3.	EQUITY METHOD INVESTMENTS (RESTATED)

The consolidated financial statements include the accounts of the Company and its subsidiaries in which it maintains a controlling financial interest. Investments in entities where the Company is able to exercise significant influence, but not control, are accounted for by the equity method. For transactions with entities accounted for under the equity method, any intercompany profits on amounts still remaining are eliminated. Amounts originating from any deferral of intercompany profits are recorded within either the Company’s investment account or the account balance to which the transaction specifically relates (e.g., construction of fixed assets). Only upon settlement of the intercompany transaction with a third party is the deferral of the intercompany profit recognized by the Company. At September 30, 2013, all affiliate transactions have been settled with third parties.

The Company’s equity method investments consist of a 49% interest in TekMate and a 33% interest in AWN.

The following table provides the Company’s ownership interest and investment in TekMate and AWN at the dates indicated:


				September 30,
	Ownership			2013		December 31,
	Interest			(restated)		2012
TekMate, LLC		49	%	$	2,024	$	2,028
Alaska Wireless Network, LLC		33	%		268,675		—

TekMate

In the nine-month period ended September 30, 2013, the Company’s interest in TekMate’s loss was $3 and TekMate made no cash distributions to the Company. At September 30, 2013, there were no undistributed earnings.

AWN

On July 22, 2013, the Company and General Communication, Inc. (“GCI”) completed the transactions contemplated by the June 4, 2012 Asset Purchase and Contribution Agreement (the “Contribution Agreement”) between themselves, two of their respective subsidiaries (the “ACS Member” and the “GCI Member”) and AWN for the purpose of combining their wireless networks into AWN.

Pursuant to the Contribution Agreement, the ACS Member sold certain wireless assets to the GCI Member for a cash payment of $100,000. The GCI Member then contributed these assets, together with GCI’s wireless assets, to AWN in exchange for a two-thirds membership interest in AWN. The ACS Member contributed the Company’s wireless assets that were not sold to GCI to AWN in exchange for a one-third membership interest in AWN.

At the closing, the parties to the AWN transaction entered into the First Amended and Restated Operating Agreement of The Alaska Wireless Network, LLC (the “Operating Agreement”) and other related agreements which will govern the ongoing relationship between the parties. Under the terms of the Operating Agreement, AWN will generally be managed by its majority owner, GCI, subject to certain protective rights retained by the Company and representation of one of three seats on AWN’s Board. Accordingly, ACS has the ability to exercise significant influence over AWN and accounts for its investment under the equity method in accordance with ASC 323 Investments - Equity Method and Joint Ventures.

The Operating Agreement provides that the ACS Member is entitled to a cumulative preferred cash distribution of up to $12,500 of Adjusted Free Cash Flow, as defined in the agreement, in each of the first eight quarters after closing and $11,250 in each of the eight quarters thereafter (ACS’ preference period). Such preferred cash distributions will be made on a monthly basis. GCI Member will receive distributions of the Adjusted Free Cash Flow in excess of the preferred distributions in each quarter during ACS’ preference period. The distributions to each member are subject to certain adjustments based on decreases in the number of ACS Member and GCI Member connections, with the aggregate adjustment capped at $21,800 for each member over the respective testing periods for each member. At the end of ACS’ preference period and payment of accumulated preference amounts, distributions will be made in accordance with membership interests.

A national valuation firm was engaged by ACS and GCI to assist in the determination of the fair value of AWN including the preferred distribution and the allocation of the purchase price to the assets and liabilities using income (discounted cash flow) and cost (replacement cost) approaches. At the time we filed our Form 10-Q for the three and nine months ended September 30, 2013, the firm provided a preliminary valuation subject to review and further input from both GCI and ACS. Based upon our latest correspondence with the valuation firm our estimate of the value of our interest in AWN, which includes the value of the preferred distributions, now stands at $266,000.

The assets sold or contributed included spectrum licenses and wireless switching and transmission equipment having a carrying value on the Company’s books of $87,542. Additionally, the Company contributed certain network usage rights necessary to operate the combined Alaska state-wide network contributed to AWN. Using the work performed by the national valuation firm noted above, these rights have been recorded at fair value and the resulting liability was recorded in Accounts payable and other accrued liabilities – affiliates and Deferred AWN Capacity revenue in the “Consolidated Balance Sheets”. This balance is being amortized on a straight-line basis to revenue in the “Consolidated Statements of Comprehensive Income (Loss)”, over the 20 year contract period for which the Company has contracted to provide service. Cost to maintain our state-wide network are not maintained at a level of specificity that would allow us to determine any incremental direct costs associated with providing capacity to AWN.

Contributed liabilities included certain asset retirement obligations and the obligations arising under the contributed contracts and direct third-party data circuit costs provided by tariff or purchase orders after the closing date.

In accordance with the Operating agreement, ACS as a member of AWN is required to purchase its wholesale wireless services from AWN. As these services are performed they are recorded as operating revenue by AWN and Cost of services and sales – affiliate by ACS.

In accordance with ASC 810-10, paragraph 40-6 Deconsolidation, the Contribution Agreement and the Operating Agreement cannot be bifurcated and are treated as a single transaction for accounting and financial reporting purposes. Accordingly, the sale by ACS of certain wireless assets to GCI, the contribution by ACS of other certain wireless assets directly to AWN, and the acquisition of one-third interest, including the preferred distribution, in AWN by ACS are accounted for as a single transaction.

In the third quarter 2013, the Company recorded a pre-tax gain of $207,318 representing the gain on the sale of wireless assets to GCI and the contribution of wireless assets to AWN. Approximately $83,200 of the pre-tax gain relates to ACS’ one-third retained interest in its wireless assets sold/contributed to AWN.

The following table represents the calculation of the gain:


Consideration received:
Investment	$	266,000
Cash		100,000

Total consideration received		366,000
Consideration provided:
Net intangible and tangible assets		(90,500	)
Deferred AWN Capacity Revenue		(68,182	)

Total consideration provided		(158,682	)

Gain on disposal of assets	$	207,318

In the nine-month period ended September 30, 2013, specifically July 23, 2013 through September 30, 2013, the Company’s share of AWN’s adjusted free cash flow was $9,556, of which $5,389 was received during the period and $4,167 was paid within the 12-day contractual period.

Condensed financial information on AWN is as follows:


	September 30, 2013
Current Assets	$	76,857
Non-Current Assets	$	530,908
Current Liabilities	$	26,136
Non-Current Liabilities	$	43,190
Equity	$	631,382

	Inception to September 30, 2013

Operating Revenues	$	58,826
Gross Profit	$	36,568
Operating Income	$	25,333
Net Income	$	25,259
Adjusted Free Cash Flow ⁽¹⁾	$	20,068

⁽¹⁾	Adjusted free cash flow as defined in the AWN Operating Agreement

The excess of ACS’ investment over the Company’s share of net assets in AWN is estimated to be $47,278 at September 30, 2013. This difference represents the increase in basis of the GCI Member’s contribution to AWN, as AWN is accounting for the GCI member’s contribution at carryover basis and ACS is accounting for it at estimated fair value. Approximately 54.9% of this balance represents an increase in the basis of GCI’s depreciable contributed assets and will be amortized over the estimated remaining useful lives of these assets. The remaining difference is not amortized; however, the investment in AWN is analyzed for impairment. No impairment has been recorded on ACS’ investment of AWN to-date.

Additionally on July 22, 2013, the Company made a $65,000 principal payment on the term loan under its 2010 Senior Secured Credit Facility (“Senior Credit Facility”). As a result of this incremental principal payment in the third quarter 2013, the Company terminated $192,500 of its $385,000 total notional floating-to-fixed interest rate swaps and paid charges of $4,073. Also in the third quarter 2013, the portion of unrealized losses on this swap recorded to accumulated other comprehensive loss, from the swap’s inception through the date hedge accounting treatment was discontinued (November 1, 2012), associated with the variable rate interest payments underlying the accelerated $65,000 principal payment, were reclassified to loss on extinguishment of debt. The amount of this reclassification was $707. The remaining balance of amounts recorded to accumulated other comprehensive loss associated with this hedge will be amortized to interest expense over the period of the remaining originally designated hedged variable rate interest payments.