Company Quick10K Filing
Quick10K
GCI Liberty
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$59.61 106 $6,290
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-07-12 Regulation FD, Exhibits
8-K 2019-06-29 Officers
8-K 2019-06-24 Officers, Shareholder Vote
8-K 2019-06-11 Regulation FD, Exhibits
8-K 2019-06-06 Regulation FD, Exhibits
8-K 2019-06-03 Regulation FD, Exhibits
8-K 2019-05-07 Earnings, Regulation FD, Exhibits
8-K 2019-04-09 Regulation FD, Exhibits
8-K 2019-03-08 Regulation FD, Exhibits
8-K 2019-01-28 Regulation FD, Exhibits
8-K 2018-12-27 Off-BS Arrangement
8-K 2018-12-10 Officers, Regulation FD, Exhibits
8-K 2018-11-08 Earnings, Exhibits
8-K 2018-10-12 Regulation FD, Exhibits
8-K 2018-10-08 Regulation FD, Exhibits
8-K 2018-10-05 Off-BS Arrangement, Other Events
8-K 2018-09-19 Regulation FD, Exhibits
8-K 2018-08-08 Earnings, Exhibits
8-K 2018-07-06 Regulation FD, Exhibits
8-K 2018-06-25 Shareholder Vote
8-K 2018-06-21 Regulation FD, Exhibits
8-K 2018-06-18 Regulation FD, Exhibits
8-K 2018-06-12 Regulation FD, Exhibits
8-K 2018-05-25 Regulation FD, Exhibits
8-K 2018-05-10 Off-BS Arrangement, Shareholder Rights, Officers, Amend Bylaw, Other Events, Exhibits
8-K 2018-05-07 Earnings, Shareholder Vote, Exhibits
8-K 2018-04-10 Regulation FD, Exhibits
8-K 2018-04-03 Regulation FD, Exhibits
8-K 2018-03-08 Enter Agreement, Leave Agreement, M&A, Off-BS Arrangement, Off-BS Arrangement, Accountant, Control, Exhibits
8-K 2018-02-26 Other Events, Exhibits
8-K 2018-02-20 Shareholder Rights, Other Events, Exhibits
8-K 2018-02-02 Suspend Trading, Shareholder Vote, Other Events, Exhibits
BERY Berry Global Group 6,720
NEU Newmarket 4,680
CVI CVR Energy 4,410
TRNO Terreno Realty 2,840
SMMF Summit Financial Group 331
MTEM Molecular Templates 272
LONE Lonestar Resources 88
TMSR TMSR Holding 35
ATOS Atossa Genetics 24
STRI STR Holdings 0
GLIBA 2019-03-31
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-10.1 glib03312019exhibit101.htm
EX-10.2 glib03312019exhibit102.htm
EX-31.1 glib03312019exhibit311.htm
EX-31.2 glib03312019exhibit312.htm
EX-32 glib03312019exhibit32.htm

GCI Liberty Earnings 2019-03-31

GLIBA 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 glib10q3-31x2019.htm 10-Q Document



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019  
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. 001-38385
GCI LIBERTY, INC.
(Exact name of Registrant as specified in its charter)
 
Delaware
 
92-0072737
 
 
(State or other jurisdiction of
 
(I.R.S Employer
 
 
incorporation or organization)
 
Identification No.)
 

 
12300 Liberty Boulevard
 
 
 
 
Englewood, Colorado
 
80112
 
 
(Address of principal executive offices)
 
(Zip Code)
 

Registrant’s telephone number, including area code: (720) 875-5900

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbols
 
Name of exchange on which registered
Series A Common Stock, par value $0.01 per share
 
GLIBA
 
The Nasdaq Stock Market LLC
Series A Cumulative Redeemable preferred stock, par value $0.01 per share
 
GLIBP
 
The Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files.) Yes x No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer," "accelerated filer,” "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act:
Large accelerated filer x
Accelerated filer ☒
Non-accelerated filer ☐
Smaller reporting company ☐
Emerging growth company ☐
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

The number of shares outstanding of the registrant's classes of common stock as of April 30, 2019 was:

101,078,857 shares of Series A common stock; and
4,441,109 shares of Series B common stock

1



TABLE OF CONTENTS

 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Item 3.
 
Item 4.
 
 
 
 
 
Item 1.
 
Item 2.
 
Item 6.
 
 
 
 

2




GCI LIBERTY, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(unaudited)
 
 
 
 
 
March 31,

December 31,

2019

2018

amounts in thousands
Assets



Current assets:
 

 
Cash and cash equivalents
$
422,420


491,257

Trade and other receivables, net of allowance for doubtful accounts of $17,548 and $7,555, respectively
175,825


182,600

Current portion of tax sharing receivable
36,781


36,781

Other current assets
34,349


40,100

Total current assets
669,375


750,738

Investments in equity securities (note 5)
1,867,838


1,533,517

Investments in affiliates, accounted for using the equity method (note 6)
172,975


177,030

Investment in Liberty Broadband measured at fair value (note 6)
3,915,632


3,074,373

Property and equipment, net
1,161,345


1,184,606

Intangible assets not subject to amortization





Goodwill
855,837


855,837

Cable certificates
305,000


305,000

Wireless licenses
191,697


190,000

Other
16,500


16,500


1,369,034


1,367,337

Intangible assets subject to amortization, net (note 7)
423,431


436,006

Tax sharing receivable
74,782


65,701

Other assets, net
163,848


71,514

Total assets
$
9,818,260


8,660,822

 
 
 
 
 
 
 
(Continued)
 See accompanying notes to interim condensed consolidated financial statements.

3



GCI LIBERTY, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(unaudited)
 
 
March 31,
 
December 31,
 
2019
 
2018
 
amounts in thousands, except share amounts
Liabilities and Equity



Current liabilities:



Accounts payable and accrued liabilities
$
80,678


100,334

Deferred revenue
32,004


31,743

Current portion of debt, net of deferred financing costs (note 8)
901,306


900,759

Variable forward
91,484


20,340

Other current liabilities
67,490


27,618

Total current liabilities
1,172,962


1,080,794

Long-term debt, net, including $521,376 and $462,336 measured at fair value (note 8)
2,042,158


1,985,275

Obligations under finance leases and tower obligations, excluding current portion (note 9)
118,039


122,245

Long-term deferred revenue
62,324


65,954

Deferred income tax liabilities
1,064,198


793,696

Preferred stock (note 10)
177,445


177,103

Indemnification obligation (note 4)
110,317


78,522

Other liabilities
121,835


50,543

Total liabilities
4,869,278


4,354,132

Equity





Stockholders’ equity:





Series A common stock, $.01 par value. Authorized 500,000,000 shares; issued and outstanding 101,078,065 shares at March 31, 2019 and 102,058,816 shares at December 31, 2018
1,011


1,021

Series B common stock, $.01 par value. Authorized 20,000,000 shares; issued and outstanding 4,441,109 shares at March 31, 2019 and 4,441,609 shares at December 31, 2018
44


44

Series C common stock, $.01 par value. Authorized 1,040,000,000 shares; no shares issued



Additional paid-in capital
3,212,878


3,251,957

Accumulated other comprehensive earnings (loss), net of taxes
3,068

 
168

Retained earnings
1,722,471


1,043,933

Total stockholders' equity
4,939,472


4,297,123

Non-controlling interests
9,510


9,567

Total equity
4,948,982


4,306,690

Commitments and contingencies




Total liabilities and equity
$
9,818,260


8,660,822

 
 
 
 
 See accompanying notes to interim condensed consolidated financial statements.

4



GCI LIBERTY, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
 
 
 
 
 
Three Months Ended
 
March 31,

2019
 
2018

amounts in thousands, except per share amounts
Revenue
$
217,736


61,204

Operating costs and expenses:





Operating expense (exclusive of depreciation and amortization shown separately below)
68,893


19,819

Selling, general and administrative, including stock-based compensation (note 12)
116,309


32,733

Insurance proceeds
(2,500
)


Depreciation and amortization expense
67,678


16,021


250,380


68,573

Operating income (loss)
(32,644
)

(7,369
)
Other income (expense):





Interest expense (including amortization of deferred loan fees)
(37,618
)

(8,248
)
Share of earnings (losses) of affiliates, net (note 6)
(3,296
)

(2,492
)
Realized and unrealized gains (losses) on financial instruments, net (note 4)
1,009,600


(71,481
)
Tax sharing agreement
9,081


(6,883
)
Other, net
2,768


1,697


980,535


(87,407
)
Earnings (loss) before income taxes
947,891


(94,776
)
Income tax (expense) benefit
(269,405
)

(75,955
)
Net earnings (loss)
678,486


(170,731
)
Less net earnings (loss) attributable to the non-controlling interests
(57
)

(39
)
Net earnings (loss) attributable to GCI Liberty, Inc. shareholders
$
678,543


(170,692
)
Basic net earnings (loss) attributable to Series A and Series B GCI Liberty, Inc. shareholders per common share (note 3)
$
6.47


(1.58
)
Diluted net earnings (loss) attributable to Series A and Series B GCI Liberty, Inc. shareholders per common share (note 3)
$
6.41


(1.58
)
 
 
 
 
 See accompanying notes to interim condensed consolidated financial statements.

5



GCI LIBERTY, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Earnings (Loss)
(Unaudited)
 
 
 
 
 
Three Months Ended
 
March 31,
 
2019
 
2018
 
amounts in thousands
Net earnings (loss)
$
678,486

 
(170,731
)
Other comprehensive earnings (loss), net of taxes:
 
 
 
Comprehensive earnings (loss) attributable to debt credit risk adjustments
2,900

 

Comprehensive earnings (loss)
681,386

 
(170,731
)
Less comprehensive earnings (loss) attributable to the non-controlling interests
(57
)
 
(39
)
Comprehensive earnings (loss) attributable to GCI Liberty, Inc. shareholders
$
681,443

 
(170,692
)
 
 
 
 
 See accompanying notes to interim condensed consolidated financial statements.


6



GCI LIBERTY, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
 
Three Months Ended
 
March 31,
 
2019

2018
 
amounts in thousands
Cash flows from operating activities:
 
 
 
Net earnings (loss)
$
678,486

 
(170,731
)
Adjustments to reconcile net earnings (loss) to net cash from operating activities:


 


Depreciation and amortization
67,678

 
16,021

Stock-based compensation expense
5,631

 
5,236

Share of (earnings) losses of affiliates, net
3,296

 
2,492

Realized and unrealized (gains) losses on financial instruments, net
(1,009,600
)
 
71,481

Deferred income tax expense (benefit)
269,397

 
75,596

Other, net
2,489

 
243

Change in operating assets and liabilities:


 


Current and other assets
20,882

 
(20,092
)
Payables and other liabilities
(17,194
)
 
(1,889
)
Net cash provided (used) by operating activities
21,065

 
(21,643
)
Cash flows from investing activities:


 


Cash and restricted cash from acquisition of GCI Holdings

 
147,957

Capital expended for property and equipment
(40,114
)
 
(6,500
)
Other
803



Net cash provided (used) by investing activities
(39,311
)
 
141,457

Cash flows from financing activities:


 


Borrowings of debt

 
1,000,000

Repayment of debt, capital lease, and tower obligations
(4,739
)
 
(81,386
)
Repurchases of GCI Liberty common stock
(43,910
)


Contributions from (distributions to) parent, net

 
(1,121,320
)
Distribution to non-controlling interests

 
(3,272
)
Derivative payments

 
(80,001
)
Other financing activities, net
(1,929
)
 
(4,341
)
Net cash provided (used) by financing activities
(50,578
)
 
(290,320
)
Net increase (decrease) in cash, cash equivalents and restricted cash
(68,824
)
 
(170,506
)
Cash, cash equivalents and restricted cash at beginning of period
492,032

 
574,148

Cash, cash equivalents and restricted cash at end of period
$
423,208

 
403,642


The following table reconciles cash and cash equivalents and restricted cash reported in the accompanying condensed consolidated balance sheets to the total amount presented in the accompanying condensed consolidated statement of cash flows:
 
March 31,
 
December 31,
 
2019
 
2018
 
amounts in thousands
Cash and cash equivalents
$
422,420

 
491,257

Restricted cash included in other current assets
788

 
775

Total cash and cash equivalents and restricted cash at end of period
$
423,208

 
492,032

 
 
 
 
See accompanying notes to condensed consolidated financial statements.


7



GCI LIBERTY, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Equity
Three Months Ended March 31, 2019 and 2018
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Series A common stock
 
Series B common stock
 
Parent's Investment
 
Additional paid-in capital
 
Accumulated other comprehensive earnings (loss)
 
Retained earnings
 
Non-controlling interest in equity of subsidiaries
 
Total equity
 
amounts in thousands
Balances at January 1, 2018
$

 

 
2,305,440

 

 

 
1,914,963

 
3,633

 
4,224,036

Net earnings (loss)

 

 

 

 

 
(170,692
)
 
(39
)
 
(170,731
)
Stock-based compensation

 

 

 
4,874

 

 

 

 
4,874

Contribution of taxes in connection with HoldCo Split-Off

 

 
1,345,704

 

 

 

 

 
1,345,704

Contributions from (distributions to) former parent, net

 

 
(1,121,295
)
 

 

 

 

 
(1,121,295
)
Change in Capitalization in connection with HoldCo Split-Off

 

 
(2,529,849
)
 
2,529,849

 

 

 
7,000

 
7,000

Issuance of GCI Liberty Stock in connection with the Transactions

 

 

 
1,111,206

 

 

 

 
1,111,206

Issuance of Indemnification Agreement

 

 

 
(281,255
)
 

 

 

 
(281,255
)
Distribution to non-controlling interests

 

 

 

 

 

 
(3,272
)
 
(3,272
)
Other

 

 

 
7

 

 
(7
)
 

 

Balances at March 31, 2018
$

 

 

 
3,364,681

 

 
1,744,264

 
7,322

 
5,116,267

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances at January 1, 2019
$
1,021

 
44

 

 
3,251,957

 
168

 
1,043,933

 
9,567

 
4,306,690

Net earnings (loss)

 

 

 

 

 
678,543

 
(57
)
 
678,486

Other comprehensive earnings (loss)

 

 

 

 
2,900

 

 

 
2,900

Stock-based compensation

 

 

 
6,735

 

 

 

 
6,735

Series A GCI Liberty stock repurchases
(10
)
 

 

 
(43,900
)
 

 

 

 
(43,910
)
Other

 

 

 
(1,914
)
 

 
(5
)
 

 
(1,919
)
Balances at March 31, 2019
$
1,011

 
44

 

 
3,212,878

 
3,068

 
1,722,471

 
9,510

 
4,948,982

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 See accompanying notes to interim condensed consolidated financial statements.

8



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



(1) Basis of Presentation

On April 4, 2017, Liberty Interactive Corporation, now known as Qurate Retail, Inc. ("Qurate Retail"), entered into an Agreement and Plan of Reorganization (as amended, the "reorganization agreement" and the transactions contemplated thereby, the "Transactions") with General Communication, Inc. ("GCI"), an Alaska corporation and parent company of GCI Holdings, LLC ("GCI Holdings"), and Liberty Interactive LLC, a Delaware limited liability company and a direct wholly‑owned subsidiary of Qurate Retail ("LI LLC"). Pursuant to the reorganization agreement, GCI amended and restated its articles of incorporation (which resulted in GCI being renamed GCI Liberty, Inc. ("GCI Liberty")) and effected a reclassification and auto conversion of its common stock. Following these events, Qurate Retail acquired GCI Liberty on March 9, 2018 through a reorganization in which certain Qurate Retail interests, assets and liabilities attributed to its Ventures Group (following the reattribution by Qurate Retail of certain assets and liabilities from its Ventures Group to its QVC Group), were contributed to GCI Liberty in exchange for a controlling interest in GCI Liberty (the "contribution"). Qurate Retail and LI LLC contributed to GCI Liberty their entire equity interests in Liberty Broadband Corporation ("Liberty Broadband"), Charter Communications, Inc. ("Charter"), and LendingTree, Inc. ("LendingTree"), the Evite, Inc. ("Evite") operating business and other assets and liabilities (collectively, "HoldCo"), in exchange for (a) the issuance to LI LLC of a number of shares of GCI Liberty Class A common stock and a number of shares of GCI Liberty Class B common stock equal to the number of outstanding shares of Qurate Retail's Series A Liberty Ventures common stock and Qurate Retail's Series B Liberty Ventures common stock on March 9, 2018, respectively, (b) cash and (c) the assumption of certain liabilities by GCI Liberty.

The contribution was treated as a reverse acquisition under the acquisition method of accounting in accordance with generally accepted accounting principles in the United States ("GAAP"). For accounting purposes, HoldCo is considered to have acquired GCI Liberty in the contribution based, among other considerations, upon the fact that in exchange for the contribution of HoldCo, Qurate Retail received a controlling interest in the combined company of GCI Liberty.

Following the contribution and acquisition of GCI Liberty, Qurate Retail effected a tax‑free separation of its controlling interest in the combined company, GCI Liberty, to the holders of Qurate Retail's Liberty Ventures common stock in full redemption of all outstanding shares of such stock (the "HoldCo Split‑Off"), in which each outstanding share of Qurate Retail's Series A Liberty Ventures common stock was redeemed for one share of GCI Liberty Class A common stock and each outstanding share of Qurate Retail's Series B Liberty Ventures common stock was redeemed for one share of GCI Liberty Class B common stock. In July 2018, the Internal Revenue Service completed its review of the HoldCo Split-Off and informed Qurate Retail that it agreed with the nontaxable characterization of the transactions. Qurate Retail received an Issue Resolution Agreement from the IRS documenting this conclusion.

On May 10, 2018, pursuant to the Agreement and Plan of Merger, dated as of March 22, 2018, GCI Liberty completed its reincorporation into Delaware by merging with its wholly owned Delaware subsidiary, which was the surviving corporation (the “Reincorporation Merger”). References to GCI Liberty or the Company prior to May 10, 2018 refer to GCI Liberty, Inc., an Alaska corporation and references to GCI Liberty after May 10, 2018 refer to GCI Liberty, Inc., a Delaware corporation.

The accompanying condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the results for the periods presented have been included. The results of operations for any interim period are not necessarily indicative of results for the full year. Additionally, certain prior period amounts have been reclassified for comparability with current period presentation. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.

These notes to the condensed consolidated financial statements refer to the combination of GCI Holdings, non‑controlling interests in Liberty Broadband, Charter and LendingTree, a controlling interest in Evite, and certain other assets and liabilities as "GCI Liberty", the "Company", "us", "we" and "our." Although HoldCo was reported as a combined company until the date of the HoldCo Split-Off, these financial statements present all periods as consolidated by the Company. All significant intercompany accounts and transactions have been eliminated in the condensed consolidated financial statements.


9



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


The Company, through its ownership of interests in subsidiaries and other companies, is primarily engaged in providing a full range of wireless, data, video, voice, and managed services to residential customers, businesses, governmental entities, and educational and medical institutions primarily in Alaska.

The Company holds investments that are accounted for using the equity method. The Company does not control the decision making process or business management practices of these affiliates. Accordingly, the Company relies on management of these affiliates to provide it with accurate financial information prepared in accordance with GAAP that the Company uses in the application of the equity method. In addition, the Company relies on audit reports that are provided by the affiliates' independent auditors on the financial statements of such affiliates. The Company is not aware, however, of any errors in or possible misstatements of the financial information provided by its equity affiliates that would have a material effect on its condensed consolidated financial statements.

Split‑Off from Qurate Retail

Following the HoldCo Split‑Off, Qurate Retail and GCI Liberty operate as separate, publicly traded companies, and neither have any stock ownership, beneficial or otherwise, in the other. In connection with the HoldCo Split‑Off, Qurate Retail, Liberty Media Corporation ("Liberty Media") (or its subsidiary) and GCI Liberty entered into certain agreements in order to govern certain of the ongoing relationships among the companies after the HoldCo Split‑Off and to provide for an orderly transition. These agreements include an indemnification agreement, a reorganization agreement, a services agreement, a facilities sharing agreement and a tax sharing agreement.

The reorganization agreement provides for, among other things, the principal corporate transactions (including the internal restructuring) required to effect the Transactions and certain conditions to and provisions governing the relationship between GCI Liberty and Qurate Retail (for accounting purposes a related party of GCI Liberty) with respect to and resulting from the Transactions. The tax sharing agreement provides for the allocation and indemnification of tax liabilities and benefits between Qurate Retail and GCI Liberty and other agreements related to tax matters. Pursuant to the services agreement, Liberty Media provides GCI Liberty with general and administrative services including legal, tax, accounting, treasury and investor relations support. Under the facilities sharing agreement, GCI Liberty shares office space with Liberty Media and related amenities at its corporate headquarters. GCI Liberty reimburses Liberty Media for direct, out‑of‑pocket expenses incurred by Liberty Media in providing these services and for costs that will be negotiated semi‑annually. Liberty Media is a related party of GCI Liberty for accounting purposes as a result of the services agreement. Under these agreements, approximately $2.3 million and $1.7 million were reimbursable to Liberty Media for the three months ended March 31, 2019 and 2018, respectively.

In addition, Qurate Retail and GCI Liberty have agreed to indemnify each other with respect to certain potential losses in respect of the HoldCo Split‑Off. See note 4 for information related to the indemnification agreement.

Recent Accounting Pronouncements

New Accounting Pronouncements Not Yet Adopted

In August 2018, the Financial Accounting Standards Board ("FASB") issued new guidance which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance will be effective for the Company in the first quarter of 2020 with early adoption permitted. The Company is currently assessing the impact that adopting this new accounting standard will have on its consolidated financial statements.

(2) Acquisition

The Company accounted for the Transactions contemplated under the reorganization agreement using the acquisition method of accounting. Under this method, HoldCo is the acquirer of GCI Liberty. The acquisition price was $1.1 billion (level 1). The application of the acquisition method resulted in the assignment of purchase price to the GCI Liberty assets acquired and liabilities assumed based on our estimates of their acquisition date fair values (primarily level 3). The assets acquired and liabilities assumed, and as discussed within this note, are those assets and liabilities of GCI Liberty prior to the completion of the Transactions. The determination of the fair values of the acquired assets and liabilities (and the determination of estimated lives of depreciable tangible and identifiable intangible assets) requires significant judgment.
    

10



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


The acquisition price allocation for GCI Liberty is as follows (amounts in thousands):
 
 
 
Cash and cash equivalents including restricted cash
 
$
147,957

Receivables
 
171,014

Property and equipment
 
1,211,392

Goodwill
 
966,044

Intangible assets not subject to amortization
 
572,500

Intangible assets subject to amortization
 
468,737

Other assets
 
83,422

Deferred revenue
 
(92,561
)
Debt, including capital leases
 
(1,707,002
)
Other liabilities
 
(251,692
)
Deferred income tax liabilities
 
(276,683
)
Preferred stock
 
(174,922
)
Non-controlling interest
 
(7,000
)
 
 
$
1,111,206


Goodwill is calculated as the excess of the consideration transferred over the identifiable net assets acquired and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce, value associated with future customers, continued innovation and non-contractual relationships. Amortizable intangible assets of $468.7 million were acquired and are comprised of a tradename with an estimated useful life of approximately 10 years, customer relationships with a weighted average useful life of approximately 16 years and right-to-use assets with a weighted average useful life of 8 years. Approximately $170.0 million of the acquired goodwill will be deductible for income tax purposes. As of March 31, 2019, the determination of the acquisition date fair value of the acquired assets and assumed liabilities is final.

Since the date of the acquisition, included in net earnings (loss) attributable to GCI Liberty shareholders for the three months ended March 31, 2018 is $1.5 million in losses related to GCI Holdings. The unaudited pro forma revenue, net earnings and basic and diluted net earnings per common share of GCI Liberty, prepared utilizing the historical financial statements of HoldCo, giving effect to acquisition accounting related adjustments made at the time of acquisition, as if the acquisition discussed above occurred on January 1, 2017, are as follows:
 
 
Three Months Ended
 
 
March 31,
 
 
2018
 
 
amounts in thousands, except per share amounts
Revenue
 
$
219,470

Net earnings (loss)
 
$
(180,981
)
Net earnings (loss) attributable to GCI Liberty shareholders
 
$
(180,826
)
Basic net earnings (loss) attributable to Series A and Series B GCI Liberty, Inc. shareholders per common share
 
$
(1.68
)
Diluted net earnings (loss) attributable to Series A and Series B GCI Liberty, Inc. shareholders per common share
 
$
(1.68
)

The pro forma results include adjustments directly attributable to the business combination including adjustments related to the amortization of acquired tangible and intangible assets, revenue, interest expense, stock-based compensation, and the exclusion of transaction related costs. These results also include the impact of the Federal Communications Commission's decision to reduce rates paid to us under the Rural Health Care Program and the new revenue standard. The pro forma information is not representative of the Company’s future results of operations nor does it reflect what the Company’s results of operations would have been if the acquisition had occurred previously and the Company consolidated the results of GCI Liberty during the periods presented.

11



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



(3) Earnings Attributable to GCI Liberty Stockholders Per Common Share

Basic earnings (loss) per common share ("EPS") is computed by dividing net earnings (loss) by the weighted average number of common shares outstanding ("WASO") for the period. Diluted EPS presents the dilutive effect on a per share basis of potential common shares as if they had been converted at the beginning of the periods presented. Potentially dilutive shares are excluded from the computation of diluted EPS during periods in which losses are reported since the result would be antidilutive.

Series A and Series B Common Stock
 
Three Months Ended March 31,
 
2019
 
2018
 
number of shares in thousands
Basic WASO
104,842

 
107,735

Diluted WASO
105,864

 
107,735

Antidilutive shares excluded from diluted WASO

 
1,599


(4) Assets and Liabilities Measured at Fair Value

For assets and liabilities required to be reported at fair value, GAAP provides a hierarchy that prioritizes inputs to valuation techniques used to measure fair value into three broad levels. Level 1 inputs are quoted market prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs, other than quoted market prices included within Level 1, are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. The Company does not have any recurring assets or liabilities measured at fair value that would be considered Level 3.

The Company’s assets and liabilities measured at fair value are as follows:
 
 
March 31, 2019
 
December 31, 2018
Description
 
Total
 
Quoted prices
in active
markets
for identical
assets
(Level 1)
 
Significant
other
observable
inputs
(Level 2)
 
Total
 
Quoted prices
in active
markets
for identical
assets
(Level 1)
 
Significant
other
observable
inputs
(Level 2)
 
 
amounts in thousands
Cash equivalents
 
$
351,076

 
351,076

 

 
384,071

 
384,071

 

Equity securities
 
$
1,862,553

 
1,862,553

 

 
1,529,901

 
1,529,901

 

Investment in Liberty Broadband
 
$
3,915,632

 
3,915,632

 

 
3,074,373

 
3,074,373

 

Variable forward
 
$
91,484

 

 
91,484

 
20,340

 

 
20,340

Indemnification obligation
 
$
110,317

 

 
110,317

 
78,522

 

 
78,522

Exchangeable senior debentures
 
$
521,376

 

 
521,376

 
462,336

 

 
462,336

    
On June 6, 2017, Qurate Retail purchased 450,000 LendingTree shares and executed a 2‑year variable forward with respect to 642,850 LendingTree shares. The variable forward was executed at the LendingTree closing price on June 6, 2017 of $170.70 per share and has a floor price of $128.03 per share and a cap price of $211.67 per share. The fair value of the variable forward was derived from a Black‑Scholes‑Merton model using observable market data as the significant inputs.

Pursuant to an indemnification agreement, GCI Liberty has agreed to indemnify LI LLC for certain payments made to a holder of LI LLC's 1.75% exchangeable debentures due 2046 (the "1.75% Exchangeable Debentures"). An indemnity obligation in the amount of $281.3 million was recorded upon completion of the HoldCo Split-Off. In June 2018, Qurate Retail repurchased 417,759 bonds of the 1.75% Exchangeable Debentures for approximately $457 million, including accrued interest,

12



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


and the Company made a payment under the indemnification agreement to Qurate Retail in the amount of $133 million.The remaining indemnification liability due to LI LLC pertains to the holder’s ability to exercise its exchange right according to the terms of the 1.75% Exchangeable Debentures on or before October 5, 2023. Such amount will equal the difference between the exchange value and par value of the 1.75% Exchangeable Debentures at the time the exchange occurs. The indemnification obligation recorded in the accompanying condensed consolidated balance sheets as of March 31, 2019 represents the fair value of the estimated exchange feature included in the 1.75% Exchangeable Debentures primarily based on observable market data as significant inputs (Level 2). As of March 31, 2019, a holder of the 1.75% Exchangeable Debentures does not have the ability to exchange and, accordingly, such indemnification obligation is included as a long-term liability in the accompanying condensed consolidated balance sheets. Additionally, as of March 31, 2019, 332,241 bonds of the 1.75% Exchangeable Debentures remain outstanding.

Realized and Unrealized Gains (Losses) on Financial Instruments, net

Realized and unrealized gains (losses) on financial instruments, net are comprised of changes in the fair value of the following:
 
 
Three Months Ended
 
 
March 31,
 
 
2019
 
2018
 
 
amounts in thousands
Equity securities
 
$
334,320

 
(131,562
)
Investment in Liberty Broadband
 
841,259

 
22,621

Variable forward
 
(71,144
)
 
8,743

Indemnification obligation
 
(31,795
)
 
28,717

Exchangeable senior debentures
 
(63,040
)
 

 
 
$
1,009,600

 
(71,481
)

The Company has elected to account for its exchangeable debt using the fair value option.  Accordingly, a portion of the unrealized gain (loss) recognized on the Company’s exchangeable debt is presented in other comprehensive income as it relates to instrument specific credit risk and any other changes in fair value are presented in the accompanying condensed consolidated statements of operations.

(5) Investments in Equity Securities

Investments in equity securities, the majority of which are carried at fair value, are summarized as follows:
 
 
 
March 31,
 
December 31,
 
 
 
2019
 
2018
 
 
 
amounts in thousands
Charter (a)
 
 
$
1,858,883

 
1,526,984

Other investments (b)
 
 
8,955

 
6,533

 
 
 
$
1,867,838

 
1,533,517

(a) A portion of the Charter equity securities are considered covered shares and subject to certain contractual restrictions in accordance with the indemnification agreement. See note 4 for additional discussion of the indemnification agreement.
(b) The Company has elected the measurement alternative for a portion of these securities.

(6) Investments in Affiliates Accounted for Using the Equity Method

Investment in LendingTree

The Company has various investments accounted for using the equity method. The following table includes the Company’s carrying amount and percentage ownership of the more significant investments in affiliates at March 31, 2019 and the carrying amount at December 31, 2018:

13



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


 
March 31, 2019
 
December 31, 2018
 
Percentage
ownership
 
Market
value
 
Carrying
amount
 
Carrying
amount
 
 
 
dollars in thousands
LendingTree (a)
26.9
%
 
$
1,210,769

 
$
171,116

 
174,002

Other
various

 
NA

 
1,859

 
3,028

 
 
 
 
 
$
172,975

 
177,030

 
 
 
 
 
 
 
 
(a) Both the Company's ownership interest in LendingTree and the Company's share of LendingTree's earnings (losses) are reported on a three month lag. The market value disclosed is as of March 31, 2019.

The Company’s share of LendingTree’s losses was $2.1 million and $2.5 million for the three months ended March 31, 2019 and 2018, respectively.

Investment in Liberty Broadband

On May 18, 2016, Qurate Retail completed a $2.4 billion investment in Liberty Broadband Series C non-voting shares (for accounting purposes a related party of the Company) in connection with the merger of Charter and Time Warner Cable Inc. ("TWC"). The proceeds of this investment were used by Liberty Broadband to fund, in part, its acquisition of $5 billion of stock in the new public parent company, Charter, of the combined enterprises. Qurate Retail, along with third party investors, all of whom invested on the same terms as Qurate Retail, purchased newly issued shares of Liberty Broadband Series C common stock at a per share price of $56.23, which was determined based upon the fair value of Liberty Broadband’s net assets on a sum‑of‑the parts basis at the time the investment agreements were executed (May 2015). Qurate Retail, as part of the merger described above, exchanged, in a tax‑free transaction, its shares of TWC common stock for shares of Charter Class A common stock, on a one‑for‑one basis, and Qurate Retail granted to Liberty Broadband a proxy and a right of first refusal with respect to the shares of Charter Class A common stock held by Qurate Retail following the exchange, which proxy and right of first refusal was assigned to GCI Liberty in connection with the completion of the Transactions.

As of March 31, 2019, the Company has a 23.5% economic ownership interest in Liberty Broadband. Due to overlapping boards of directors and management, the Company has been deemed to have significant influence over Liberty Broadband for accounting purposes, even though the Company does not have any voting rights. The Company has elected to apply the fair value option for its investment in Liberty Broadband (Level 1) as it is believed that investors value this investment based on the trading price of Liberty Broadband. The Company recognizes changes in the fair value of its investment in Liberty Broadband in realized and unrealized gains (losses) on financial instruments, net in the accompanying condensed consolidated statements of operations. Summarized financial information for Liberty Broadband is as follows:
 
 
March 31,
 
December 31,
 
 
2019
 
2018
 
 
amounts in thousands
Current assets
 
$
74,299

 
84,574

Investment in Charter, accounted for using the equity method
 
11,999,494

 
12,004,376

Other assets
 
9,585

 
9,487

Total assets
 
12,083,378

 
12,098,437

Long-term debt, including current portion
 
523,238

 
522,928

Deferred income tax liabilities
 
961,665

 
965,829

Other liabilities
 
8,720

 
11,062

Equity
 
10,589,755

 
10,598,618

Total liabilities and shareholders' equity
 
$
12,083,378

 
12,098,437


14



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


 
 
Three months ended
 
 
March 31,
 
 
2019
 
2018
 
 
amounts in thousands
Revenue
 
$
3,458

 
11,791

Operating expenses, net
 
(9,659
)
 
(9,545
)
Operating income (loss)
 
(6,201
)
 
2,246

Share of earnings (losses) of affiliates
 
34,849

 
9,302

Gain (loss) on dilution of investment in affiliate
 
(41,403
)
 
(26,757
)
Other income (expense), net
 
(6,120
)
 
(4,812
)
Income tax benefit (expense)
 
4,574

 
4,951

Net earnings (loss)
 
$
(14,301
)
 
(15,070
)

(7) Intangible Assets

Intangible Assets Subject to Amortization
 
 
March 31, 2019
 
    
Gross
    
 
    
Net
 
 
carrying
 
Accumulated
 
carrying
 
 
amount
 
amortization
 
amount
 
 
amounts in thousands
Customer relationships
 
$
408,267

 
(65,354
)
 
342,913

Other amortizable intangibles
 
126,453

 
(45,935
)
 
80,518

Total
 
$
534,720

 
(111,289
)
 
423,431


Amortization expense for intangible assets with finite useful lives was $16.3 million and $5.2 million for the three months ended March 31, 2019 and 2018, respectively. Amortization expense for amortizable intangible assets for each of the five succeeding fiscal years is estimated to be (amounts in thousands):
Remainder of 2019
$
44,525

2020
$
51,997

2021
$
41,616

2022
$
36,009

2023
$
33,260



15



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


(8) Debt

Debt is summarized as follows:
 
 
Outstanding
 
 
 
    
Principal
 
Carrying Value
 
 
March 31,
 
March 31,
 
December 31,
 
 
2019
 
2019
 
2018
 
 
amounts in thousands
Margin Loan Facility
 
$
900,000

 
900,000

 
900,000

Exchangeable senior debentures
 
477,250

 
521,376

 
462,336

Senior notes
 
775,000

 
802,107

 
803,287

Senior credit facility
 
714,510

 
714,510

 
715,124

Wells Fargo note payable
 
7,436

 
7,436

 
7,554

Deferred financing costs
 

 
(1,965
)
 
(2,267
)
Total debt
 
$
2,874,196

 
2,943,464

 
2,886,034

Debt classified as current (included in other current liabilities)
 
 
 
(901,306
)
 
(900,759
)
Total long-term debt
 
 
 
$
2,042,158

 
1,985,275


Margin Loan

On December 29, 2017, Broadband Holdco, LLC ("Broadband Holdco"), a wholly owned subsidiary of, at such time, Qurate Retail, and now the Company, entered into a margin loan agreement with various lender parties consisting of a term loan in an aggregate principal amount of $1 billion (the “Margin Loan”). 42,681,842 shares of Liberty Broadband Series C common stock with a value of $3.9 billion were pledged by Broadband Holdco, LLC as collateral for the loan as of March 31, 2019. This Margin Loan has a term of two years with an interest rate of LIBOR plus 1.85% and contains an undrawn commitment fee of up to 0.75% per annum. Deferred financing costs incurred on the Margin Loan are reflected in current portion of debt, net in the accompanying condensed consolidated balance sheet. In connection with the completion of the Transactions, Broadband Holdco borrowed the full principal amount of the Margin Loan. A portion of the proceeds of the Margin Loan was used to make a distribution to Qurate Retail of $1.1 billion to be used within one year for the repurchase of QVC Group stock (now the Qurate Retail common stock) or to pay down certain debt at Qurate Retail, and for the payment of fees and other costs and expenses, in each case, pursuant to the terms of the reorganization agreement.  The distributed loan proceeds constituted a portion of the cash reattributed to the QVC Group.

On October 5, 2018 (the “Closing Date”), Broadband Holdco entered into Amendment No. 1 (the “Amendment”) to the Margin Loan (the “Margin Loan Agreement”). Pursuant to the Amendment, lenders under the Margin Loan have agreed to, among other things, provide commitments (the “Revolving Commitments”) for a new revolving credit facility in an aggregate principal amount of up to $200.0 million (the “Revolving Credit Facility” and, the loans thereunder, the “Revolving Loans”). The Revolving Credit Facility established under the Margin Loan Agreement is in addition to the existing term loan credit facility under the Margin Loan Agreement (the “Term Loan Facility” and, together with Revolving Credit Facility, the “Margin Loan Facility” and the loans thereunder, the “Loans”). After giving effect to the initial borrowing of Revolving Loans and Term Loan Prepayment (as defined below) on the Closing Date, $800.0 million of loans under the Term Loan Facility were outstanding and $200.0 million of Revolving Loans were outstanding. Subsequent to the Closing Date, the Company repaid $100.0 million of the Revolving Credit Facility. The Amendment also amends certain covenants in the Margin Loan to permit, among other things, a designated GCI Liberty subsidiary to enter into a subordinated revolving note with GCI Liberty and certain additional investments.

Broadband Holdco is permitted to use the proceeds of the Revolving Loans for any purpose not prohibited under the Margin Loan, including, without limitation, (i) to make dividends and distributions, (ii) for the purchase of margin stock, (iii) to make investments not prohibited under the Margin Loan, (iv) to repay an intercompany loan to GCI Liberty, and/or (v) otherwise for general corporate purposes, including, without limitation, for payment of interest and fees and other costs and expenses. On the Closing Date, Broadband Holdco drew down on the full amount of the commitments under the Revolving

16



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


Credit Facility and applied all of the proceeds to prepay, on the Closing Date, a portion of the loans outstanding under the Term Loan Facility (the “Term Loan Prepayment”).

The Loans will mature on December 29, 2019 (the “maturity date”) and accrue interest at a rate equal to the 3-month LIBOR rate plus a per annum spread of 1.85%, subject to certain conditions and exceptions. Undrawn Revolving Commitments shall be available to Broadband Holdco from the Closing Date to but excluding the earlier of (i) the date that is one month prior to the maturity date and (ii) the date of the termination of such Revolving Commitments pursuant to the terms of the Margin Loan. The obligations under the Revolving Credit Facility, together with the obligations under Term Loan Facility, are secured by first priority liens on the shares of Liberty Broadband owned by Broadband Holdco and certain other cash collateral provided by Broadband Holdco. In addition, the Revolving Credit Facility and the Term Loan Facility are subject to the same affirmative and negative covenants and events of default.

Exchangeable Senior Debentures

On June 18, 2018, GCI Liberty issued 1.75% exchangeable senior debentures due 2046 ("Exchangeable Senior Debentures"). Upon an exchange of debentures, GCI Liberty, at its option, may deliver Charter Class A common stock, cash or a combination of Charter Class A common stock and cash. Initially, 2.6989 shares of Charter Class A common stock are attributable to each $1,000 principal amount of debentures, representing an initial exchange price of approximately $370.52 for each share of Charter Class A common stock. A total of 1,288,051 shares of Charter Class A common stock are attributable to the debentures. Interest is payable quarterly on March 31, June 30, September 30 and December 31 of each year. The debentures may be redeemed by GCI Liberty, in whole or in part, on or after October 5, 2023. Holders of debentures also have the right to require GCI Liberty to purchase their debentures on October 5, 2023. The redemption and purchase price will generally equal 100% of the adjusted principal amount of the debentures plus accrued and unpaid interest.

Senior Notes

Interest on the 6.75% Senior Notes due 2021 (the "2021 Notes") and the 6.875% Senior Notes due 2025, both of which were issued by GCI, Inc., which is now GCI, LLC (collectively, the “Senior Notes”), is payable semi-annually in arrears. The Senior Notes are redeemable at the Company's option, in whole or in part, at a redemption price defined in the respective indentures, and accrued and unpaid interest (if any) to the date of redemption. The Senior Notes are stated net of an aggregate unamortized premium of $27.1 million at March 31, 2019. Such premium is being amortized to interest expense in the accompanying condensed consolidated statements of operations. As of March 31, 2019, GCI, LLC exceeded the maximum leverage threshold, as measured by the terms of its Senior Notes, and therefore does not have access to any additional funding under the revolving portion of the Senior Credit Facility, as defined below.

Senior Credit Facility

On December 27, 2018, GCI, LLC, a wholly-owned subsidiary of the Company, amended and restated the Fifth Amended and Restated Credit Agreement dated as of March 9, 2018 and refinanced the revolving credit facility and term loan A with a new revolving credit facility, leaving the existing Term Loan B in place (the "Senior Credit Facility"). The Senior Credit Facility provides a $240.7 million term loan B ("Term Loan B") and a $550.0 million revolving credit facility.

GCI, LLC's Senior Credit Facility Total Leverage Ratio (as defined in the Senior Credit Facility) may not exceed 6.50 to one and the Secured Leverage Ratio (as defined in the Senior Credit Facility) may not exceed 4.00 to one.

The revolving credit facility borrowings that are LIBOR loans bear interest at a per annum rate equal to the applicable LIBOR plus a margin that varies between 1.50% and 2.75% depending on the total leverage ratio. The full principal revolving credit facility included in the Senior Credit Facility will mature on December 27, 2023 or December 3, 2020 if the 2021 Notes are not refinanced prior to such date.

The interest rate for the Term Loan B is LIBOR plus 2.25%. The Term Loan B requires principal payments of 0.25% of the original principal amount on the last day of each calendar quarter with the full amount maturing on February 2, 2022 or December 3, 2020 if the Company's 2021 Notes are not refinanced prior to such date.

The terms of the Senior Credit Facility include customary representations and warranties, customary affirmative and negative covenants and customary events of default. At any time after the occurrence of an event of default under the Senior

17



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


Credit Facility, the lenders may, among other options, declare any amounts outstanding under the Senior Credit Facility immediately due and payable and terminate any commitment to make further loans under the Senior Credit Facility. The obligations under the Senior Credit Facility are secured by a security interest on substantially all of the assets of GCI Holdings and the subsidiary guarantors, as defined in the Senior Credit Facility, and on the stock of GCI Holdings.

As of March 31, 2019, there is $239.5 million outstanding under the Term Loan B, $475.0 million outstanding under the revolving portion of the Senior Credit Facility and $10.1 million in letters of credit under the Senior Credit Facility, which leaves $64.9 million available for borrowing when GCI, LLC meets the maximum leverage threshold, as measured by the terms of its Senior Notes.

Wells Fargo Note Payable

GCI Holdings issued a note to Wells Fargo that matures on July 15, 2029 and is payable in monthly installments of principal and interest (the "Wells Fargo Note Payable"). The interest rate is variable at one month LIBOR plus 2.25%.

The note is subject to similar affirmative and negative covenants as the Senior Credit Facility. The obligations under the note are secured by a security interest and lien on the building purchased with the note.

Debt Covenants

GCI, LLC is subject to covenants and restrictions under its Senior Notes and Senior Credit Facility. The Company and GCI, LLC are in compliance with all debt maintenance covenants as of March 31, 2019.

Fair Value of Debt

The fair value of the Senior Notes was $798.6 million at March 31, 2019.

Due to the variable rate nature of the Margin Loan, Senior Credit Facility and Wells Fargo Note Payable, the Company believes that the carrying amount approximates fair value at March 31, 2019.

(9) Leases

In February 2016 and subsequently, the FASB issued new guidance which revises the accounting for leases (“ASC 842”). Under the new guidance, entities that lease assets are required to recognize assets and liabilities on the balance sheet related to the rights and obligations created by those leases regardless of whether they are classified as finance or operating leases. In addition, new disclosures are required to meet the objective of enabling users of the financial statements to better understand the amount, timing, and uncertainty of cash flows arising from leases. The Company adopted this guidance on January 1, 2019 and elected the optional transition method that allowed for a cumulative-effect adjustment in the period of adoption. Results for reporting periods beginning after January 1, 2019 are presented under the new guidance, while prior period amounts were not adjusted and continue to be reported under the accounting standards in effect for those periods.

The Company elected certain of the available transition practical expedients, including those that permit it to not reassess (1) whether any expired or existing contracts are or contain leases, (2) the lease classification for any expired or existing leases, and (3) any initial direct costs for any existing leases as of the effective date. The Company did not elect the hindsight practical expedient, which permits entities to use hindsight in determining the lease term and assessing impairment. The most significant impact of the new guidance was the recognition of right-of-use ("ROU") assets and lease liabilities for operating leases. In addition, the Company elected the practical expedient to account for the lease and non-lease components as a single lease component and will not recognize a right-of-use assets or lease liabilities for short-term leases, which are those leases with a term of twelve months or less at the lease commencement date.

The Company recognized $107 million of ROU assets, $27 million of short-term operating lease liabilities and $80 million of long-term operating lease liabilities in the accompanying condensed consolidated balance sheet upon the adoption of the new standard.


18



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


In 2016 and 2017, GCI Holdings sold certain tower sites and entered into a master lease agreement in which it leased back space on those tower sites. At the time, GCI Holdings determined that it was precluded from applying sales-leaseback accounting. Upon adoption of ASC 842, GCI Holdings considered whether this transaction would have resulted in a completed sale-leaseback transaction and concluded that the transaction did not meet the criteria and should continue to be accounted for in the same manner as previously determined.

The Company has entered into finance lease agreements with satellite providers for transponder capacity to transmit voice and data traffic in rural Alaska. The Company is also party to finance lease agreements for an office building and certain retail store locations. The Company also leases office space, land for towers and communication facilities, satellite transponders, fiber capacity, and equipment. These leases are classified as operating leases. Operating lease right-of-use assets and operating lease liabilities are recognized based on the present value of the future lease payments using our incremental borrowing rate at the commencement date of the lease.
 
Our leases have remaining lease terms of 0 years to 31 years, some of which may include the option to extend for up to 40 years, and some of which include options to terminate the leases within 4 years.

The components of lease cost during the three months ended March 31, 2019 were as follows:
 
Three months ended
 
March 31, 2019
 
amounts in thousands
Operating lease cost (1)
$
9,780

 
 
Finance lease cost
 
Depreciation of leased assets
$
2,159

Interest on lease liabilities
506

Total finance lease cost
$
2,665

(1) Included within operating lease costs were short-term lease costs and variable lease costs, which were not material to the financial statements.

For the three months ended March 31, 2018, the Company recorded depreciation expense on finance leases (previously referred to as capital leases) and operating lease expense of $0.7 million and $3 million, respectively.

The remaining weighted-average lease term and the weighted average discount rate were as follows:
 
Three months ended
 
March 31, 2019
Weighted-average remaining lease term (years):
 
Finance leases
3.5
Operating leases
5.8
Weighted-average discount rate:
 
Finance leases
4.9
Operating leases
5.8


19



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


Supplemental balance sheet information related to leases was as follows:
 
 
March 31,
 
 
2019
 
 
amounts in thousands
Operating leases:
 
 
Operating lease right-of-use assets, net (1)
 
$
101,551

 
 
 
Current operating lease liabilities (2)
 
$
28,235

Operating lease liabilities (3)
 
71,254

Total operating lease liabilities
 
$
99,489

 
 
 
Finance Leases:
 
 
Property and equipment, at cost
 
$
41,084

Accumulated depreciation
 
(9,354
)
Property and equipment, net
 
$
31,730

 
 
 
Current obligations under finance leases (4)
 
$
11,778

Obligations under finance leases and tower obligations
 
26,921

Total finance lease liabilities
 
$
38,699

(1) Operating lease right-of-use assets, net are included within the other assets, net line item in the accompanying condensed consolidated balance sheets.
(2) Current operating lease liabilities are included within the other current liabilities line item in the accompanying condensed consolidated balance sheets.
(3) Operating lease liabilities are included within the other liabilities line item in the accompanying condensed consolidated balance sheets.
(4) Current obligations under finance leases are included within the other current liabilities line item in the accompanying condensed consolidated balance sheets.

Supplemental cash flow information related to leases was as follows:
 
Three months ended
 
March 31, 2019
 
amounts in thousands
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash flows from operating leases
$
9,888

Operating cash flows from finance leases
$
506

Financing cash flows from finance leases
$
2,856

Right-of-use assets obtained in exchange for lease obligations
 
Operating leases
$
2,398

Finance leases
$


20



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



Future lease payments under finance leases, operating leases and tower obligations with initial terms of one year or more at March 31, 2019 consisted of the following:
 
Finance Leases
 
Operating Leases
 
Tower Obligation
 
amounts in thousands
Remainder of 2019
$
10,088

 
26,966

 
5,739

2020
13,459

 
31,437

 
7,797

2021
12,044

 
22,530

 
7,953

2022
5,293

 
13,737

 
8,112

2023
678

 
9,720

 
8,274

Thereafter
1,734

 
21,952

 
142,825

Total lease payments
43,296

 
126,342

 
180,700

Less: imputed interest
(4,597
)
 
(26,853
)
 
(88,593
)
Total lease liabilities
$
38,699

 
99,489

 
92,107


(10) Preferred Stock

GCI Liberty Series A Cumulative Redeemable Preferred Stock (the "Preferred Stock") was issued as a result of the auto conversion that occurred on March 8, 2018. The Company is required to redeem all outstanding shares of Preferred Stock out of funds legally available, at the liquidation price plus all unpaid dividends (whether or not declared) accrued from the most recent dividend payment date through the redemption date, on the first business day following the twenty-first anniversary of the March 8, 2018 auto conversion. There were 7,500,000 shares of Preferred Stock authorized and 7,215,797 shares issued and outstanding at March 31, 2019. An additional 42,500,000 shares of preferred stock of the Company are authorized and are undesignated as to series. The Preferred Stock is accounted for as a liability in the accompanying condensed consolidated balance sheets because it is mandatorily redeemable. As a result, all dividends paid on the Preferred Stock are recorded as interest expense in the accompanying condensed consolidated statements of operations.

The liquidation price is measured per share and shall mean the sum of (i) $25, plus (ii) an amount equal to all unpaid dividends (whether or not declared) accrued with respect to such share have been added to and then remain part of the liquidation price as of such date.

The holders of shares of Preferred Stock are entitled to receive, when and as declared by the GCI Liberty Board of Directors, out of legally available funds, preferential dividends that accrue and cumulate as provided in the restated GCI Liberty certificate of incorporation.

Dividends on each share of Preferred Stock accrued on a daily basis at an initial rate of 5.00% per annum of the liquidation price, and increased to 7.00% per annum of the liquidation price effective July 16, 2018 as a result of the Reincorporation Merger in the State of Delaware in May 2018.

Accrued dividends are payable quarterly on each dividend payment date, which is January 15, April 15, July 15, and October 15 of each year, commencing on the first such date following the auto conversion, which occurred immediately after the market closed on March 8, 2018. If GCI Liberty fails to pay cash dividends on the Preferred Stock in full for any four consecutive or non-consecutive dividend periods then the dividend rate shall increase by 2.00% per annum of the liquidation price until cured. On March 8, 2019, the Company announced that it declared a quarterly cash dividend of approximately $0.44 per share of Preferred Stock which was paid on April 15, 2019 to shareholders of record of the Preferred Stock at the close of business on April 1, 2019.


21



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


(11) Variable Interest Entities

New Markets Tax Credit Entities

GCI entered into several arrangements under the New Markets Tax Credit ("NMTC") program with US Bancorp to help fund various projects that extended terrestrial broadband service for the first time to rural Northwestern Alaska communities via a high capacity hybrid fiber optic and microwave network.  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.

Each of the transactions has an investment fund, which is a special purpose entity created to effect the financing arrangement. In each of the transactions, the Company loaned money to the investment fund and US Bancorp invested money in the investment fund. The investment fund would then contribute the funds from the Company's loan and US Bancorp's investment to a CDE. The CDE, in turn, would loan the funds to the Company's wholly owned subsidiary, Unicom, Inc. ("Unicom") as partial financing for the projects.

US Bancorp is entitled to substantially all of the benefits derived from the NMTCs.  All of the loan proceeds to Unicom, net of syndication and arrangement fees, were restricted for use on the projects.  Restricted cash of $0.8 million was held by Unicom at March 31, 2019 and is included in the accompanying condensed consolidated balance sheets. The Company completed construction of the projects partially funded by these transactions.

These transactions include put/call provisions whereby the Company may be obligated or entitled to repurchase US Bancorp’s interest in each investment fund for a nominal amount. The Company believes that US Bancorp will exercise the put options at the end of the compliance periods for each of the transactions. The NMTCs are subject to 100% recapture for a period of seven years as provided in the Internal Revenue Code of 1986, as amended. The Company is 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. The Company has agreed to indemnify US Bancorp for any loss or recapture of NMTCs until such time as its obligation to deliver tax benefits is relieved. There have been no credit recaptures as of March 31, 2019.  The value attributed to the put/calls is nominal.

The Company has determined that each of the investment funds are variable interest entities ("VIEs").  The consolidated financial statements of each of the investment funds include the CDEs. 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 the Company 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 the Company is obligated to absorb losses of the VIEs. The Company concluded that it is the primary beneficiary of each and consolidated the VIEs in accordance with the accounting standard for consolidation.

The assets and liabilities of the consolidated VIEs were $89 million and $63 million, respectively, as of March 31, 2019.

The assets of the VIEs serve as the sole source of repayment for the debt issued by these entities. US Bank does not have recourse to us or our other assets, with the exception of customary representations and indemnities the Company has provided. The Company is not required and does not currently intend to provide additional financial support to these VIEs. While these subsidiaries are included in the Company's consolidated financial statements, these subsidiaries are separate legal entities and their assets are legally owned by them and not available to the Company's creditors.


22



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


The following table summarizes the key terms of each of the NMTC transactions:
Financing Arrangement
Investment Funds
Transaction Date
Loan Amount
Interest Rate on Loan to Investment Fund
Maturity Date
US Bancorp Investment
Loan to Unicom
Interest Rate on Loan(s) to Unicom
Expected Put Option Exercise
NMTC #2
TIF 2 & TIF 2-USB
October 3, 2012
$37.7 million
1%
October 2, 2042
$17.5 million
$52.0 million
0.71% to 0.77%
October 2019
NMTC #3
TIF 3
December 11, 2012
$8.2 million
1%
December 10, 2042
$3.8 million
$12.0 million
1.35%
December 2019
NMTC #4
TIF 4
March 21, 2017
$6.7 million
1%
March 21, 2040
$3.3 million
$9.8 million
0.73%
March 2024
NMTC #5
TIF 5-1 and TIF 5-2
December 22, 2017
$10.4 million
1%
December 22, 2047
$5.1 million
$14.7 million
0.67% to 1.24%
December 2024

(12) Stock-Based Compensation

GCI Liberty has granted to certain directors, employees and employees of its subsidiaries, restricted shares (“RSAs”), restricted stock units (“RSUs”) and options to purchase shares of GCI Liberty’s common stock (collectively, "Awards"). The Company measures the cost of employee services received in exchange for an equity classified Award (such as stock options, RSAs and RSUs) based on the grant-date fair value (“GDFV”) of the Award, and recognizes that cost over the period during which the employee is required to provide service (usually the vesting period of the Award). The Company measures the cost of employee services received in exchange for a liability classified Award based on the current fair value of the Award, and remeasures the fair value of the Award at each reporting date.

Included in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations are $5.6 million and $5.2 million of stock-based compensation during the three months ended March 31, 2019 and 2018, respectively.

During the three months ended March 31, 2019, and in connection with our CEO's employment agreement, GCI Liberty granted 51 thousand performance-based RSUs of GCI Liberty Series B common stock to our CEO. The RSUs had a GDFV of $53.78 per share at the time they were granted and cliff vest in one year, subject to the satisfaction of certain performance objectives. Performance objectives, which are subjective, are considered in determining the timing and amount of the compensation expense recognized. When the satisfaction of the performance objectives becomes probable, the Company records compensation expense. The probability of satisfying the performance objectives is assessed at the end of each reporting period.
 
The Company has calculated the GDFV for all of its equity classified Awards and any subsequent remeasurement of its liability classified Awards using the Black-Scholes-Merton Model. The Company estimates the expected term of the Awards based on historical exercise and forfeiture data. The volatility used in the calculation for Awards is based on the historical volatility of GCI Liberty's stock and the implied volatility of publicly traded GCI Liberty options. The Company uses a zero dividend rate and the risk-free rate for Treasury Bonds with a term similar to that of the subject options.

GCI Liberty-Outstanding Awards

The following tables present the number and weighted average exercise price ("WAEP") of Awards to purchase GCI Liberty common stock granted to certain officers, employees and directors of the Company, as well as the weighted average remaining life and aggregate intrinsic value of the Awards.

23



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


 
 
Series A
 
    
 
    
 
    
Weighted
    
Aggregate
 
 
 
 
 
 
average
 
intrinsic
 
 
Awards
 
 
 
remaining
 
value
 
 
(000's)
 
WAEP
 
life
 
(millions)
Outstanding at January 1, 2019
 
1,650

 
$
47.61

 
 
 
 
 
Granted
 

 
$

 
 
 
 
 
Exercised
 
(40
)
 
$
22.59

 
 
 
 
 
Forfeited/Cancelled
 

 
$

 
 
 
 
 
Outstanding at March 31, 2019
 
1,610

 
$
48.22

 
1.5
years
 
$
12

Exercisable at March 31, 2019
 
1,276

 
$
48.78

 
1.1
years
 
$
9


 
 
Series B
 
    
 
    
 
    
Weighted
    
Aggregate
 
 
 
 
 
 
average
 
intrinsic
 
 
Awards
 
 
 
remaining
 
value
 
 
(000's)
 
WAEP
 
life
 
(millions)
Outstanding at January 1, 2019
 
1,223

 
$
56.10

 
 
 
 
 
Granted
 

 
$

 
 
 
 
 
Exercised
 

 
$

 
 
 
 
 
Forfeited/Cancelled
 

 
$

 
 
 
 
 
Outstanding at March 31, 2019
 
1,223

 
$
56.10

 
3.8
years
 
$

Exercisable at March 31, 2019
 
905

 
$
56.01

 
4.1
years
 
$


As of March 31, 2019, the total unrecognized compensation cost related to unvested options and RSA/RSUs was approximately $7 million and $27 million, respectively. Such amounts will be recognized in the Company's consolidated statements of operations over a weighted average period of approximately 1.2 years and 2.0 years, respectively.

As of March 31, 2019, GCI Liberty reserved for issuance upon exercise of outstanding stock options approximately 1.6 million shares of GCI Liberty Series A common stock and 1.2 million shares of GCI Liberty Series B common stock.

(13) Commitments and Contingencies

Rural Health Care (“RHC”) Program

On November 30, 2018, a subsidiary of GCI Holdings received multiple funding denial notices from USAC, denying requested funding from the RHC Program operated by a rural health customer (the "Customer") for the funding year that ended on June 30, 2018. In November 2017, USAC requested information from the Customer related to bidding process documentation for two separate service contracts a subsidiary of GCI Holdings has with the Customer. Although the Customer timely responded, USAC found that bids previously received were not submitted with the original funding request and/or that bidding information submitted was related to the wrong bidding year. The Customer filed an appeal with USAC on January 29, 2019 and made a supplemental filing on March 12, 2019.

On May 6, 2019, the Customer received a letter from USAC that denied the Customer’s appeal for all requested funding on the basis that the Customer failed to indicate that it had received, and failed to submit copies of, the responses or bids received, when it originally sought funding from the RHC Program under the two service contracts that a subsidiary of GCI Holdings has with the Customer. It is our understanding that the Customer intends to appeal USAC’s decision to the Wireline Competition Bureau of the FCC but resolution and the timing of the appeal is unknown at this time. As of March 31, 2019, GCI Holdings has accounts receivable of approximately $21.3 million outstanding associated with these two service contracts, which is dependent upon receipt of funding from USAC. Given that USAC has denied the Customer’s appeal as specifically outlined in the May 6, 2019 letter received by the Customer, it is probable that GCI Holdings has incurred a loss and an accounts receivable reserve has been recorded in the amount of $21.3 million as of March 31, 2019 and an associated

24



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


bad debt expense has been recorded and included within selling, general, and administrative expense in the condensed consolidated statements of operations.

(14) Information About the Company's Operating Segments

The Company, through its interests in subsidiaries and other companies, is primarily engaged in the broadband communications services industry. The Company identifies its reportable segments as (A) those consolidated companies that represent 10% or more of its consolidated annual revenue, annual Adjusted OIBDA (as defined below) or total assets and (B) those equity method affiliates whose share of earnings represent 10% or more of the Company’s annual pre‑tax earnings.

The Company evaluates performance and makes decisions about allocating resources to its operating segments based on financial measures such as revenue, Adjusted OIBDA (as defined below), and subscriber metrics.
    
For the three months ended March 31, 2019 the Company has identified the following subsidiary as a reportable segment:

GCI Holdings-provides a full range of wireless, data, video, voice, and managed services to residential, businesses, governmental entities, and educational and medical institutions primarily in Alaska.

For presentation purposes the Company is providing financial information for Liberty Broadband. While the Company’s equity method investment in Liberty Broadband does not meet the reportable segment threshold defined above, the Company believes that the inclusion of such information is relevant to users of these financial statements.

Liberty Broadband-an equity method affiliate of the Company, accounted for at fair value, has a non‑controlling interest in Charter, and a wholly‑owned subsidiary, Skyhook Wireless, Inc. ("Skyhook"). Charter is the second largest cable operator in the United States and a leading broadband communications services company providing video, Internet and voice services. Skyhook provides a Wi‑Fi based location platform focused on providing positioning technology and contextual location intelligence solutions.

The Company’s operating segments are strategic business units that offer different products and services. They are managed separately because each segment requires different technologies, distribution channels and marketing strategies. The accounting policies of the consolidated subsidiaries included in the segments are the same as those described in the Company’s Summary of Significant Accounting Policies in note 2 to the accompanying consolidated financial statements to the Annual Report on Form 10-K for the year ended December 31, 2018.


25



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


Performance Measures

Revenue by segment from contracts with customers, classified by customer type and significant service offerings follows:
 
Three Months Ended
 
2019
 
2018
 
amounts in thousands
GCI Holdings
 
 
 
Consumer Revenue
 
 
 
Wireless
$
27,492

 
7,762

Data
41,178

 
10,026

Video
21,016

 
5,762

Voice
4,461

 
1,168

Business Revenue
 
 
 
Wireless
18,384

 
5,427

Data
68,110

 
18,431

Video
3,825

 
1,022

Voice
6,204

 
1,627

Lease, grant, and revenue from subsidies
22,541

 
5,567

Total GCI Holdings
213,211

 
56,792

Corporate and other
4,525

 
4,412

Total
$
217,736

 
61,204


Liberty Broadband revenue totaled $3.5 million and $11.8 million for the three months ended March 31, 2019 and 2018, respectively.

The Company had gross receivables of $206 million and deferred revenue of $36 million at March 31, 2019 from contracts with customers, which amounts exclude receivables and deferred revenue arising from leases, grants, and subsidies. Our customers generally pay for services in advance of the performance obligation and therefore these prepayments are recorded as deferred revenue. The deferred revenue is recognized as revenue in the accompanying condensed consolidated statements of operations as the services are provided. Changes in the contract liability balance for the Company during the three months ended March 31, 2019 were not materially impacted by other factors.

The Company expects to recognize revenue in the future related to performance obligations that are unsatisfied (or partially unsatisfied) of approximately $158 million in the remainder of 2019, $193 million in 2020, $127 million in 2021, $86 million in 2022 and $24 million in 2023 and thereafter.

The Company applies certain practical expedients as permitted under ASC 606 and does not disclose information about remaining performance obligations that have original expected durations of one year or less, information about revenue remaining from usage based performance obligations that are recognized over time as-invoiced, or variable consideration allocated to wholly unsatisfied performance obligations.

The Company defines Adjusted OIBDA as revenue less cost of sales, operating expenses, and selling, general and administrative expenses (excluding stock‑based compensation). The Company believes this measure is an important indicator of the operational strength and performance of its businesses, including each business’s ability to service debt and fund capital expenditures. In addition, this measure allows management to view operating results and perform analytical comparisons and benchmarking between businesses and identify strategies to improve performance. This measure of performance excludes depreciation and amortization, stock‑based compensation, separately reported litigation settlements, insurance proceeds and restructuring and impairment charges that are included in the measurement of operating income pursuant to GAAP.

26



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


Accordingly, Adjusted OIBDA should be considered in addition to, but not as a substitute for, operating income, net income, cash flow provided by operating activities and other measures of financial performance prepared in accordance with GAAP.

Adjusted OIBDA is summarized as follows:
 
Three Months Ended March 31,
 
2019
 
2018
 
amounts in thousands
GCI Holdings
$
44,471

 
19,748

Liberty Broadband
(3,117
)
 
4,560

Corporate and other
(6,306
)
 
(5,860
)
 
35,048

 
18,448

Eliminate Liberty Broadband
3,117

 
(4,560
)
 
$
38,165

 
13,888


Other Information
 
 
March 31, 2019
 
 
Total
 
Investments
 
Capital
 
 
assets
 
in affiliates
 
expenditures
 
 
amounts in thousands
GCI Holdings
 
$
3,386,445

 
613

 
39,689

Liberty Broadband
 
12,083,378

 
11,999,494

 
17

Corporate and other
 
6,431,815

 
172,362

 
425

Eliminate Liberty Broadband
 
(12,083,378
)
 
(11,999,494
)
 
(17
)
Consolidated
 
$
9,818,260

 
172,975

 
40,114


The following table provides a reconciliation of segment Adjusted OIBDA to operating income (loss) and earnings (loss) from continuing operations before income taxes:
 
Three Months Ended March 31,
 
2019
 
2018
 
amounts in thousands
Consolidated segment Adjusted OIBDA
$
38,165

 
13,888

Stock‑based compensation
(5,631
)
 
(5,236
)
Depreciation and amortization
(67,678
)
 
(16,021
)
Insurance proceeds
2,500

 

Operating income (loss)
(32,644
)
 
(7,369
)
Interest expense
(37,618
)
 
(8,248
)
Share of earnings (loss) of affiliates, net
(3,296
)
 
(2,492
)
Realized and unrealized gains (losses) on financial instruments, net
1,009,600

 
(71,481
)
Tax Sharing Agreement
9,081

 
(6,883
)
Other, net
2,768

 
1,697

Earnings (loss) from continuing operations before income taxes
$
947,891

 
(94,776
)

27



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

Certain statements in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding the recoverability of the Company's goodwill and other long-lived assets; the Company's projected sources and uses of cash; the Rural Healthcare Program; the impact of the Alaskan recession and the anticipated impact of certain contingent liabilities related to legal and tax proceedings and other matters arising in the ordinary course of business. Where, in any forward-looking statement, we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be achieved or accomplished. The following include some but not all of the factors (as they relate to our consolidated subsidiaries and equity affiliates) that could cause actual results or events to differ materially from those anticipated:

The ability of GCI Liberty, Inc. (the "Company") to successfully integrate and recognize anticipated efficiencies and benefits from the Transactions (as defined below); 
customer demand for the Company's products and services and the Company's ability to adapt to changes in demand; 
competitor responses to the Company's and its businesses' products and services; 
the levels of online traffic to the Company's businesses' websites and its ability to convert visitors into consumers or contributors; 
uncertainties inherent in the development and integration of new business lines and business strategies; 
future financial performance, including availability, terms and deployment of capital; 
the ability of suppliers and vendors to deliver products, equipment, software and services; 
the outcome of any pending or threatened litigation; 
availability of qualified personnel; 
changes in, or failure or inability to comply with, government regulations, including, without limitation, regulations of the Federal Communications Commission (the "FCC"), and adverse outcomes from regulatory proceedings; 
changes in the nature of key strategic relationships with partners, distributors, suppliers and vendors; 
domestic and international economic and business conditions and industry trends, specifically the state of the Alaska economy; 
consumer spending levels, including the availability and amount of individual consumer debt; 
rapid technological changes; 
failure to protect the security of personal information about the Company's and its businesses' customers, subjecting the Company and its businesses to potentially costly government enforcement actions or private litigation and reputational damage; and
the regulatory and competitive environment of the industries in which the Company operates.

For additional risk factors, please see Part I, Item 1A of the Annual Report on Form 10-K for the year ended December 31, 2018. Any forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this Quarterly Report, and we expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein, to reflect any change in our expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based.

The following discussion and analysis provides information concerning our results of operations and financial condition. This discussion should be read in conjunction with our accompanying condensed consolidated financial statements and the notes thereto.

Overview

On April 4, 2017, Liberty Interactive Corporation, now known as Qurate Retail, Inc. ("Qurate Retail"), entered into an Agreement and Plan of Reorganization (as amended, the "reorganization agreement" and the transactions contemplated thereby, the "Transactions") with General Communication, Inc. ("GCI"), an Alaska corporation, and Liberty Interactive LLC, a Delaware limited liability company and a direct wholly owned subsidiary of Qurate Retail ("LI LLC"). Pursuant to the reorganization agreement, GCI amended and restated its articles of incorporation (which resulted in GCI being renamed GCI Liberty, Inc. ("GCI Liberty")) and effected a reclassification and auto conversion of its common stock. Following these events, Qurate Retail acquired GCI Liberty on March 9, 2018 through a reorganization in which certain Qurate Retail interests, assets and liabilities attributed to its Ventures Group (following the reattribution by Qurate Retail of certain assets and liabilities from its Ventures Group to its QVC Group) were contributed to GCI Liberty in exchange for a controlling interest in GCI Liberty (the "contribution"). Qurate Retail and LI LLC contributed to GCI Liberty their entire equity interests in Liberty Broadband Corporation ("Liberty Broadband"), Charter Communications, Inc. ("Charter"), and LendingTree, Inc. ("LendingTree"), the

28



Evite, Inc. ("Evite") operating business and other assets and liabilities (collectively, "HoldCo"), in exchange for (a) the issuance to LI LLC of a number of shares of GCI Liberty Class A common stock and a number of shares of GCI Liberty Class B common stock equal to the number of outstanding shares of Qurate Retail's Series A Liberty Ventures common stock and Qurate Retail's Series B Liberty Ventures common stock on March 9, 2018, respectively, (b) cash and (c) the assumption of certain liabilities by GCI Liberty.

The contribution was treated as a reverse acquisition under the acquisition method of accounting in accordance with generally accepted accounting principles in the United States ("GAAP"). For accounting purposes, HoldCo is considered to have acquired GCI Liberty in the contribution based, among other considerations, upon the fact that in exchange for the contribution of HoldCo, Qurate Retail received a controlling interest in the combined company of GCI Liberty.

Following the contribution and acquisition of GCI Liberty, Qurate Retail effected a tax free separation of its controlling interest in the combined company, GCI Liberty, to the holders of Qurate Retail's Liberty Ventures common stock in full redemption of all outstanding shares of such stock (the "HoldCo Split-Off"), in which each outstanding share of Qurate Retail's Series A Liberty Ventures common stock was redeemed for one share of GCI Liberty Class A common stock and each outstanding share of Qurate Retail's Series B Liberty Ventures common stock was redeemed for one share of GCI Liberty Class B common stock. In July 2018, the Internal Revenue Service completed its review of the HoldCo Split-Off and informed Qurate Retail that it agreed with the nontaxable characterization of the transactions. Qurate Retail received an Issue Resolution Agreement from the IRS documenting this conclusion.

On May 10, 2018, pursuant to the Agreement and Plan of Merger, dated as of March 22, 2018, GCI Liberty completed its reincorporation into Delaware by merging with its wholly owned Delaware subsidiary, which was the surviving corporation (the “Reincorporation Merger”). References to GCI Liberty or the Company prior to May 10, 2018 refer to GCI Liberty, Inc., an Alaska corporation and references to GCI Liberty after May 10, 2018 refer to GCI Liberty, Inc., a Delaware corporation.

We refer to the combination of GCI Holdings, LLC ("GCI Holdings"), non controlling interests in Liberty Broadband, Charter and LendingTree, a controlling interest in Evite, and certain other assets and liabilities as "GCI Liberty", the "Company", "us", "we" and "our." Although HoldCo was reported as a combined company until the date of the HoldCo Split-Off, the accompanying financial statements and the following discussion present all periods as consolidated by the Company.
 
Update on Economic Conditions

GCI Holdings offers wireless and wireline telecommunication services, data services, video services, and managed services to customers primarily throughout Alaska. Because of this geographic concentration, growth of GCI Holdings' business and operations depends upon economic conditions in Alaska. The economy of Alaska is dependent upon the oil industry, state government spending, United States military spending, investment earnings and tourism. Prolonged periods of low oil prices adversely impacts the Alaska economy, which in turn can have an adverse impact on the demand for GCI Holdings' products and services and on its results of operations and financial condition.

Low oil prices have put significant pressure on the Alaska state government budget since the majority of its revenue comes from the oil industry. While the Alaska state government has significant reserves that GCI Holdings believes will help fund the state government for the next couple of years, major structural budgetary reforms will need to be implemented in order to offset the impact of low oil prices.

The Alaska economy is in a recession that started in late 2015. While it is difficult for GCI Holdings to predict the future impact of the continuing recession on its business, these conditions have had an adverse impact on its business and could continue to adversely affect the affordability of and demand for some of its products and services and cause customers to shift to lower priced products and services or to delay or forgo purchases of its products and services. Additionally, GCI Holdings' customers may not be able to obtain adequate access to credit, which could affect their ability to make timely payments to GCI Holdings. If that were to occur, GCI Holdings could be required to increase its allowance for doubtful accounts, and the number of days outstanding for its accounts receivable could increase. If the recession continues, it could continue to negatively affect GCI Holdings' business including its financial position, results of operations, or liquidity, as well as its ability to service debt, pay other obligations and enhance shareholder returns.

Rural Health Care (“RHC”) Program

Subsidiaries of GCI Holdings receive support from various Universal Service Fund ("USF") programs including the RHC Program. The USF programs are subject to change by regulatory actions taken by the FCC, interpretations of or compliance with USF program rules, or legislative actions. The following paragraphs describe certain separate matters related to the RHC Program that impact or could impact the revenue earned by the Company.

29




The Company disclosed the following items related to its involvement in the RHC Program in its Annual Report on Form 10-K for the year ended December 31, 2018:

The FCC reduced the rates charged to RHC customers by approximately 26%.
The Company's participating subsidiary received a letter of inquiry and request from the Enforcement Bureau of the FCC in March 2018.
The Company's participating subsidiary received multiple funding denial notices from Universal Service Administrative Company ("USAC"), denying the RHC funding requests that had been submitted by a rural health customer.

The Company has no new information regarding the items noted above except with respect to the multiple funding denial notices that were received in which USAC denied funding requests that had been submitted by a rural health customer (the “Customer”).

On November 30, 2018, a subsidiary of GCI Holdings received multiple funding denial notices from USAC, denying requested funding from the RHC Program operated by the Customer for the funding year that ended on June 30, 2018. In November 2017, USAC requested information from the Customer related to bidding process documentation for two separate service contracts a subsidiary of GCI Holdings has with the Customer. Although the Customer timely responded, USAC found that bids previously received were not submitted with the original funding request and/or that bidding information submitted was related to the wrong bidding year. The Customer filed an appeal with USAC on January 29, 2019 and made a supplemental filing on March 12, 2019.

On May 6, 2019, the Customer received a letter from USAC that denied the Customer’s appeal for all requested funding on the basis that the Customer failed to indicate that it had received, and failed to submit copies of, the responses or bids received, when it originally sought funding from the RHC Program under the two service contracts that a subsidiary of GCI Holdings has with the Customer. It is our understanding that the Customer intends to appeal USAC’s decision to the Wireline Competition Bureau of the FCC but resolution and the timing of the appeal is unknown at this time. As of March 31, 2019, GCI Holdings has accounts receivable of approximately $21.3 million outstanding associated with these two service contracts, which is dependent upon receipt of funding from USAC. Given that USAC has denied the Customer’s appeal as specifically outlined in the May 6, 2019 letter received by the Customer, it is probable that GCI Holdings has incurred a loss and an accounts receivable reserve has been recorded in the amount of $21.3 million as of March 31, 2019 and an associated bad debt expense has been recorded and included within selling, general, and administrative expense in the condensed consolidated statements of operations. Additionally, because of the uncertainty of the Customer’s future appeals process and uncertainty relating to our ability to recover payment directly from the Customer, we no longer believe revenue associated with the two service contracts should be recognized due to the unpredictability surrounding the collection of consideration under these two service contracts currently being denied by USAC. Historical annual revenue associated with the two service contracts was approximately $12 million in total and was expected to be the same in future periods. Revenue will not be recognized until an adequate level of clarity is reached on the matter and the applicable revenue recognition criteria are met.

Results of Operations - Consolidated

General.     We provide in the tables below information regarding our consolidated operating results and other income and expenses, as well as information regarding the contribution to those items from our reportable segments. The "Corporate and other" category consists of those assets or businesses which do not qualify as a separate reportable segment. For a more detailed discussion and analysis of the financial results of our principal reportable segment see "Results of Operations-GCI Holdings" below.

30



 
Three Months Ended March 31,
 
2019
 
2018
 
amounts in thousands
Revenue
 
 
 
GCI Holdings
$
213,211

 
56,792

Corporate and other
4,525

 
4,412

Consolidated
$
217,736

 
61,204

 
 
 
 
Operating Income (Loss)
 
 
 
GCI Holdings
$
(23,978
)
 
3,096

Corporate and other
(8,666
)
 
(10,465
)
Consolidated
$
(32,644
)
 
(7,369
)
 
 
 
 
Adjusted OIBDA
 
 
 
GCI Holdings
$
44,471

 
19,748

Corporate and other
(6,306
)
 
(5,860
)
Consolidated
$
38,165

 
13,888


Revenue. Our consolidated revenue increased $156.5 million for the three months ended March 31, 2019 as compared to the corresponding period in the prior year. The increase for the three months ended March 31, 2019 is primarily due to an increase of $156.4 million at GCI Holdings for the same period as a result of the acquisition of GCI Holdings on March 9, 2018. See “Results of Operations-GCI Holdings, LLC” below for a more complete discussion of the results of operations of GCI Holdings.

Operating Income (Loss). Our consolidated operating loss increased $25.3 million for the three months ended March 31, 2019 as compared to the corresponding period in the prior year. The increase is primarily due to a $27.1 million increase in the operating loss at GCI Holdings as a result of the acquisition of GCI Holdings on March 9, 2018, which resulted in a partial quarter of activity for 2018 and a full quarter of activity for 2019 and associated depreciation and amortization as a result of acquisition accounting. See “Results of Operations-GCI Holdings, LLC” below for a more complete discussion of the results of operations of GCI Holdings.

Operating losses for corporate and other decreased $1.8 million for the three months ended March 31, 2019 as compared to the corresponding period in the prior year due to a decrease in stock-based compensation.

Stock-based compensation. Stock based compensation includes compensation related to restricted shares of GCI Liberty's common stock and preferred stock, restricted stock units with respect to GCI Liberty's common stock, and options to purchase shares of GCI Liberty's common stock granted to certain of the Company's directors, employees, and employees of its subsidiaries. We recorded $5.6 million and $5.2 million of stock compensation expense for the three months ended March 31, 2019 and 2018, respectively. The increase is primarily due to the acquisition of GCI Holdings on March 9, 2018. See “Results of Operations-GCI Holdings, LLC” below for a more complete discussion of the results of operations of GCI Holdings. As of March 31, 2019, the total unrecognized compensation cost related to unvested options and RSAs was approximately $7 million and $27 million, respectively. Such amounts will be recognized in the Company's consolidated statements of operations over a weighted average period of approximately 1.2 years and 2.0 years, respectively.

Adjusted OIBDA. The Company defines Adjusted OIBDA as revenue less cost of sales, operating expenses, and selling, general and administrative expenses (excluding stock based compensation). The Company believes this measure is an important indicator of the operational strength and performance of its businesses, including each business’s ability to service debt and fund capital expenditures. In addition, this measure allows management to view operating results and perform analytical comparisons and benchmarking between businesses and identify strategies to improve performance. This measure of performance excludes depreciation and amortization, stock based compensation, separately reported litigation settlements, insurance proceeds and restructuring and impairment charges that are included in the measurement of operating income pursuant to GAAP. Accordingly, Adjusted OIBDA should be considered in addition to, but not as a substitute for, operating income, net income, cash flow provided by operating activities and other measures of financial performance prepared in

31



accordance with GAAP. See note 14 to the accompanying condensed consolidated financial statements for a reconciliation of Adjusted OIBDA to operating income (loss) and earnings (loss) from continuing operations before income taxes.

Consolidated Adjusted OIBDA increased $24.3 million for the three months ended March 31, 2019 as compared to the corresponding period in the prior year primarily due to the acquisition of GCI Holdings on March 9, 2018. See “Results of Operations-GCI Holdings, LLC” below for a more complete discussion of the results of operations of GCI Holdings.

Other Income and Expense

Components of Other income (expense) are presented in the table below.
 
Three Months Ended March 31,
 
2019
 
2018
 
amounts in thousands
Interest expense
 
 
 
GCI Holdings
$
(21,176
)
 
(5,205
)
Corporate and other
(16,442
)
 
(3,043
)
Consolidated
$
(37,618
)
 
(8,248
)
 
 
 
 
Share of earnings (losses) of affiliates, net
 
 
 
GCI Holdings
$
(106
)
 

Corporate and other
(3,190
)
 
(2,492
)
Consolidated
$
(3,296
)
 
(2,492
)
 
 
 
 
Realized and unrealized gains (losses) on financial instruments, net
 
 
 
GCI Holdings
$
1,858

 

Corporate and other
1,007,742

 
(71,481
)
Consolidated
$
1,009,600

 
(71,481
)
 
 
 
 
Tax sharing agreement
 
 
 
GCI Holdings
$

 

Corporate and other
9,081

 
(6,883
)
Consolidated
$
9,081

 
(6,883
)
 
 
 
 
Other, net
 
 
 
GCI Holdings
$
1,209

 
130

Corporate and other
1,559

 
1,567

Consolidated
$
2,768

 
1,697


Interest Expense. Consolidated interest expense increased $29.4 million for the three months ended March 31, 2019 as compared to the corresponding period in the prior year primarily due to the acquisition of GCI Holdings on March 9, 2018, the $1.0 billion margin loan and the exchangeable senior debentures that were issued on June 18, 2018.

Share of earnings (losses) of affiliates, net. Share of earnings (losses) of affiliates, net decreased $0.8 million for the three months ended March 31, 2019 as compared to the corresponding period in the prior year due to increased losses by our affiliates.


32



Realized and unrealized gains (losses) on financial instruments, net. Realized and unrealized gains (losses) on financial instruments, net are comprised of changes in the fair value of the following:
 
Three Months Ended March 31,
 
2019
 
2018
 
amounts in thousands
Equity securities
$
334,320

 
(131,562
)
Investment in Liberty Broadband
841,259

 
22,621

Variable forward
(71,144
)
 
8,743

Indemnification obligation
(31,795
)
 
28,717

Exchangeables senior debentures
(63,040
)
 

 
$
1,009,600

 
(71,481
)

The changes in these accounts are primarily due to market factors and changes in the fair value of the underlying stocks or financial instruments to which these related. The increase for the three months months ended March 31, 2019 as compared to the corresponding prior period was primarily driven by an unrealized gain in our investments in Liberty Broadband and Charter.

Tax sharing agreement. The change in the tax sharing receivable due from Qurate Retail resulted in a gain of $9.1 million and a loss of $6.9 million for the three months ended March 31, 2019 and 2018, respectively.  The change in the tax sharing receivable for both periods was primarily the result of the tax effect of the movement in the fair value of Qurate Retail’s 1.75% exchangeable senior debentures due 2046.  

Income taxes. The Company had earnings before income taxes of $947.9 million and income tax expense of $269.4 million during the three months ended March 31, 2019 and losses before income taxes of $94.8 million and income tax expense of $76.0 million during the three months ended March 31, 2018.

The Company recognized income tax expense in excess of expected federal tax expense for the three months ended March 31, 2019, primarily due to state tax expense. The income tax expense recognized for the three months ended March 31, 2018 was the result of an increase in the Company's state effective tax rate used to measure deferred taxes as a result of the acquisition.

Net earnings (loss). The Company had net earnings of $678.5 million and a net loss of $170.7 million for the three months ended March 31, 2019 and 2018, respectively. The change in net earnings was the result of the above-described fluctuations in our revenue, expenses, and other income and expenses.

Liquidity and Capital Resources

As of March 31, 2019, substantially all of our cash and cash equivalents were invested in U.S. Treasury securities, other government agencies, AAA rated money market funds and other highly rated financial and corporate debt instruments.

The following are potential sources of liquidity: available cash balances, proceeds from asset sales, monetization of our investments, outstanding or anticipated debt facilities, and debt and equity issuances. As of March 31, 2019, GCI, LLC exceeded the maximum leverage threshold, as measured by the terms of its Senior Notes, and therefore does not have access to any additional funding under the revolving portion of the Senior Credit Facility. We believe we have sufficient cash from operating activities and cash on hand to fund our business.

As of March 31, 2019, the Company had a cash and cash equivalents balance of $422.4 million.

33