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EX-32.1 - EXHIBIT 32.1 - GCI, LLCinc06302014exhibit32-1.htm



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

(Mark One)
 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2014
 
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from           to
 Commission File No. 0-5890
 
GCI, INC.
 
 
(Exact name of registrant as specified in its charter)
 
 
State of Alaska
 
91-1820757
 
 
(State or other jurisdiction of
 
(I.R.S Employer
 
 
incorporation or organization)
 
Identification No.)
 
 
2550 Denali Street
 
 
 
 
Suite 1000
 
 
 
 
Anchorage, Alaska
 
99503
 
 
(Address of principal
executive offices)
 
(Zip Code)
 
Registrant’s telephone number, including area code: (907) 868-5600
 
Not Applicable
 
 
Former name, former address and former fiscal year, if changed since last report
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) x Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer", "accelerated filer” and "smaller reporting company" in Rule 12b-2 of the Exchange Act:
Large accelerated filer ¨
Accelerated filer ¨
Non-accelerated filer  x (Do not check if a smaller reporting company)
Smaller reporting company  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
¨ Yes x No

1



GCI, INC.
WHOLLY OWNED SUBSIDIARY OF GENERAL COMMUNICATION, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2014

TABLE OF CONTENTS

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

2



Cautionary Statement Regarding Forward-Looking Statements

You should carefully review the information contained in this Quarterly Report, but should particularly consider any risk factors that we set forth in this Quarterly Report and in other reports or documents that we file from time to time with the Securities and Exchange Commission (“SEC”). In this Quarterly Report, in addition to historical information, we state our future strategies, plans, objectives or goals and our beliefs of future events and of our future operating results, financial position and cash flows. In some cases, you can identify these so-called “forward-looking statements” by words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “project,” or “continue” or the negative of these words and other comparable words. All forward-looking statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance, achievements, plans and objectives to differ materially from any future results, performance, achievements, plans and objectives expressed or implied by these forward-looking statements. In evaluating these statements, you should specifically consider various factors, including those identified under “Risk Factors” in Item 1A of our annual report on Form 10-K for the year ended December 31, 2013.  Those factors may cause our actual results to differ materially from any of our forward-looking statements. For these forward looking statements, we claim the protection of the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995.

You should not place undue reliance on any such forward-looking statements. Further, any forward-looking statement, and the related risks, uncertainties and other factors speak only as of the date on which they were originally made and we expressly disclaim any obligation or undertaking to update or revise any forward-looking statement to reflect any change in our expectations with regard to these statements or any other change in events, conditions or circumstances on which any such statement is based. New factors emerge from time to time, and it is not possible for us to predict what factors will arise or when. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

3



PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
 
 
 
 
GCI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in thousands)
 
 
 
 
June 30,
 
December 31,
ASSETS
2014
 
2013
Current assets:
 
 
 
Cash and cash equivalents
$
82,329

 
44,971

 
 
 
 
Receivables (including $33,200 and $28,000 from a related party at June 30, 2014 and December 31, 2013, respectively)
203,550

 
228,372

Less allowance for doubtful receivables
3,052

 
2,346

Net receivables
200,498

 
226,026

 
 
 
 
Deferred income taxes
44,600

 
39,753

Prepaid expenses
12,713

 
7,725

Inventories
8,377

 
10,347

Other current assets
166

 
230

Total current assets
348,683

 
329,052

 
 
 
 
Property and equipment in service, net of depreciation
985,260

 
969,578

Construction in progress
89,351

 
87,476

Net property and equipment
1,074,611

 
1,057,054

 
 
 
 
Goodwill
229,043

 
219,041

Cable certificates
191,635

 
191,635

Wireless licenses
86,347

 
91,400

Other intangible assets, net of amortization
64,526

 
71,435

Deferred loan and senior notes costs, net of amortization of $7,607 and $6,545 at June 30, 2014 and December 31, 2013, respectively
11,341

 
12,129

Other assets
54,958

 
40,061

Total other assets
637,850

 
625,701

Total assets
$
2,061,144

 
2,011,807

 
 
 
 
See accompanying condensed notes to interim consolidated financial statements.
 
 

 
(Continued)

4



GCI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Continued)
(Amounts in thousands)
 
 
 
 
June 30,
 
December 31,
LIABILITIES AND STOCKHOLDER'S EQUITY
2014
 
2013
Current liabilities:
 
 
 
  Current maturities of obligations under long-term debt and
    capital leases
$
10,681

 
9,301

Accounts payable (including $10,900 and $11,200 to a related party at June 30, 2014 and December 31, 2013, respectively)
57,138

 
65,095

Deferred revenue
30,946

 
27,586

Accrued payroll and payroll related obligations
25,516

 
29,855

Accrued liabilities
16,995

 
14,359

Accrued interest
6,704

 
7,088

Subscriber deposits
1,138

 
1,326

Total current liabilities
149,118

 
154,610

 
 
 
 
Long-term debt, net
1,082,990

 
1,045,144

Obligations under capital leases, excluding current maturities
70,609

 
66,261

Obligation under capital lease due to related party, excluding
  current maturity
1,870

 
1,880

Deferred income taxes
166,665

 
161,476

Long-term deferred revenue
86,552

 
88,259

Other liabilities
37,879

 
36,823

Total liabilities
1,595,683

 
1,554,453

 
 
 
 
Commitments and contingencies


 


Stockholder's equity:
 

 
 

Class A common stock (no par). Authorized 10 shares; issued and outstanding 0.1 shares each at June 30, 2014 and December 31, 2013.
206,622

 
206,622

Paid-in capital
84,161

 
79,297

Retained deficit
(119,035
)
 
(128,775
)
Total GCI, Inc. stockholder's equity
171,748

 
157,144

Non-controlling interests
293,713

 
300,210

Total stockholder's equity
465,461

 
457,354

Total liabilities and stockholder's equity
$
2,061,144

 
2,011,807

 
 
 
 
See accompanying condensed notes to interim consolidated financial statements.
 
 

5



GCI, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
 
 
 
 
 
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
(Amounts in thousands)
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
Non-related party
$
210,236

 
189,661

 
410,739

 
375,877

Related party
14,163

 

 
29,943

 

Total revenues
224,399

 
189,661

 
440,682

 
375,877

 
 
 
 
 
 
 
 
Cost of goods sold (exclusive of depreciation and amortization shown separately below):
 
 
 
 
 
 
 
Non-related party
69,707

 
65,699

 
138,850

 
130,309

Related party
2,675

 

 
5,306

 

Total cost of goods sold
72,382

 
65,699

 
144,156

 
130,309

 
 
 
 
 
 
 
 
Selling, general and administrative expenses:
 
 
 
 
 
 
 
Non-related party
68,685

 
63,871

 
139,427

 
128,418

Related party
1,132

 

 
2,282

 

Total selling, general and administrative expenses
69,817

 
63,871

 
141,709

 
128,418

 
 
 
 
 
 
 
 
Depreciation and amortization expense
43,786

 
34,396

 
86,138

 
68,395

Operating income
38,414

 
25,695

 
68,679

 
48,755

 
 
 
 
 
 
 
 
Other expense:
 

 
 

 
 
 
 
Interest expense (including amortization of deferred loan fees)
(18,170
)
 
(17,527
)
 
(36,381
)
 
(34,431
)
Other
(1,049
)
 
53

 
(1,146
)
 
53

Other expense
(19,219
)
 
(17,474
)
 
(37,527
)
 
(34,378
)
Income before income tax expense
19,195

 
8,221

 
31,152

 
14,377

Income tax expense
(127
)
 
(4,158
)
 
(342
)
 
(7,187
)
 
 
 
 
 
 
 
 
Net income
19,068

 
4,063

 
30,810

 
7,190

Net income (loss) attributable to non-controlling interests
10,913

 
(117
)
 
20,534

 
(234
)
  Net income attributable to GCI, Inc.
$
8,155

 
4,180

 
10,276

 
7,424

 
 
 
 
 
 
 
 
See accompanying condensed notes to interim consolidated financial statements.
 
 
 
 


6



GCI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
SIX MONTHS ENDED JUNE 30, 2014 AND 2013
(Unaudited)
 
Shares of Class A Common Stock
 
Class A Common Stock
 
Paid-in Capital
 
Retained
Earnings
 
Non-
controlling
Interests
 
Total
Stockholder's
Equity
 
(Amounts in thousands)
Balances at January 1, 2013
100

 
$
206,622

 
67,493

 
(120,843
)
 
32,258

 
185,530

Net income (loss)

 

 

 
7,424

 
(234
)
 
7,190

Distribution to General Communication, Inc.

 

 

 
(13,143
)
 

 
(13,143
)
Contribution from General Communication, Inc.

 

 
3,715

 

 

 
3,715

Balances at June 30, 2013
100

 
$
206,622

 
71,208

 
(126,562
)
 
32,024

 
183,292

 
 
 
 
 
 
 
 
 
 
 
 
Balances at January 1, 2014
100

 
$
206,622

 
79,297

 
(128,775
)
 
300,210

 
457,354

Net income

 

 

 
10,276

 
20,534

 
30,810

Distribution to General Communication, Inc.

 

 

 
(536
)
 

 
(536
)
Contribution from General Communication, Inc.

 

 
4,864

 

 

 
4,864

Distribution to non-controlling interest

 

 

 

 
(25,000
)
 
(25,000
)
Adjustment to investment by non-controlling interest

 

 

 

 
(2,131
)
 
(2,131
)
Other

 

 

 

 
100

 
100

Balances at June 30, 2014
100

 
$
206,622

 
84,161

 
(119,035
)
 
293,713

 
465,461

 
 
 
 
 
 
 
 
 
 
 
 
See accompanying condensed notes to interim consolidated financial statements.

7



GCI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2014 AND 2013
(Unaudited)
(Amounts in thousands)
 
 
 
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net income
$
30,810

 
7,190

Adjustments to reconcile net income to net cash
   provided by operating activities:
 

 
 

Depreciation and amortization expense
86,138

 
68,395

Share-based compensation expense
3,971

 
2,906

Deferred income tax expense
342

 
7,187

Other noncash income and expense items
4,933

 
3,042

Change in operating assets and liabilities
12,826

 
(12,404
)
Net cash provided by operating activities
139,020

 
76,316

Cash flows from investing activities:
 

 
 

Purchases of property and equipment
(80,550
)
 
(87,355
)
Purchase of investments
(21,179
)
 

Restricted cash
5,789

 
10,782

Purchases of other assets and intangible assets
(4,895
)
 
(2,306
)
Grant proceeds
1,136

 
1,773

Other
(621
)
 
390

Net cash used in investing activities
(100,320
)
 
(76,716
)
Cash flows from financing activities:
 

 
 

Borrowing on Senior Credit Facility
50,000

 
110,000

Repayment of debt and capital lease obligations
(26,403
)
 
(93,921
)
Distribution to non-controlling interest
(25,000
)
 

Borrowing on other long-term debt
421

 
1,780

Net distribution to General Communication, Inc.
(360
)
 
(13,143
)
Payment of debt issuance costs

 
(2,990
)
Net cash (used) provided by financing activities
(1,342
)
 
1,726

Net increase in cash and cash equivalents
37,358

 
1,326

Cash and cash equivalents at beginning of period
44,971

 
20,585

Cash and cash equivalents at end of period
$
82,329

 
21,911

 
 
 
 
See accompanying condensed notes to interim consolidated financial statements.

8



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



The accompanying unaudited interim consolidated financial statements include the accounts of GCI, Inc. and its direct and indirect subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. They should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2013, filed with the SEC on March 27, 2014, as part of our annual report on Form 10-K.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of operations for interim periods are not necessarily indicative of the results that may be expected for an entire year or any other period.

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

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

(a)
Business
We offer the following services primarily in Alaska:

Postpaid and prepaid wireless services and sale of wireless handsets and accessories,
Video services, including broadcast television,
Internet access services,
Wholesale wireless, including postpaid and prepaid wireless plans for resale by other carriers and roaming for certain wireless carriers,
Local and long-distance voice services,
Data network services,
Broadband services, including our SchoolAccess® offering to rural school districts, our ConnectMD® offering to rural hospitals and health clinics, and managed video conferencing,
Managed services to certain commercial customers,
Sales and service of dedicated communications systems and related equipment, and
Lease, service arrangements and maintenance of capacity on our fiber optic cable systems used in the transmission of services within Alaska and between Alaska and the remaining United States and foreign countries.
(b)
Principles of Consolidation
Our consolidated financial statements include the consolidated accounts of GCI, Inc. and its wholly owned subsidiaries, The Alaska Wireless Network, LLC ("AWN") of which we own a two-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.  We use the equity method to account for our investments in entities that we do not control, but where we have the ability to exercise significant influence over operating and financial policies. We use the cost method to account for our investments in entities where we hold a non-controlling interest and do not have the ability to exercise significant influence over operating and financial policies.

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.


9



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


(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 July 22, 2013, GCI closed the transactions for our two-thirds ownership interest in AWN. Alaska Communications Systems Group, Inc. ("ACS") owns the other one-third ownership interest in AWN.

The following table summarizes the purchase price and the estimated fair value of ACS’s assets acquired and liabilities assumed, effective July 23, 2013 (amounts in thousands):
Purchase price:
 
Previously Reported
Adjustments
Final Purchase Price Allocation
Cash consideration paid
 
$
100,000


100,000

Fair value of the one-third ownership interest of AWN
 
267,642

(2,131
)
265,511

Total purchase price
 
$
367,642

(2,131
)
365,511

 
 
 
 
 
Assets acquired and liabilities assumed:
 
 
 
 
Acquired assets
 
 
 
 
Current assets
 
$
16,952

11

16,963

Property and equipment, including construction in progress
 
82,473

138

82,611

Goodwill
 
140,081

8,867

148,948

Wireless licenses
 
65,433

(5,053
)
60,380

Rights to use capacity
 
52,636

(7,298
)
45,338

Other assets
 
16,078

1,204

17,282

Fair value of liabilities assumed
 
(6,011
)

(6,011
)
Total fair value of assets acquired and liabilities assumed
 
$
367,642

(2,131
)
365,511


Unaudited pro forma financial information does not purport to be indicative of the actual results that would have occurred if the acquisition had actually been completed on January 1, 2013, nor is it necessarily indicative of the future revenue of the combined company as it includes estimates of the acquired entity revenue. The following unaudited pro forma financial information is presented as if the acquisition occurred on January 1, 2013 (amounts in thousands):
 
(unaudited)
 
(unaudited)
 
Three Months Ended 
 June 30,
 
Six Months Ended June 30,
 
2013
 
2013
Pro forma consolidated revenue
$
227,132

 
445,230


Supplemental pro forma earnings have not been provided as it would be impracticable due to the nature of GCI's and ACS's respective wireless operations prior to the business combination. GCI and ACS were unable to disaggregate the components of expenses related to their wireless operations contributed to AWN and thus the amounts would require estimates so significant that the resulting information would not be meaningful.

(e)
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers, or ASU 2014-09. This new standard provides guidance

10



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


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. The standard is effective for the first interim period within annual reporting periods beginning after December 15, 2016. Early adoption is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We are currently evaluating the impact of the provisions of this new standard on our financial position and results of operations.

(f)
Regulatory Accounting
We account for our regulated operations in accordance with the accounting principles for regulated enterprises.  These accounting principles recognize the economic effects of rate regulation by recording cost and a return on investment as such amounts are recovered through rates authorized by regulatory authorities.  Accordingly, plant and equipment is depreciated over lives approved by regulators and certain costs and obligations are deferred based upon approvals received from regulators to permit recovery of such amounts in future years.  Our cost studies and depreciation rates for our regulated operations are subject to periodic audits that could result in a change to recorded revenues.

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

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

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

(i) Revenue Recognition
We recorded high cost support revenue under the Universal Service Fund (“USF”) program of $17.0 million and $10.5 million for the three months ended June 30, 2014 and 2013, respectively, and $33.5 million and $21.1 million for the six months ended June 30, 2014 and 2013, respectively.  At June 30, 2014, we have $47.4 million in high cost support accounts receivable.


11



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


(j) 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, our effective tax rate, purchase price allocations, deferred lease expense, asset retirement obligations, the accrual of cost of goods sold (exclusive of depreciation and amortization expense) (“Cost of Goods Sold”), depreciation and the accrual of contingencies and litigation.  Actual results could differ from those estimates.

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

Income taxes were computed using an effective tax rate, which is subject to ongoing review and evaluation. Our effective tax rate for the three and six months ended June 30, 2014 is lower than the U.S. statutory rate due primarily to the inclusion of income attributable to the non-controlling interest in AWN in income before income tax expense and the exclusion of income taxes on income attributable to the non-controlling interest in AWN.

(l) 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 Income Statements.  The following are certain surcharges reported on a gross basis in our Consolidated Income Statements (amounts in thousands):
 
Three Months Ended 
 June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Surcharges reported gross
$
1,101

 
1,205

 
2,234

 
2,432


(m)
Reclassifications
Reclassifications have been made to the 2013 financial statements to make them comparable with the 2014 presentation.


12



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


(2)
Consolidated Statements of Cash Flows Supplemental Disclosures
Changes in operating assets and liabilities consist of (amounts in thousands):
Six Months Ended June 30,
2014
 
2013
(Increase) decrease in accounts receivable, net
$
24,693

 
(19,241
)
Increase in prepaid expenses
(5,084
)
 
(2,531
)
Decrease in inventories
2,024

 
3,333

Decrease in other current assets
75

 
1,185

Increase in other assets
(344
)
 
(1,294
)
Increase (decrease) in accounts payable
(6,821
)
 
1,044

Increase in deferred revenues
3,360

 
207

Increase (decrease) in accrued payroll and payroll related obligations
(4,359
)
 
3,732

Increase in accrued liabilities
1,452

 
2,881

Decrease in accrued interest
(384
)
 
(25
)
Increase (decrease) in subscriber deposits
(188
)
 
133

Decrease in long-term deferred revenue
(2,345
)
 
(927
)
Increase (decrease) in components of other long-term liabilities
747

 
(901
)
Total change in operating assets and liabilities
$
12,826

 
(12,404
)

The following item is for the six months ended June 30, 2014 and 2013 (amounts in thousands):
Net cash paid or received:
2014
 
2013
Interest paid including capitalized interest
$
37,658

 
35,139


The following items are non-cash investing and financing activities for the six months ended June 30, 2014 and 2013 (amounts in thousands):
 
2014
 
2013
Non-cash additions for purchases of property and
  equipment
$
25,114

 
13,740

Net capital lease obligation
$
9,386

 

Distribution to non-controlling interest
$
4,167

 

Asset retirement obligation additions to property and
  equipment
$
361

 
1,066

Deferred compensation distribution denominated in
  shares
$
617

 
621


(3)
Intangible Assets and Goodwill
Wireless licenses allocated to the Wireless segment decreased at June 30, 2104, due to an adjustment to the AWN purchase price. Goodwill allocated to the Wireless segment increased at June 30, 2014, primarily due to an adjustment to the AWN purchase price. See Note 1(d), "Acquisition" of this Form 10-Q for further discussion of the AWN transaction.

Amortization expense for amortizable intangible assets was as follows (amounts in thousands):
 
Three Months Ended 
 June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Amortization expense
$
2,189

 
1,431

 
4,600

 
2,887



13



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


Amortization expense for amortizable intangible assets for each of the five succeeding fiscal years is estimated to be (amounts in thousands):
Years Ending December 31,
 
2014
$
9,131

2015
7,905

2016
6,112

2017
4,275

2018
3,287


(4)
Financial Instruments

Fair Value of Financial Instruments
The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties. At June 30, 2014 and December 31, 2013, the fair values of cash and cash equivalents, net receivables, inventories, accounts payable, accrued payroll and payroll related obligations, accrued interest, accrued liabilities, and subscriber deposits approximate their carrying value due to the short-term nature of these financial instruments. The carrying amounts and approximate fair values of our financial instruments at June 30, 2014 and December 31, 2013 follow (amounts in thousands):
 
June 30,
2014
 
December 31,
2013
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Current and long-term debt
$
1,085,859

 
1,118,227

 
1,047,980

 
1,058,431


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

Current and long-term debt:  The fair values of the 6.75% Senior Notes due 2021 and the 8.63% Senior Notes due 2019 are based upon quoted market prices for the same or similar issues (Level 2). The fair value of our Rural Utilities Service debt is based on the current rates offered to us for the same remaining maturities (Level 3).  The fair value of our Senior Credit Facility is estimated to approximate the carrying value because this instrument is subject to variable interest rates (Level 2).

Fair Value Measurements
Assets measured at fair value on a recurring basis as of June 30, 2014 and December 31, 2013 are as follows (amounts in thousands):
 
Fair Value Measurement at Reporting Date Using
June 30, 2014 Assets
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
Deferred compensation plan assets
  (mutual funds)
$
1,882

 

 

Total assets at fair value
$
1,882

 

 

 
 
 
 
 
 
December 31, 2013 Assets
 

 
 

 
 

Deferred compensation plan assets
  (mutual funds)
$
2,183

 

 

Total assets at fair value
$
2,183

 

 



14



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


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

(5)
Stockholder's Equity

Shared-Based Compensation
GCI's Amended and Restated 1986 Stock Option Plan ("Stock Option Plan"), provides for the grant of options and restricted stock awards (collectively "award") for a maximum of 15.7 million shares of GCI Class A common stock, subject to adjustment upon the occurrence of stock dividends, stock splits, mergers, consolidations or certain other changes in corporate structure or capitalization. If an award expires or terminates, the shares subject to the award will be available for further grants of awards under the Stock Option Plan. The Compensation Committee of GCI’s Board of Directors administers the Stock Option Plan. Substantially all restricted stock awards granted vest over periods of up to three years.  Substantially all options vest in equal installments over a period of five years and expire ten years from the date of grant. The requisite service period of our awards is generally the same as the vesting period.  Options granted pursuant to the Stock Option Plan are only exercisable if at the time of exercise the option holder is our employee, non-employee director, or a consultant or advisor working on our behalf.  New shares of GCI Class A common stock are issued when stock option agreements are exercised or restricted stock awards are granted.  We have 2.3 million shares available for grant under the Stock Option Plan at June 30, 2014.

A summary of option activity under the Stock Option Plan as of June 30, 2014 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, 2014
620

 
$
7.74

 
 
 
 
Exercised
(19
)
 
$
8.73

 
 
 
 
Options forfeited and retired
(250
)
 
$
8.40

 
 
 
 
Expired
(12
)
 
$
10.69

 
 
 
 
Outstanding at June 30, 2014
339

 
$
7.09

 
4.5 years
 
$
1,392

Exercisable at June 30, 2014
336

 
$
7.10

 
4.4 years
 
$
1,373


The total fair value of options vesting during the six months ended June 30, 2014 and 2013, was $50,000 and $23,000, respectively.  The total intrinsic values, determined as of the date of exercise, of options exercised in the six months ended June 30, 2014 and 2013, were $46,000 and $0.1 million, respectively. We received $0.2 million and $0.3 million in cash from stock option exercises in the six months ended June 30, 2014 and 2013, respectively.

A summary of nonvested restricted stock award activity under the Stock Option Plan for the six months ended June 30, 2014, follows (share amounts in thousands):
 
Shares
 
Weighted
Average
Grant Date
Fair Value
Nonvested at January 1, 2014
1,209

 
$
8.60

Granted
1,187

 
$
9.89

Vested
(153
)
 
$
10.82

Forfeited
(6
)
 
$
9.38

Nonvested at June 30, 2014
2,237

 




15



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


The weighted average grant date fair value of awards granted during the six months ended June 30, 2014 and 2013, were $9.89 and $8.22, respectively. We have recorded share-based compensation expense of $4.0 million and $2.9 million for the six months ended June 30, 2014 and 2013, respectively. Share-based compensation expense is classified as Selling, General and Administrative Expense in our Consolidated Income Statements.  Unrecognized share-based compensation expense was $12.5 million relating to 2.2 million restricted stock awards and $8,000 relating to 3,000 unvested stock options as of June 30, 2014.  We expect to recognize share-based compensation expense over a weighted average period of 0.6 year for stock options and 2.1 years for restricted stock awards.

(6) 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, local, national and global businesses, governmental entities and public and private educational institutions; wholesale data and voice services to common carrier customers; Internet, data network and managed services to rural schools and health organizations and regulated voice services to residential and commercial customers in rural communities primarily in Southwest Alaska.

We evaluate performance and allocate resources based on earnings before depreciation and amortization expense, net interest expense, income taxes, share-based compensation expense, accretion expense, income or loss attributable to non-controlling interest resulting from New Markets Tax Credit ("NMTC") transactions, non-cash contribution adjustment, and other non-cash adjustments (“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 six months ended June 30, 2014 and 2013 follows (amounts in thousands):
 
Three Months Ended
 
Six Months Ended
 
Wireless
 
Wireline
 
Total Reportable Segments
 
Wireless
 
Wireline
 
Total Reportable Segments
June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
Revenues
$
69,397

 
155,002

 
224,399

 
131,914

 
308,768

 
440,682

Adjusted EBITDA
$
40,174

 
44,297

 
84,471

 
78,196

 
81,072

 
159,268

 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2013
 

 
 

 
 

 
 
 
 
 
 

Revenues
$
35,559

 
154,102

 
189,661

 
69,396

 
306,481

 
375,877

Adjusted EBITDA
$
14,273

 
47,866

 
62,139

 
29,462

 
91,326

 
120,788



16



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


A reconciliation of reportable segment Adjusted EBITDA to consolidated income before income taxes follows (amounts in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Reportable segment Adjusted EBITDA
$
84,471

 
62,139

 
159,268

 
120,788

Less depreciation and amortization
  expense
(43,786
)
 
(34,396
)
 
(86,138
)
 
(68,395
)
Less share-based compensation
  expense
(2,193
)
 
(1,647
)
 
(3,971
)
 
(2,906
)
Less accretion expense
(301
)
 
(155
)
 
(602
)
 
(282
)
Other
223

 
(246
)
 
122

 
(450
)
Consolidated operating income
38,414

 
25,695

 
68,679

 
48,755

Less other expense
(19,219
)
 
(17,474
)
 
(37,527
)
 
(34,378
)
Consolidated income before
  income tax expense
$
19,195

 
8,221

 
31,152

 
14,377


(7)
Related Party Transaction
Upon closing of the AWN acquisition on July 22, 2013, ACS became a related party for financial statement reporting purposes. ACS provides us with local service lines and network capacity in locations where we do not have our own facilities. We provide wholesale services to ACS who uses our network to sell services to its respective retail customers and we receive ACS' high cost support from USF for its wireless customers. For the six months ended June 30, 2014, we have paid ACS $32.7 million and received $20.1 million in payments from ACS. At June 30, 2014 we have $33.2 million in receivables from ACS and $10.9 million in payables to ACS. We also have long term capacity exchange agreements with ACS for which no money is exchanged.

(8)
Variable Interest Entities
We have entered into several arrangements under the NMTC program with US Bancorp to help fund a $59.3 million project to extend terrestrial broadband service for the first time to rural Northwestern Alaska communities via a high capacity hybrid fiber optic and microwave network.  When completed, the project, called TERRA-Northwest (“TERRA-NW”), will connect to the TERRA-Southwest ("TERRA-SW") network and provide a high capacity backbone connection from the served communities to the Internet.  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 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

17



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


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, our wholly owned subsidiary, net of syndication and arrangement fees, are restricted for use on TERRA-NW.  Restricted cash of $1.1 million and $6.9 million was held by Unicom at June 30, 2014 and December 31, 2013, respectively, and is included in our Consolidated Balance Sheets.  We began construction on TERRA-NW in 2012 and expect to complete all current phases of the project in early 2015.  We began offering service on Phases 1 and 2 of this new facility in 2013.

These transactions include put/call provisions whereby we may be obligated or entitled to repurchase US Bancorp’s interests in TIF, TIF 2, TIF 2-USB and/or TIF 3. We believe that US Bancorp will exercise the put options in August 2018, October 2019 and December 2019, at the end of the compliance periods for NMTC #1, NMTC #2 and NMTC #3, respectively.  The NMTCs are subject to 100% recapture for a period of seven years as provided in the Internal Revenue Code.  We are required to be in compliance with various regulations and contractual provisions that apply to the NMTC arrangements.  Non-compliance with applicable requirements could result in projected tax benefits not being realized by US Bancorp.  We have agreed to indemnify US Bancorp for any loss or recapture of NMTCs until such time as our obligation to deliver tax benefits is relieved.  There have been no credit recaptures as of June 30, 2014.  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 June 30, 2014 and December 31, 2013.

(9) Commitments and Contingencies

Capital Leases as Lessee
We have a capital lease agreement for transponder capacity on Intelsat, Ltd.’s (“Intelsat”) Galaxy 18 spacecraft.  The Intelsat Galaxy 18 C-band and Ku-Band transponders are being leased over an expected term of 14 years.  At lease inception the present value of the lease payments, excluding telemetry, tracking and command services and back-up protection, was $98.6 million. We amended our transponder capacity lease agreement with Intelsat in October 2013 to lease additional transponder capacity on Intelsat's Galaxy 18 spacecraft with a term of 7 years. As a result, on January 1, 2014, we increased our existing capital lease asset and liability by $9.4 million.


18



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


A summary of future minimum capital lease payments follows (amounts in thousands):
Years ending December 31:
 
2014
$
6,718

2015
13,444

2016
13,454

2017
13,433

2018
13,440

2019 and thereafter
46,658

Total minimum lease payments
107,147

Less amount representing interest
26,855

Less current maturity of obligations under capital leases
7,813

Long-term obligations under capital leases, excluding current maturity
$
72,479


Tribal Mobility Fund I Grant
On February 28, 2014, the Federal Communications Commission ("FCC") announced our winning bids in the Tribal Mobility Fund I auction for a $41.4 million grant to partially fund expansion of our 3G wireless network, or better, to locations in Alaska where we would not otherwise be able to construct within our return-on-investment requirements. We filed a long-form application with the FCC by their deadline of April 4, 2014, and this form must be reviewed for final approval, before the award can be issued. 

19



Part I

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

In the following discussion, GCI, 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, 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, our effective tax rate, purchase price allocations, deferred lease expense, asset retirement obligations, the accrual of cost of goods sold (exclusive of depreciation and amortization expense) ("Cost of Goods Sold"), depreciation, and accrual of contingencies and litigation. We base our estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. See also our “Cautionary Statement Regarding Forward-Looking Statements.”

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

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

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

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.

Our revenue is impacted by the strength of the Alaska economy. The Alaska economy is affected by certain economic factors including activity in the oil and gas industry, tourism, government spending, and military personnel stationed in Alaska. Additionally, the health of the national economy can impact our revenue.


20



On July 22, 2013, we closed the transactions under the Wireless Agreement and other related agreements entered into on June 4, 2012 by and among Alaska Communications Systems Group, Inc. (“ACS”), GCI, ACS Wireless, Inc., a wholly owned subsidiary of ACS, GCI Wireless Holdings, LLC, a wholly owned subsidiary of GCI, and AWN, pursuant to which the parties agreed to contribute the respective wireless network assets of GCI, ACS and their affiliates to AWN. This transaction provides a statewide network with the spectrum mix, scale, advanced technology and cost structure necessary to compete with Verizon Wireless and AT&T Mobility in Alaska. AWN provides wholesale services to GCI and ACS. GCI and ACS use the AWN network in order to continue to sell services to their respective retail customers. GCI and ACS continue to compete against each other and other wireless providers in the retail market.


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 June 30,

Percentage Change
2014
 
Six Months Ended June 30,
 
Percentage Change
2014
 
2014
2013

vs. 2013
 
2014
2013
 
vs. 2013
Statements of Operations Data:
 

 
 
 
 
 
 
Revenues:
 
 

 
 
 
 
 
 
Wireless segment
31%
19%
 
95%
 
30%
18%
 
90%
Wireline segment
69%
81%
 
1%
 
70%
82%
 
1%
Total revenues
100%
100%
 
18%
 
100%
100%
 
17%
Selling, general and administrative expenses
31%
34%
 
9%
 
32%
34%
 
10%
Depreciation and amortization expense
20%
18%
 
27%
 
20%
18%
 
26%
Operating income
17%
14%
 
49%
 
16%
13%
 
41%
Other expense, net
9%
9%
 
10%
 
9%
9%
 
9%
Income before income taxes
9%
4%
 
133%
 
7%
4%
 
117%
Net income
8%
2%
 
369%
 
7%
2%
 
329%
Net income (loss) attributable to the non-controlling interests
5%
—%
 
9,327%
 
5%
—%
 
8,775%
Net income attributable to GCI, Inc.
4%
2%
 
95%
 
2%
2%
 
38%
 
 
 
 
 
 
 
 
 
 
1Percentage change in underlying data
 
 
 
 
 
 
 
 

We evaluate performance and allocate resources based on earnings before depreciation and amortization expense, net interest expense, income taxes, share-based compensation expense, accretion expense, income or loss attributable to non-controlling interest resulting from New Markets Tax Credit transactions, non-cash contribution adjustment, and other non-cash adjustments (“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 6 in the "Condensed Notes to Interim Consolidated Financial Statements" included in Part I of this quarterly report on Form 10-Q for a reconciliation of consolidated Adjusted EBITDA, a non-GAAP financial measure, to consolidated income before income taxes.

Overview of Revenues and Cost of Goods Sold
Total revenues increased 18% from $189.7 million in the three months ended June 30, 2013 to $224.4 million in the same period in 2014.  Total revenues increased 17% from $375.9 million in the six months ended June 30, 2013 to $440.7 million in the same period in 2014. Revenue increased in both of our segments for the three and six months ended June 30, 2014 compared to the same periods in 2013.  See the discussion below for more information by segment.


21



Total Cost of Goods Sold increased 10% from $65.7 million in the three months ended June 30, 2013 to $72.4 million in the same period in 2014.  Total Cost of Goods Sold increased 11% from $130.3 million in the six months ended June 30, 2013 to $144.2 million in the same period in 2014. Cost of Goods Sold decreased in our Wireline segment and increased in our Wireless segment for the three months ended June 30, 2014 compared to the same period in 2013. Cost of Goods Sold increased in both of our segments for the six months ended June 30, 2014 compared to the same period in 2013.  See the discussion below for more information by segment.

Wireless Segment Overview
Wireless segment revenue, Cost of Goods Sold, and Adjusted EBITDA for the three and six months ended June 30, 2014 and 2013 are as follows (amounts in thousands):
 
Three Months Ended 
 June 30,
 
Percentage
 
Six Months Ended 
 June 30,
 
Percentage
 
2014
 
2013
 
Change
 
2014
 
2013
 
Change
Revenue
$
69,397

 
35,559

 
95
%
 
131,914

 
69,396

 
90
%
Cost of Goods Sold
$
23,500

 
16,573

 
42
%
 
42,213

 
30,985

 
36
%
Adjusted EBITDA
$
40,174

 
14,273

 
181
%
 
78,196

 
29,462

 
165
%

See note 6 in the "Condensed Notes to Interim Consolidated Financial Statements" included in Part I of this quarterly report on Form 10-Q for a reconciliation of consolidated Adjusted EBITDA, a non-GAAP financial measure, to consolidated income before income taxes.

Wireless Segment Revenues
The increase in revenue is primarily due to the following:
A $15.4 million and $28.0 million increase in roaming revenue for the three and six months ended June 30, 2014 when compared to the same periods in 2013, respectively, primarily due to the July 22, 2013 close of the AWN transaction,
A $11.3 million and $22.0 million increase in non-Lifeline wholesale plan fee revenue for the three and six months ended June 30, 2014 when compared to the same periods in 2013, respectively, due to the July 22, 2013 close of the AWN transaction,
A $4.4 million and $8.8 million increase in high cost support revenue for the three and six months ended June 30, 2014 when compared to the same periods in 2013, respectively, due to the July 22, 2013 close of the AWN transaction, and
A $2.6 million and $4.5 million increase in private line revenue for the three and six months ended June 30, 2014 when compared to the same periods in 2013, respectively, due to increased demand for backhaul capacity.

The increase is partially off-set by a $2.8 million and $5.2 million increase in the wireless handset cash incentives to ACS for the three and six months ended June 30, 2014 when compared to the same periods in 2013, respectively, for the sale of wireless handsets to their retail customers due to the July 22, 2013 close of the AWN transaction.

Wireless Segment Cost of Goods Sold
The increase in Cost of Goods Sold is primarily due to the following:
A $4.0 million and $8.3 million increase in roaming costs for the three and six months ended June 30, 2014 when compared to the same periods in 2013, respectively, due to the July 22, 2013 close of the AWN transaction,
A $1.5 million and $3.5 million increase in distribution and capacity costs for the three and six months ended June 30, 2014 when compared to the same periods in 2013, respectively, due to the July 22, 2013 close of the AWN transaction and growth in traffic carried on the wireless network, and
A $1.2 million and $3.6 million increase in network maintenance costs for the three and six months ended June 30, 2014 when compared to the same periods in 2013, respectively, due to the growth of the wireless network resulting from the July 22, 2013 close of the AWN transaction and increased emphasis on our wireless network.

The increase in wireless Cost of Goods Sold is partially off-set by a $6.0 million decrease in wireless equipment costs for the six months ended June 30, 2014 when compared to the same period in 2013, respectively. Through the AWN transaction close date, the Wireless segment recorded the Cost of Goods Sold related to wireless equipment sales to retail customers based upon equipment sales and agreed-upon subsidy rates. Any amount in excess of this subsidy was recorded in the Wireline segment. Subsequent to the transaction close and through

22



March 31, 2014, although permitted, the Wireline segment was unable to meet the requirements in order to request a wireless equipment subsidy from the Wireless segment in accordance with the AWN agreements.

Wireless Segment Adjusted EBITDA
The increase in Adjusted EBITDA for the three and six months ended June 30, 2014 when compared to the same periods in 2013 is primarily due to increased revenue as described above in “Wireless Segment Revenues.”  This increase was partially offset by increased Cost of Goods Sold as described above in “Wireless Segment Cost of Goods Sold” and an increase in selling, general and administrative expense.

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 local, national and global businesses, governmental entities and public and private educational institutions and wholesale data and voice services to common carrier customers.
Managed Broadband – we offer Internet, data network 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



The components of Wireline segment revenue for the three and six months ended June 30, 2014 and 2013 are as follows (amounts in thousands):
 
Three Months Ended 
 June 30,
 
Percentage
 
Six Months Ended 
 June 30,
 
Percentage
 
2014
 
2013
 
Change
 
2014
 
2013
 
Change
Consumer
 
 
 
 
 
 
 
 
 
 
 
Wireless
$
6,360

 
7,180

 
(11
)%
 
13,851

 
13,726

 
1
 %
Data
27,313

 
24,413

 
12
 %
 
54,257

 
48,469

 
12
 %
Video
26,871

 
27,740

 
(3
)%
 
54,120

 
55,701

 
(3
)%
Voice
8,279

 
9,141

 
(9
)%
 
16,724

 
18,671

 
(10
)%
Business Services
 
 
 
 
 

 
 
 
 
 
 

Wireless
789

 
764

 
3
 %
 
1,534

 
1,443

 
6
 %
Data
35,554

 
39,394

 
(10
)%
 
70,394

 
79,530

 
(11
)%
Video
7,607

 
3,467

 
119
 %
 
12,759

 
6,592

 
94
 %
Voice
11,359

 
13,253

 
(14
)%
 
23,100

 
25,580

 
(10
)%
Managed Broadband
 
 
 
 
 

 
 
 
 
 
 

Data
25,608

 
23,370

 
10
 %
 
51,437

 
46,050

 
12
 %
Voice
5,262

 
5,380

 
(2
)%
 
10,592

 
10,719

 
(1
)%
Total Wireline segment revenue
$
155,002

 
154,102

 
1
 %
 
308,768

 
306,481

 
1
 %

Wireline segment Cost of Goods Sold and Adjusted EBITDA for the three and six months ended June 30, 2014 and 2013 are as follows (amounts in thousands):
 
Three Months Ended 
 June 30,
 
Percentage
 
Six Months Ended 
 June 30,
 
Percentage
 
2014
 
2013
 
Change
 
2014
 
2013
 
Change
Wireline segment Cost of Goods Sold
$
48,882

 
49,126

 
 %
 
101,943

 
99,324

 
3
 %
Wireline segment Adjusted EBITDA
$
44,297

 
47,866

 
(7
)%
 
81,072

 
91,326

 
(11
)%

See note 6 in the "Condensed Notes to Interim Consolidated Financial Statements" included in Part I of this quarterly report on Form 10-Q for a reconciliation of consolidated Adjusted EBITDA, a non-GAAP financial measure, to consolidated income before income taxes.

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

Percentage
 
2014

2013

Change
Consumer
 

 

 
Data:
 

 

 
Cable modem subscribers
115,600


115,600


 %
Video:
 
 
 
 
 

Basic subscribers
116,300

 
119,600

 
(3
)%
Digital programming tier subscribers
65,200

 
69,500

 
(6
)%
HD/DVR converter boxes
103,400

 
89,900

 
15
 %
Homes passed
248,000

 
245,100

 
1
 %
Video ARPU - quarter-to-date5
$
76.49

 
$
76.47

 
 %
Video ARPU - year-to-date6
$
76.78

 
$
76.51

 
 %
Voice:
 
 
 
 
 

Total local access lines in service
57,700

 
65,200

 
(12
)%

24



Local access lines in service on GCI facilities7
53,800

 
60,800

 
(12
)%
Business Services
 
 
 
 
 

Data:
 
 
 
 
 

Cable modem subscribers
14,200

 
14,100

 
1
 %
Voice:
 
 
 
 
 

Total local access lines in service
48,200

 
50,500

 
(5
)%
Local access lines in service on GCI facilities
35,000

 
35,600

 
(2
)%
Combined Consumer and Business Services
 
 
 
 
 

Wireless
 
 
 
 
 

Consumer Lifeline wireless lines in service8
28,200

 
32,600

 
(13
)%
Consumer Non-Lifeline wireless lines in service9
96,700

 
92,800

 
4
 %
Business Services Non-Lifeline wireless lines in service
18,500

 
17,500

 
6
 %
Total wireless lines in service
143,400

 
142,900

 
 %
Wireless ARPU - quarter-to-date10
$
49.95

 
$
49.99

 
 %
Wireless ARPU - year-to-date11
$
50.53

 
$
49.63

 
2
 %
Cable Modem ARPU - quarter-to-date12
$
76.83

 
$
68.25

 
13
 %
Cable Modem ARPU - year-to-date13
$
76.38

 
$
68.17

 
12
 %
A cable modem subscriber is defined by the purchase of cable modem service regardless of the level of service purchased. If one entity purchases multiple cable modem service access points, each access point is counted as a subscriber. Cable modem subscribers may also be video basic subscribers though basic video service is not required to receive cable modem service.
A basic subscriber is defined as one basic tier of service delivered to an address or separate subunits thereof regardless of the number of outlets purchased.
A digital programming tier subscriber is defined as one digital programming tier of service delivered to an address or separate subunits thereof regardless of the number of outlets or digital programming tiers purchased. Digital programming tier subscribers are a subset of basic subscribers.
A high-definition/digital video recorder ("HD/DVR") converter box is defined as one box rented by a digital programming or basic tier subscriber. A digital programming or basic tier subscriber is not required to rent an HD/DVR converter box to receive service.
Applicable average monthly video revenues divided by the average number of basic subscribers at the beginning and end of each month in the period ("Video ARPU") for the three months ended June 30, 2014 and 2013.
6 Video ARPU for the six months ended June 30, 2014 and 2013.
A local access line in service is defined as a revenue generating circuit or channel connecting a customer to the public switched telephone network.
A Lifeline wireless line in service is defined as a revenue generating wireless device that is eligible for Lifeline support. The Universal Service Fund's Lifeline program is administered by the Universal Service Administrative Company and is designed to ensure that quality telecommunications services are available to low-income customers at affordable rates.
A non-Lifeline wireless line in service is defined as a revenue generating wireless device that is not eligible for Lifeline support.
10 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"). 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 for the three months ended June 30, 2014 and 2013.
11 Wireless ARPU for the six months ended June 30, 2014 and 2013. 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 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 June 30, 2014 and 2013.
13 Cable Modem ARPU for the six months ended June 30, 2014 and 2013.


25



Wireline Segment Revenues

Consumer
The increase in data revenue is primarily due to a $3.0 million or 14% and $5.4 million or 13% increase in cable modem revenue for the three and six months ended June 30, 2014 when compared to the same periods in 2013, due to our subscribers’ selection of plans that offer higher speeds and higher usage limits.

Business Services
Business Services data revenue is comprised of monthly recurring charges for data services and charges billed on a time and materials basis largely for personnel providing on-site customer support.  This latter category can vary significantly based on project activity.

The decrease in data revenue is primarily due to a $5.7 million or 35% and $12.5 million or 37% decrease in managed services project revenue for the three and six months ended June 30, 2014 when compared to the same periods in 2013, respectively, due to a decrease in special project work.

The increase in video revenue for the three and six months ended June 30, 2014 when compared to the same periods in 2013 is primarily due to our acquisition of the television broadcast stations in the fourth quarter of 2013 and an increase in advertising sales due to the election cycle.

Managed Broadband
The increase in data revenue is primarily due to a $2.4 million or 10% and $5.4 million or 12% increase in monthly contract revenue for the three and six months ended June 30, 2014 when compared to the same periods in 2013, respectively, due to new ConnectMD® and SchoolAccess® customers and increased data network capacity purchased by our existing ConnectMD® and SchoolAccess® customers.

Wireline Segment Cost of Goods Sold

The individually significant items contributing to the increase in Wireline segment Cost of Goods Sold include:
A $1.9 million or 69% and $7.1 million or 117% increase in wireless Cost of Goods Sold for the three and six months ended June 30, 2014 when compared to the same periods in 2013, respectively, primarily due to an increase in the number of handsets sold and a decrease in subsidies received from the Wireless segment for the purchase of wireless handsets. Through the AWN transaction close, the Wireless segment recorded the Cost of Goods Sold related to wireless equipment sales to retail customers based upon equipment sales and agreed-upon subsidy rates. Any amount in excess of this subsidy was recorded in the Wireline segment. Subsequent to the transaction close and through March 31, 2014, although permitted, the Wireline segment was unable to meet the requirements in order to request a wireless equipment subsidy from the Wireless segment in accordance with the AWN agreements, and
A $2.4 million or 17% and $4.5 million or 16% increase in video Cost of Goods Sold for the three and six months ended June 30, 2014 when compared to the same periods in 2013, respectively, primarily due to the acquisition of the television broadcast stations in the fourth quarter of 2013 and increased rates paid to programmers.

The increases are partially offset by a $4.3 million or 32% and $9.8 million or 35% decrease in managed services project Cost of Goods Sold for the three and six months ended June 30, 2014 when compared to the same periods in 2013, respectively, due to the decrease in special project work described above in "Wireline Segment Revenues - Business Services."

Wireline Segment Adjusted EBITDA
The decrease in Adjusted EBITDA for the three and six months ended June 30, 2014 when compared to the same periods in 2013 is primarily due to an increase in selling, general and administrative expense partially offset by an increase in revenue as described above in "Wireline Segment Revenues" for the three and six months ended June 30, 2014.

Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 9% to $69.8 million for the three months ended June 30, 2014.  Selling, general and administrative expenses increased 10% to $141.7 million for the six months ended June 30, 2014. Individually significant items contributing to the increase include:


26



A $2.5 million and $5.1 million increase in labor costs for the three and six months ended June 30, 2014, when compared to the same periods in 2013, respectively,
A $0.5 million and $1.0 million in share-based compensation expense for the three and six months ended June 30, 2014, when compared to the same periods in 2013, respectively,
A $0.8 million increase in bad debt expense for the three months ended June 30, 2014, when compared to the same period in 2013,
A $2.6 million increase in health benefit costs for the six months ended June 30, 2014, when compared to the same period in 2013, and
A $1.1 million increase in contract service costs for the six months ended June 30, 2014, when compared to the same period in 2013.

As a percentage of total revenues, selling, general and administrative expenses decreased from 34% for the three and six months ended June 30, 2013 to 31% and 32% for the three and six months ended June 30, 2014, respectively.

Depreciation and Amortization Expense
Depreciation and amortization expense increased $9.4 million to $43.8 million and $17.7 million to $86.1 million in the three and six months ended June 30, 2014 compared to the same periods in 2013, respectively.  These increases are primarily due to new assets placed in service in the last six months of 2013 and in the first six months of 2014, partially offset by assets which became fully depreciated during the last six months of 2013 and in the first six months of 2014.

Other Expense, Net
Other expense, net of other income, increased $1.7 million to $19.2 million and $3.1 million to $37.5 million in the three and six months ended June 30, 2014 when compared to the same periods in 2013, respectively, primarily due to increased interest expense attributable to increased borrowing on our Senior Credit Facility.

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

Income tax expense totaled $0.1 million and $4.2 million and our effective income tax rate was 1% and 51% in the three months ended June 30, 2014 and 2013, respectively. Income tax expense totaled $0.3 million and $7.2 million and our effective income tax rate was 1% and 50% in the six months ended June 30, 2014 and 2013, respectively. Our effective income tax rate decreased due to the inclusion of income attributable to the non-controlling interest in AWN in income before income tax expense and the exclusion of income taxes on income attributable to the non-controlling interest in AWN in 2014 as compared to 2013.

At June 30, 2014, we have income tax net operating loss carryforwards of $275.6 million that will begin expiring in 2020 if not utilized, and alternative minimum tax credit carryforwards of $1.9 million available to offset regular income taxes payable in future years.

We have recorded deferred tax assets of $113.3 million associated with income tax net operating losses that were generated from 2000 to 2013 and that expire from 2020 to 2033, respectively, and with charitable contributions that were converted to net operating losses in 2004 through 2007, and that expire in 2024 through 2027, 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 (benefit) rate for financial statement purposes will be (1)% to 4% in the year ending December 31, 2014.

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

27



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 July 22, 2013, we closed the AWN transaction.  Under the terms of the agreement, ACS is entitled to receive preferential cash distributions totaling $190.0 million over the first four years of AWN’s operations ("Preference Period") contingent on the future cash flows of AWN. The preferential cash distribution is cumulative and may be paid beyond the Preference Period until the entire $190.0 million is paid. AWN has paid ACS $42.8 million in preferential cash distributions during the period from the AWN transaction close through June 30, 2014.

On February 28, 2014, the Federal Communications Commission ("FCC") announced our winning bids in the Tribal Mobility Fund I auction for a $41.4 million grant to partially fund expansion of our 3G wireless network, or better, to locations in Alaska where we would not otherwise be able to construct within our return-on-investment requirements. We filed a long-form application with the FCC by their deadline of April 4, 2014, and this form must be reviewed for final approval before the award can be issued.

We have entered into several financing arrangements under the New Markets Tax Credit (“NMTC”) program which have provided a total of $32.3 million in net cash to help fund the extension of terrestrial broadband service for the first time to rural Northwestern Alaska communities via a high capacity hybrid fiber optic and microwave network.  The project, called TERRA-NW, connects to our TERRA-Southwest network and provides a high capacity backbone connection from the served communities to the Internet.  We began construction on TERRA-NW in 2012, placed into service Phases 1 and 2 of the TERRA-NW project in 2013, and expect to place the final phase into service in late 2014.  The total net cash received under the NMTC program is recorded in Other Assets on our Consolidated Balance Sheets.  We have used the entire $32.3 million of NMTC Restricted Cash to fund TERRA-NW capital expenditures.

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 for the six months ended June 30, 2014 and 2013, are summarized as follows (amounts in thousands):
 
Six Months Ended June 30,
 
2014
 
2013
Operating activities
$
139,020

 
76,316

Investing activities
(100,320
)
 
(76,716
)
Financing activities
(1,342
)
 
1,726

Net increase in cash and cash equivalents
$
37,358

 
1,326


Operating Activities
The increase in cash flows provided by operating activities for the six months ended June 30, 2014, as compared to the same period in 2013, is due to an increase in net income and a decrease in accounts receivable due to the timing of receipt of payments.

Investing Activities
Net cash used in investing activities consists primarily of cash paid for capital expenditures.  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. Additionally, on February 18, 2014, we invested $15.0 million for a 39% interest in Texas Energy Network LLC, a next generation carrier-class communications services firm that specializes in serving the energy exploration and production, oilfield service and midstream industries.


28



Our cash expenditures for property and equipment, including construction in progress, totaled $80.6 million (including $19.0 million for the purchase of real estate) and $87.4 million during the six months ended June 30, 2014 and 2013, respectively.  Additionally, we had $19.8 million in non-cash additions for the purchase of real estate and the extension of satellite lease capacity. Depending on available opportunities and the amount of cash flow we generate during 2014, we expect our 2014 expenditures to total $170.0 million excluding real estate acquisitions and an extension of the satellite lease capacity.

Financing Activities
Net cash provided by financing activities for the six months ended June 30, 2014, consists primarily of proceeds from borrowing on our Senior Credit Facility partially off-set by repayments of our Senior Credit Facility and distributions paid to ACS from AWN.  We may use excess cash to make optional repayments on our debt or repurchase GCI's common stock depending on various factors, such as market conditions.

Available Borrowings Under Senior Credit Facility
Our Senior Credit Facility includes a $240.0 million term loan and a $150.0 million revolving credit facility with a $25.0 million sublimit for letters of credit.  We had $240.0 million outstanding under the term loan at June 30, 2014.  Under the revolving portion of the Senior Credit Facility we have borrowed $49.0 million and have $4.5 million of letters of credit outstanding, which leaves $96.5 million available for borrowing as of June 30, 2014.  A total of $289.0 million is outstanding as of June 30, 2014.

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 $425.0 million in aggregate principal amount of 8.63% Senior Notes due 2019, our Senior Credit Facility, and our Rural Utilities Service loans.  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 Class A and Class B common stock in order to reduce the outstanding shares of Class A and Class B common stock.  Under this program, GCI is currently authorized to make up to $116.1 million of repurchases as of June 30, 2014.  GCI is authorized to increase its repurchase limit $5.0 million per quarter indefinitely and to use stock option exercise proceeds to repurchase additional shares.  If stock repurchases are less than the total approved quarterly amount the difference may be carried forward and applied against future stock repurchases.  We did not purchase any shares under the stock buyback program, on GCI's behalf, during the six months ended June 30, 2014.  The common stock buyback program is expected to continue for an indefinite period dependent on leverage, liquidity, company performance, and market conditions and subject to continued oversight by GCI’s Board of Directors. The open market repurchases have and will continue to comply with the restrictions of SEC Rule 10b-18.

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

Those policies considered to be critical accounting policies for 2014 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, 2013 annual report on Form 10-K.

29




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 December 31, 2013 annual report on Form 10-K.

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.  Our Senior Credit Facility carries interest rate risk.  Amounts borrowed under our Senior Credit Facility bear interest at LIBOR plus 2.75% or less depending upon our Total Leverage Ratio (as defined in the Senior Credit Facility).  Should the LIBOR rate change, our interest expense will increase or decrease accordingly.  As of June 30, 2014, we have borrowed $289.0 million subject to interest rate risk.  On this amount, each 1% increase in the LIBOR interest rate would result in $2.9 million of additional gross interest cost on an annualized basis.  All of our other material borrowings have a fixed interest rate.  We do not hold derivatives.

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 effective as of June 30, 2014.

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

Changes in Internal Control Over Financial Reporting
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 June 30, 2014, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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

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

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

PART II. OTHER INFORMATION


30



Item 6. Exhibits

Listed below are the exhibits that are filed as a part of this Report (according to the number assigned to them in Item 601 of Regulation S-K):
Exhibit No.
Description
31.1
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by our President and Director *
31.2
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by our Chief Financial Officer, Secretary and Treasurer*
32.1
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by our President and Director *
32.2
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by our Chief Financial Officer, Secretary and Treasurer *
101
The following materials from GCI, Inc.'s Quarterly Report on Form
10-Q for the quarter ended June 30, 2014, formatted in XBRL (eXtensible Business
Reporting Language): (i) Consolidated Balance Sheets; (ii) Consolidated Income Statements; (iii) Consolidated Statements of Stockholder's Equity; (iv) Consolidated Statements of Cash Flows; and (v) Condensed Notes to Interim Consolidated Financial Statements *
 
 
 
 
*
Filed herewith.
 
 

31



SIGNATURES

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

GCI, INC.


Signature
 
Title
 
Date
 
 
 
 
 
 
 
 
 
 
/s/ Gregory F. Chapados
 
President and Director
 
August 7, 2014
Gregory F. Chapados
 
(Principal Executive Officer)
 
 
 
 
 
 
 
/s/ Peter J. Pounds
 
Chief Financial Officer, Secretary,
 
August 7, 2014
Peter J. Pounds
 
Treasurer, and Director
(Principal Financial Officer)
 
 
 
 
 
 
 
/s/ Lynda L. Tarbath
 
Vice President, Chief Accounting Officer
 
August 7, 2014
Lynda L. Tarbath
 
(Principal Accounting Officer)
 
 


32