GNCMA 2014 10-K

General Communication Inc (GNCMA) SEC Quarterly Report (10-Q) for Q3 2015

GNCMA 2015 10-K
GNCMA 2014 10-K GNCMA 2015 10-K


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. 0-15279

GENERAL COMMUNICATION, INC.

(Exact name of registrant as specified in its charter)

State of Alaska

92-0072737

(State or other jurisdiction of

(I.R.S Employer

incorporation or organization)

Identification No.)

2550 Denali Street

Suite 1000

Anchorage, Alaska

99503

(Address of principal

executive offices)

(Zip Code)

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

Not Applicable

Former name, former address and former fiscal year, if changed since last report

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

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 x

Non-accelerated filer  ¨  (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


The number of shares outstanding of the registrant's classes of common stock as of November 2, 2015 was:


35,785,000  shares of Class A common stock; and

3,154,000  shares of Class B common stock.


1



GENERAL COMMUNICATION, INC.

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2015


TABLE OF CONTENTS


Page No.

Cautionary Statement Regarding Forward-Looking Statements

3

Part I.  FINANCIAL INFORMATION

Item 1.

Financial Statements

Consolidated Balance Sheets (unaudited) as of September 30, 2015 and December 31, 2014

4

Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2015 and 2014

6

Consolidated Statements of Stockholders' Equity (unaudited) for the nine months ended September 30, 2015 and 2014

7

Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2015 and 2014

8

Condensed Notes to Interim Consolidated Financial Statements (unaudited)

9

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

28

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

38

Item 4.

Controls and Procedures

39

Part II.  OTHER INFORMATION

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

40

Item 6.

Exhibits

40

Other items are omitted, as they are not applicable.

SIGNATURES

42


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

GENERAL COMMUNICATION, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Amounts in thousands)

September 30,

December 31,

ASSETS

2015

2014

Current assets:

Cash and cash equivalents

$

59,689


15,402


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

189,039


212,441


Less allowance for doubtful receivables

4,695


4,542


Net receivables

184,344


207,899


Deferred income taxes

49,075


56,120


Prepaid expenses

13,068


12,179


Inventories

10,075


17,032


Other current assets

3,136


153


Total current assets

319,387


308,785


Property and equipment

2,435,768


2,341,511


Less accumulated depreciation

1,350,470


1,229,029


Net property and equipment

1,085,298


1,112,482


Goodwill

239,098


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

626,893


637,231


Total assets

$

2,031,578


2,058,498


See accompanying condensed notes to interim consolidated financial statements.


(Continued)


4



GENERAL COMMUNICATION, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Continued)

(Amounts in thousands)

September 30,

December 31,

LIABILITIES AND STOCKHOLDERS' EQUITY

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)

50,417


76,918


Deferred revenue

33,917


29,314


Accrued payroll and payroll related obligations

29,138


32,803


Accrued interest

26,689


6,654


Accrued liabilities

17,135


14,457


Subscriber deposits

1,100


1,212


Total current liabilities

170,298


170,080


Long-term debt, net

1,345,098


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

176,007


187,872


Long-term deferred revenue

94,701


85,734


Other liabilities

73,018


43,178


Total liabilities

1,921,007


1,591,276


Commitments and contingencies





Stockholders' equity:



Common stock (no par):



Class A. Authorized 100,000 shares; issued 35,850 and 37,998 shares at September 30, 2015 and December 31, 2014, respectively; outstanding 35,824 and 37,972 shares at September 30, 2015 and December 31, 2014, respectively

-


13,617


Class B. Authorized 10,000 shares; issued and outstanding 3,154 and 3,159 at September 30, 2015 and December 31, 2014, respectively; convertible on a share-per-share basis into Class A common stock

2,664


2,668


Less cost of 26 Class A common shares held in treasury at September 30, 2015 and December 31, 2014

(249

)

(249

)

Paid-in capital

(4,931

)

26,773


Retained earnings

82,020


124,547


Total General Communication, Inc. stockholders' equity

79,504


167,356


Non-controlling interests

31,067


299,866


Total stockholders' equity

110,571


467,222


Total liabilities and stockholders' equity

$

2,031,578


2,058,498


See accompanying condensed notes to interim consolidated financial statements.


5



GENERAL COMMUNICATION, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

Three Months Ended

Nine Months Ended

September 30,

September 30,

(Amounts in thousands, except per share amounts)

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

82,655


71,717


249,090


211,144


Related party

-


1,066


540


3,348


Total selling, general and administrative expenses

82,655


72,783


249,630


214,492


Depreciation and amortization expense

45,157


41,705


135,563


127,843


Software impairment charge

2,571


-


29,839


-


Operating income

45,473


49,336


85,417


118,015


Other income (expense):



Loss on extinguishment of debt

-


-


(27,700

)

-


Interest expense (including amortization of deferred loan fees)

(21,088

)

(17,848

)

(64,473

)

(54,229

)

Impairment of equity method investment

-


-


(12,593

)

-


Derivative instrument unrealized income (loss)

30


-


(5,040

)

-


Other

1,202


(563

)

2,445


(1,709

)

Other expense, net

(19,856

)

(18,411

)

(107,361

)

(55,938

)

Income (loss) before income taxes

25,617


30,925


(21,944

)

62,077


Income tax (expense) benefit

(8,122

)

(5,078

)

4,957


(8,629

)

Net income (loss)

17,495


25,847


(16,987

)

53,448


Net income (loss) attributable to non-controlling interests

(136

)

15,932


278


36,466


  Net income (loss) attributable to General Communication, Inc.

$

17,631


9,915


(17,265

)

16,982


Basic net income (loss) attributable to General Communication, Inc. common stockholders per Class A common share

$

0.45


0.24


(0.45

)

0.41


Basic net income (loss) attributable to General Communication, Inc. common stockholders per Class B common share

$

0.45


0.24


(0.45

)

0.41


Diluted net income (loss) attributable to General Communication, Inc. common stockholders per Class A common share

$

0.44


0.24


(0.45

)

0.41


Diluted net income (loss) attributable to General Communication, Inc. common stockholders per Class B common share

$

0.44


0.24


(0.45

)

0.41


See accompanying condensed notes to interim consolidated financial statements.


6



GENERAL COMMUNICATION, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

(Unaudited)

Class A

Common

Stock

Class B

Common

Stock

Class A

Shares

Held in

Treasury

Paid-in

Capital

Retained

Earnings

Non-

controlling

Interests

Total

Stockholders'

Equity

(Amounts in thousands)

Balances at January 1, 2014

$

11,467


2,673


(866

)

26,880


116,990


300,210


457,354


Net income

-


-


-


-


16,982


36,466


53,448


Common stock repurchases and retirements

(1,972

)

-


-


-


-


-


(1,972

)

Shares issued under stock option plan

344


-


-


-


-


-


344


Issuance of restricted stock awards

2,144


-


-


(2,144

)

-


-


-


Share-based compensation expense

-


-


-


6,131


-


-


6,131


Issuance of treasury shares related to deferred compensation payment

-


-


617


98


-


-


715


Distribution to non-controlling interest

-


-


-


-


-


(37,500

)

(37,500

)

Adjustment to investment by non-controlling interest

-


-


-


-


-


(2,131

)

(2,131

)

Other

3


(3

)

-


-


-


100


100


Balances at September 30, 2014

$

11,986


2,670


(249

)

30,965


133,972


297,145


476,489


Balances at January 1, 2015

$

13,617


2,668


(249

)

26,773


124,547


299,866


467,222


Net income (loss)

-


-


-


-


(17,265

)

278


(16,987

)

Common stock repurchases and retirements

(19,062

)

-


-


-


(25,262

)

-


(44,324

)

Shares issued under stock option plan

295


-


-


-


-


-


295


Issuance of restricted stock awards

5,146


-


-


(5,146

)

-


-


-


Share-based compensation expense

-


-


-


7,982


-


-


7,982


Distribution to non-controlling interest

-


-


-


-


-


(765

)

(765

)

Investment by non-controlling interest

-


-


-


-


-


3,209


3,209


Non-controlling interest acquisition

-


-


-


(34,310

)

-


(271,521

)

(305,831

)

Other

4


(4

)

-


(230

)

-


-


(230

)

Balances at September 30, 2015

$

-


2,664


(249

)

(4,931

)

82,020


31,067


110,571


See accompanying condensed notes to interim consolidated financial statements.


7



GENERAL COMMUNICATION, 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)

$

(16,987

)

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 (benefit)

(5,006

)

8,629


Impairment of equity method investment

12,593


-


Share-based compensation expense

8,074


6,124


Other noncash income and expense items

14,146


7,206


Change in operating assets and liabilities

20,588


16,967


Net cash provided by operating activities

226,510


220,217


Cash flows from investing activities:



Purchases of property and equipment

(134,562

)

(124,871

)

Grant proceeds

14,007


1,136


Purchase of businesses, net of cash received

(12,736

)

(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

(140,642

)

(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

(282,505

)

-


Issuance of Searchlight note payable and derivative stock appreciation rights

75,000


-


Purchase of treasury stock to be retired

(44,324

)

(1,972

)

Payment of bond call premium

(20,244

)

-


Payment of debt issuance costs

(13,979

)

-


Distribution to non-controlling interest

(4,932

)

(37,500

)

Proceeds from stock option exercises

295


344


Borrowing on other long-term debt

203


421


Net cash used for financing activities

(41,581

)

(81,095

)

Net increase (decrease) in cash and cash equivalents

44,287


(9,507

)

Cash and cash equivalents at beginning of period

15,402


44,971


Cash and cash equivalents at end of period

$

59,689


35,464


See accompanying condensed notes to interim consolidated financial statements.


8



GENERAL COMMUNICATION, INC. AND SUBSIDIARIES

Condensed Notes to Interim Consolidated Financial Statements

(Unaudited)




The accompanying unaudited interim consolidated financial statements include the accounts of General Communication, Inc. ("GCI") and its direct and indirect subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. They should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 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 and its direct and indirect subsidiaries are referred to as "we," "us" and "our."


(a)

Business

GCI, an Alaska corporation, was incorporated in 1979 . We 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 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.


(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


9



GENERAL COMMUNICATION, INC. AND SUBSIDIARIES

Condensed Notes to Interim Consolidated Financial Statements

(Unaudited)



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 Stockholders' 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.


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 three immaterial business acquisitions for total cash consideration of $12.7 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, liabilities assumed and any non-controlling interests 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,


10



GENERAL COMMUNICATION, INC. AND SUBSIDIARIES

Condensed Notes to Interim Consolidated Financial Statements

(Unaudited)



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 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.



11



GENERAL COMMUNICATION, INC. AND SUBSIDIARIES

Condensed Notes to Interim Consolidated Financial Statements

(Unaudited)



(f)

Regulatory Accounting

We account for our regulated operations in accordance with the accounting principles for regulated enterprises.  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 compute net income (loss) attributable to GCI per share of Class A and Class B common stock using the "two class" method.  Therefore, basic net income (loss) per share is computed by dividing net income (loss) applicable to common stockholders by the weighted average number of common shares outstanding during the period.  Diluted net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common and dilutive common equivalent shares outstanding during the period.  The computation of the dilutive net income (loss) per share of Class A common stock assumes the conversion of Class B common stock to Class A common stock, while the dilutive net income (loss) per share of Class B common stock does not assume the conversion of those shares. Additionally, in applying the "two-class" method, undistributed earnings are allocated to both common shares and participating securities. Our restricted stock grants are entitled to dividends and meet the criteria of a participating security.


We allocate undistributed earnings in periods of net income based on the contractual participation rights of Class A common shares, Class B common shares, and participating securities as if the earnings for the period had been distributed. We do not allocate undistributed earnings to participating securities in periods in which we have a net loss. In accordance with our Articles of Incorporation, if and when dividends are declared on our common stock in accordance with Alaska corporate law, equivalent dividends shall be paid with respect to the shares of Class A and Class B common stock, including participating securities. Both classes of common stock have identical dividend rights and would therefore share equally in our net assets in the event of liquidation. As such, we have allocated undistributed earnings on a proportionate basis.


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

Three Months Ended September 30,

2015

2014

Class A

Class B

Class A

Class B

Basic net income per share:

Numerator:

Net income available to common stockholders

$

16,213


1,418


$

9,161


754


Less: Undistributed income allocable to participating securities

(920

)

-


(526

)

-


Undistributed income allocable to common stockholders

15,293


1,418


8,635


754


Denominator:





Weighted average common shares outstanding

34,031


3,155


36,220


3,162


Basic net income attributable to GCI common stockholders per common share

$

0.45


0.45


$

0.24


0.24



12



GENERAL COMMUNICATION, INC. AND SUBSIDIARIES

Condensed Notes to Interim Consolidated Financial Statements

(Unaudited)



Three Months Ended September 30,

2015

2014

Class A

Class B

Class A

Class B

Diluted net income per share:





Numerator:





Undistributed income allocable to common stockholders for basic computation

$

15,293


1,418


$

8,635


754


Reallocation of undistributed earnings as a result of conversion of Class B to Class A shares

1,418


-


754


-


Reallocation of undistributed earnings as a result of conversion of dilutive securities

22


(34

)

2


(3

)

Effect of derivative instruments that may be settled in cash or shares

(18

)

-


-


-


Effect of share based compensation that may be settled in cash or shares

4


-


(3

)

-


Net income adjusted for allocation of undistributed earnings and effect of contracts that may be settled in cash or shares

$

16,719


1,384


$

9,388


751


Denominator:





Number of shares used in basic computation

34,031


3,155


36,220


3,162


Conversion of Class B to Class A common shares outstanding

3,155


-


3,162


-


Unexercised stock options

122


-


120


-


Effect of derivative instruments that may be settled in cash or shares

781


-


-


-


Effect of share based compensation that may be settled in cash or shares

26


-


26


-


Number of shares used in per share computation

38,115


3,155


39,528


3,162


Diluted net income attributable to GCI common stockholders per common share

$

0.44


0.44


$

0.24


0.24



Nine Months Ended September 30, 2015

2015

2014

Class A

Class B

Class A

Class B

Basic net income (loss) per share:

Numerator:

Net income (loss) available to common stockholders

$

(15,838

)

(1,427

)

$

15,686


1,296


Less: Undistributed income allocable to participating securities

-


-


(868

)

-


Undistributed income (loss) allocable to common stockholders

(15,838

)

(1,427

)

14,818


1,296


Denominator:





Weighted average common shares outstanding

35,037


3,158


36,149


3,162


Basic net income (loss) attributable to GCI common stockholders per common share

$

(0.45

)

(0.45

)

$

0.41


0.41



13



GENERAL COMMUNICATION, INC. AND SUBSIDIARIES

Condensed Notes to Interim Consolidated Financial Statements

(Unaudited)



Nine Months Ended September 30, 2015

2015

2014

Class A

Class B

Class A

Class B

Diluted net income (loss) per share:





Numerator:





Undistributed income (loss) allocable to common stockholders for basic computation

$

(15,838

)

(1,427

)

$

14,818


1,296


Reallocation of undistributed earnings (loss) as a result of conversion of Class B to Class A shares

(1,427

)

-


1,296


-


Reallocation of undistributed earnings as a result of conversion of dilutive securities

-


-


3


(5

)

Effect of share based compensation that may be settled in cash or shares

-


-


(4

)

-


Net income (loss) adjusted for allocation of undistributed earnings and effect of contracts that may be settled in cash or shares

$

(17,265

)

(1,427

)

$

16,113


1,291


Denominator:





Number of shares used in basic computation

35,037


3,158


36,149


3,162


Conversion of Class B to Class A common shares outstanding

3,158


-


3,162


-


Unexercised stock options

-


-


120


-


Effect of share based compensation that may be settled in cash or shares

-


-


26


-


Number of shares used in per share computation

38,195


3,158


39,457


3,162


Diluted net income (loss) attributable to GCI common stockholders per common share

$

(0.45

)

(0.45

)

$

0.41


0.41



Weighted average shares associated with outstanding securities for the three and nine months ended September 30, 2015 and 2014 , which have been excluded from the computations of diluted EPS, because the effect of including these securities would have been anti-dilutive, consist of the following (shares, in thousands):

Three Months Ended 
 September 30,

Nine Months Ended September 30,

2015

2014

2015

2014

Derivative instruments that may be settled in cash or shares, the effect of which is anti-dilutive

-


-


595


-


Shares associated with anti-dilutive unexercised stock options

-


28


120


30


Share-based compensation that may be settled in cash or shares, the effect of which is anti-dilutive

-


-


26


-


Total excluded

-


28


741


30



14



GENERAL COMMUNICATION, INC. AND SUBSIDIARIES

Condensed Notes to Interim Consolidated Financial Statements

(Unaudited)



(h)

Common Stock

Following are the changes in issued common stock for the nine months ended September 30, 2015 and 2014 (shares, in thousands):

Class A

Class B

Balances at December 31, 2013

37,299


3,165


Class B shares converted to Class A

3


(3

)

Shares issued upon stock option exercises

40


-


Share awards issued

1,186


-


Shares retired

(148

)

-


Shares acquired to settle minimum statutory tax withholding requirements

(37

)

-


Balances at September 30, 2014

38,343


3,162


Balances at December 31, 2014

37,998


3,159


Class B shares converted to Class A

5


(5

)

Shares issued upon stock option exercises

38


-


Share awards issued

647


-


Shares retired

(2,761

)



Shares acquired to settle minimum statutory tax withholding requirements

(77

)

-


Balances at September 30, 2015

35,850


3,154



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


During the three months ended September 30, 2015 and 2014 , we repurchased 0.4 million and 0.1 million shares, respectively, of our Class A common stock under the stock buyback program at a cost of $7.3 million and $1.3 million , respectively. During the nine months ended September 30, 2015 and 2014 , we repurchased 2.8 million and 0.1 million shares, respectively, of our Class A common stock under the stock buyback program at a cost of $43.2 million and $1.3 million , respectively. The stock was constructively retired as of September 30, 2015 . Under this program we are currently authorized to make up to $94.3 million of repurchases as of September 30, 2015 .  


We expect to continue the repurchases for an indefinite period dependent on leverage, liquidity, company performance, and market conditions and subject to continued oversight by GCI's Board of Directors.


(i)

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


15



GENERAL COMMUNICATION, INC. AND SUBSIDIARIES

Condensed Notes to Interim Consolidated Financial Statements

(Unaudited)



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.


(j)

Derivative Financial Instruments

We account for our derivative instruments in accordance with ASC 815-10, Derivatives and Hedging. ASC 815-10 establishes accounting and reporting standards requiring that derivative instruments, including derivative instruments embedded in other contracts, be recorded on the balance sheet as either an asset or liability measured at its fair value. ASC 815-10 also requires that changes in the fair value of derivative instruments be recognized currently in results of operations unless specific hedge accounting criteria are met. We have not entered into any hedging activities to date. We recognize all derivative instruments as either assets or liabilities in our Consolidated Balance Sheets at their respective fair values. Our derivative instruments (as described in Note 5) includes stock appreciation rights, which have been recorded as a liability at fair value, and will be revalued at each reporting date, with changes in the fair value of the instrument included in our Consolidated Statements of Operations as Derivative Instrument Unrealized Income (Loss).


(k)

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 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.


(l)

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(k). 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(k) for more information on guarantees.



16



GENERAL COMMUNICATION, INC. AND SUBSIDIARIES

Condensed Notes to Interim Consolidated Financial Statements

(Unaudited)



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.


(m)

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, the derivative stock appreciation rights liability, guarantees, and the accrual of contingencies and litigation.  Actual results could differ from those estimates.


(n)

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



(o)

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 Stockholders' 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. 



17



GENERAL COMMUNICATION, INC. AND SUBSIDIARIES

Condensed Notes to Interim Consolidated Financial Statements

(Unaudited)



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

$

(328,682

)

280,505


(48,177

)

Net cash provided by financing activities

281,370


(280,505

)

865


Consolidated Statements of Cash Flows for the six months ended June 30, 2015

Net cash used for investing activities

$

(372,469

)

280,505


(91,964

)

Net cash provided (used) by financing activities

251,698


(280,505

)

(28,807

)


(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

$

16,916


5,185


Increase in prepaid expenses

(813

)

(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

(8,095

)

(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

2,505


(722

)

Increase in accrued interest

20,035


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

$

20,588


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

$

43,195


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




18



GENERAL COMMUNICATION, INC. AND SUBSIDIARIES

Condensed Notes to Interim Consolidated Financial Statements

(Unaudited)



(3)     Intangible Assets and Goodwill

Goodwill increased $9.5 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



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.


Searchlight Note

On February 2, 2015, we sold an unsecured promissory note to an affiliate of Searchlight Capital, L.P. ("Searchlight") in the principal amount of $75.0 million at an issue price of 100% that will mature on February 2, 2023 and bears interest at a rate of 7.5% per year ("Searchlight Note"). We may not prepay the Searchlight Note prior to February 2, 2019. On July 13, 2015, we amended the Searchlight transaction documents to permit Searchlight to pledge the Searchlight Note and related stock appreciation rights, subject to our right to redeem the Searchlight Note for 50% of its then current outstanding balance in the event a lender attempts to enforce its rights with respect to such pledged collateral.


In conjunction with the Searchlight Note, we entered into a stock appreciation rights agreement pursuant to which we issued to Searchlight three million stock appreciation rights which entitles Searchlight to receive, upon


19



GENERAL COMMUNICATION, INC. AND SUBSIDIARIES

Condensed Notes to Interim Consolidated Financial Statements

(Unaudited)



exercise, an amount payable at our election in either cash or shares of GCI's Class A common stock equal in value to the excess of the fair market value of a share of GCI Class A common stock on the date of exercise over the price of $13.00 . We allocated the $75.0 million in total proceeds received to the stock appreciation rights based on the fair value of the stock appreciation rights on the day of issuance with the remainder allocated to the Searchlight Note. The allocation resulted in a $21.7 million discount for the Searchlight Note that will be amortized over the term of the note using the effective interest method. Please see note 5 for additional information on the stock appreciation rights.


We have the option to pay the annual interest obligation on the Searchlight Note in cash or by capitalizing such interest and adding it to the outstanding principal amount of the note. If we elect to capitalize interest in a given year, we are also required to issue additional stock appreciation rights in the amount of four hundredths of a stock appreciation right for each dollar of interest being capitalized.


Senior Notes

On April 1, 2015 ("Closing Date"), GCI, Inc. our wholly owned subsidiary, 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

%


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.



20



GENERAL COMMUNICATION, INC. AND SUBSIDIARIES

Condensed Notes to Interim Consolidated Financial Statements

(Unaudited)



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 and Derivative Instruments


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


Liabilities:

Derivative stock appreciation rights

$

-


-


26,700


26,700


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


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


The fair value of our derivative stock appreciation rights was determined using a lattice-based valuation model (see the section "Derivative Financial Instruments" below for more information).


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

$

1,348,448


1,380,691


1,036,678


1,055,952




21



GENERAL COMMUNICATION, INC. AND SUBSIDIARIES

Condensed Notes to Interim Consolidated Financial Statements

(Unaudited)



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 both issued by GCI, Inc., our wholly owned subsidiary, are based upon quoted market prices for the same or similar issues (Level 2).

The fair value of our Searchlight Note Payable is based on the current rates offered to us for similar remaining maturities plus an additional premium to reflect its subordination to our 2021 and 2025 Notes (Level 3). 

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).


Derivative Financial Instruments

In connection with the $75.0 million unsecured promissory note issued to Searchlight on February 2, 2015, we entered into a stock appreciation rights agreement pursuant to which we issued to Searchlight three million stock appreciation rights. Each stock appreciation right entitles Searchlight to receive, upon exercise, an amount payable at our election in either cash or shares of GCI's Class A common stock equal in value to the excess of the fair market value of a share of GCI Class A common stock on the date of exercise over the price of $13.00 . The instruments are exercisable on the fourth anniversary of the grant date and will expire eight years from the date of grant. We have determined that the stock appreciation rights are required to be separately accounted for as derivative instruments and subject to fair value liability accounting under ASC 815-10.


We use a lattice based valuation model to value the stock appreciation rights liability at each reporting date. The model incorporates transaction details such as our stock price, instrument term and settlement provisions, as well as highly complex and subjective assumptions about volatility, risk-free interest rates, issuer behavior and holder behavior. The lattice model uses highly subjective assumptions and the use of other reasonable assumptions could provide different results.


We revalue our derivative liability at each reporting period and recognize gains or losses in our Consolidated Statements of Operations attributable to the change in the fair value of the instruments. The stock appreciation rights liability is included within Other Liabilities in our Consolidated Balance Sheets and are classified as Level 3 within the fair value hierarchy.


The following table summarizes the changes in fair value of all financial instruments measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the nine months ended September 30, 2015 :

Fair Value Measurement Using Level 3 Inputs

Derivative Stock Appreciation Rights

Balance at January 1, 2015

$

-


Issuance

21,660


Fair value adjustment at end of period, included in Other Income (Expense)

5,040


Balance at September 30, 2015

$

26,700



(6)

Stockholders' Equity


Share-based Compensation

Our Amended and Restated 1986 Stock Option Plan ("Stock Option Plan"), provides for the grant of options and restricted stock awards (collectively "award") for a maximum of 15.7 million shares of GCI Class A common stock, subject to adjustment upon the occurrence of stock dividends, stock splits, mergers, consolidations or certain other changes in corporate structure or capitalization. If an award expires or terminates, the shares subject to the award will be available for further grants of awards under the Stock Option Plan. The Compensation Committee of GCI's Board of Directors administers the Stock Option Plan. Substantially all restricted stock awards granted vest over periods of up to three years.  Substantially all options vest in equal


22



GENERAL COMMUNICATION, INC. AND SUBSIDIARIES

Condensed Notes to Interim Consolidated Financial Statements

(Unaudited)



installments over a period of five years and expire ten years from the date of grant. The requisite service period of our awards is generally the same as the vesting period.  Options granted pursuant to the Stock Option Plan are only exercisable if at the time of exercise the option holder is our employee, non-employee director, or a consultant or advisor working on our behalf.  New shares are issued when stock option agreements are exercised or restricted stock awards are granted.  We have 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:

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.



23



GENERAL COMMUNICATION, INC. AND SUBSIDIARIES

Condensed Notes to Interim Consolidated Financial Statements

(Unaudited)



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, derivative instrument unrealized income (loss), 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.


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


39,122


96,526


$

140,518


119,312


259,830


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

$

96,526


93,194


$

259,830


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

45,473


49,336


85,417


118,015


Less other expense, net

(19,856

)

(18,411

)

(107,361

)

(55,938

)

Consolidated income (loss) before

  income taxes

$

25,617


30,925


$

(21,944

)

62,077




24



GENERAL COMMUNICATION, INC. AND SUBSIDIARIES

Condensed Notes to Interim Consolidated Financial Statements

(Unaudited)



(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.


(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


25



GENERAL COMMUNICATION, INC. AND SUBSIDIARIES

Condensed Notes to Interim Consolidated Financial Statements

(Unaudited)



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; 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


26



GENERAL COMMUNICATION, INC. AND SUBSIDIARIES

Condensed Notes to Interim Consolidated Financial Statements

(Unaudited)



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 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.



27



Part I


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations


In the following discussion, General Communication, Inc. ("GCI") and its direct and indirect subsidiaries are referred to as "we," "us" and "our."

Management's Discussion and Analysis of Financial Condition and Results of Operations discusses our 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, the derivative stock appreciation rights liability, 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."


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.


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.


28



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%

14%

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%

(28)%

Other expense, net

8%

8%

8%

15%

8%

92%

Income (loss) before income taxes

10%

13%

(17)%

(3)%

9%

(135)%

Net income (loss)

7%

11%

(32)%

(2)%

8%

(132)%

Net income attributable to the non-controlling interests

-%

7%

(101)%

-%

5%

(99)%

Net income (loss) attributable to GCI

7%

4%

78%

(2)%

2%

(202)%

1 Percentage 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, derivative instrument unrealized income (loss), 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 ("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.



29



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,

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.


30




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.


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):


31



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

$

39,122


45,915


(15

)%

119,312


126,987


(6

)%


Selected key performance indicators for our Wireline segment follow:

September 30,


Percentage

2015


2014


Change

Consumer



Data:



Cable modem subscribers 1 

124,300



117,000



6

 %

Video:


Basic subscribers 2 

113,600


115,900


(2

)%

Digital programming tier subscribers 3 

59,500


64,200


(7

)%

HD/DVR converter boxes 4 

110,700


105,600


5

 %

Homes passed

251,200


248,000


1

 %

Video ARPU - quarter-to-date 5

$

80.85


$

80.22


1

 %

Video ARPU - year-to-date 6

$

83.24


$

77.91


7

 %

Voice:


Total local access lines in service 7

51,000


55,900


(9

)%

Business Services


Data:


Cable modem subscribers 1 

14,200


14,200


-

 %

Voice:


Total local access lines in service 7

47,100


47,400


(1

)%

Combined Consumer and Business Services


Wireless


Consumer Lifeline wireless lines in service 8

28,100


25,600


10

 %

Consumer prepaid wireless lines in service 9

27,100


11,700


132

 %

Consumer postpaid wireless lines in service 10

146,700


91,000


61

 %

Business Services postpaid wireless lines in service 10

30,000


18,600


61

 %

Total wireless lines in service

231,900


146,900


58

 %

Wireless ARPU - quarter-to-date 11

$

44.24


$

50.87


(13

)%

Wireless ARPU - year-to-date 12

$

46.60


$

49.93


(7

)%

Cable Modem ARPU - quarter-to-date 13

$

84.87


$

80.20


6

 %

Cable Modem ARPU - year-to-date 14

$

84.27


$

77.48


9

 %

1  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.

2  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.

3  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.

4  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.


32



5  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.

7  A local access line in service is defined as a revenue generating circuit or channel connecting a customer to the public switched telephone network.

8  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.


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.



33



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 14% to $82.7 million and 16% to $249.6 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,

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.


34




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 $1.4 million to $19.9 million and $51.4 million to $107.4 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),

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 $5.0 million unrealized loss for the nine months ended September 30, 2015 recorded for a derivative instrument where we issued 3.0 million stock appreciation rights to an affiliate of Searchlight Capital, L.P. ("Searchlight"),

A $3.2 million and $10.2 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) Benefit

Income tax (expense) benefit totaled $(8.1) million and $5.0 million in the three and nine months ended September 30, 2015, respectively. Our effective income tax rate was 32% and 23% 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. Our effective income tax rate was lower in 2014 due to the inclusion of income attributable to the non-controlling interest in AWN in income before income taxes and the exclusion of income taxes on income attributable to the non-controlling interest in AWN. We completed the Wireless Acquisition on February 2, 2015, after which ACS no longer has a non-controlling interest in AWN.


At September 30, 2015, we have income tax net operating loss carryforwards of $284.9 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.



35



We have recorded deferred tax assets of $117.1 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 20% to 25% 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. We also sold an unsecured promissory note to Searchlight in the principal amount of $75.0 million that will mature on February 2, 2023 and will bear interest at a rate of 7.5% per year ("Searchlight Note"). A portion of the proceeds from the Searchlight Note were used to finance the Wireless Acquisition and the remainder was used for general corporate purposes. Additionally, we entered into a stock appreciation rights agreement pursuant to which we issued to Searchlight three million stock appreciation rights which entitles Searchlight to receive, upon exercise, an amount payable at our election in either cash or shares of GCI's Class A common stock equal in value to the excess of the fair market value of a share of GCI Class A common stock on the date of exercise over the price of $13.00.


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% issued by our wholly owned subsidiary, GCI, Inc. 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):


36



Nine Months Ended September 30,

2015

2014

Operating activities

$

226,510


220,217


Investing activities

(140,642

)

(148,629

)

Financing activities

(41,581

)

(81,095

)

Net increase (decrease) in cash and cash equivalents

$

44,287


(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 $134.6 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 Searchlight Note 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 our 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.


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.  We are authorized to increase our repurchase limit $5.0 million per quarter indefinitely and to use stock option exercise proceeds to repurchase additional shares.  If stock repurchases are less than the total approved quarterly amount the difference may be carried forward and used to repurchase additional shares in future quarters.  The cost of the repurchased common stock reduced Common Stock and Retained Earnings in our Consolidated Balance Sheets.


During the nine months ended September 30, 2015 and 2014, we repurchased 2.8 million and 0.1 million shares, respectively, of our Class A common stock under the stock buyback program at a cost of $43.2 million and $1.3


37



million, respectively. The stock was constructively retired as of September 30, 2015. Under this program we are currently authorized to make up to $94.3 million of repurchases as of September 30, 2015.  


We expect to continue the repurchases 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 our 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.


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 and adjustments to the fair value of our derivative stock appreciation rights liability. 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.


Other Market Risk

As our derivative stock appreciation rights are subject to fair value liability accounting, we revalue the instrument at each reporting date and recognize changes in the fair value of the derivative liability as a component of Other Income (Expense) included in our Consolidated Statements of Operations. The earnings effect of the fair value adjustment at each reporting date is sensitive to changes in our stock price volatility. At September 30, 2015, a 1% increase in our stock price volatility used to determine the fair value of our stock appreciation rights would result in recognition of $0.4 million of additional derivative instrument unrealized loss.



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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.


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.



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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 2. Unregistered Sales of Equity Securities and Use of Proceeds


(a)

Not applicable.

(b)

Not applicable.

(c)

The following table provides information about repurchases of shares of our Class A common stock during the quarter ended September 30, 2015:

(a) Total

Number of

Shares

Purchased 1

(b) Average

Price Paid

per Share

(c) Total

Number of

Shares

Purchased as

Part of Publicly

Announced

Plans or

Programs 2

(d) Maximum

Number (or

approximate

Dollar Value) of

Shares that May

Yet Be

Purchased

Under the Plan

or Programs 3

July 1, 2015 to July 31, 2015

52,149


$

17.33


52,149


$

100,743,106


August 1, 2015 to August 31, 2015

217,401


$

16.90


213,730


$

97,137,512


September 1, 2015 to September 30, 2015

164,476


$

17.06


164,476


$

94,331,353


Total

434,026





Consists of 430,355 shares from open market purchases made under our publicly announced repurchase plan and 3,671 shares from private purchases made to settle the minimum statutory tax-withholding requirements pursuant to restricted stock award vesting.

The repurchase plan was publicly announced on November 3, 2004. Our plan does not have an expiration date, however transactions pursuant to the plan are subject to periodic approval by our Board of Directors. We expect to continue the repurchases for an indefinite period dependent on leverage, liquidity, company performance, market conditions and subject to continued oversight by our Board of Directors.

The total amount approved by our Board of Directors for repurchase under our publicly announced repurchase plan was $373.7 million through September 30, 2015, consisting of $358.4 million through December 31, 2014, and an additional $15.3 million during the nine months ended September 30, 2015. We have made total repurchases under the program of $279.4 million through September 30, 2015. If stock repurchases are less than the total approved quarterly amount the difference may be carried forward and used to repurchase additional shares in future quarters, subject to board approval.


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):


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Exhibit No.

Description

4.1

Amended and Restated Securityholder Agreement by and between General Communication, Inc. and Searchlight ALX, LTD dated as of July 13, 2015 *

4.2

Unsecured Promissory Note Due 2023 entered into as of July 13, 2015 by and between General Communication, Inc. and Searchlight ALX, LTD. *

4.3

Amended and Restated Stock Appreciation Rights Agreement entered into as of July 13, 2015 by and between General Communication, Inc. and Searchlight ALX, LTD. *

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 Senior Vice President, Chief Financial Officer and Secretary *

32.1

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by our President and Director *

32.2

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by our Senior Vice President, Chief Financial Officer and Secretary *

101

The following materials from General Communication, 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 Stockholders' 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.


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SIGNATURES


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


GENERAL COMMUNICATION, INC.



Signature

Title

Date

/s/ Ronald A. Duncan

President and Director

November 5, 2015

Ronald A. Duncan

(Principal Executive Officer)

/s/ Peter J. Pounds

Senior Vice President, Chief Financial

November 5, 2015

Peter J. Pounds

Officer and Secretary

(Principal Financial Officer)

/s/ Lynda L. Tarbath

Vice President, Chief Accounting

November 5, 2015

Lynda L. Tarbath

Officer (Principal Accounting Officer)



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