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EX-99.1 - EXHIBIT 99.1 - GCI, LLCex99-1llcrecon3x31x18.htm
EX-32 - EXHIBIT 32 - GCI, LLCllc03312018exhibit32.htm
EX-31.2 - EXHIBIT 31.2 - GCI, LLCllc03312018exhibit312.htm
EX-31.1 - EXHIBIT 31.1 - GCI, LLCllc03312018exhibit311.htm



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

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
 
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. 000-05890
GCI, LLC
(Exact name of Registrant as specified in its charter)
 
Delaware
 
91-1820757
 
 
(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

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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) Yes ☒ 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 ☐
Accelerated filer ☐
Non-accelerated filer ☒ (Do not check if a smaller reporting company)
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 ☒

As of May 15, 2018, GCI, LLC is a wholly-owned subsidiary of GCI Liberty, Inc.





TABLE OF CONTENTS


2




 
 
 
 
GCI, LLC AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(unaudited)
 
 
 
 
 
March 31,
 
December 31,
 
2018
 
2017
 
amounts in thousands
Assets

 

Current assets:
 
 
 
Cash and cash equivalents
$
150,549

 
573,210

Trade and other receivables, net of allowance for doubtful accounts of $149 thousand and $0, respectively
205,666

 
6,803

Other current assets
38,657

 
1,265

Total current assets
394,872

 
581,278

Investments in equity securities (note 6)
1,673,580

 
1,803,064

Investments in affiliates, accounted for using the equity method (note 7)
112,975

 
114,655

Investment in Liberty Broadband measured at fair value (note 7)
3,657,407

 
3,634,786




 


Property and equipment, net
1,193,509

 
624

Intangible assets not subject to amortization


 


Goodwill (note 9)
950,198

 
25,569

Cable certificates
370,000

 

Wireless licenses
193,000

 

Other
4,025

 
4,000


1,517,223

 
29,569

Intangible assets subject to amortization, net (note 9)
544,415

 
4,237

Other assets, at cost, net of accumulated amortization
48,421

 
4,000

Total assets
$
9,142,402

 
6,172,213

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

3



GCI, LLC AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(unaudited)
 
 
March 31,
 
December 31,
 
2018
 
2017
 
amounts in thousands
Liabilities and Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
28,795

 
718

Deferred revenue
22,729

 

Other current liabilities
115,742

 
9,747

Total current liabilities
167,266

 
10,465

Long-term debt, net (note 10)
2,474,835

 

Obligations under capital leases and tower obligation, excluding current portion
131,788

 

Long-term deferred revenue
60,636

 
130

Deferred income tax liabilities
1,062,043

 
643,426

Taxes payable

 
1,198,315

Other liabilities
146,136

 
95,841

Total liabilities
4,042,704

 
1,948,177

Equity


 


Member's equity:


 


Member's investment
3,368,931

 
2,305,440

Retained earnings
1,723,445

 
1,914,963

Total member's equity
5,092,376

 
4,220,403

Non-controlling interests
7,322

 
3,633

Total equity
5,099,698

 
4,224,036

Commitments and contingencies

 


Total liabilities and equity
$
9,142,402

 
6,172,213

 
 
 
 
 See accompanying notes to interim condensed consolidated financial statements.

4



GCI, LLC AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
 
 
 
 
 
Three Months Ended
 
March 31,
 
2018
 
2017
 
amounts in thousands
Revenue
$
61,204

 
3,969

Operating costs and expenses:


 


Operating expense (exclusive of depreciation and amortization shown separately below)
19,819

 
2,759

Selling, general and administrative, including stock-based compensation (note 4)
32,533

 
11,808

Depreciation and amortization expense
16,021

 
753

 
68,373

 
15,320

Operating income (loss)
(7,169
)
 
(11,351
)
Other income (expense):


 


Interest expense (including amortization of deferred loan fees)
(7,673
)
 

Share of earnings (losses) of affiliates, net (note 7)
(2,492
)
 
1,723

Realized and unrealized gains (losses) on financial instruments, net (note 5)
(100,198
)
 
737,552

Other, net
244

 
209

 
(110,119
)
 
739,484

Earnings (loss) before income taxes
(117,288
)
 
728,133

Income tax (expense) benefit
(74,261
)
 
(277,479
)
Net earnings (loss)
(191,549
)
 
450,654

Less net earnings (loss) attributable to the non-controlling interests
(39
)
 

Net earnings (loss) attributable to member
$
(191,510
)
 
450,654

 
 
 
 
 See accompanying notes to interim condensed consolidated financial statements.

5



GCI, LLC AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
 
Three Months Ended
 
March 31,
 
2018
 
2017
 
amounts in thousands
Cash flows from operating activities:
 
 
 
Net earnings (loss)
$
(191,549
)
 
450,654

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


 


Depreciation and amortization
16,021

 
753

Stock-based compensation expense
5,236

 
2,726

Share of (earnings) losses of affiliates, net
2,492

 
(1,723
)
Realized and unrealized (gains) losses on financial instruments, net
100,198

 
(737,552
)
Deferred income tax expense (benefit)
75,596

 
277,479

Other, net
243

 
206

Change in operating assets and liabilities:
 
 
 
Current and other assets
(20,634
)
 
2,335

Payables and other liabilities
(7,420
)
 
2,257

Net cash provided (used) by operating activities
(19,817
)
 
(2,865
)
Cash flows from investing activities:


 


GCI Holdings cash acquired in consolidation
147,958

 

Capital expended for property and equipment
(6,500
)
 
(943
)
Net cash provided (used) by investing activities
141,458

 
(943
)
Cash flows from financing activities:


 


Borrowings of debt
1,000,000

 

Repayment of debt, capital lease, and tower obligations
(6,386
)
 

Contributions from (distributions to) member
(447,950
)
 

Contributions from (distributions to) Qurate Retail
(1,082,321
)
 
(41,462
)
Distribution to non-controlling interests
(3,272
)
 

Other financing activities, net
(4,341
)
 
557

Net cash provided (used) by financing activities
(544,270
)
 
(40,905
)
Net increase (decrease) in cash, cash equivalents and restricted cash
(422,629
)
 
(44,713
)
Cash, cash equivalents and restricted cash at beginning of period
574,148

 
488,127

Cash, cash equivalents and restricted cash at end of period
$
151,519

 
443,414


6



GCI, LLC AND SUBSIDIARIES
Condensed Consolidated Statement of Equity
Three Months Ended March 31, 2018
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
Member's Investment
 
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)
 

 
(191,510
)
 
(39
)
 
(191,549
)
Stock-based compensation
 
4,874

 

 

 
4,874

Contribution of taxes in connection with HoldCo Split-Off
 
1,147,186

 

 

 
1,147,186

Distribution to Qurate Retail
 
(1,082,296
)
 

 

 
(1,082,296
)
Contributions from (distributions to) member, net
 
(447,950
)
 

 

 
(447,950
)
Allocated consideration in connection with the Transactions
 
1,441,669

 

 
7,000

 
1,448,669

Distribution to non-controlling interests
 

 

 
(3,272
)
 
(3,272
)
Other
 
8

 
(8
)
 

 

Balances at March 31, 2018
 
$
3,368,931

 
1,723,445

 
7,322

 
5,099,698

 
 
 
 
 
 
 
 
 
 See accompanying notes to interim condensed consolidated financial statements.

7



GCI, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)



(1)
Basis of Presentation

GCI, LLC is a wholly-owned subsidiary of GCI Liberty, Inc. On April 4, 2017, Liberty Interactive Corporation, now known as Qurate Retail, Inc. ("Qurate Retail") effective April 9, 2018, entered into an Agreement and Plan of Reorganization (as amended, the "reorganization agreement" and the transactions contemplated thereby, the "Transactions") with GCI, LLC's parent company, General Communication, Inc. ("GCI"), an Alaska corporation and indirect 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 (the “reattribution”)), 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.

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 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.

GCI, LLC, 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.


8



GCI, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)


GCI, LLC holds investments that are accounted for using the equity method. GCI, LLC does not control the decision making process or business management practices of these affiliates. Accordingly, GCI, LLC 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, GCI, LLC 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 GCI LLC's 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 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 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 Qurate Retail and Liberty Media and related amenities at their 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. Under these agreements, approximately $1.7 million was reimbursable to Liberty Media for the three months ended March 31, 2018.

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (the "FASB") issued new accounting guidance on revenue from contracts with customers.  The new guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This new guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In March 2016, the FASB issued additional guidance which clarifies principal versus agent considerations, and in April 2016, the FASB issued further guidance which clarifies the identification of performance obligations and the implementation guidance for licensing. The updated guidance replaced most existing revenue recognition guidance in GAAP. The Company adopted the new guidance, which established Accounting Standards Codification Topic 606 ("ASC 606"), effective January 1, 2018, under the modified retrospective transition method. The impact of the new guidance on Evite was not material to the condensed consolidated financial statements. GCI Holdings adopted the new guidance prior to its acquisition by HoldCo. As a result, there was no impact to the Company’s condensed consolidated financial statements related to GCI Holdings’ adoption of the new guidance.

In January 2016, the FASB issued new accounting guidance that is intended to improve the recognition and measurement of financial instruments. The new guidance requires equity investments with readily determinable fair values (except those accounted for under the equity method of accounting or those that result in consolidation) to be measured at fair value, with changes in fair value recognized in net income, and simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. The new standard is effective for the Company for fiscal years and interim periods beginning after December 15, 2017. The Company adopted this guidance effective January 1, 2018. As the Company has historically measured its investments in equity securities with readily determinable fair values at fair value, the new guidance had no impact on the accounting for these instruments. The Company has elected the measurement alternative for its equity securities without readily

9



GCI, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)


determinable fair values and will perform a qualitative assessment of these instruments to identify potential impairments. See note 6 for information related to the Company’s equity securities.

In November 2016, the FASB issued a new accounting standard which requires that the statement of cash flows include restricted cash and cash equivalents when reconciling beginning and ending cash. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company adopted this new guidance effective January 1, 2018. Upon adoption, the Company added restricted cash to the reconciliation of beginning and ending cash and cash equivalents and included a reconciliation of total cash and cash equivalents and restricted cash to the balance sheet for each period presented in the condensed consolidated statements of cash flows. The following table reconciles cash and cash equivalents and restricted cash reported in our condensed consolidated balance sheets to the total amount presented in our condensed consolidated statements of cash flows:
 
March 31,
 
December 31,
 
2018
 
2017
 
amounts in thousands
Cash and cash equivalents
$
150,549

 
573,210

Restricted cash included in other current assets
970

 
938

Total cash and cash equivalents and restricted cash at end of period
$
151,519

 
574,148


New Accounting Pronouncements Not Yet Adopted

In February 2016, the FASB issued new accounting guidance on lease accounting. This guidance requires a company to recognize lease assets and lease liabilities arising from operating leases in the statement of financial position. Additionally, the criteria for classifying a lease as a finance lease versus an operating lease are substantially the same as the previous guidance. The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and early adoption is permitted. We plan to adopt this guidance on January 1, 2019. Companies are required to use a modified retrospective approach to adopt this guidance. The Company is currently working with its consolidated subsidiaries to evaluate the impact of the adoption of this new guidance on our consolidated financial statements, including identifying the population of leases, evaluating technology solutions and collecting lease data.

(2)
Acquisition

GCI, LLC's parent company, GCI Liberty was acquired on March 9, 2018. The acquisition of our parent company was accounted for as a reverse acquisition. Under this method, HoldCo is the acquirer of our parent company and is also considered the acquirer of GCI, LLC. We have elected to apply pushdown accounting given there was a change-in-control event related to our parent company. We have reflected the new basis of accounting established by our parent company for the individual assets and liabilities that were acquired by HoldCo using the acquisition method of accounting. The allocated acquisition price was $1.4 billion (primarily Level 1). The application of the acquisition method resulted in the assignment of the purchase price to the GCI, LLC assets acquired and liabilities assumed based on our preliminary estimates of their acquisition date fair values (primarily Level 3). The assets acquired and liabilities assumed, as discussed within this note, are those assets and liabilities of GCI, LLC prior to the completion of the acquisition by HoldCo. 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, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)


The preliminary acquisition price allocation for GCI, LLC is as follows (amounts in thousands):
 
 
 
Cash and cash equivalents
 
$
132,563

Receivables
 
184,704

Property and equipment
 
1,195,126

Goodwill
 
924,629

Intangible assets not subject to amortization
 
563,000

Intangible assets subject to amortization
 
543,905

Other assets
 
97,580

Deferred revenue
 
(76,991
)
Debt, including capital leases
 
(1,631,049
)
Other liabilities
 
(192,514
)
Deferred income tax liabilities
 
(292,284
)
Non-controlling interest
 
(7,000
)
 
 
$
1,441,669


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 $543.9 million were acquired and are comprised of a tradename with an estimated useful life of approximately 8 years, customer relationships with a weighted average useful life of approximately 13 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, 2018, the valuation related to the acquisition of GCI, LLC is not final, and the acquisition price allocation is preliminary and subject to revision. The primary areas of the acquisition price allocation that are not yet finalized are related to certain property and equipment, intangible assets, liabilities and tax balances.

Since the date of the acquisition, included in net earnings (loss) for the three months ended March 31, 2018 is $1.5 million in losses related to the operations of GCI, LLC. The unaudited pro forma revenue and net earnings of GCI, LLC, 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
 
2017
 
 
amounts in thousands, except per share amounts
Revenue
 
$
220,805

 
229,292

Net earnings (loss)
 
$
(197,096
)
 
451,616

Net earnings (loss) attributable to GCI, LLC shareholder
 
$
(196,941
)
 
451,733


The pro forma results include adjustments primarily related to the amortization of acquired tangible and intangible assets, revenue, interest expense, stock-based compensation and the exclusion of transaction related costs. 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, LLC during the periods presented.


11



GCI, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)


(3)
Revenue

Revenue Recognition

Revenue is measured based on consideration specified in a contract with a customer and excludes any sales incentives and amounts collected on behalf of third parties. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer. Substantially all of the Company's revenue is earned from services transferred over time. If at contract inception we determine the time period between when we transfer a promised good or service to a customer and when the customer pays us for that good or service is one year or less, we do not adjust the promised amount of consideration for the effects of a significant financing component.

Taxes assessed by a governmental authority that are both imposed on, and concurrent with, a specific revenue-producing transaction that are collected by the Company from a customer, are excluded from revenue from contracts with customers.

Nature of Services and Products

Wireless

Wireless revenue is generated by providing access to, and usage of the Company's network, as well as the sale of equipment. In general, access revenue is billed one month in arrears and recognized as services are provided. Equipment sales revenue associated with the sale of wireless devices and accessories is generally recognized when the products are delivered to and control transfers to the customer. Consideration received from the customer is allocated to the service and products based on stand-alone selling prices when purchased together.

New and existing wireless customers have the option to participate in Upgrade Now, a program that provides eligible customers with the ability to purchase certain wireless devices in installments over a period of up to 24 months. Participating customers have the right to trade-in the original equipment for a new device after making the equivalent of 12 monthly installment payments, provided their handset is in good working condition. Upon upgrade, the outstanding balance of the wireless equipment installment plan is exchanged for the used handset. The Company accounts for this upgrade option as a right of return with a reduction of Revenue and Operating expense for handsets expected to be upgraded based on historical data.

Data

Data revenue is generated by providing data network access, high-speed internet services, and product sales. Monthly service revenue for data network access and high-speed internet services is billed in advance, recorded as Deferred Revenue on the balance sheet, and recognized as the associated services are provided to the customer. Internet service excess usage revenue is recognized when the services are provided. The Company recognizes revenue for product sales when a customer takes possession of the equipment. The Company provides telecommunications engineering services on a time and materials basis. Revenue is recognized for these services as-invoiced utilizing the practical expedient as permitted under ASC 606.

Video

Video revenue is generated primarily from residential and business customers that subscribe to the Company's cable video plans. Video revenue is billed in advance, recorded as Deferred Revenue on the balance sheet, and recognized as the associated services are provided to the customer.

Voice

Voice revenue is for fixed monthly fees for voice plans as well as usage based fees for long-distance service usage. Voice plan fees are billed in advance, recorded as Deferred Revenue on the balance sheet, and recognized as the associated services are provided to the customer. Usage based fees are recognized as services are provided.


12



GCI, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)


Arrangements with Multiple Performance Obligations

Contracts with customers may include multiple performance obligations as customers purchase multiple services and products within those contracts. For such arrangements, revenue is allocated to each performance obligation based on the relative standalone selling price for each service or product within the contract. Standalone selling prices are generally determined based on the prices charged to customers.

Significant Judgments

Some contracts with customers include variable consideration, and may require significant judgment to determine the total transaction price, which impacts the amount and timing of revenue recognized. The Company uses historical customer data to estimate the amount of variable consideration included in the total transaction price and reassess its estimate at each reporting period. Any change in the total transaction price due to a change in the estimated variable consideration is allocated to the performance obligations on the same basis as at contract inception. Any portion of a change in transaction price that is allocated to a satisfied or partially satisfied performance obligation is recognized as revenue (or a reduction in revenue) in the period of the transaction price change. Variable consideration has been constrained to reduce the likelihood of a significant revenue reversal.

Often contracts with customers include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment.

Judgment is required to determine the standalone selling price for each distinct performance obligation. Services and products are generally sold separately, and help establish standalone selling price for services and products the Company provides.

Remaining Performance Obligations

The Company expects to recognize revenue in the future related to performance obligations that are unsatisfied (or partially unsatisfied) as of March 31, 2018 of $151.5 million in the remainder of 2018, $195.2 million in 2019, $172.1 million in 2020, $93.7 million in 2021 and $63.9 million in 2022 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.

Contract Balances

The Company had receivables of $201.0 million and deferred revenue of $19.0 million at March 31, 2018 from contracts with customers, which amounts exclude receivables and deferred revenue that are out of the scope of ASC 606. 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, 2018 were not materially impacted by other factors.
    
Assets Recognized from the Costs to Obtain a Contract with a Customer

Management expects that incremental commission fees paid to intermediaries as a result of obtaining customer contracts are recoverable and therefore the Company capitalized them as contract costs.

Capitalized commission fees are amortized based on the transfer of goods or services to which the assets relate which typically range from two to five years, and are included in Selling, General, and Administrative expenses.


13



GCI, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)


The Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that the Company otherwise would have recognized is one year or less. These costs are included in Selling, General, and Administrative expenses.

Revenue from contracts with customers, classified by customer type and significant service offerings follows:
 
Three months ended March 31,
 
2018
 
amounts in thousands
GCI Holdings
 
Consumer Revenue
 
Wireless
$
7,762

Data
10,026

Video
5,762

Voice
1,168

Business Revenue
 
Wireless
5,427

Data
18,431

Video
1,022

Voice
1,627

Evite
4,412

Lease, grant, and revenue from subsidies
5,567

Total
$
61,204


(4)
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 $5.2 million and $2.7 million of stock-based compensation during the three months ended March 31, 2018 and 2017, respectively.

During the three months ended March 31, 2018, and in connection with our current CEO's employment agreement, GCI Liberty granted 143 thousand options to purchase shares of GCI Liberty Class B common stock to our current CEO. Such options had a weighted average GDFV of $16.55 per share and vest on December 31, 2018.

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 the Awards to purchase

14



GCI, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)


GCI Liberty common stock granted to certain officers, employees and directors of GCI Liberty and the Company. The options outstanding as of January 1, 2018 reflect Qurate Retail's Series A and Series B Liberty Ventures common stock. On March 9, 2018, Qurate Retail redeemed each outstanding share of Qurate Retail's Series A and Series B Liberty Ventures common stock for the corresponding class of GCI Liberty common stock using a one-for-one ratio.
 
 
Class A
 
    
 
    
 
    
Weighted
    
Aggregate
 
 
 
 
 
 
average
 
intrinsic
 
 
Awards
 
 
 
remaining
 
value
 
 
(000's)
 
WAEP
 
life
 
(millions)
Outstanding at January 1, 2018
 
1,670

 
$
47.12

 
 
 
 
 
Granted
 

 
$

 
 
 
 
 
Exercised
 
(3
)
 
$
16.94

 
 
 
 
 
Forfeited/Cancelled
 

 
$

 
 
 
 
 
Outstanding at March 31, 2018
 
1,667

 
$
47.18

 
2.4
years
 
$
13

Exercisable at March 31, 2018
 
1,306

 
$
47.39

 
1.8
years
 
$
10


 
 
Class B
 
    
 
    
 
    
Weighted
    
Aggregate
 
 
 
 
 
 
average
 
intrinsic
 
 
Awards
 
 
 
remaining
 
value
 
 
(000's)
 
WAEP
 
life
 
(millions)
Outstanding at January 1, 2018
 
1,080

 
$
56.38

 
 
 
 
 
Granted
 
143

 
$
54.01

 
 
 
 
 
Exercised
 

 
$

 
 
 
 
 
Forfeited/Cancelled
 

 
$

 
 
 
 
 
Outstanding at March 31, 2018
 
1,223

 
$
56.10

 
4.8
years
 
$

Exercisable at March 31, 2018
 
443

 
$
56.38

 
5.5
years
 
$


As of March 31, 2018, the total unrecognized compensation cost related to unvested options and RSAs was approximately $24 million and $23 million, respectively. Such amounts will be recognized in the Company's consolidated statements of operations over a weighted average period of approximately 1.7 years and 1.8 years, respectively.

As of March 31, 2018, GCI Liberty reserved for issuance upon exercise of outstanding stock options approximately 1.7 million shares of GCI Liberty Class A common stock and 1.2 million shares of GCI Liberty Class B common stock.

As of March 31, 2018, the Company had approximately 1.3 million and 27 thousand unvested RSAs and RSUs, respectively, of GCI Liberty common stock and preferred stock held by certain directors, officers and employees of GCI Liberty and the Company. These Class A common stock, Class B common stock and Series A Cumulative Redeemable Preferred unvested RSAs, along with the Class A common stock unvested RSUs of GCI Liberty had a weighted average GDFV of $46.76 per share.

The aggregate fair value of all restricted shares of GCI Liberty common and preferred stock that vested during the three months ended March 31, 2018 was $1.8 million.

(5)
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.

15



GCI, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)



The Company’s assets and liabilities measured at fair value are as follows:
 
 
March 31, 2018
 
December 31, 2017
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
 
$
3,524

 
3,524

 

 
570,526

 
570,526

 

Equity securities
 
$
1,667,642

 
1,667,642

 

 
1,800,208

 
1,800,208

 

Investment in Liberty Broadband
 
$
3,657,407

 
3,657,407

 

 
3,634,786

 
3,634,786

 

Variable forward
 
$
86,065

 

 
86,065

 
94,807

 

 
94,807

    
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 liability associated with this instrument is included in the Other liabilities line item in the condensed consolidated balance sheets. The fair value of the variable forward was derived from a Black‑Scholes‑Merton model using observable market data as the significant inputs.

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:
 
 
March 31,
 
 
2018
 
2017
 
 
amounts in thousands
Equity securities
 
$
(131,562
)
 
211,285

Investment in Liberty Broadband
 
22,621

 
526,267

Variable forward
 
8,743

 

 
 
$
(100,198
)
 
737,552


(6)
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,
 
 
 
2018
 
2017
 
 
 
amounts in thousands
Charter (a)
 
 
$
1,667,642

 
1,800,208

Other investments (b)
 
 
5,938

 
2,856

 
 
 
$
1,673,580

 
1,803,064

(a) A portion of the Charter equity securities are considered covered shares and subject to certain contractual restrictions in accordance with an indemnification agreement entered into by GCI Liberty. Pursuant to the indemnification agreement, GCI Liberty has agreed to indemnify LI LLC for certain payments made to a holder of LI LLC 1.75% exchangeable debentures due 2046 (the "1.75% Exchangeable Debentures") that exercises its exchange right under the terms of the debentures on or before October 5, 2023 (the "Exchange Indemnity"). The Exchange Indemnity, which is supported by a negative pledge in favor of Qurate Retail on the referenced shares that underlie the 1.75% Exchangeable Debentures, will not apply to any 1.75% Exchangeable Debentures purchased by LI LLC. GCI Liberty’s Exchange

16



GCI, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)


Indemnity obligation and the number of shares subject to the negative pledge will be ratably reduced as to any 1.75% Exchangeable Debentures purchased by LI LLC in connection with certain obligations it has to commence and consummate one or more privately negotiated transactions, a tender offer or other purchase transaction for the 1.75% Exchangeable Debenture within six months of the HoldCo Split Off.
(b) The Company has elected the measurement alternative for these securities.

(7)
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, 2018 and the carrying amount at December 31, 2017:
 
March 31, 2018
 
December 31,
2017
 
Percentage
ownership
 
Market
value
 
Carrying
amount
 
Carrying
amount
 
 
 
dollars in thousands
LendingTree
27
%
 
$
1,057,952

 
$
112,174

 
114,655

Other
various

 
NA

 
801

 

 
 
 
 
 
$
112,975

 
114,655


The Company’s share of LendingTree’s earnings (losses) was ($2.5 million) and $1.7 million for the three months ended March 31, 2018 and 2017, respectively. Both our ownership interest in LendingTree and our share of LendingTree's earnings (losses) are reported on a three month lag.

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.

17



GCI, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)



As of March 31, 2018, 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 condensed consolidated statements of operations. Summarized financial information for Liberty Broadband is as follows:
 
 
March 31,
 
December 31,
 
 
2018
 
2017
 
 
amounts in thousands
Current assets
 
$
79,885

 
84,054

Investment in Charter, accounted for using the equity method
 
11,866,434

 
11,835,613

Other assets
 
11,228

 
12,122

Total assets
 
11,957,547

 
11,931,789

Long-term debt, including current portion
 
497,764

 
497,370

Deferred income tax liabilities
 
939,821

 
932,593

Other liabilities
 
8,567

 
14,925

Equity
 
10,511,395

 
10,486,901

Total liabilities and shareholders' equity
 
$
11,957,547

 
11,931,789

 
 
Three months ended
 
 
March 31,
 
 
2018
 
2017
 
 
amounts in thousands
Revenue
 
$
11,791

 
3,140

Operating expenses, net
 
(9,545
)
 
(9,502
)
Operating income (loss)
 
2,246

 
(6,362
)
Share of earnings (losses) of affiliates
 
9,302

 
18,922

Gain (loss) on dilution of investment in affiliate
 
(26,757
)
 
(32,138
)
Realized and unrealized gains (losses) on financial instruments, net
 

 
981

Other income (expense), net
 
(4,812
)
 
(4,218
)
Income tax benefit (expense)
 
4,951

 
8,370

Net earnings (loss)
 
$
(15,070
)
 
(14,445
)

(8)
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, we loaned money to the investment fund and US Bancorp invested money in the investment fund. The investment fund would then contribute the funds from our loan and US Bancorp's investment to a CDE. The CDE, in turn, would loan the funds to our wholly owned subsidiary, Unicom, Inc. ("Unicom") as partial financing for the projects.

18



GCI, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)



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 $1.0 million was held by Unicom at March 31, 2018 and is included in our condensed consolidated balance sheets. We completed construction of the projects partially funded by these transactions.

These transactions include put/call provisions whereby we may be obligated or entitled to repurchase US Bancorp’s interests in the investment funds. We believe 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.  We are required to be in compliance with various regulations and contractual provisions that apply to the NMTC arrangements.  Non-compliance with applicable requirements could result in projected tax benefits not being realized by US Bancorp.  We have agreed to indemnify US Bancorp for any loss or recapture of NMTCs until such time as our obligation to deliver tax benefits is relieved.  There have been no credit recaptures as of March 31, 2018.  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 us to deliver tax benefits and provide various other guarantees to US Bancorp; US Bancorp’s lack of a material interest in the underlying economics of the project; and the fact that we are obligated to absorb losses of the VIEs.  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 $165.9 million and $121.2 million, respectively, as of March 31, 2018.

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 we have 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 its 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.

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 #1
TIF
August 30, 2011
$58.3 million
1%
August 29, 2041
$22.4 million
$76.8 million
1% to 3.96%
August 2018
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


19



GCI, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)


(9)
Intangible Assets and Goodwill

Goodwill
 
 
GCI Holdings
 
Corporate and other
 
Total
 
 
amounts in thousands
Balance at January 1, 2018
 
$

 
25,569

 
25,569

Acquisitions
 
924,629

 

 
924,629

Balance at March 31, 2018
 
$
924,629

 
25,569

 
950,198


Intangible Assets Subject to Amortization
 
 
March 31, 2018
 
    
Gross
    
 
    
Net
 
 
carrying
 
Accumulated
 
carrying
 
 
amount
 
amortization
 
amount
 
 
amounts in thousands
Customer relationships
 
$
483,267

 
(26,462
)
 
456,805

Other amortizable intangibles
 
108,320

 
(20,710
)
 
87,610

Total
 
$
591,587

 
(47,172
)
 
544,415


Amortization expense for intangible assets with finite useful lives was $5.2 million and $723 thousand for the three months ended March 31, 2018 and 2017, respectively. Amortization expense for amortizable intangible assets for each of the five succeeding fiscal years is estimated to be (amounts in thousands):
Remainder of 2018
$
51,699

2019
$
62,808

2020
$
57,159

2021
$
49,522

2022
$
39,047


(10)
Long-Term Debt

Debt is summarized as follows:
 
 
Outstanding
 
 
 
    
Principal
 
Carrying Value
 
 
March 31,
 
March 31,
 
December 31,
 
 
2018
 
2018
 
2017
 
 
amounts in thousands
Margin Loan
 
$
1,000,000

 
1,000,000

 

Senior notes
 
775,000

 
806,726

 
NA

Senior credit facility
 
666,968

 
666,968

 
NA

Wells Fargo note payable
 
7,918

 
7,918

 
NA

Deferred financing costs
 

 
(3,806
)
 

Total debt
 
$
2,449,886

 
2,477,806

 

Debt classified as current (included in other current liabilities)
 
 
 
(2,971
)
 

Total long-term debt
 
 
 
$
2,474,835

 



20



GCI, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)


Margin Loan

On December 29, 2017, Broadband Holdco, LLC, 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”). Approximately 42.7 million shares of Liberty Broadband Series C common stock with a value of $3.7 billion were pledged by Broadband Holdco, LLC as collateral for the loan as of March 31, 2018. This Margin Loan has a term of two years and bears interest at a rate of LIBOR plus 1.85% and contains an undrawn commitment fee of up to 1.0% per annum. Deferred financing costs incurred on the Margin Loan are reflected in Long-term debt, net in the condensed consolidated balance sheet. In connection with the completion of the Transactions, Broadband Holdco, LLC 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 to be used within one year for the repurchase of QVC Group 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.

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 our 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 $31.7 million at March 31, 2018.  Such premium is being amortized to interest expense in the accompanying consolidated statements of operations.

Senior Credit Facility

GCI, LLC and GCI Holdings, a wholly-owned subsidiary of GCI, LLC, are party to a Seventh Amended and Restated Credit Agreement which provides a $245.9 million term loan B ("Term Loan B"), $215.0 million term loan A ("Term Loan A") and a $300.0 million revolving credit facility (collectively, the "Senior Credit Facility"). GCI, LLC is the borrower under the Senior Credit Facility.

Under the Senior Credit Facility, the interest rate for the Term Loan A is LIBOR plus margin based on the Company's leverage ratio and ranges from 2.00% to 3.00%. Our Senior Credit Facility Total Leverage Ratio (as defined in the Senior Credit Facility) may not exceed 5.95 to one; the Secured Leverage Ratio (as defined in the Senior Credit Facility) may not exceed 3.50 to one; and the Company's Interest Coverage Ratio (as defined in the Senior Credit Facility) must not be less than 2.50 to one at any time. The full principal amount of our Term Loan A and revolving credit facility included in the Senior Credit Facility will mature on November 17, 2021 or December 3, 2020 if our 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 our 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 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, 2018, there is $242.0 million outstanding under the Term Loan B, $215.0 million outstanding under the Term Loan A, $210.0 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 $79.9 million available for borrowing.


21



GCI, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)


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. GCI, LLC is in compliance with all debt covenants as of March 31, 2018.

Fair Value of Debt

The fair value of the Senior Notes was $803 million at March 31, 2018.

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, 2018.

(11)
Information About GCI, LLC'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 segment presentation for prior periods has been conformed to the current period segment presentation.

The Company evaluates performance and makes decisions about allocating resources to its operating segments based on financial measures such as revenue, Adjusted OIBDA, gross margin, average sales price per unit, number of units shipped and revenue or sales per customer equivalent. In addition, the Company reviews non-financial measures such as conversion rates and active customers, as appropriate.
    
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 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 accordance with GAAP.

For the three months ended March 31, 2018, 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

22



GCI, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)


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.
Performance Measures
 
Three months ended March 31,
 
2018
 
2017
 
Revenue
 
Adjusted OIBDA
 
Revenue
 
Adjusted OIBDA
 
amounts in thousands
GCI Holdings
$
56,792

 
19,748

 

 

Liberty Broadband
11,791

 
4,560

 
3,140

 
(3,961
)
Corporate and other
4,412

 
(5,660
)
 
3,969

 
(7,872
)
 
72,995

 
18,648

 
7,109

 
(11,833
)
Eliminate Liberty Broadband
(11,791
)
 
(4,560
)
 
(3,140
)
 
3,961

 
$
61,204

 
14,088

 
3,969

 
(7,872
)

Other Information
 
 
March 31, 2018
 
 
Total
 
Investments
 
Capital
 
 
assets
 
in affiliates
 
expenditures
 
 
amounts in thousands
GCI Holdings
 
$
3,555,357

 

 
5,777

Liberty Broadband
 
11,957,547

 
11,866,434

 
14

Corporate and other
 
5,587,045

 
112,975

 
723

 
 
21,099,949

 
11,979,409

 
6,514

Eliminate Liberty Broadband
 
(11,957,547
)
 
(11,866,434
)
 
(14
)
Consolidated GCI, LLC
 
$
9,142,402

 
112,975

 
6,500


The following table provides a reconciliation of segment Adjusted OIBDA to operating income and earnings (loss) from continuing operations before income taxes:

23



GCI, LLC AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)


 
Three months ended March 31,
 
2018
 
2017
 
amounts in thousands
Consolidated segment Adjusted OIBDA
$
14,088

 
(7,872
)
Stock‑based compensation
(5,236
)
 
(2,726
)
Depreciation and amortization
(16,021
)
 
(753
)
Operating income
(7,169
)
 
(11,351
)
Interest expense
(7,673
)
 

Share of earnings (loss) of affiliates, net
(2,492
)
 
1,723

Realized and unrealized gains (losses) on financial instruments, net
(100,198
)
 
737,552

Other, net
244

 
209

Earnings (loss) from continuing operations before income taxes
$
(117,288
)
 
728,133

 

24



Part I

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 our business, product and marketing strategies; expansion; new service offerings; the recoverability of our goodwill and other long-lived assets; our projected sources and uses of cash; 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, LLC to successfully integrate and recognize anticipated efficiencies and benefits from the Transactions (as defined below); 
customer demand for GCI, LLC's products and services and GCI, LLC's ability to adapt to changes in demand; 
competitor responses to GCI, LLC's and its businesses' products and services; 
the levels of online traffic to GCI, LLC'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; 
consumer spending levels, including the availability and amount of individual consumer debt; 
rapid technological changes; 
failure to protect the security of personal information about GCI, LLC's and its businesses' customers, subjecting GCI, LLC 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 GCI, LLC operates.

For additional risk factors, please see Part II, Item 1A of this Quarterly Report on Form 10-Q. 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

GCI, LLC is a wholly-owned subsidiary of GCI Liberty, Inc. On April 4, 2017, Liberty Interactive Corporation, now known as Qurate Retail, Inc. ("Qurate Retail") effective April 9, 2018, entered into an Agreement and Plan of Reorganization (as amended, the "reorganization agreement" and the transactions contemplated thereby, the "Transactions") with GCI, LLC's parent company, 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.) 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 (the “reattribution”)) 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

25



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.

The accompanying condensed consolidated financial statements have been prepared in accordance with GAAP. 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 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 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

In November 2017, the Universal Service Administrative Company ("USAC") requested further information in support of the rural rates charged to a number of our RHC customers in connection with the funding requests for the year that runs July 1, 2017 through June 30, 2018. Similar requests have been made of other Alaska carriers. We have fully responded to that request and a subsequent request for additional information.
  
On March 15, 2018, USAC announced that the funding requests for the year that runs July 1, 2017 through June 30, 2018 exceeded the funding available for the RHC Program. USAC will allocate the funding shortfall between consortia and non-consortia health care providers. Our customers are non-consortia health care providers and subject to a 15.6% reduction in support. Under the program rules, we are forbidden from lowering our rates for services previously provided, however, the FCC

26



published an order in December 2017 allowing carriers, such as us, to forgive the funding shortfall that has shifted to our customers. A reduction of $5.5 million to the RHC Program support receivable was recognized for amounts that may not ultimately be collectible for the current funding period to date. We may need to further reduce the RHC Program support receivable as we pursue avenues for payment of the shortfall. USAC's assessment of the program funding shortfall caused a program-wide delay of support payments, which delay has continued during the review of rates charged by Alaska carriers.

In addition, on March 23, 2018, we received a letter of inquiry and request for information from the Enforcement Bureau of the FCC, to which we are in the process of responding. This inquiry into the rates charged by us is still pending and we presently are unable to assess the ultimate resolution of this matter. The ongoing uncertainty in program funding could have an adverse effect on our business, financial position, results of operations or liquidity.

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.
 
Three months ended March 31,
 
2018
 
2017
 
amounts in thousands
Revenue
 
 
 
GCI Holdings
$
56,792

 

Corporate and other
4,412

 
3,969

Consolidated GCI, LLC
$
61,204

 
3,969

 
 
 
 
Operating Income (Loss)
 
 
 
GCI Holdings
$
3,096

 

Corporate and other
(10,265
)
 
(11,351
)
Consolidated GCI, LLC
$
(7,169
)
 
(11,351
)
 
 
 
 
Adjusted OIBDA
 
 
 
GCI Holdings
$
19,748

 

Corporate and other
(5,660
)
 
(7,872
)
Consolidated GCI, LLC
$
14,088

 
(7,872
)

Revenue. Our consolidated revenue increased $57.2 million during the three months ended March 31, 2018, as compared to the corresponding period in the prior year primarily due to an increase of $56.8 million at GCI Holdings 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 decreased $4.2 million during the three months ended March 31, 2018, as compared to the corresponding period in the prior year primarily due to $3.1 million of operating income at GCI Holdings as a result of the acquisition of GCI Holdings on March 9, 2018 and a decrease of $1.1 million of corporate and other operating loss due to increased revenue from Evite and lower operating expenses. See “Results of Operations-GCI Holdings, LLC” below for a more complete discussion of the results of operations of GCI Holdings.

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 $5.2 million and $2.7 million of stock compensation expense for the three months ended March 31, 2018 and 2017, respectively. The increase in 2018 as compared to the corresponding prior year period 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, 2018, the total unrecognized compensation cost

27



related to outstanding awards was approximately $47 million. Such amounts will be recognized in the Company's consolidated statements of operations over a weighted average period of approximately 1.7 years.

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 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 accordance with GAAP. See note 11 to the accompanying condensed consolidated financial statements for a reconciliation of Adjusted OIBDA to operating income (loss) and earnings (loss) before income taxes.

Consolidated Adjusted OIBDA increased $22.0 million during the three months ended March 31, 2018, 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,
 
2018
 
2017
 
amounts in thousands
Interest expense
 
 
 
GCI Holdings
$
5,205

 

Corporate and other
2,468

 

Consolidated GCI, LLC
$
7,673

 

 
 
 
 
Share of earnings (losses) of affiliates, net
 
 
 
GCI Holdings
$

 

Corporate and other
(2,492
)
 
1,723

Consolidated GCI, LLC
$
(2,492
)
 
1,723

 
 
 
 
Realized and unrealized gains (losses) on financial instruments, net
 
 
 
GCI Holdings
$

 

Corporate and other
(100,198
)
 
737,552

Consolidated GCI, LLC
$
(100,198
)
 
737,552

 
 
 
 
Other, net
 
 
 
GCI Holdings
$
130

 

Corporate and other
114

 
209

Consolidated GCI, LLC
$
244

 
209


Interest Expense. Consolidated interest expense increased $7.7 million during the three months ended March 31, 2018, as compared to the corresponding period in the prior year primarily due to the acquisition of GCI Holdings on March 9, 2018 and a new $1.0 billion margin loan.

Share of earnings (losses) of affiliates, net. Share of earnings (losses) of affiliates, net decreased $4.2 million during the three months ended March 31, 2018, as compared to the corresponding period in the prior year due to decreases in LendingTree's results.


28



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,
 
 
2018
 
2017
 
 
amounts in thousands
Equity securities
 
$
(131,562
)
 
211,285

Investment in Liberty Broadband
 
22,621

 
526,267

Variable forward
 
8,743

 

 
 
$
(100,198
)
 
737,552


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 decrease for the three months ended March 31, 2018 as compared to the corresponding prior year was primarily driven by the investments in Liberty Broadband and Charter experiencing lower gains during the three months ended March 31, 2018 as compared to the corresponding prior year.

Income taxes. During the three months ended March 31, 2018, the Company had losses before income taxes of $117.3 million and income tax expense of $74.3 million. The Company recognized additional income tax expense for the period, primarily due to an increase in the Company’s state effective tax rate used to measure deferred taxes. During the three months ended March 31, 2017, the Company had earnings before income taxes of $728.1 million and income tax expense of $277.5 million. The Company recognized additional income tax expense for the period, primarily due to the effect of state income taxes.

Net earnings (loss). The Company had a net loss of $191.5 million and net earnings of $450.7 million for the three months ended March 31, 2018 and 2017, 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, 2018, 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, 2018, the Company had a cash balance of $150.5 million.
 
 
Three months ended
 
 
March 31,
 
 
2018
 
2017
 
 
amounts in thousands
Cash flow information
 
 
 
 
Net cash provided (used) by operating activities
 
$
(19,817
)
 
(2,865
)
Net cash provided (used) by investing activities
 
141,458

 
(943
)
Net cash provided (used) by financing activities
 
(544,270
)
 
(40,905
)
 
 
$
(422,629
)
 
(44,713
)

During the three months ended March 31, 2018, GCI, LLC’s primary uses of cash included a $1.1 billion distribution to Qurate Retail in connection with the Transactions, a $448.0 million distribution to GCI Liberty, and repayments of debt. GCI, LLC’s primary sources of cash included borrowing $1.0 billion under the Company's margin loan.

Net cash used for investing activities consists primarily of cash paid for capital expenditures.  Our most significant recurring investing activity has been capital expenditures and we expect that this will continue in the future.  A significant portion of our capital expenditures is based on the level of customer growth and the technology being deployed.

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


29



The projected uses of GCI, LLC cash for the remainder of 2018 are capital expenditures of approximately $149.6 million, approximately $93.7 million for interest payments on outstanding debt, potential additional investments in existing or new businesses, and potential distributions to GCI Liberty. We expect that cash on hand and cash provided by operating activities and borrowing capacity in future periods will be sufficient to fund projected uses of cash.

Exhibit 99.1 shows the net assets and net earnings of GCI, LLC and its Restricted Subsidiaries under and as defined in its bond indentures.

Results of Operations - GCI Holdings, LLC

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.

As described in notes 1 and 2 to the accompanying condensed consolidated financial statements, for accounting purposes, HoldCo is considered to have acquired GCI, LLC's parent company, GCI Liberty, in the contribution. Although GCI Holdings’ results are only included in GCI, LLC's results beginning on March 9, 2018, we believe a discussion of GCI Holdings’ results for all periods presented promotes a better understanding of the overall results of its business. For comparison and discussion purposes we are presenting the pro forma results of GCI Holdings for the full three months ended March 31, 2018 and 2017, inclusive of acquisition accounting adjustments. The pro forma financial information was prepared based on the historical financial information of GCI Holdings and assuming the acquisition of GCI Holdings took place on January 1, 2017. The acquisition price allocation related to the GCI Holdings business combination is preliminary.  Accordingly, the pro forma adjustments are based on this preliminary allocation and have been made solely for the purpose of providing comparative pro forma financial information. Additionally, we have made pro forma adjustments to the first quarter of 2017 results for the impact of the new revenue standard (as described in note 1) to assist in the comparability of the three months ended March 31, 2018 and 2017. The financial information below is presented for illustrative purposes only and does not purport to represent what the results of operations of GCI Holdings would actually have been had the business combination occurred on January 1, 2017, or to project the results of operations of GCI, LLC for any future periods. The pro forma adjustments are based on available information and certain assumptions that GCI, LLC management believes are reasonable. The pro forma adjustments are directly attributable to the business combination (as described in note 2) and the new revenue standard and are expected to have a continuing impact on the results of operations of GCI, LLC.

GCI Holdings’ pro forma operating results were as follows:
 
Three months ended 
 March 31,
 
2018
 
2017
 
amounts in thousands
Revenue
$
216,393

 
225,323

Operating expenses (excluding stock-based compensation included below):
 
 
 
Operating expense
(63,010
)
 
(68,419
)
Selling, general and administrative expenses
(83,195
)
 
(83,258
)
Adjusted OIBDA
70,188

 
73,646

Stock-based compensation
(1,676
)
 
(4,176
)
Legal settlement
(3,600
)
 

Depreciation and amortization
(59,315
)
 
(60,949
)
Operating income (loss)
$
5,597

 
8,521



30



Pro forma revenue

The components of pro forma revenue for the three months ended March 31, 2018 and 2017 are as follows:
 
Three months ended 
 March 31,
 
2018
 
2017
 
amounts in thousands
Consumer
 
 
 
Wireless
$
40,990

 
40,656

Data
39,062

 
36,088

Video
22,477

 
24,939

Voice
5,299

 
5,648

Business
 
 
 
Wireless
23,414

 
23,663

Data
70,051

 
77,150

Video
3,685

 
4,122

Voice
11,415

 
13,057

Total pro forma revenue
$
216,393

 
225,323


Pro forma consumer wireless revenue was relatively flat for the three months ended March 31, 2018 as compared to the corresponding period in the prior year.

Pro forma consumer data revenue increased $3.0 million for the three months ended March 31, 2018 as compared to the corresponding period in the prior year. The increases were primarily attributable to a $3.0 million increase in cable modem plan fee revenue due to subscribers' selection of plans with higher recurring monthly charges that offer higher speeds and higher usage limits. The increase was partially offset by a decrease in the overall number of subscribers.

Pro forma consumer video revenue decreased for the three months ended March 31, 2018 as compared to the corresponding period in the prior year. The decrease was primarily due to an 11% decrease in the number of subscribers.

Pro forma consumer voice revenue decreased $0.3 million for the three months ended March 31, 2018 as compared to the corresponding period in the prior year. The decrease was primarily due to a $0.3 million decrease in USF high cost support due to a scheduled decrease in funding for urban areas.

Pro forma business wireless revenue was relatively flat for the three months ended March 31, 2018 as compared to the corresponding period in the prior year.

Pro forma business data revenue decreased $7.1 million for the three months ended March 31, 2018 as compared to the corresponding period in the prior year. The decrease was primarily due to a $5.5 million decrease in revenue as a result of the funding shortfall for the RHC Program, as discussed above in the Overview section, and a $2.5 million decrease in professional services revenue due to a decrease in special project work. The decreases discussed above were partially offset by increased purchases by our existing customers of additional data and transport services.

Pro forma business video revenue was relatively flat for the three months ended March 31, 2018 as compared to the corresponding period in the prior year.

Pro forma business voice revenue decreased $1.6 million for the three months ended March 31, 2018 as compared to the corresponding period in the prior year. The decrease is primarily due to a $0.5 million decrease in long distance revenue as a result of decreased long distance traffic and rate compression and a $1.1 million decrease in local voice revenue as a result of a decrease in access lines in service.


31



Selected key performance indicators follow:
 
March 31,
 
2018
 
2017
Consumer
 

 
Data:
 

 
Cable modem subscribers
125,400


130,900

Video:
 
 
 
Basic subscribers
93,900

 
106,100

Homes passed
252,900

 
250,800

Voice:
 
 
 
Total local access lines in service3
49,300

 
52,700

Business
 
 
 
Data:
 
 
 
Cable modem subscribers
9,200

 
9,900

Voice:
 
 
 
Total local access lines in service3
37,600

 
40,300

Combined Consumer and Business
 
 
 
Wireless
 
 
 
Consumer wireless lines in service4
196,500

 
198,600

Business wireless lines in service4
22,100

 
23,400

Total wireless lines in service
218,600

 
222,000

 
 
 
 
A cable modem subscriber is defined by the purchase of cable modem service regardless of the level of service purchased. If one entity purchases multiple cable modem service access points, each access point is counted as a subscriber. On January 1, 2018, we transferred 700 small business cable modem subscribers from Business to Consumer.
2 A basic subscriber is defined as one basic tier of service delivered to an address or separate subunits thereof regardless of the number of outlets purchased. On January 1, 2018, we transferred 100 small business basic subscribers from Business to Consumer.
A local access line in service is defined as a revenue generating circuit or channel connecting a customer to the public switched telephone network. On January 1, 2018, we transferred 1,600 small business local access lines from Business to Consumer.
4 A wireless line in service is defined as a revenue generating wireless device. On January 1, 2018, we transferred 600 small business wireless lines from Business to Consumer.

Pro forma Operating expenses decreased $5.4 million for the three months ended March 31, 2018 as compared to the corresponding period in the prior year. The decreases were primarily due to a $1.1 million decrease in time and materials costs for special project work; a $1.4 million decrease in video distribution and programming costs primarily due to a decrease in the number of video subscribers; and, a $1.2 million decrease in data transport cost due to the migration of circuits to our own facilities.

Pro forma Selling, general and administrative expenses were relatively flat for the three months ended March 31, 2018 as compared to the corresponding period in the prior year.

Pro forma Stock based compensation decreased $2.5 million for the three months ended March 31, 2018 as compared to the corresponding period in the prior year due to a decrease in the number of unvested awards.

Pro forma Depreciation and amortization decreased $1.6 million or 3% during the three months ended March 31, 2018 as compared to the corresponding period in the prior year. The decrease was primarily due to expected accelerated amortization expense in earlier periods related to intangible assets acquired in the acquisition of GCI Holdings.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk in the normal course of business due to our ongoing investing and financial activities. Market risk refers to the risk of loss arising from adverse changes in stock prices and interest rates. The risk of loss can be assessed from the perspective of adverse changes in fair values, cash flows and future earnings. We have established policies, procedures and internal processes governing our management of market risks and the use of financial instruments to manage our exposure to such risks.

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We are exposed to changes in interest rates primarily as a result of our borrowing and investment activities, which include investments in fixed and floating rate debt instruments and borrowings used to maintain liquidity and to fund business operations. The nature and amount of our long-term and short-term debt are expected to vary as a result of future requirements, market conditions and other factors. We manage our exposure to interest rates by maintaining what we believe is an appropriate mix of fixed and variable rate debt. We believe this best protects us from interest rate risk. We have achieved this mix by (i) issuing fixed rate debt that we believe has a low stated interest rate and significant term to maturity, (ii) issuing variable rate debt with appropriate maturities and interest rates and (iii) entering into interest rate swap arrangements when we deem appropriate. As of March 31, 2018, our debt is comprised of the following amounts:
 
Variable rate debt
 
Fixed rate debt
 
Principal amount
 
Weighted average interest rate
 
Principal amount
 
Weighted average interest rate
 
dollar amounts in thousands
GCI Holdings
$
674,886

 
4.3
%
 
$
775,000

 
6.8
%
Corporate and other
$
1,000,000

 
3.5
%
 
$

 


We are exposed to changes in stock prices primarily as a result of our significant holdings in publicly traded securities. We continually monitor changes in stock markets, in general, and changes in the stock prices of our holdings, specifically. We believe that changes in stock prices can be expected to vary as a result of general market conditions, technological changes, specific industry changes and other factors. We periodically use equity collars and other financial instruments to manage market risk associated with certain investment positions. These instruments are recorded at fair value based on option pricing models.
 
At March 31, 2018, the fair value of our equity securities was $1.7 billion. Had the market price of such securities been 10% lower at March 31, 2018, the aggregate value of such securities would have been $166.8 million lower. At March 31, 2018, the fair value of our investment in Liberty Broadband was $3.7 billion. Had the market price of such security been 10% lower at March 31, 2018, the fair value of such security would have been $365.7 million lower.

Item 4. Controls and Procedures

In accordance with Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Company carried out an evaluation, under the supervision and with the participation of management, including its chief executive officer and its principal accounting and financial officer (the "Executives"), of the effectiveness of its disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the Executives concluded that the Company's disclosure controls and procedures were effective as of March 31, 2018 to provide reasonable assurance that information required to be disclosed in its reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's (the "SEC") rules and forms.

In March 2018, GCI Liberty completed the Transactions, pursuant to which the contribution was treated as a reverse acquisition under the acquisition method of accounting in accordance with GAAP. The Transactions resulted in changes to the management of the Company. As a result of the Transactions, the Company and new members of management are re-evaluating the internal controls of the legacy GCI Liberty operating business and are making appropriate changes as deemed necessary. The Company also notes that, although Qurate Retail had previously certified the effectiveness of internal controls with respect to the HoldCo assets that were contributed to the Company prior to the completion of the Transactions, the effectiveness of such internal control has not previously been certified to by HoldCo. Except as described above, there has been no change in the Company’s internal control over financial reporting that occurred  during  the  three  months  ended  March 31, 2018  that  has  materially  affected,  or  is  reasonably  likely  to  materially affect, its internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are involved in various lawsuits, billing disputes, legal proceedings, and regulatory matters that have arisen from time to time in the normal course of business.  Management believes there are no proceedings from asserted and unasserted claims which if determined adversely would have a material adverse effect on our financial position, results of operations or liquidity.


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Item 1A. Risk Factors

As a result of the completion of the Transactions, many of the risk factors in Part 1, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2017 have materially changed due to the change in the composition of our businesses, assets and liabilities. Therefore, presented below are revised risk factors which more accurately reflect the most material risks that relate to our businesses and capitalization.

The risks described below and elsewhere in this Quarterly Report on Form 10-Q are not the only ones that relate to our businesses or our capitalization. The risks described below are considered to be the most material. However, there may be other unknown or unpredictable economic, business, competitive, regulatory or other factors that also could have material adverse effects on our businesses. Past financial performance may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods. If any of the events described below were to occur, our businesses, prospects, financial condition, results of operations and/or cash flows could be materially adversely affected.

Factors Relating to Our Corporate History and Structure

The historical financial information of our Company prior to the Transactions and the historical financial information of Holdco is not necessarily representative of our future financial position, future results of operations or future cash flows, nor does it reflect what our financial position, results of operations or cash flows would have been as a combined, stand-alone company during the periods presented.

The historical financial information of our Company as presented in our filings under the Exchange Act, including our Forms 10-K and 10-Q, made prior to the completion of the Transactions includes only the financial information of our legacy operations as GCI, LLC (the “legacy GCI financial information”). Due to the treatment of a portion of the Transactions as a “reverse acquisition” under the acquisition method of accounting in accordance with GAAP, for accounting purposes, Holdco was considered to acquire GCI Liberty in the Transactions. Therefore, the new historical financial information of our Company is the historical financial information of HoldCo, and not the legacy GCI financial information. As a result, neither the current historical financial information of our Company nor the legacy GCI financial information is representative of our future financial position, future results of operations or future cash flows, nor do they reflect what our financial position, results of operations or cash flows would have been as a combined, stand-alone company, pursuing independent strategies, during the periods presented.

Our Company will conduct its operations to maintain its exclusion from the 40 Act, but nevertheless, may become subject to the Investment Company Act of 1940.

Following the completion of the Transactions, GCI, LLC is in the business of selling communications and entertainment services to subscribers, and its economic success will be based on its ability to retain current subscribers and attract new subscribers. Further, the legacy GCI operating subsidiaries are expected to generate substantially all of the cash flow of the consolidated GCI, LLC. GCI, LLC intends to continue to conduct its operations so that neither it nor any of its subsidiaries is required to register as an investment company under the Investment Company Act of 1940, as amended, and the rules and regulations promulgated thereunder (the “40 Act”). To ensure that GCI, LLC does not become subject to regulation under the 40 Act, GCI, LLC may be limited in the type of assets that it may continue to own or acquire and, further, may need to dispose of or acquire certain assets (through a purchase, sale, merger or other transaction) at such times or on such terms as may be less favorable to GCI, LLC than if it were not required to enter into such transaction to maintain its exclusion from regulation under the 40 Act. If for any reason, however, GCI, LLC were to become subject to regulation under the 40 Act (such as due to significant accretion in the value of its interests in certain publicly traded securities coupled with a reduction in the value of the legacy GCI operations or a change in circumstance which results in a reclassification of certain of its operating assets as investment securities for purposes of the 40 Act), after giving effect to any applicable grace periods, GCI, LLC may be required to register as an investment company, which could result in significant registration and compliance costs, could require changes to its corporate governance structure and financial reporting, and could restrict its activities going forward. In addition, if GCI, LLC were to become inadvertently subject to the 40 Act, any violation of the 40 Act could subject it to material adverse consequences, including potentially significant regulatory penalties and the possibility that certain of its contracts could be deemed unenforceable.

The market value of GCI, LLC's interests in publicly-traded securities may be affected by market conditions beyond its control that could cause it to record losses for declines in such market value.

Substantially all of the contributed HoldCo assets consist of equity interests in publicly-traded companies. As of the completion of the Transactions, the contributed HoldCo assets included shares of Charter valued at approximately $1.9 billion

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and shares of Liberty Broadband, which is Charter's largest shareholder with a 25.01% voting interest in Charter, valued at approximately $3.8 billion. Our Company has no ability to exercise control over either Charter or Liberty Broadband, and therefore we cannot cause either investee to take actions which may be in the best interest of our Company and our investment in these companies. Although many of the risks described below relating to our operating business similarly affect Charter and Liberty Broadband, for additional information regarding the risks and uncertainties specific to Charter and Liberty Broadband, holders of GCI, LLC securities should please see "Part I-Item 1A. Risk Factors-Factors Relating to Our Corporate History and Structure" and "Part I-Item 1A. Risk Factors-Factors Relating to Charter" of Liberty Broadband's Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC on February 9, 2018. In addition, as of the completion of the Transactions, the contributed HoldCo assets included an interest in the publicly traded equity of LendingTree with a market value of approximately $1.1 billion. The value of these interests may be affected by economic and market conditions that are beyond our control, and our ability to liquidate or otherwise monetize these interests without adversely affecting their value may be limited.

Factors Relating to Our Business and Future Results

We face competition that may reduce our market share and harm our financial performance.

There is substantial competition in the telecommunications and entertainment industries. Through mergers, various service integration strategies, and business alliances, major providers are striving to strengthen their competitive positions. We face increased wireless services competition from national carriers in the Alaska market and increasing video services competition from direct broadcast satellite providers and over-the-top content providers who are often able to offer more flexible subscription packages and exclusive content.

We expect competition to increase as a result of the rapid development of new technologies, services and products. We cannot predict which of many possible future technologies, products or services will be important to maintain our competitive position or what expenditures will be required to develop and provide these technologies, products or services. Our ability to compete successfully will depend on marketing and on our ability to anticipate and respond to various competitive factors affecting the industry, including new services that may be introduced, changes in consumer preferences, economic conditions and pricing strategies by competitors. To the extent we do not keep pace with technological advances or fail to timely respond to changes in competitive factors in our industry and in our markets, we could lose market share or experience a decline in our revenue and net income. Competitive conditions create a risk of market share loss and the risk that customers shift to less profitable lower margin services. Competitive pressures also create challenges for our ability to grow new businesses or introduce new services successfully and execute our business plan. We also face the risk of potential price cuts by our competitors that could materially adversely affect our market share and gross margins.

Our wholesale customers including our major roaming customers may construct facilities in locations where they contract with us to use our network to provide service on their behalf. We would experience a decline in revenue and net income if any of our wholesale customers constructed or expanded their existing networks in places where service is provided on our network. Some of our wholesale customers have greater access to financial, technical, and other resources than we do. We expect to continue to offer competitive alternatives to such customers in order to retain significant traffic on our network. We cannot predict whether such negotiations will be successful. Our inability to negotiate such contracts could have a material adverse effect on our business, financial condition and results of operations.

If we experience low or negative rates of subscriber acquisition or high rates of turnover, our financial performance will be impaired.

We are in the business of selling communications and entertainment services to subscribers, and our economic success is based on our ability to retain current subscribers and attract new subscribers. If we are unable to retain and attract subscribers, our financial performance will be impaired. Our rates of subscriber acquisition and turnover are affected by a number of competitive factors including the size of our service areas, network performance and reliability issues, our device and service offerings, subscribers’ perceptions of our services, and customer care quality. Managing these factors and subscribers’ expectations is essential in attracting and retaining subscribers. Although we have implemented programs to attract new subscribers and address subscriber turnover, we cannot assure you that these programs or our strategies to address subscriber acquisition and turnover will be successful. A high rate of turnover or low or negative rate of new subscriber acquisition would reduce revenues and increase the total marketing expenditures required to attract the minimum number of subscribers required to sustain our business plan which, in turn, could have a material adverse effect on our business, financial condition and results of operations.


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We may be unable to obtain or maintain the roaming services we need from other carriers to remain competitive.

Some of our competitors have national networks that enable them to offer nationwide coverage to their subscribers at a lower cost than we can offer. The networks we operate do not, by themselves, provide national coverage and we must pay fees to other carriers who provide roaming services to us. We currently rely on roaming agreements with several carriers for the majority of our roaming services.

The FCC requires commercial mobile radio service providers to provide roaming, upon request, for voice and SMS text messaging services on just, reasonable and non-discriminatory terms. The FCC also requires carriers to offer data roaming services. The rules do not provide or mandate any specific mechanism for determining the reasonableness of roaming rates for voice, SMS text messaging or data services and require that roaming complaints be resolved on a case-by-case basis, based on a non-exclusive list of factors that can be taken into account in determining the reasonableness of particular conduct or rates. If we were to lose the benefit of one or more key roaming or wholesale agreements unexpectedly, we may be unable to obtain similar replacement agreements and as a result may be unable to continue providing nationwide voice and data roaming services for our customers or may be unable to provide such services on a cost-effective basis. Our inability to obtain new or replacement roaming services on a cost-effective basis may limit our ability to compete effectively for wireless customers, which may increase our turnover and decrease our revenues, which in turn could materially adversely affect our business, financial condition and results of operations.

Our business is subject to extensive governmental legislation and regulation. Applicable legislation and regulations and changes to them could adversely affect our business, financial position, results of operations or liquidity.

Wireless Services. The licensing, construction, operation, sale and interconnection arrangements of wireless communications systems are regulated by the FCC and, depending on the jurisdiction, state and local regulatory agencies. In particular, the FCC imposes significant regulation on licensees of wireless spectrum with respect to:

How radio spectrum is used by licensees;
The nature of the services that licensees may offer and how such services may be offered; and
Resolution of issues of interference between spectrum bands.

Although the Communications Act of 1934, as amended, preempts state and local regulation of market entry and the rates charged by commercial mobile radio service providers, states may exercise authority over such things as certain billing practices and consumer-related issues. These regulations could increase the costs of our wireless operations. The FCC grants wireless licenses for terms of generally ten years that are subject to renewal and revocation. FCC rules require all wireless licensees to meet certain build-out requirements and substantially comply with applicable FCC rules and policies and the Communications Act of 1934, as amended, in order to retain their licenses. Failure to comply with FCC requirements in a given license area could result in revocation of the license for that license area. There is no guarantee that our licenses will be renewed.

Commercial mobile radio service providers must implement enhanced 911 (“E911”) capabilities in accordance with FCC rules. While we believe that we are currently in compliance with such FCC rules, the failure to deploy E911 service consistent with FCC requirements could subject us to significant fines.

We use tower facilities for the provision of our wireless services. The FCC, together with the Federal Aviation Administration, also regulates tower marking and lighting. In addition, tower construction is affected by federal, state and local statutes addressing zoning, environmental protection and historic preservation. The FCC requires local notice in any community in which an applicant is seeking FCC Antenna Structure Registration to build a tower. Local notice provides members of the community with an opportunity to comment on or challenge the tower construction for environmental reasons. This rule could cause delay for certain tower construction projects.

Internet Services. In 2015, the FCC adopted an order reclassifying Internet service as a telecommunications service under Title II of the Communications Act. The order prohibited broadband providers from blocking or throttling most lawful public Internet traffic, from engaging in paid prioritization of that traffic, and from unreasonably interfering with or disadvantaging end users' and edge providers' ability to send traffic to, from, and among each other. The order also strengthened the FCC's transparency rules, which require accurate and truthful service disclosures, sufficient for consumers to make informed choices, for example, about speed, price and fees, latency, and network management practices. The order allowed broadband providers to engage in reasonable network management, including using techniques to address traffic congestion. The new rules applied equally to wired and wireless broadband services. The order refrained from imposing rate regulation or tariff requirements on broadband services.


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On January 4, 2018, the FCC released an order that returned to a Title I classification of Internet service and eliminated many of the requirements described above. There are various efforts in Congress, through the federal courts of appeal, and through state legislation to re-impose the rules adopted in 2015. We cannot predict whether the FCC will re-impose the 2015 rules, but if it did, it is possible that the FCC could interpret or apply those rules in a way that has a material adverse effect on our business, financial position, results of operations, or liquidity.

Video Services. The cable television industry is subject to extensive regulation at various levels, and many aspects of such regulation are currently the subject of judicial proceedings and administrative or legislative proposals. It is possible that rate reductions or refunds of previously collected fees may be required of us in the future.

Other existing federal regulations, currently the subject of judicial, legislative, and administrative review, could change, in varying degrees, the manner in which video systems operate. Neither the outcome of these proceedings nor their impact on the cable television industry in general, or on our activities and prospects in the cable television business in particular, can be predicted at this time. There can be no assurance that future regulatory actions taken by Congress, the FCC or other federal, state or local government authorities will not have a material adverse effect on our business, financial position, results of operations or liquidity.

Local Access Services. Our success in the local telephone market depends on our continued ability to obtain interconnection, access and related services from local exchange carriers on terms that are reasonable and that are based on the cost of providing these services. Our local telephone services business faces the risk of unfavorable changes in regulation or legislation or the introduction of new regulations. Our ability to provide service in the local telephone market depends on our negotiation or arbitration with local exchange carriers to allow interconnection to the carrier’s existing local telephone network (in some Alaska markets at cost-based rates), to establish dialing parity, to obtain access to rights-of-way, to resell services offered by the local exchange carrier, and in some cases, to allow the purchase, at cost-based rates, of access to unbundled network elements. Future negotiations or arbitration proceedings with respect to new or existing markets could result in a change in our cost of serving these markets via the facilities of the Incumbent Local Exchange Carriers or via wholesale offerings.

Loss of our ETC status would disqualify us for USF support.

The Universal Service Fund (“USF”) pays support to Eligible Telecommunications Carriers (“ETCs”) to support the provision of facilities-based wireline and wireless telephone service in high cost areas. If we were to lose our ETC status in any of the study areas where we are currently an authorized ETC whether due to legislative or regulatory reform or our failure to comply with applicable laws and regulations, we would be ineligible to receive USF support for providing service in that area. Loss of our ETC status could have an adverse effect on our business, financial position, results of operations or liquidity.

Revenues and accounts receivable from USF support may be reduced or lost.

We receive support from each of the various USF programs: high cost, low income, rural health care, and schools and libraries. This support was 26%, 24%, and 19% of our revenue for the years ended December 31, 2017, 2016 and 2015, respectively. We had USF net receivables of $131.8 million and $100.5 million at December 31, 2017 and 2016, respectively. The programs are subject to change by regulatory actions taken by the FCC or legislative actions. Changes to any of the USF programs that we participate in could result in a material decrease in revenue and accounts receivable, which could have an adverse effect on our business, financial position, results of operations or liquidity.

Additionally, the RHC Program subsidizes the rates for services provided to rural health care providers. Our rates for services provided to rural health care providers are currently under review by the USAC and the FCC. We cannot predict the result of the ongoing reviews, but if pending funding requests or previously paid funding requests were adjusted as a result of rate reviews, such adjustments could result in a material decrease in revenue and accounts receivable, which could have an adverse effect on our business, financial position, results of operations or liquidity.

Also with respect to the RHC Program, USAC received requests for support that exceeded the available RHC Program funding for the first time in the funding year that ran from July 1, 2016 through June 30, 2017 (“Funding Year 2016”), and on March 15, 2018, USAC announced that funding requests for the funding year that runs from July 1, 2017 through June 30, 2018 (“Funding Year 2017”) exceeded the available RHC Program funding. We expect that the support requests will continue to exceed the program’s annual cap for subsequent funding years.

As a result of the excess support requests with respect to Funding Year 2017, we have reflected a $5.5 million shortfall in our pro forma revenue for the quarter ended March 31, 2018 (the “Q1 2017 Shortfall Amount”), as described in

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more detail under “Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The Q1 2017 Shortfall Amount does not include any future additional shortfalls with respect to Funding Year 2017 and represents only a reduction from the period beginning July 1, 2017 and ending March 9, 2018, the date on which the Transactions were completed. The Q1 2017 Shortfall Amount is based on our internal estimates and has been derived from, among other things, information regarding the shortfalls with respect to Funding Year 2016 and Funding Year 2017. Therefore, the actual shortfall with respect to Funding Year 2017 may be higher. We provide services to rural health care providers who may be impacted by funding caps and as a result may not receive the full subsidy that was expected under the program, which may negatively affect our financial position, results of operations or liquidity. We cannot predict the impact of future RHC Program funding caps but they may negatively affect our financial position, results of operations, or liquidity.

We may not meet our performance plan milestones under the Alaska High Cost Order.

As an ETC, we receive support from the USF to support the provision of wireline local access and wireless service in high cost areas. On August 31, 2016, the FCC published the Alaska High Cost Order which requires us to submit to the FCC a performance plan with five-year and ten-year commitments. If we are unable to meet the final performance plan milestones approved by the FCC we will be required to repay 1.89 times the average amount of support per location received over the ten-year term for the relevant number of locations that we failed to deploy to, plus ten percent of our total Alaska High Cost Order support received over the ten-year term. Inability to meet our performance plan milestones could have an adverse effect on our business, financial position, results of operations or liquidity.

We may lose USF high cost support if another carrier adds 4G LTE service in an area where we currently provide 4G LTE service.

Under the Alaska High Cost Order, the FCC adopted a process for revisiting after five years whether and to what extent there is duplicative support for 4G LTE service in rural Alaska and to take steps to eliminate such duplicative support levels in the second half of the ten-year term. As a result, if another carrier builds 4G LTE service in an area where we are the sole provider and the FCC decides to redistribute the support then our high cost support may be reduced which could have an adverse effect on our business, financial position, results of operations or liquidity.

Programming expenses for our video services are increasing, which could adversely affect our business.

We expect programming expenses for our video services to continue to increase in the foreseeable future. The multichannel video provider industry has continued to experience an increase in the cost of programming, especially sports programming and costs to retransmit local broadcast stations. As our contracts with content providers expire, there can be no assurance that they will be renewed on acceptable terms or that they will be renewed at all, in which case we may be unable to provide such content as part of our video services and our business could be adversely affected. If we add programming to our video services or if we choose to distribute existing programming to our customers through additional delivery platforms, we may incur increased programming expenses. If we are unable to raise our customers’ rates or offset such programming cost increases through the sale of additional services, the increasing cost of programming could have an adverse impact on our business, financial condition, or results of operations.

The decline in our voice services’ results of operations, which include long-distance and local access services, may accelerate.

We expect our voice services’ results of operations, which include long-distance and local access services, will continue to decline. As competition from wireless carriers, such as our Company, increases, we expect our long-distance and local access services' subscribers and revenues will continue to decline and the rate of decline may accelerate.

We may not be able to satisfy the requirements of our participation in a New Markets Tax Credit ("NMTC") program for funding our TERRA project.

We have entered into five separate arrangements under the NMTC program with US Bancorp to help fund various phases of our project operating a hybrid fiber optic cable and digital microwave system (“TERRA”) linking Anchorage with the Bristol Bay, Yukon-Kuskokwim, and northwest regions of the state. In connection with the NMTC transactions we received proceeds which were restricted for use on TERRA. The NMTCs are subject to 100% recapture of the tax credit for a period of seven years as provided in the Internal Revenue Code of 1986, as amended (the “Code”). We are required to be in compliance with various regulations and contractual provisions that apply to the NMTC arrangements. We have agreed to indemnify US Bancorp for any loss or recapture of its $65.8 million in NMTCs plus interest and penalties until such time as our obligation to deliver tax benefits is relieved. Our obligation to deliver tax benefits is relieved in various stages from August 2018 through

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December 2024. Non-compliance with applicable requirements could result in projected tax benefits not being realized by US Bancorp and could have an adverse effect on our financial position, results of operations or liquidity.

Failure to stay abreast of new technology could affect our ability to compete in the industry.

We test and deploy various new technologies and support systems intended to enhance our competitiveness and increase the utility of our services. As our operations grow in size and scope, we must continuously improve and upgrade our systems and infrastructure while maintaining or improving the reliability and integrity of our systems and infrastructure. The emergence of alternative platforms such as mobile or tablet computing devices and the emergence of niche competitors who may be able to optimize products, services or strategies for such platforms will require new investment in technology. We may not successfully complete the rollout of new technology and related features or services in a timely manner, and they may not be widely accepted by our customers or may not be profitable, in which case we could not recover our investment in the technology. There can be no assurance that we will be able to compete with advancing technology or introduce new technologies and systems as quickly as we would like or in a cost effective manner. Deployment of technology supporting new service offerings may also adversely affect the performance or reliability of our networks with respect to both the new and existing services. Any resulting customer dissatisfaction could affect our ability to retain customers and may have an adverse effect on our financial position, results of operations, or liquidity. In addition to introducing new technologies and offerings, we must phase out outdated and unprofitable technologies and services. If we are unable to do so on a cost-effective basis, we could experience reduced profits.

Our operations are geographically concentrated in Alaska and are impacted by the economic conditions in Alaska.

We offer products and services to customers primarily throughout Alaska. Because of this geographic concentration, growth of our 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 will adversely impact the Alaska economy, which in turn could have an adverse impact on the demand for our products and services and on our results of operations and financial condition. Oil prices have continued to remain low which has put significant pressure on the Alaska state government budget since the majority of its revenues come from the oil industry. While the Alaska state government has significant reserves that we believe 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 lower oil prices.

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

The customer base in Alaska is limited and we have already achieved significant market penetration with respect to our service offerings in Anchorage and other locations in Alaska. We may not be able to continue to increase our share of the existing markets for our services, and no assurance can be given that the Alaskan economy will grow and increase the size of the markets we serve or increase the demand for the services we offer. The markets in Alaska for wireless and wireline telecommunications and video services are unique and distinct within the United States due to Alaska’s large geographical size, its sparse population located in a limited number of clusters, and its distance from the rest of the United States. The expertise we have developed in operating our businesses in Alaska may not provide us with the necessary expertise to successfully enter other geographic markets.

Natural or man-made disasters or terrorist attacks could have an adverse effect on our business.

Our technical infrastructure (including our communications network infrastructure and ancillary functions supporting our network such as service activation, billing and customer care) is vulnerable to damage or interruption from technology failures, power surges or outages, natural disasters, fires, human error, terrorism, intentional wrongdoing or similar events. As a communications provider, there is an increased risk that our technological infrastructure may be targeted in connection with terrorism or cyberattacks, either as a primary target, or as a means of facilitating additional attacks on other targets.


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In addition, earthquakes, floods, fires and other unforeseen natural disasters or events could materially disrupt our business operations or our provision of service in one or more markets. Costs we incur to restore, repair or replace our network or technical infrastructure, as well as costs associated with detecting, monitoring or reducing the incidence of unauthorized use, may be substantial and increase our cost of providing service. Any failure in or interruption of systems that we or third parties maintain to support ancillary functions, such as billing, point of sale, inventory management, customer care and financial reporting, could materially impact our ability to timely and accurately record, process and report information important to our business. If any of the above events were to occur, we could experience higher churn, reduced revenues and increased costs, any of which could harm our reputation and have a material adverse effect on our business, financial condition or results of operations.

Additionally, our insurance may not be adequate to cover the costs associated with a natural disaster or terrorist attack.

Cyberattacks or other network disruptions could have an adverse effect on our business.

Cyberattacks against our technological infrastructure or breaches of network information technology may cause equipment failures, disruption of our operations, and potentially unauthorized access to confidential customer data. Cyberattacks, which include the use of malware, computer viruses, and other means for service disruption or unauthorized access to confidential customer data, have increased in frequency, scope, and potential harm for businesses in recent years. It is possible for such cyberattacks to go undetected for an extended period of time, increasing the potential harm to our customers, assets, and reputation.

To date, we have not been subject to cyberattacks or network disruptions that, individually or in the aggregate, have been material to our operations or financial condition. Nevertheless, we engage in a variety of preventive measures at an increased cost to us, in order to reduce the risk of cyberattacks and safeguard our infrastructure and confidential customer information. Such measures include, but are not limited to the following industry best practices: application whitelisting, anti-malware, message and spam filtering, encryption, advanced firewalls, threat detection, and URL filtering. Despite these preventive and detective actions, our efforts may be insufficient to repel a major cyberattack or network disruption in the future.

Some of the most significant risks to our information technology systems, networks, and infrastructure include:

Cyberattacks that disrupt, damage, and gain unauthorized access to our network and computer systems including data breaches caused by criminal or terrorist activities;
Undesired human actions including intentional or accidental errors;
Malware (including viruses, worms, cryptoware, and Trojan horses), software defects, unsolicited mass advertising, denial of service, ransomware, and other malicious or abusive attacks by third parties; and,
Unauthorized access to our information technology, billing, customer care, and provisioning systems and networks and those of its vendors and other providers.

If hackers or cyberthieves gain improper access to our technology systems, networks, or infrastructure, they may be able to access, steal, publish, delete, misappropriate, modify or otherwise disrupt access to confidential customer data. Moreover, additional harm to customers could be perpetrated by third parties who are given access to the confidential customer data. A network disruption (including one resulting from a cyberattack) could cause an interruption or degradation of service as well as permit access, theft, publishing, deletion, misappropriation, or modification to or of confidential customer data. Due to the evolving techniques used in cyberattacks to disrupt or gain unauthorized access to technology networks, we may not be able to anticipate or prevent such disruption or unauthorized access.

The costs imposed on us as a result of a cyberattack or network disruption could be significant. Among others, such costs could include increased expenditures on cyber security measures, litigation, fines, and sanctions, lost revenues from business interruption, and damage to the public’s perception regarding our ability to provide a secure service. As a result, a cyberattack or network disruption could have a material adverse effect on our business, financial condition, and operating results.

Increases in data usage on our wired and wireless networks may cause network capacity limitations, resulting in service disruptions, reduced capacity or slower transmission speeds for our customers.

Video streaming services and peer-to-peer file sharing applications use significantly more bandwidth than traditional Internet activity such as web browsing and email. As use of these services continues to grow, our customers will likely use more

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bandwidth than in the past. Additionally, new wireless handsets and devices may place a higher demand for data on our wireless network. If this occurs, we could be required to make significant capital expenditures to increase network capacity in order to avoid service disruptions, service degradation or slower transmission speeds for our customers. Alternatively, we could choose to implement network management practices to reduce the network capacity available to bandwidth-intensive activities during certain times in market areas experiencing congestion, which could negatively affect our ability to retain and attract customers in affected areas. While we believe demand for these services may drive customers to pay for faster speeds, competitive or regulatory constraints may preclude us from recovering the costs of the necessary network investments which could result in an adverse impact to our business, financial condition, and operating results.

Prolonged service interruptions or system failures could affect our business.

We rely heavily on our network equipment, communications providers, data and software to support all of our functions. We rely on our networks and the networks of others for substantially all of our revenues. We are able to deliver services and serve our customers only to the extent that we can protect our network systems against damage from power or communication failures, computer viruses, natural disasters, unauthorized access and other disruptions. While we endeavor to provide for failures in the network by providing back-up systems and procedures, we cannot guarantee that these back-up systems and procedures will operate satisfactorily in an emergency. Disruption to our billing systems due to a failure of existing hardware and backup protocols could have an adverse effect on our revenue and cash flow. Should we experience a prolonged failure, it could seriously jeopardize our ability to continue operations. In particular, should a significant service interruption occur, our ongoing customers may choose a different provider, and our reputation may be damaged, reducing our attractiveness to new customers.

If failures occur in our undersea fiber optic cable systems or our TERRA facilities and its extensions, our ability to immediately restore the entirety of our service may be limited and we could incur significant costs.

Our communications facilities include undersea fiber optic cable systems that carry a large portion of our traffic to and from the contiguous lower 48 states, one of which provides an alternative geographically diverse backup communication facility to the other. Our facilities also include TERRA and its extensions some of which are unringed, operating in a remote environment and are at times difficult to access for repairs. Damage to an undersea fiber optic cable system or TERRA and its extensions could result in significant unplanned expense. If a failure of both sides of the ring of our undersea fiber optic facilities or our ringed TERRA facility and its unringed extensions occurs and we are not able to secure alternative facilities, some of the communications services we offer to our customers could be interrupted, which could have a material adverse effect on our business, financial position, results of operations or liquidity.

If a failure occurs in our satellite communications systems, our ability to immediately restore the entirety of our service may be limited.

Our communications facilities include satellite transponders that we use to serve many rural and remote Alaska locations. Each of our C-band and Ku-band satellite transponders is backed up using on-board transponder redundancy. In the event of a complete spacecraft failure the services are restored using capacity on other spacecraft that are held in reserve. If a failure of our satellite transponders occurs and we are not able to secure alternative facilities, some of the communications services we offer to our customers could be interrupted which could have a material adverse effect on our business, financial position, results of operations or liquidity.

We depend on a limited number of third-party vendors to supply communications equipment. If we do not obtain the necessary communications equipment, we will not be able to meet the needs of our customers.

We depend on a limited number of third-party vendors to supply wireless, Internet, video and other telephony-related equipment. If our providers of this equipment are unable to timely supply the equipment necessary to meet our needs or provide them at an acceptable cost, we may not be able to satisfy demand for our services and competitors may fulfill this demand. Due to the unique characteristics of the Alaska communications markets (i.e., remote locations, rural, satellite-served, low density populations, and our leading edge services and products), in many situations we deploy and utilize specialized, advanced technology and equipment that may not have a large market or demand. Our vendors may not succeed in developing sufficient market penetration to sustain continuing production and may fail. Vendor bankruptcy, or acquisition without continuing product support by the acquiring company, may require us to replace technology before its otherwise useful end of life due to lack of on-going vendor support and product development.

The suppliers and vendors on which we rely may also be subject to litigation with respect to technology on which we depend, including litigation involving claims of patent infringement. Such claims have been growing rapidly in the communications industry. We are unable to predict whether our business will be affected by any such litigation. We expect our

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dependence on key suppliers to continue as they develop and introduce more advanced generations of technology. The failure of our key suppliers to provide products or product support could have a material adverse effect on our business, financial position, and results of operations.

We do not have insurance to cover certain risks to which we are subject, which could lead to the occurrence of uninsured liabilities.

As is typical in the communications industry, we are self-insured for damage or loss to certain of our transmission facilities, including our buried, undersea and above-ground fiber optic cable systems. If we become subject to substantial uninsured liabilities due to damage or loss to such facilities, our financial position, results of operations or liquidity may be adversely affected.

We are in the process of transferring our customer billing systems to a new third-party vendor. Any unanticipated difficulties, disruption or significant delays could have adverse operational, financial and reputational effects on our business.

We are currently implementing a new customer billing system, which involves moving to a new third-party billing services vendor and platform in 2018. The implementation may cause major system or business disruptions or we may fail to implement the new billing system in a timely or effective manner. In addition, the third-party billing services vendor may experience errors, cyber-attacks or other operational disruptions that could negatively impact us and over which we may have limited control. Interruptions and/or failure of this new billing services system could disrupt our operations and impact our ability to provide or bill for our services, retain customers, or attract new customers, and negatively impact overall customer experience. Any occurrence of the foregoing could cause material adverse effects on our operations and financial condition, material weaknesses in our internal control over financial reporting and reputational damage.

Concerns about health/safety risks associated with wireless equipment may reduce the demand for our wireless services.

We do not manufacture devices or other equipment we sell, and we depend on our suppliers to provide defect-free and safe equipment. Suppliers are required by applicable law to manufacture their devices to meet certain governmentally imposed safety criteria. However, even if the devices we sell meet the regulatory safety criteria, we could be held liable with the equipment manufacturers and suppliers for any harm caused by products we sell if such products are later found to have design or manufacturing defects. We cannot guarantee that we will be fully protected against all losses associated with a product that is found to be defective.

Portable communications devices have been alleged to pose health risks, including cancer, due to radio frequency emissions from these devices. Purported class actions and other lawsuits have been filed from time to time against other wireless companies seeking not only damages but also remedies that could increase the cost of doing business. We cannot be sure of the outcome of any such cases or that the industry will not be adversely affected by litigation of this nature or public perception about health risks. The actual or perceived risk of mobile communications devices could adversely affect us through a reduction in subscribers. Further research and studies are ongoing, with no linkage between health risks and mobile phone use established to date by a credible public source. However, we cannot be sure that additional studies will not demonstrate a link between radio frequency emissions and health concerns.

Additionally, there are safety risks associated with the use of wireless devices while operating vehicles or equipment. Concerns over any of these risks and the effect of any legislation, rules or regulations that have been and may be adopted in response to these risks could limit our ability to sell our wireless services.

Risk Related to Our Company as a Whole

Our significant debt and lease obligations could adversely affect our business.

We have and will continue to have a significant amount of debt and lease obligations including capital, operating, and the tower obligations. Our high level of debt and lease obligations could have important consequences, including the following:

Increasing our vulnerability to adverse economic, industry, or competitive developments;
Requiring a substantial portion of our cash flows from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use our cash flows to fund operations, capital expenditures, and future business opportunities;
Exposing us to the risk of increased interest rates to the extent of any future borrowings at variable rates of interest;

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Making it more difficult for us to satisfy our obligations with respect to our indebtedness;
Restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;
Limiting our ability to obtain additional financing for working capital, capital expenditures, product and service development, debt service requirements, acquisitions, and general corporate or other purposes; and
Limiting our flexibility in planning for, or reacting to, changes in our business or market conditions and placing us at a competitive disadvantage compared to our competitors who are less highly leveraged and who, therefore, may be able to take advantage of opportunities that our leverage may prevent us from exploiting.

We will require a significant amount of cash to service our debt and to meet other obligations. Our ability to generate cash depends on many factors beyond our control. If we are unable to meet our future capital needs it may be necessary for us to curtail, delay or abandon our business growth plans. If we incur significant additional indebtedness to fund our plans, it could cause a decline in our credit rating and could increase our borrowing costs or limit our ability to raise additional capital.

We will continue to require a significant amount of cash to satisfy our debt service requirements and to meet other obligations. As of March 31, 2018, we have outstanding approximately $2.5 billion of indebtedness. Our ability to make payments on and to refinance our debt and to fund planned capital expenditures and acquisitions will depend on our ability to generate cash and to arrange additional financing in the future. These abilities are subject to, among other factors, our credit rating, our financial performance, general economic conditions, prevailing market conditions, the state of competition in our market, the outcome of certain legislative and regulatory issues and other factors that may be beyond our control. Our business may not generate sufficient cash flow from operations and future borrowings may not be available to us in an amount sufficient to enable us to pay our debt or to fund our other liquidity needs. We may need to refinance all or a portion of our debt on or before maturity. We may not be able to refinance any of our debt on commercially reasonable terms or at all.

The terms of our debt obligations impose restrictions on us that may affect our ability to successfully operate our business and our ability to make payments on the debt obligations.

The indentures governing our 6.75% senior notes due 2021 and 6.875% senior notes due 2025 (together, the “Senior Notes”)and/or the credit agreements governing our term loans under a senior secured credit facility with a syndicate of banks (the “Senior Credit Facility”) and other loans contain various covenants that could materially and adversely affect our ability to finance our future operations or capital needs and to engage in other business activities that may be in our best interest.

All of these covenants may restrict our ability to expand or to pursue our business strategies. Our ability to comply with these covenants may be affected by events beyond our control, such as prevailing economic conditions and changes in regulations, and if such events occur, we cannot be sure that we will be able to comply. A breach of these covenants could result in a default under the indentures and/or the credit agreements. If there were an event of default under the indentures and/ or the credit agreements, holders of such defaulted debt could cause all amounts borrowed under these instruments to be due and payable immediately. Additionally, if we fail to repay the debt under the Senior Credit Facility when it becomes due, the lenders under the Senior Credit Facility could proceed against certain of our assets and capital stock of our subsidiaries that we have pledged to them as security. Our assets or cash flow may not be sufficient to repay borrowings under our outstanding debt instruments in the event of a default thereunder.

When our Senior Credit Facility and Senior Notes mature, we may not be able to refinance or replace one or both.

When our Senior Credit Facility and Senior Notes mature, we will likely need to refinance them and may not be able to do so on favorable terms or at all. If we are able to refinance maturing indebtedness, the terms of any refinancing or alternate credit arrangements may contain terms and covenants that restrict our financial and operating flexibility.

Variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.

Our borrowings under our Senior Credit Facility are at variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on the variable rate indebtedness could increase even though the amount borrowed remained the same, and our net income and cash flow could decrease.

In order to manage our exposure to interest rate risk, in the future, we may enter into derivative financial instruments, typically interest rate swaps and caps, involving the exchange of floating for fixed rate interest payments. If we are unable to enter into interest rate swaps, it may adversely affect our cash flow and may impact our ability to make required principal and interest payments on our indebtedness.


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Any significant impairment of our indefinite-lived intangible assets would lead to a decrease in our assets and a reduction in our net operating performance.

We had $1,517.2 million of indefinite-lived intangible assets at March 31, 2018, consisting of goodwill of $950.2 million, cable certificates of $370.0 million, wireless licenses of $193.0 million and other intangibles of $4.0 million. However, these valuations are not final and the acquisition price allocation is preliminary and subject to revision. Goodwill represents the excess of cost over fair value of net assets acquired in connection with business acquisitions and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition. Our cable certificates represent agreements with government entities to construct and operate a video business. Our wireless licenses are from the FCC and give us the right to provide wireless service within a certain geographical area. Our broadcast licenses represent permission to use a portion of the radio frequency spectrum in a given geographical area for broadcasting purposes.

If we make changes in our business strategy or if market or other conditions adversely affect our operations, we may be forced to record an impairment charge, which would lead to a decrease in our assets and a reduction in our net operating performance. Our indefinite-lived intangible assets are tested annually for impairment during the fourth quarter and at any time upon the occurrence of certain events or substantive changes in circumstances that indicate the assets might be impaired. If the testing performed indicates that impairment has occurred, we are required to record an impairment charge for the difference between the carrying value and the fair value of the goodwill and/or the indefinite-lived intangible assets, as appropriate, in the period in which the determination is made. The testing of goodwill and indefinite-lived intangible assets for impairment requires us to make significant estimates about our future performance and cash flows, as well as other assumptions. These estimates can be affected by numerous factors, including changes in economic, industry or market conditions, changes in underlying business operations, future operating performance, changes in competition, or changes in technologies. Any changes to key assumptions, or actual performance compared with those assumptions, about our business and its future prospects or other assumptions could affect the fair value, resulting in an impairment charge.

Our ability to use net operating loss carryforwards to reduce future tax payments could be negatively impacted if there is an “ownership change” as defined under Section 382 of the Code.

GCI, LLC is a wholly owned subsidiary and member of the GCI Liberty controlled group of corporations, and it files its income tax returns as part of the consolidated group of corporations under GCI Liberty. Accordingly, all discussions regarding income taxes reflect the consolidated group's activity. At March 31, 2018, we had tax net operating loss carryforwards of $387.1 million for U.S. federal income tax purposes and, under the Code, we may carry forward these net operating losses in certain circumstances to offset any current and future taxable income and thus reduce our federal income tax liability, subject to certain requirements and restrictions. If GCI Liberty experiences an “ownership change,” as defined in Section 382 of the Code and related Treasury regulations at a time when its market capitalization is below a certain level, our ability to use the net operating loss carryforwards could be substantially limited. This limit could impact the timing of the usage of the net operating loss carryforwards, thus accelerating cash tax payments or causing net operating loss carryforwards to expire prior to their use, which could affect the ultimate realization of that deferred tax asset.

We have not voluntarily implemented various corporate governance measures, in the absence of which you may have more limited protections against interested transactions, conflicts of interest and similar matters.

Federal legislation, including the Sarbanes-Oxley Act of 2002, encourages the adoption of various corporate governance measures designed to promote the integrity of corporate management and the securities markets. Some of these measures have been adopted in response to legal requirements. Others have been adopted by companies in response to the requirements of national securities exchanges on which their securities are listed. Among the corporate governance measures that are required under the rules of national securities exchanges are those that address board of directors' independence and audit committee oversight.

As a “close corporation” under Delaware law, our stockholder, rather than a board of directors, manages our business. Our stockholder is GCI Liberty, meaning that we do not have any independent governing body. In addition, we have not adopted corporate governance measures such as the implementation of an audit committee or other independent governing body. It is possible that if we were to appoint a board of directors and include one or more independent directors and adopt some or all of these corporate governance measures, there may be somewhat greater assurances that internal corporate decisions were being made by disinterested directors and that policies had been implemented to define responsible conduct. However, our stockholder has the ability to make decisions regarding transactions with related parties and corporate actions that could involve conflicts of interest. In addition, our Chief Executive Officer and President, Gregory B. Maffei, is the Chief Executive Officer and President and a director of GCI Liberty. Investors should bear in mind our current lack of independent directors, the positions with GCI Liberty that are held by Mr. Maffei and corporate governance measures in formulating their investment decisions.

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The interests of GCI Liberty may not coincide with your interests and GCI Liberty may make decisions with which you may disagree.

Our member is GCI Liberty. As a “close corporation” under Delaware law, our member, rather than a board of directors, manages our business. As a result, GCI Liberty controls certain aspects of our management, including the approval of significant corporate transactions such as a change of control. The interests of GCI Liberty may not coincide with our interests or your interests. For example, GCI Liberty's dependence on our cash flow for servicing GCI Liberty's debt and for other purposes, including payments of dividends on GCI Liberty's capital stock, stock repurchases or to fund acquisitions or other operational requirements of GCI Liberty and its subsidiaries is likely to result in our payment of large dividends to GCI Liberty when permitted by law or the terms of our Senior Credit Facility and the indentures governing our outstanding Senior Notes, which may increase our accumulated deficit or require us to borrow under our Senior Credit Facility, increasing our leverage and decreasing our liquidity.

Item 6. Exhibits

Listed below are the exhibits that are filed as a part of this Report (according to the number assigned to them in Item 601 of Regulation S-K):
Exhibit No.
Description
2.1
3.1
3.2
3.3
4.1
4.2
4.3
4.4
31.1
31.2
32
99.1
101
The following materials from GCI, LLC's Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets; (ii) Condensed Consolidated Statements of Operations; (iii) Condensed Consolidated Statements of Cash Flows; (iv) Condensed Consolidated Statement of Equity; and (v) Notes to Condensed Consolidated Financial Statements *
*
Filed herewith.
 
 
**
Furnished herewith
 
 

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SIGNATURES

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

GCI, LLC


Signature
 
Title
 
Date