” will be eliminated. The ASU defines net realizable value as the “estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.” No other changes were made to the current guidance on inventory measurement. The ASU is effective for interim and annual periods beginning after December 15, 2016. Early application is permitted and should be applied prospectively. We are currently evaluating the impact of the provisions of this new standard on our financial position and results of operations.

(f)
Regulatory Accounting
We account for our regulated operations in accordance with the accounting principles for regulated enterprises.  These accounting principles recognize 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 (Loss) 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)
Accounts Receivable and Allowance for Doubtful Receivables
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful receivables is our best estimate of the amount of probable credit losses in our existing accounts receivable. We base our estimates on the aging of our accounts receivable balances, financial health of specific customers, regional economic data, changes in our collections process, regulatory requirements and our customers’ compliance with Universal Service Administrative Company rules. We review our allowance for doubtful receivables methodology at least annually.

Depending upon the type of account receivable our allowance is calculated using a pooled basis with an allowance for all accounts greater than 120 days past due or a specific identification method.  When a specific identification method is used, potentially uncollectible accounts due to bankruptcy or other issues are reviewed individually for collectability.  Account balances are charged off against the allowance when we believe it is probable the receivable will not be recovered. We do not have any off-balance-sheet credit exposure related to our customers.

(i)
Guarantees
We offer a device trade-in program, "Upgrade Now", which provides eligible customers a specified-price trade-in right to upgrade their device. Participating customers must have purchased a financed device using an Equipment Installment Plan ("EIP") from us and have a qualifying monthly wireless service plan with us. Upon qualifying for an Upgrade Now device trade-in, the customer's remaining EIP balance is settled provided they trade in their eligible used device in good working condition and purchase a new device from us on a new EIP.

For customers who enroll in Upgrade Now, we defer the portion of equipment sales revenue which represents the estimated value of the trade-in right guarantee. The estimated value of the guarantees are based on various economic and customer behavioral assumptions, including the customer's estimated remaining EIP balance at trade-in, the expected fair value of the used handset at trade-in and the probability and timing of a trade-in.

We assess facts and circumstances at each reporting date to determine if we need to adjust the guarantees. The recognition of subsequent adjustments to the guarantees as a result of these assessments

12



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


are recorded as adjustments to revenue. When customers upgrade their devices, the difference between the trade-in credit to the customer and the fair value of the returned devices is recorded against the guarantees.

(j)
Revenue Recognition

Wireless
We offer new and existing wireless customers the option to participate in Upgrade Now, a program that is described above in Note 1(i). Upgrade Now is a multiple-element arrangement typically consisting of the trade-in right, handset, and one month of wireless service. At the inception of the arrangement, revenue is allocated between the separate units of accounting based upon each components' relative selling price on a standalone basis. This is subject to the requirement that revenue recognized is limited to the amounts already received from the customer that are not contingent on the delivery of additional products or services to the customer in the future.

We recognize the full amount of the fair value of the trade-in right (not an allocated value) as the guarantee and the remaining allocable consideration is allocated to the handset and wireless service. We recognize revenue for the entire amount of the EIP receivable at the time of sale, net of the fair value of the trade-in right guarantee and imputed interest. See Note 1(i) for more information on guarantees.

Remote and Urban High Cost Support
We recorded high cost support revenue under the Universal Service Fund (“USF”) program of $16.5 million and $16.5 million for the three months ended September 30, 2015 and 2014, respectively, and $50.6 million and $50.0 million for the nine months ended September 30, 2015 and 2014, respectively.  At September 30, 2015, we have $46.1 million in high cost support accounts receivable.

(k)
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, wireless licenses,and broadcast licenses, the fair value of equity method investments evaluated for impairment, our effective tax rate, imputed interest rate, purchase price allocations, deferred lease expense, asset retirement obligations, the accrual of cost of goods sold (exclusive of depreciation and amortization expense), depreciation, guarantees, and the accrual of contingencies and litigation.  Actual results could differ from those estimates.

(l)
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.


13



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



(m)
Classification of Taxes Collected from Customers
We report sales, use, excise, and value added taxes assessed by a governmental authority that is directly imposed on a revenue-producing transaction between us and a customer on a net basis in our Consolidated 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 
 September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Surcharges reported gross
$
1,426

 
990

 
3,960

 
3,224


(n)
Reclassifications and Immaterial Error Correction
Reclassifications have been made to the 2014 financial statements to make them comparable with the 2015 presentation.

During the third quarter of 2015, we determined that the purchase of the noncontrolling interest from ACS in the Consolidated Statement of Cash Flows for the three months ended March 31, 2015 and the six months ended June 30, 2015 should have been reported as a financing outflow instead of an investing outflow as previously reported. The classification error had no effect on previously reported Consolidated Balance Sheets, Consolidated Statements of Operations, Adjusted EBITDA, or the Consolidated Statement of Stockholder's Equity. In order to assess materiality of this error we considered 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 classification error on prior period interim consolidated financial statements was immaterial.

The impact of the immaterial classification error for the prior periods is as follows (amounts in thousands):
Consolidated Statements of Cash Flows for the three months ended March 31, 2015
 
As Previously Reported
 
Adjustment
 
As Revised
Net cash used for investing activities
$
(326,262
)
 
280,505

 
(45,757
)
Net cash provided (used) by financing activities
 
262,745

 
(280,505
)
 
(17,760
)
 
 
 
 
 
 
 
Consolidated Statements of Cash Flows for the six months ended June 30, 2015
 
 
 
 
 
 
Net cash used for investing activities
$
(370,018
)
 
280,505

 
(89,513
)
Net cash provided (used) by financing activities
 
248,661

 
(280,505
)
 
(31,844
)


14



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


(2)
Consolidated Statements of Cash Flows Supplemental Disclosures
Changes in operating assets and liabilities consist of (amounts in thousands):
Nine Months Ended September 30,
2015
 
2014
Decrease in accounts receivable, net
$
17,016

 
5,185

Increase in prepaid expenses
(885
)
 
(3,278
)
Decrease in inventories
6,957

 
2,449

Decrease in other current assets
17

 
135

Increase in other assets
(7,886
)
 
(511
)
Decrease in accounts payable
(7,743
)
 
(2,365
)
Increase in deferred revenues
1,532

 
4,198

Decrease in accrued payroll and payroll related obligations
(3,783
)
 
(246
)
Increase (decrease) in accrued liabilities
2,496

 
(722
)
Increase in accrued interest
16,321

 
14,205

Decrease in subscriber deposits
(590
)
 
(160
)
Decrease in long-term deferred revenue
(6,437
)
 
(3,108
)
Increase in components of other long-term liabilities
230

 
1,185

Total change in operating assets and liabilities
$
17,245

 
16,967


The following item is for the nine months ended September 30, 2015 and 2014 (amounts in thousands):
Net cash paid or received:
2015
 
2014
Interest paid including capitalized interest
$
45,393

 
41,396


The following items are non-cash investing and financing activities for the nine months ended September 30, 2015 and 2014 (amounts in thousands):
 
2015
 
2014
Non-cash consideration for Wireless Acquisition
$
23,326

 

Non-cash additions for purchases of property and equipment
$
17,683

 
36,805

Asset retirement obligation additions to property and equipment
$
1,730

 
382

Net capital lease obligation
$

 
9,386

Distribution to non-controlling interest
$

 
4,167

Deferred compensation distribution denominated in shares
$

 
617


(3)    Intangible Assets and Goodwill
Goodwill increased $5.8 million during the nine months ended September 30, 2015 as a result of business combinations.

Amortization expense for amortizable intangible assets was as follows (amounts in thousands):
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
Amortization expense
$
2,701

 
2,382

 
$
7,919

 
$
6,981



15



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


Amortization expense for amortizable intangible assets for each of the five succeeding fiscal years is estimated to be (amounts in thousands):
Years Ending December 31,
 
2015
$
10,636

2016
$
8,957

2017
$
6,653

2018
$
4,733

2019
$
3,660


(4)
Long-Term Debt

Amended Senior Credit Facility
On February 2, 2015, GCI Holdings, Inc. ("Holdings"), our wholly owned subsidiary, entered into a Fourth Amended and Restated Credit and Guarantee Agreement with MUFG Union Bank, N.A., Suntrust Bank, Bank of America, N.A., as documentation agent, and Credit Agricole Corporate and Investment Bank, as administrative agent ("Amended Senior Credit Facility"). The Amended Senior Credit Facility added a $275.0 million Term B loan to the existing Senior Credit Facility described in Note 6(c) of our December 31, 2014 annual report on Form 10-K. The Amended Senior Credit Facility was subsequently amended on August 3, 2015 ("First Amendment").

Under the Amended Senior Credit Facility and First Amendment, the interest rate for the Term B loan is London Interbank Offered Rate ("LIBOR") plus 3.25%, with a 0.75% LIBOR floor. The Term B loan requires principal payments of 0.25% of the original principal amount on the last day of each calendar quarter with the full amount maturing on February 2, 2022 or December 3, 2020 if our Senior Notes due 2021 are not refinanced prior to such date. The interest rate, maturity, and other terms of the existing Senior Credit Facility as described in Note 6(c) of our December 31, 2014 annual report on Form 10-K did not change as a result of this amendment.

In connection with the Amended Senior Credit Facility and First Amendment, we paid loan fees and other expenses of $6.2 million that were deferred and are being amortized over the life of the Amended Senior Credit Facility.

Senior Notes
On April 1, 2015 (“Closing Date”), we completed an offering of $450.0 million in aggregate principal amount of 6.875% Senior Notes due 2025 (“2025 Notes”) at an issue price of 99.105%. We used the net proceeds from this offering to repay and retire all $425.0 million of our outstanding senior unsecured notes due 2019 (“2019 Notes”).

At any time before April 15, 2020, the 2025 Notes are redeemable at our option, in whole or in part, on not less than thirty nor more than sixty days’ notice, at a redemption price equal to 100% of the principal amount of the 2025 Notes, plus a premium calculated as defined in the 2025 Notes agreement, and accrued and unpaid interest (if any) to the date of redemption.

At any time on or after April 15, 2020, the 2025 Notes are redeemable at our option, in whole or in part, on not less than thirty nor more than sixty days’ notice, at the following redemption prices (expressed as percentages of principal amount), plus accrued and unpaid interest (if any) to the date of redemption:
If redeemed during the twelve month period commencing April 15 of the year indicated:
Redemption Price
2020
103.438
%
2021
102.292
%
2022
101.146
%
2023 and thereafter
100.000
%


16



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


The 2025 Notes mature on April 15, 2025. Semi-annual interest payments are payable on April 15 and October 15, beginning on October 15, 2015.

The 2025 Notes were issued pursuant to an Indenture, dated as of April 1, 2015, between us and MUFG Union Bank, N.A., as trustee.

We are not required to make mandatory sinking fund payments with respect to the 2025 Notes.

Upon the occurrence of a change of control, each holder of the 2025 Notes will have the right to require us to purchase all or any part of such holder’s 2025 Notes at a purchase price equal to 101% of the principal amount of such 2019 Notes, plus accrued and unpaid interest on such 2025 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 2025 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 2025 Notes are senior unsecured obligations which rank equally in right of payment with our existing and future senior unsecured debt, including our 6.75% Senior Notes due 2021, and senior in right of payment to all future subordinated indebtedness.

The covenants in the indenture restrict GCI, Inc. and certain of its subsidiaries from incurring additional debt or entering into sale and leaseback transactions; paying dividends or distributions on capital stock or repurchase capital stock; issuing stock of subsidiaries; making certain investments; creating liens on assets to secure debt; entering into transactions with affiliates; merging or consolidating with another company; and transferring and selling assets. These covenants are subject to a number of limitations and exceptions, as further described in the 2025 Notes indenture.

We paid closing costs totaling $7.9 million in connection with the offering, which were recorded as deferred loan costs and are being amortized over the term of the 2025 Notes. We recorded a $27.7 million loss on extinguishment of debt in our Consolidated Statements of Operations for the nine months ended September 30, 2015. Included in the loss was $20.2 million in call premium payments to redeem our 2019 Notes, $5.4 million in unamortized 2019 Notes deferred loan costs, and $2.1 million for the unamortized portion of the 2019 Notes original issue discount.


(5)
Fair Value Measurements

Recurring Fair Value Measurements
Assets and liabilities measured at fair value on a recurring basis as of September 30, 2015 and December 31, 2014 are as follows (amounts in thousands):
September 30, 2015
Level 1 (1)
 
Level 2 (2)
 
Level 3 (3)
 
Total
Assets:
 
 
 
 
 
 
 
Deferred compensation plan assets (mutual funds)
$
1,660

 

 

 
1,660

 
 
 
 
 
 
 
 
December 31, 2014
Level 1 (1)
 
Level 2 (2)
 
Level 3 (3)
 
Total
Assets:
 
 
 
 
 
 
 
Deferred compensation plan assets (mutual funds)
$
2,068

 

 

 
2,068

 
 
 
 
 
 
 
 
(1) Quoted prices in active markets for identical assets or liabilities
(2) Observable inputs other than quoted prices in active markets for identical assets and liabilities
(3) Inputs that are generally unobservable and not corroborated by market data


17



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


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

Current and Long-Term Debt
The carrying amounts and approximate fair values of our current and long-term debt, excluding capital leases, at September 30, 2015 and December 31, 2014 are as follows (amounts in thousands):
 
September 30,
2015
 
December 31,
2014
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Current and long-term debt
$
1,294,062

 
1,305,700

 
1,036,678

 
1,055,952


The following methods and assumptions were used to estimate fair values:
The fair values of the 6.75% Senior Notes due 2021 and the 6.875% Senior Notes due 2025 are based upon quoted market prices for the same or similar issues (Level 2).
The fair value of our Amended Senior Credit Facility and Wells Fargo note payable are estimated to approximate their carrying value because the instruments are subject to variable interest rates (Level 2).



(6)
Stockholder's Equity

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.  We have not issued any new options since 2010 when we transitioned to issuing restricted stock awards. We have 1.8 million shares available for grant under the Stock Option Plan at September 30, 2015.

A summary of option activity under the Stock Option Plan as of September 30, 2015 and changes during the period then ended is presented below:
 
Shares (in thousands)
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Term
 
Aggregate Intrinsic Value (in thousands)
Outstanding at January 1, 2015
308

 
$
6.86

 
 
 
 
Exercised
(38
)
 
$
7.77

 
 
 
 
Expired
(2
)
 
$
7.63

 
 
 
 
Outstanding at September 30, 2015
268

 
$
6.73

 
3.4 years
 
$
2,828

Exercisable at September 30, 2015
268

 
$
6.73

 
3.4 years
 
$
2,828


A summary of nonvested restricted stock award activity under the Stock Option Plan as of September 30, 2015 and changes during the period then ended is presented below:

18



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


 
Shares (in thousands)
 
Weighted
Average
Grant Date
Fair Value
Nonvested at January 1, 2015
1,744

 
$
9.11

Granted
647

 
$
14.70

Vested
(342
)
 
$
10.27

Forfeited
(7
)
 
$
12.54

Nonvested at September 30, 2015
2,042

 



The weighted average grant date fair value of awards granted during the nine months ended September 30, 2015 and 2014, were $14.70 and $9.89, respectively. We have recorded share-based compensation expense of $8.0 million and $6.1 million for the nine months ended September 30, 2015 and 2014, respectively. Share-based compensation expense is classified as Selling, General and Administrative Expense in our Consolidated Statements of Operations.  Unrecognized share-based compensation expense was $10.8 million relating to 2.0 million restricted stock awards as of September 30, 2015.  We expect to recognize share-based compensation expense over a weighted average period of 1.6 years for restricted stock awards.

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

A description of our reportable segments follows:

Wireless - We offer wholesale wireless services.  

Wireline - We offer a full range of retail wireless, data, video and voice services to residential customers, businesses, governmental entities and educational institutions; wholesale data and voice services to common carrier customers; data and managed services to rural schools and health organizations and regulated voice services to residential and commercial customers in rural communities primarily in Southwest Alaska.

We evaluate performance and allocate resources based on earnings before net interest expense, income taxes, depreciation and amortization expense, loss on extinguishment of debt, software impairment charge, share-based compensation expense, accretion expense, loss attributable to non-controlling interest resulting from New Markets Tax Credit ("NMTC") transactions, gains and impairment losses on equity and cost method investments, and other non-cash adjustments, plus imputed interest on financed devices (“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.  We have no intersegment sales.

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.


19



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


Summarized financial information for our reportable segments for the three and nine months ended September 30, 2015 and 2014 follows (amounts in thousands):
 
Three Months Ended
 
Nine Months Ended
 
Wireless
 
Wireline
 
Total Reportable Segments
 
Wireless
 
Wireline
 
Total Reportable Segments
September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
Revenues
$
80,424

 
178,149

 
258,573

 
$
207,568

 
529,622

 
737,190

Adjusted EBITDA
$
57,404

 
39,198

 
96,602

 
$
140,518

 
119,517

 
260,035

 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2014
 

 
 

 
 

 
 
 
 
 
 

Revenues
$
76,398

 
164,327

 
240,725

 
$
208,312

 
473,095

 
681,407

Adjusted EBITDA
$
47,279

 
45,915

 
93,194

 
$
125,475

 
126,987

 
252,462


A reconciliation of reportable segment Adjusted EBITDA to consolidated income (loss) before income taxes follows (amounts in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended 
 September 30, 2015
 
2015
 
2014
 
2015
 
2014
Reportable segment Adjusted EBITDA
$
96,602

 
93,194

 
$
260,035

 
252,462

Less depreciation and amortization
  expense
(45,157
)
 
(41,705
)
 
(135,563
)
 
(127,843
)
Less software impairment charge
(2,571
)
 

 
(29,839
)
 

Less share-based compensation
  expense
(2,660
)
 
(2,153
)
 
(8,074
)
 
(6,124
)
Less accretion expense
(191
)
 
(359
)
 
(992
)
 
(961
)
Other
(474
)
 
359

 
55

 
481

Consolidated operating income
45,549

 
49,336

 
85,622

 
118,015

Less other expense, net
(18,058
)
 
(18,411
)
 
(97,561
)
 
(55,938
)
Consolidated income (loss) before
  income taxes
$
27,491

 
30,925

 
$
(11,939
)
 
62,077


(8)
Related Party Transaction
ACS was a related party for financial statement reporting purposes through the date of the Wireless Acquisition on February 2, 2015. Included in our related party disclosures were ACS' provision to us of local service lines and network capacity in locations where we do not have our own facilities, our provision to ACS of wholesale wireless services for their use of our network to sell services to their respective retail customers, and our receipt of ACS' high cost support from USF for its wireless customers. For the period January 1, 2015 to February 2, 2015, we paid ACS $6.2 million and received $8.1 million in payments from ACS. For the nine months ended September 30, 2014, we paid $48.2 million and received $29.5 million in payments from ACS. We also have long term capacity exchange agreements with ACS for which no money is exchanged.


20



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


(9)
Variable Interest Entities

New Markets Tax Credit Entities
We have entered into several arrangements under the NMTC program with US Bancorp to help fund a $59.3 million project that extended terrestrial broadband service for the first time to rural Northwestern Alaska communities via a high capacity hybrid fiber optic and microwave network ("TERRA-NW").  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.

On August 30, 2011, we entered into the first arrangement (“NMTC #1”).  In connection with the NMTC #1 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.  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 our wholly owned subsidiary, Unicom, as partial financing for TERRA-NW.

On October 3, 2012, we entered into the second arrangement (“NMTC #2”). In connection with the NMTC #2 transaction we loaned $37.7 million to TIF 2 and TIF 2-USB, special purpose entities created to effect the financing arrangement, at 1% interest due October 2, 2042.  Simultaneously, US Bancorp invested $17.5 million in TIF 2 and TIF 2-USB.  TIF 2 and TIF 2-USB then contributed US Bancorp’s contributions and the loan proceeds to certain CDEs.  The CDEs, in turn, loaned the $55.2 million in funds less payment of placement fees, at interest rates varying from 0.7099% to 0.7693%, to Unicom, as partial financing for TERRA-NW.

On December 11, 2012, we entered into the third arrangement (“NMTC #3”).  In connection with the NMTC #3 transaction we loaned $8.2 million to TIF 3, a special purpose entity created to effect the financing arrangement, at 1% interest due December 10, 2042.  Simultaneously, US Bancorp invested $3.8 million in TIF 3.  TIF 3 then contributed US Bancorp’s contributions and the loan proceeds to a CDE.  The CDE, in turn, loaned the $12.0 million in funds less payment of placement fees, at an interest rate of 1.35%, to Unicom, as partial financing for TERRA-NW.

US Bancorp is the sole investor in TIF, TIF 2, TIF 2-USB and TIF 3, and as such, is entitled to substantially all of the benefits derived from the NMTCs.  All of the loan proceeds to Unicom net of syndication and arrangement fees, were restricted for use on TERRA-NW.  We completed construction of TERRA-NW and placed the final phase into service in 2014.

These transactions include put/call provisions whereby we may be obligated or entitled to repurchase US Bancorp’s interests in TIF, TIF 2, TIF 2-USB and/or TIF 3. We believe that US Bancorp will exercise the put options in August 2018, October 2019 and December 2019, at the end of the compliance periods for NMTC #1, NMTC #2 and NMTC #3, respectively.  The NMTCs are 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 arrangements.  Non-compliance with applicable requirements could result in projected tax benefits not being realized by US Bancorp.  We have agreed to indemnify US Bancorp for any loss or recapture of NMTCs until such time as our obligation to deliver tax benefits is relieved.  There have been no credit recaptures as of September 30, 2015.  The value attributed to the puts/calls is nominal.

We have determined that TIF, TIF 2, TIF 2-USB and TIF 3 are VIEs.  The consolidated financial statement of TIF, TIF 2, TIF 2-USB and TIF 3 include the CDEs discussed above. The ongoing activities of the VIEs – 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 VIEs.  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;

21



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


and the fact that we are obligated to absorb losses of the VIEs.  We concluded that we are the primary beneficiary of each and consolidated the VIEs in accordance with the accounting standard for consolidation.

US Bancorp’s contributions, net of syndication fees and other direct costs incurred in structuring the NMTC arrangements, are included in Non-controlling Interests on the Consolidated Balance Sheets.  Incremental costs to maintain the structure during the compliance period are recognized as incurred to selling, general and administrative expense.

The assets and liabilities of our consolidated VIEs were $140.9 million and $104.2 million, respectively, as of September 30, 2015 and December 31, 2014.

Equity Method Investment
We own a 40.8% interest in a next generation carrier-class communications services firm. We account for our investment using the equity method. Due to declining economic conditions in the sector that it operates, additional financing was needed for the company to maintain its business plan. In March 2015, the existing owners provided financial support in the form of a loan of which our portion is $3.0 million. We determined that the additional financing provided to the company was a reconsideration event under ASC 810 and have subsequently determined that the entity is a VIE due to insufficient equity to finance its operations as a result of the decline in economic conditions.

We concluded that the company's board has the power to direct the significant activities of the entity. The board is comprised of five members of which we may choose two of the board members. As we do not control the board, we concluded that we do not have the power to direct the significant activities of the entity and are not the primary beneficiary. Our maximum exposure to loss related to the VIE is the combination of the investment and note receivable. We do not have a contractual obligation to provide additional financing.

During the second quarter of 2015, it became apparent that we would not recover the carrying value of our investment. We determined that the fair value of the equity investment was $0 and subsequently wrote-off the entire value of our investment resulting in an impairment loss of $12.6 million for the nine months ended September 30, 2015 that is recorded in Other Income (Expense) in our Consolidated Statements of Operations. The fair value determination was based upon market information obtained during the second quarter of 2015, the estimated liquidation value of the entity's assets and the amount of senior secured debt at the valuation date.

We have a note receivable with the entity of $3.0 million that is recorded in Other Current Assets in our Consolidated Balance Sheets as of September 30, 2015. We believe we will recover the value of the note receivable, therefore, we have not recorded an impairment loss related to the note receivable as of September 30, 2015. We will continue to monitor the entity's financial performance and record an impairment to the note receivable if it becomes apparent that the full value is no longer recoverable.

(10)
Software Impairment
During the years ended December 31, 2013 and 2014, we internally developed computer software in our Wireline segment to replace our wireless, Internet, video, local service, and long distance customer billing systems. During the first quarter of 2015, we completed a detailed assessment of our progress to date and determined it was no longer probable that the computer software being developed would be completed and placed in service. Our assessment concluded that the cost of continuing the development would be much higher than originally estimated, and the timing and scope risks were substantial. We identified development work, hardware, and software recorded as Construction in Progress through the first quarter of 2015, that may be applicable to our replacement customer billing solution, future internally developed software, and other system needs and therefore should remain capital assets. We considered the remaining capital expenditures for this billing system to have a fair value of $0 and recorded an impairment charge of $20.7 million during the nine months ended September 30, 2015, by recording an expense which is included in Software Impairment Charge in our Consolidated Statements of Operations.

During the nine months ended September 30, 2015, we reassessed our plans for our internally developed machine-to-machine billing system in our Wireline segment, and decided to no longer market this system to

22



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


third parties. Accordingly we recognized an impairment of $0.5 million and $7.1 million during the three and nine months ended September 30, 2015, respectively, by recording an expense which is included in Software Impairment Charge in our Consolidated Statements of Operations.

During the third quarter of 2015, we evaluated user management software we purchased in 2014 and determined that we would not be able to use the software. Accordingly we recognized an impairment of $1.0 million during the three and nine months ended September 30, 2015 by recording an expense which is included in Software Impairment Charge in our Consolidated Statement of Operations.


23



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 interim consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“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 Remote area program support, share-based compensation, inventory at lower of cost or market, reserve for future customer credits, guarantees, 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, wireless licenses, and broadcast licenses,the fair value of equity method investments evaluated for impairment, our effective tax rate, imputed interest rate, purchase price allocations, deferred lease expense, asset retirement obligations, the accrual of cost of goods sold (exclusive of depreciation and amortization expense) ("Cost of Goods Sold"), depreciation, and accrual of 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 General Communication, Inc. ("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 operating activities.

Emerging Growth Company
We qualify as an “emerging growth company” under the Jumpstart Our Business Startups Act (the “JOBS
Act”) enacted on April 5, 2012. As a result, we are permitted to rely on exemptions from certain disclosure requirements that are applicable to companies that are not emerging growth companies.

In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we are choosing to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

Update on Economic Conditions
Our business and operations depend upon economic conditions in Alaska. The economy of Alaska is dependent upon natural resource industries, and in particular oil exploration, development, and production, as well as both state and federal government spending, investment earnings and tourism. We believe the Alaska state economy continues to be stable despite declines in energy prices. The decline in energy prices has put significant pressure on the Alaska state government budget since the majority of its revenues come from the oil industry. The Alaska state government has significant reserves that we believe will help fund the state government for the next couple of years. A long-term decrease in oil prices, could have an adverse impact on the demand for our products and services and on our results of operations and financial condition.


24



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 and regular 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.

On February 2, 2015, we purchased Alaska Communications Systems Group, Inc.'s (“ACS”) interest in The Alaska Wireless Network, LLC ("AWN") and substantially all the assets of ACS and its affiliates related to ACS’s wireless operations (“Acquired ACS Assets”) (collectively the "Wireless Acquisition"). Under the terms of the agreement, we transfered to ACS a cash payment of $293.2 million excluding working capital adjustments and agreed to terminate or amend certain agreements related to the use of ACS network assets that were included as part of the original transaction that closed in July 2013. The Acquired ACS Assets include substantially all of ACS’s wireless subscriber assets, including subscriber contracts, and certain of ACS’s CDMA network assets, including fiber strands and associated cell site electronics and microwave facilities and associated electronics. We assumed from ACS post-closing liabilities of ACS and its affiliates under contracts assumed by us and liabilities with respect to the ownership by ACS of its equity interest in AWN to the extent accruing and related to the period after closing. All other liabilities were retained by ACS and its affiliates.

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 thousand):
 
Three Months Ended September 30,
Percentage Change
2015
 
Nine Months Ended September 30,
Percentage Change
2015
 
2015
2014
vs. 2014
 
2015
2014
vs. 2014
Statements of Operations Data:
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
Wireless segment
31%
32%
5%
 
28%
31%
—%
Wireline segment
69%
68%
8%
 
72%
69%
12%
Total revenues
100%
100%
7%
 
100%
100%
8%
Selling, general and administrative expenses
32%
30%
13%
 
34%
31%
16%
Depreciation and amortization expense
17%
17%
8%
 
18%
19%
6%
Software impairment charge
1%
—%
      ---%
 
4%
—%
100%
Operating income
18%
20%
(8)%
 
12%
17%
(27)%
Other expense, net
7%
8%
(2)%
 
13%
8%
74%
Income (loss) before income taxes
11%
13%
(11)%
 
(2)%
9%
(119)%
Net income (loss)
8%
11%
(23)%
 
(2)%
8%
(124)%
Net income attributable to the non-controlling interests
—%
7%
(101)%
 
—%
5%
(99)%
Net income (loss) attributable to GCI
8%
4%
101%
 
(2)%
2%
(176)%
 
 
 
 
 
 
 
 
1Percentage change in underlying data
 
 
 
 
 
 

We evaluate performance and allocate resources based on earnings before net interest expense, income taxes, depreciation and amortization expense, loss on extinguishment of debt, software impairment charge, share-based compensation expense, accretion expense, loss attributable to non-controlling interest resulting from New Markets Tax Credit transactions, gains and impairment losses on equity and cost method investments, and other non-cash adjustments, plus imputed interest on financed devices (“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 expense, net interest expense and income taxes

25



(“EBITDA”) are used to estimate current or prospective enterprise value.  See Note 7 in the accompanying "Condensed Notes to Interim Consolidated Financial Statements" included in Part I of this quarterly report on Form 10-Q for a reconciliation of consolidated Adjusted EBITDA, a non-GAAP financial measure, to consolidated income (loss) before income taxes.

Overview of Revenues and Cost of Goods Sold
Total revenues increased 7% from $240.7 million in the three months ended September 30, 2014 to $258.6 million in the same period in 2015. Total revenues increased 8% from $681.4 million in the nine months ended September 30, 2014 to $737.2 million in the same period in 2015. Revenue increased in both the Wireline and Wireless segments for the three months ended September 30, 2015 when compared to the same period in 2014. Revenue increased in our Wireline segment and decreased in our Wireless segment for the nine months ended September 30, 2015 compared to the same period in 2014.  See the discussion below for more information by segment.

Total Cost of Goods Sold increased 8% from $76.9 million in the three months ended September 30, 2014 to $82.7 million in the same period in 2015.  Total Cost of Goods Sold increased 7% from $221.1 million in the nine months ended September 30, 2014 to $236.7 million in the same period in 2015. Cost of Goods Sold decreased in our Wireless segment and increased in our Wireline segment for the three and nine months ended September 30, 2015 compared to the same periods in 2014. See the discussion below for more information by segment.

Wireless Segment Overview
Wireless segment revenue, Cost of Goods Sold, and Adjusted EBITDA for the three and nine months ended September 30, 2015 and 2014 are as follows (amounts in thousands):
 
Three Months Ended 
 September 30,
 
Percentage
 
Nine Months Ended September 30,
 
Percentage
 
2015
 
2014
 
Change
 
2015
 
2014
 
Change
Revenue
$
80,424

 
76,398

 
5
 %
 
207,568

 
208,312

 
 %
Cost of Goods Sold
$
18,031

 
24,021

 
(25
)%
 
53,897

 
66,234

 
(19
)%
Adjusted EBITDA
$
57,404

 
47,279

 
21
 %
 
140,518

 
125,475

 
12
 %

Wireless Segment Revenues
The increase in revenue for the three months ended September 30, 2015 when compared to the same period in 2014 is primarily due to the following:
A $8.0 million increase in roaming revenue primarily due to increased traffic from our roaming partners and
A $1.9 million decrease in the contra-revenue wireless handset cash incentives to ACS for the sale of wireless handsets to their retail customers prior to the February 2, 2015 close of the Wireless Acquisition.

The increase is partially offset by a $6.9 million decrease in plan fee revenue primarily due to our transition to a fixed percentage allocation of plan fee revenue from the Wireline segment following the February 2, 2015 close of the Wireless Acquisition.

The decrease in revenue for the nine months ended September 30, 2015 when compared to the same period in 2014 is primarily due to a $18.9 million decrease in plan fee revenue due to our transition to a fixed percentage allocation of plan fee revenue from the Wireline segment following the February 2, 2015 close of the Wireless Acquisition.

The decrease is partially offset by the following:
A $10.7 million increase in roaming revenue primarily due to increased traffic from our roaming partners and
A $6.6 million decrease in the contra-revenue wireless handset cash incentives to ACS for the sale of wireless handsets to their retail customers prior to the February 2, 2015 close of the Wireless Acquisition.

Wireless Segment Cost of Goods Sold
The decrease in Cost of Goods Sold is primarily due to the following:
A $4.2 million decrease in distribution and capacity costs for the nine months ended September 30, 2015 when compared to the same period in 2014 primarily because we were able to extend an agreement with a customer which resulted in the resolution of certain issues and the release of the related reserve and reduction of long distance traffic used by our wireless customers,

26



A $2.1 million and $7.6 million decrease in roaming costs for the three and nine months ended September 30, 2015 when compared to the same periods in 2014, respectively, primarily due to better management of permanent roaming customers, and
A $4.3 million and $3.8 million decrease in wireless equipment costs for the three and nine months ended September 30, 2015 when compared to the same periods in 2014, respectively. During the three and nine months ended September 30, 2014, the Wireless segment gave a wireless equipment subsidy to the Wireline segment in accordance with the AWN agreements. Following the February 2, 2015 close of the Wireless Acquisition this subsidy was discontinued but the Wireless segment started recording a portion of the wireless equipment costs to encourage the Wireline segment to transition customers from our CDMA network to our GSM network which partially offset the decrease.

The decreases above are partially offset by a $1.1 million and $3.1 million increase in network maintenance costs for the three and nine months ended September 30, 2015 when compared to the same periods in 2014, respectively.

Wireless Segment Adjusted EBITDA
The increase in Adjusted EBITDA for the three and nine months ended September 30, 2015 when compared to the same periods in 2014 is primarily due to increased Revenues for the three months ended September 30, 2015 as described above in "Wireless Segment Revenues" and decreased Cost of Goods Sold as described above in “Wireless Segment Cost of Goods Sold” and in selling, general and administrative expenses for the three and nine months ended September 30, 2015.

Wireline Segment Overview
Our Wireline segment offers services and products under three major customer groups as follows:
 
 
Customer Group
Wireline Segment Services and Products
Consumer
Business Services
Managed Broadband
 
 
 
 
 
Retail wireless
X
X
 
 
 
 
 
 
Data:
 
 
 
 
Internet
X
X
X
 
Data networks
 
X
X
 
Managed services
 
X
X
 
 
 
 
 
Video
X
X
 
 
 
 
 
 
Voice:
 
 
 
 
Long-distance
X
X
X
 
Local access
X
X
X

Consumer – we offer a full range of retail wireless, data, video and voice services to residential customers.
Business Services - we offer a full range of retail wireless, data, video and voice services to businesses, governmental entities, educational institutions and wholesale data and voice services to common carrier customers.
Managed Broadband – we offer data and managed services to rural schools and health organizations and regulated voice services to residential and commercial customers in rural communities primarily in Southwest Alaska.


27



The components of Wireline segment revenue for the three and nine months ended September 30, 2015 and 2014 are as follows (amounts in thousands):
 
Three Months Ended 
 September 30,
 
Percentage
 
Nine Months Ended 
 September 30,
 
Percentage
 
2015
 
2014
 
Change
 
2015
 
2014
 
Change
Consumer
 
 
 
 
 
 
 
 
 
 
 
Wireless
$
19,451

 
7,989

 
143
 %
 
56,566

 
21,840

 
159
 %
Data
32,465

 
28,755

 
13
 %
 
95,771

 
83,012

 
15
 %
Video
28,483

 
27,896

 
2
 %
 
86,629

 
82,016

 
6
 %
Voice
7,420

 
7,972

 
(7
)%
 
22,950

 
24,696

 
(7
)%
Business Services
 
 
 
 
 

 
 
 
 
 
 

Wireless
2,036

 
834

 
144
 %
 
6,077

 
2,368

 
157
 %
Data
35,238

 
36,857

 
(4
)%
 
107,021

 
107,251

 
 %
Video
4,476

 
10,432

 
(57
)%
 
13,511

 
23,191

 
(42
)%
Voice
10,316

 
11,657

 
(12
)%
 
31,502

 
34,757

 
(9
)%
Managed Broadband
 
 
 
 
 

 
 
 
 
 
 

Data
32,542

 
26,596

 
22
 %
 
92,794

 
78,033

 
19
 %
Voice
5,722

 
5,339

 
7
 %
 
16,801

 
15,931

 
5
 %
Total Wireline segment revenue
$
178,149

 
164,327

 
8
 %
 
529,622

 
473,095

 
12
 %

Wireline segment Cost of Goods Sold and Adjusted EBITDA for the three and nine months ended September 30, 2015 and 2014 are as follows (amounts in thousands):
 
Three Months Ended 
 September 30,
 
Percentage
 
Nine Months Ended 
 September 30,
 
Percentage
 
2015
 
2014
 
Change
 
2015
 
2014
 
Change
Wireline segment Cost of Goods Sold
$
64,686

 
52,880

 
22
 %
 
182,844

 
154,823

 
18
 %
Wireline segment Adjusted EBITDA
$
39,198

 
45,915

 
(15
)%
 
119,517

 
126,987

 
(6
)%

Selected key performance indicators for our Wireline segment follow:
 
September 30,

Percentage
 
2015

2014

Change
Consumer
 

 

 
Data:
 

 

 
Cable modem subscribers
124,300


117,000


6
 %
Video:
 
 
 
 
 

Basic subscribers
113,600

 
115,900

 
(2
)%
Digital programming tier subscribers
59,500

 
64,200

 
(7
)%
HD/DVR converter boxes
110,700

 
105,600

 
5
 %
Homes passed
251,200

 
248,000

 
1
 %
Video ARPU - quarter-to-date5
$
80.85

 
$
80.22

 
1
 %
Video ARPU - year-to-date6
$
83.24

 
$
77.91

 
7
 %
Voice:
 
 
 
 
 

Total local access lines in service7
51,000

 
55,900

 
(9
)%
Business Services
 
 
 
 
 

Data:
 
 
 
 
 

Cable modem subscribers
14,200

 
14,200

 
 %
Voice:
 
 
 
 
 


28



Total local access lines in service7
47,100

 
47,400

 
(1
)%
Combined Consumer and Business Services
 
 
 
 
 

Wireless
 
 
 
 
 

Consumer Lifeline wireless lines in service8
28,100

 
25,600

 
10
 %
Consumer prepaid wireless lines in service9
27,100

 
11,700

 
132
 %
Consumer postpaid wireless lines in service10
146,700

 
91,000

 
61
 %
Business Services postpaid wireless lines in service10
30,000

 
18,600

 
61
 %
Total wireless lines in service
231,900

 
146,900

 
58
 %
Wireless ARPU - quarter-to-date11
$
44.24

 
$
50.87

 
(13
)%
Wireless ARPU - year-to-date12
$
46.60

 
$
49.93

 
(7
)%
Cable Modem ARPU - quarter-to-date13
$
84.87

 
$
80.20

 
6
 %
Cable Modem ARPU - year-to-date14
$
84.27

 
$
77.48

 
9
 %
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 video service is not required to receive cable modem service.
A basic 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.
Applicable average monthly video revenues divided by the average number of basic subscribers at the beginning and end of each month in the period ("Video ARPU") for the three months ended September 30, 2015 and 2014.
6 Video ARPU for the nine months ended September 30, 2015 and 2014.
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 Lifeline wireless line in service is defined as a revenue generating wireless device that is eligible for Lifeline support. The Universal Service Fund's Lifeline program is administered by the Universal Service Administrative Company and is designed to ensure that quality telecommunications services are available to low-income customers at affordable rates.
9 A prepaid wireless line in service is defined as a revenue generating wireless device where service is purchased in advance of use. The purchased credit is used to pay for wireless services at the point the service is accessed or consumed.
10 A postpaid wireless line in service is defined as a revenue generating wireless device where service is provided by a prior arrangement with a subscriber and the subscriber is billed after the fact according to their use of wireless services at the end of each month.
11 Average monthly wireless revenues, excluding those from common carrier customers, divided by the average of wireless subscribers at the beginning and end of each month in the period ("Wireless ARPU") for the three months ended September 30, 2015 and 2014. Revenue used for this calculation includes Wireline segment - Consumer - Wireless, Wireline segment - Business Services - Wireless and wholesale wireless revenues earned from GCI retail subscribers included in the Wireless segment.
12 The average of the monthly wireless revenues, excluding those from common carrier customers, divided by the number of wireless subscribers at the end of of each month for each of the months in the nine months ended September 30, 2015. Average monthly wireless revenues, excluding those from common carrier customers, divided by the average of wireless subscribers at the beginning and end of each month in the period for the nine months ended September 30, 2014. Revenue used for this calculation includes Wireline segment - Consumer - Wireless, Wireline segment - Business Services - Wireless and wholesale wireless revenues earned from GCI retail subscribers included in the Wireless segment.
13 Applicable average monthly cable modem revenues divided by the average number of subscribers at the beginning and end of each month in the period ("Cable Modem ARPU") for the three months ended September 30, 2015 and 2014.
14 Cable Modem ARPU for the nine months ended September 30, 2015 and 2014.


29



Wireline Segment Revenues

Consumer
The items contributing to the increase in wireless revenue include:
A $3.2 million and $12.6 million increase in plan fee revenue in the three and nine months ended September 30, 2015 when compared to the same periods in 2014, respectively, primarily due to the acquisition of ACS' wireless subscribers following the February 2, 2015 close of the Wireless Acquisition, and
A $8.1 million and $20.1 million increase in equipment sales revenue in the three and nine months ended September 30, 2015 when compared to the same periods in 2014, respectively, due to an increase in the number of financed devices. In late 2014 we began encouraging our customers to purchase wireless devices through our financing program instead of subsidizing their device purchases. We offer a discount on the monthly plan fee for customers who choose to finance their device rather than buying a subsidized device.

The increase in data revenue is primarily due to a $5.0 million or 20% and $14.4 million or 20% increase in cable modem revenue for the three and nine months ended September 30, 2015 when compared to the same periods in 2014, respectively, due to an increase in the number of subscribers and our subscribers’ selection of plans that offer higher speeds and higher included usage amounts.

Business Services
The decrease in video revenue for the three and nine months ended September 30, 2015 when compared to the same periods in 2014 is primarily due to a decrease in advertising after the completion of the latest election cycle.

Managed Broadband
The increase in data revenue is primarily due to an increase in monthly contract revenue due to increased data network capacity purchased by our existing ConnectMD® and SchoolAccess® customers.

Wireline Segment Cost of Goods Sold
The items contributing to the increase in Wireline segment Cost of Goods Sold include:
A $0.8 million or 5% and $5.0 million or 10% increase in video Cost of Goods Sold for the three and nine months ended September 30, 2015 when compared to the same periods in 2014, respectively, primarily due to increased rates paid to programmers partially offset by a decrease in basic video subscribers,
A $6.6 million or 107% and $16.5 million or 93% increase in wireless Cost of Goods Sold for the three and nine months ended September 30, 2015 when compared to the same periods in 2014, respectively, primarily due to an increase in the number of handsets sold and a change in the allocation between the Wireline and Wireless segments following the February 2, 2015 close of the Wireless Acquisition. During the three and nine months ended September 30, 2014, the Wireline segment received a wireless equipment subsidy from the Wireless segment in accordance with the AWN agreements. Following the close of the Wireless Acquisition this subsidy was discontinued except the Wireless segment started recording a portion of the wireless equipment costs to encourage the Wireline segment to transition customers from our CDMA network to our GSM network which partially offset the increase, and
A $2.5 million or 55% and $4.9 million or 38% increase in the costs to provide services for Rural Health and SchoolAccess customers for the three and nine months ended September 30, 2015 when compared to the same periods in 2014, respectively.

Wireline Segment Adjusted EBITDA
The decrease in Adjusted EBITDA for the three and nine months ended September 30, 2015 when compared to the same periods in 2014 is primarily due to increased Cost of Goods Sold as described above in "Wireline Segment Cost of Goods Sold" and in selling, general and administrative expense for the three and nine months ended September 30, 2015. The decrease is partially offset by an increase in revenues as described above in "Wireline Segment Revenues."

Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 13% to $82.6 million and 16% to $249.4 million for the three and nine months ended September 30, 2015, respectively. Items contributing to the increase include:

A $4.0 million and $16.9 million increase in costs related to the acquisition of ACS' wireless subscribers and its non-controlling interest in AWN for the three and nine months ended September 30, 2015 when compared to the same periods in 2014, respectively,

30



A $4.1 million and $14.0 million increase in labor and health insurance costs for the three and nine months ended September 30, 2015 when compared to the same periods in 2014, respectively,
A $1.7 million and $3.8 million increase in contract labor costs for the three and nine months ended September 30, 2015 when compared to the same periods in 2014, respectively,
A $2.3 million increase in inventory adjustments for the nine months ended September 30, 2015 when compared to the same period in 2014, primarily due to the write-off of obsolete wireless handsets,
A $0.5 million and $2.0 million increase in share-based compensation expense for the three and nine months ended September 30, 2015, when compared to the same periods in 2014, respectively, and
A $0.7 million and $2.2 million increase in bad debt expense for the three and nine months ended September 30, 2015 when compared to the same periods in 2014.

As a percentage of total revenues, selling, general and administrative expenses increased from 30% and 31% for the three and nine months ended September 30, 2014, respectively, to 32% and 34% for the three and nine months ended September 30, 2015, respectively. The increase in selling, general, and administrative expenses as a percentage of total revenues is primarily due to the costs related to the acquisition of ACS' wireless subscribers and its non-controlling interest in AWN.

Depreciation and Amortization Expense
Depreciation and amortization expense increased $3.5 million to $45.2 million and $7.7 million to $135.6 million in the three and nine months ended September 30, 2015 compared to the same periods in 2014, respectively.  The increases are primarily due to new assets placed in service in the last three months of 2014 and in the first nine months of 2015, partially offset by assets which became fully depreciated during the last three months of 2014 and in the first nine months of 2015.

Software Impairment Charge
Software impairment charge increased $2.6 million and $29.8 million in the three and nine months ended September 30, 2015 when compared to the same periods in 2014 primarily due to an impairment charge as discussed below.

During the years ended December 31, 2013 and 2014, we internally developed computer software to replace our wireless, Internet, video, local service, and long distance customer billing systems. During the first quarter of 2015, we completed a detailed assessment of our progress to date and determined it was no longer probable that the computer software being developed would be completed and placed in service. Our assessment concluded that the cost of continuing the development would be much higher than originally estimated, and the timing and scope risks were substantial. We identified development work, hardware, and software recorded as Construction in Progress through the first quarter of 2015, that may be applicable to our replacement customer billing solution, future internally developed software, and other system needs and therefore should remain capital assets. We considered the remaining capital expenditures for this billing system to have a fair value of $0 and recorded an impairment charge of $20.7 million during the nine months ended September 30, 2015, by recording an expense which is included in Software Impairment Charge in our Consolidated Statements of Operations. We are in the process of identifying an established packaged customer billing solution.

During the first quarter of 2015, we reassessed our plans for our internally developed machine-to-machine billing system and decided to no longer market this system to third parties. Accordingly we recognized an impairment of $0.5 million and $7.1 million during the three and nine months ended September 30, 2015, respectively, by recording an expense which is included in Software Impairment Charge in our Consolidated Statements of Operations.

During the third quarter of 2015, we evaluated user management software we purchased in 2014 and determined that we would not be able to use the software. Accordingly we recognized an impairment of $1.0 million during the three and nine months ended September 30, 2015 by recording an expense which is included in Software Impairment Charge in our Consolidated Statement of Operations.

Other Expense, Net
Other expense, net of other income, increased $0.4 million to $18.1 million and $41.6 million to $97.6 million in the three and nine months ended September 30, 2015 when compared to the same periods in 2014, respectively. Items contributing to the change include:
A $27.7 million loss on extinguishment of debt for the nine months ended September 30, 2015, due to the retirement of our 2019 Notes (please see Part I - Item 2 - "Liquidity and Capital Resources" for additional information),

31



A $12.6 million impairment charge for the nine months ended September 30, 2015 recorded to reflect an other than temporary decline in fair value for one of our equity investments,
A $4.7 million gain for the nine months ended September 30, 2015 recorded upon the sale of one of our cost method investments,
A $1.4 million and $5.5 million increase in interest expense attributable to increased borrowing on our Amended Senior Credit Facility for the three and nine months ended September 30, 2015 when compared to the same periods in 2014, respectively, and
A $2.6 million net loss for the nine months ended September 30, 2015, from adjusting to fair value the assets included in the consideration transfered in the Wireless Acquisition and adjusting to fair value amendments to certain agreements related to the right to use ACS network assets.

Income Tax Expense
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.

Income tax expense totaled $7.7 million and $0.7 million in the three and nine months ended September 30, 2015, respectively. Our effective income tax rate was 28% and (6)% in the three and nine months ended September 30, 2015, respectively. Income tax expense totaled $5.1 million and $8.6 million and our effective income tax rate was 16% and 14% in the three and nine months ended September 30, 2014, respectively.

At September 30, 2015, we have income tax net operating loss carryforwards of $274.9 million that will begin expiring in 2020 if not utilized, and alternative minimum tax credit carryforwards of $1.7 million available to offset regular income taxes payable in future years.

We have recorded deferred tax assets of $113.0 million associated with income tax net operating losses that were generated from 2000 to 2014 and that expire from 2020 to 2034, respectively, and with charitable contributions that were converted to net operating losses in 2004 through 2007, 2013, and 2014 and that expire in 2024 through 2027, 2033, and 2034, respectively.

Tax benefits associated with recorded deferred tax assets are considered to be more likely than not realizable through future reversals of existing taxable temporary differences and future taxable income exclusive of reversing temporary differences and carryforwards.  The amount of deferred tax assets considered realizable, however, could be reduced if estimates of future taxable income during the carryforward period are reduced which would result in additional income tax expense.  We estimate that our effective annual income tax expense rate for financial statement purposes will be (3)% to (8)% in the year ending December 31, 2015.
  
Liquidity and Capital Resources
Our principal sources of current liquidity are cash and cash equivalents.  We believe, but can provide no assurances, that we will be able to meet our current and long-term liquidity, capital requirements and fixed charges through our cash flows from operating activities, existing cash, cash equivalents, and credit facilities, and other external financing and equity sources.  Should operating cash flows be insufficient to support additional borrowings and principal payments scheduled under our existing credit facilities, capital expenditures will likely be reduced, which would likely reduce future revenues.

As discussed in the General Overview section of this Item 2, on February 2, 2015, we completed the Wireless Acquisition to purchase ACS' wireless subscriber base and its one-third ownership interest in AWN for $293.2 million excluding working capital adjustments and the termination or amendment of certain agreements related to the use of ACS network assets that were included as part of the original transaction that closed in July 2013. Following the close of the transaction, AWN is our wholly owned subsidiary and we are entitled to 100% of the future cash flows from AWN.

To fund the purchase from ACS, on February 2, 2015, our wholly owned subsidiary, GCI Holdings, Inc., entered into a Fourth Amended and Restated Credit and Guarantee Agreement with Credit Agricole Corporate and Investment Bank, as administrative agent, that included a $275.0 million Term B loan ("Amended Senior Credit Facility"). The Amended Senior Credit Facility was subsequently amended on August 3, 2015 ("First Amendment"). The interest rate under the Term B loan is London Interbank Offered Rate (“LIBOR”) plus 3.25%, with a 0.75% LIBOR floor. The Term B loan will mature on February 2, 2022 or December 3, 2020, if our Senior Notes due 2021 are not refinanced prior to such date.

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On April 1 2015, we closed on the issuance of $450.0 million of new 6.875% Senior Notes due 2025 at an issue price of 99.105%. The net proceeds of the offering were used to retire our existing 2019 Notes (see Note 6(b) of our December 31, 2014 annual report on Form 10-K). We paid closing costs totaling $7.9 million in connection with the offering, which were recorded as deferred loan costs and will be amortized over the term of the 2025 Notes. We recorded a $27.7 million loss on extinguishment of debt for the nine months ended September 30, 2015.

While our short-term and long-term financing abilities are believed to be adequate as a supplement to internally generated cash flows to fund capital expenditures and acquisitions as opportunities arise, turmoil in the global financial markets may negatively impact our ability to further access the capital markets in a timely manner and on attractive terms, which may have a negative impact on our ability to grow our business.

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

Our net cash flows provided by and (used for) operating, investing and financing activities, as reflected in the Consolidated Statements of Cash Flows, are summarized as follows (amounts in thousands):
 
Nine Months Ended September 30,
 
2015
 
2014
Operating activities
$
227,086

 
220,217

Investing activities
(138,188
)
 
(148,629
)
Financing activities
(44,617
)
 
(81,095
)
Net increase (decrease) in cash and cash equivalents
$
44,281

 
(9,507
)

Investing Activities
Net cash used in investing activities during the nine months ended September 30, 2015, consists primarily of cash paid for capital expenditures. Net cash used in investing activities during the nine months ended September 30, 2014, consists primarily of cash paid for capital expenditures and an investment of $15.0 million for a 39% interest in a next generation carrier-class communications services firm. Our most significant recurring investing activity has been capital expenditures and we expect that this will continue in the future.  A significant portion of our capital expenditures is based on the level of customer growth and the technology being deployed.

Our cash expenditures for property and equipment, including construction in progress, totaled $134.3 million and $124.9 million during the nine months ended September 30, 2015 and 2014, respectively.  Depending on available opportunities and the amount of cash flow we generate during 2015, we expect our 2015 core capital expenditures to total approximately $170.0 million. This estimate is based on purchases in 2015 regardless of the timing of cash payments.

Financing Activities
Net cash used for financing activities for the nine months ended September 30, 2015, consists primarily of borrowings on our Amended Senior Credit Facility and a contribution from GCI to fund the Wireless Acquisition partially offset by our payment to complete the Wireless Acquisition, costs paid to retire our 2019 Notes, costs paid for the 2025 Notes, and repurchases of GCI stock. Net cash used for financing activities for the nine months ended September 30, 2014, consists primarily of repayments of our Senior Credit Facility and distributions paid to ACS from AWN partially offset by proceeds from borrowing on our Senior Credit Facility.

Proceeds from borrowings fluctuate from year to year based on our liquidity needs. We may use excess cash to make optional repayments on our debt or repurchase our common stock depending on various factors, such as market conditions.


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Available Borrowings Under Amended Senior Credit Facility
Our Amended Senior Credit Facility includes a $240.0 million term loan, a $275.0 million Term B loan, and a $150.0 million revolving credit facility with a $25.0 million sublimit for letters of credit.  We had $240.0 million and $273.6 million outstanding under the term loan and Term B loan, respectively, at September 30, 2015.  Under the revolving portion of the Amended Senior Credit Facility we have $22.5 million of letters of credit outstanding, which leaves $127.5 million available for borrowing as of September 30, 2015.  A total of $513.6 million is outstanding as of September 30, 2015.

Debt Covenants
We are subject to covenants and restrictions applicable to our $325.0 million in aggregate principal amount of 6.75% Senior Notes due 2021, our $450.0 million in aggregate principal amount of 6.875% Senior Notes due 2025, and our Amended Senior Credit Facility.  We are in compliance with the covenants, and we believe that neither the covenants nor the restrictions in our indentures or loan documents will limit our ability to operate our business.

Share Repurchases
GCI’s Board of Directors has authorized a common stock buyback program for the repurchase of GCI’s Class A and Class B common stock in order to reduce the outstanding shares of Class A and Class B common stock.  GCI is authorized to increase its 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.

During the nine months ended September 30, 2015 and 2014, we repurchased 2.8 million and 0.1 million shares, respectively, of GCI's Class A common stock, on GCI's behalf, under the stock buyback program at a cost of $43.2 million and $1.3 million, respectively. Under this program, GCI is currently authorized to make up to $94.3 million of repurchases as of September 30, 2015.  

We expect to continue the repurchases, on GCI's behalf, for an indefinite period dependent on leverage, liquidity, company performance, and market conditions and subject to continued oversight by GCI’s Board of Directors. The open market repurchases have and will continue to comply with the restrictions of SEC Rule 10b-18.

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

Those policies considered to be critical accounting policies for 2015 are revenue recognition related to revenues from the Remote high cost, rural health, and schools and libraries USF programs, the allowance for doubtful receivables, impairment and useful lives of intangible assets, and the valuation allowance for net operating loss deferred tax assets.  A complete discussion of our critical accounting policies can be found in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our December 31, 2014 annual report on Form 10-K.

Other significant accounting policies, not involving the same level of measurement uncertainties as those discussed above, are nevertheless important to an understanding of the financial statements. A complete discussion of our significant accounting policies can be found in Note 1 in the accompanying “Condensed Notes to Interim Consolidated Financial Statements” and in Part IV of our annual report on Form 10-K for the fiscal year ended December 31, 2014.


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Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to various types of market risk in the normal course of business, including the impact of interest rate changes. Market risk is the potential loss arising from adverse changes in market rates and prices. We do not hold or issue financial instruments for trading purposes.

Interest Rate Risk
Our Amended Senior Credit Facility carries interest rate risk.  Our Amended Senior Credit Facility consists of a term loan, Term B loan, and revolving credit facility. Amounts borrowed under the term loan bear interest at LIBOR plus 2.75% or less depending upon our Total Leverage Ratio (as defined in the Amended Senior Credit Facility agreement).  Amounts borrowed under the Term B loan bear interest at LIBOR plus 3.25%. Should the LIBOR rate change, our interest expense will increase or decrease accordingly.  As of September 30, 2015, we have borrowed $523.0 million subject to interest rate risk.  On this amount, each 1% increase in the LIBOR interest rate would result in $5.2 million of additional gross interest cost on an annualized basis.  All of our other material borrowings have a fixed interest rate.

Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 (“Exchange Act”) is recorded, processed, summarized, accumulated and communicated to our management, including our principal executive and financial officers, to allow timely decisions regarding required financial disclosure, and reported as specified in the SEC’s rules and forms.  As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation of the effectiveness of the design and operation of our “disclosure controls and procedures” (as defined in Exchange Act Rule 13a - 15(e)) under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer.  Based on that evaluation, our management, including our Chief Executive Officer and our Chief Financial Officer, concluded that our disclosure controls and procedures were ineffective as of September 30, 2015.

Our management concluded that as of September 30, 2015, we did not maintain effective internal control over financial reporting due to a material weakness associated with management’s review of significant and unusual transactions effecting the cash flow statement. See note 1(o) in the accompanying “Condensed Notes to Interim Consolidated Financial Statements” included in Part I of the quarterly report on Form 10-Q for further discussion of this immaterial error correction.

The certifications attached as Exhibits 31 and 32 to this report should be read in conjunction with the disclosures set forth herein.

Management's Plan for Remediation of Material Weakness
We identified the misclassification error when we performed a classification review specific to the cash flow statement during the preparation of our third quarter of 2015 Form 10-Q. Prior to the third quarter of 2015 we had a review process over significant and unusual transactions but this process did not specifically address the cash flow statement. During the third quarter of 2015 we strengthened our internal controls over the preparation of the cash flow statement by including a review of cash flow statement classifications in our accounting memos on significant and unusual transactions. During the fourth quarter of 2015 we will continue to include a review of cash flow statement classifications in our accounting memos on significant and unusual transactions.

Changes in Internal Control Over Financial Reporting
In our December 31, 2014 annual report on Form 10-K we reported that we did not maintain effective internal control over financial reporting due to a material weakness associated with inadequately designed internal controls in our financial reporting process related to the calculation of our income tax expense during all quarters in 2014. During the first quarter of 2015, we remediated our material weakness by strengthening the design and operation of our controls over the initial calculation and the review and approval of the calculation of our income tax expense. We reinforced to our staff that a heightened sense of awareness is needed during the initial preparation, as well as to any subsequent changes, and during analysis of the result.

Except as described above there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) identified in connection with the evaluation of our controls performed during the quarter ended September 30, 2015, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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On February 2, 2015, we purchased ACS’s wireless subscribers. As a result of this transaction, we are currently in the process of integrating new income streams. We are evaluating changes to processes, information technology systems and other components of internal controls over financial reporting as part of our ongoing integration activities, and as a result, controls will be changed as needed.

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

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

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

PART II. OTHER INFORMATION

Item 6. Exhibits

Listed below are the exhibits that are filed as a part of this Report (according to the number assigned to them in Item 601 of Regulation S-K):
Exhibit No.
Description
10.1
Twenty-Third Amendment to the Full-Time Transponder Capacity Agreement (Pre-Launch) between Intelsat Corporation and GCI Communication, Corp. dated July 27, 2015 # *
10.2
Twenty-Fourth Amendment to the Full-Time Transponder Capacity Agreement (Pre-Launch) between Intelsat Corporation and GCI Communication, Corp. dated September 2, 2015 # *
31.1
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by our President and Director *
31.2
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by our Chief Financial Officer, Secretary and Treasurer *
32.1
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by our President and Director *
32.2
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by our Chief Financial Officer, Secretary, and Treasurer *
101
The following materials from GCI, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations; (iii) Consolidated Statements of Stockholder's Equity; (iv) Consolidated Statements of Cash Flows; and (v) Condensed Notes to Interim Consolidated Financial Statements *
 
 
 
 
#
CONFIDENTIAL PORTION has been omitted pursuant to a request for confidential treatment by us to, and the material has been separately filed with, the SEC. Each omitted Confidential Portion is marked by three asterisks.
*
Filed herewith.
 
 

36



SIGNATURES

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

GCI, INC.


Signature
 
Title
 
Date
 
 
 
 
 
 
 
 
 
 
/s/ Gregory F. Chapados
 
President and Director
 
November 5, 2015
Gregory F. Chapados
 
(Principal Executive Officer)
 
 
 
 
 
 
 
/s/ Peter J. Pounds
 
Chief Financial Officer, Secretary,
 
November 5, 2015