Document



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 June 30, 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. 001-38385
GCI LIBERTY, INC.
(Exact name of Registrant as specified in its charter)
 
Delaware
 
92-0072737
 
 
(State or other jurisdiction of
 
(I.R.S Employer
 
 
incorporation or organization)
 
Identification No.)
 

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

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

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 ☒

The number of shares outstanding of the registrant's classes of common stock as of July 31, 2018 was:

104,560,489 shares of Series A common stock; and
4,444,127 shares of Series B common stock

1



TABLE OF CONTENTS

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

2




GCI LIBERTY, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(unaudited)
 
 
 
 
 
June 30,

December 31,

2018

2017

amounts in thousands
Assets



Current assets:
 

 
Cash and cash equivalents
$
767,873


573,210

Trade and other receivables, net of allowance for doubtful accounts of $1,915 thousand and $0, respectively
225,820


6,803

Current portion of tax sharing receivable
28,551



Other current assets
37,146


1,265

Total current assets
1,059,390


581,278

Investments in equity securities (note 7)
1,574,212


1,803,064

Investments in affiliates, accounted for using the equity method (note 8)
121,880


114,655

Investment in Liberty Broadband measured at fair value (note 8)
3,231,869


3,634,786







Property and equipment, net
1,200,050


624

Intangible assets not subject to amortization





Goodwill (note 10)
957,972


25,569

Cable certificates
370,000



Wireless licenses
190,000



Other
16,525


4,000


1,534,497


29,569

Intangible assets subject to amortization, net (note 10)
492,318


4,237

Tax sharing receivable
82,485



Other assets, at cost, net of accumulated amortization
47,396


4,000

Total assets
$
9,344,097


6,172,213

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

3



GCI LIBERTY, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(unaudited)
 
 
June 30,
 
December 31,
 
2018
 
2017
 
amounts in thousands, except share amounts
Liabilities and Equity



Current liabilities:



Accounts payable and accrued liabilities
$
104,290


718

Deferred revenue
31,628



Other current liabilities
52,153


9,747

Total current liabilities
188,071


10,465

Long-term debt, net, including $492 million and $0 measured at fair value (note 11)
2,965,504



Obligations under capital leases and tower obligation, excluding current portion
128,692



Long-term deferred revenue
64,744


130

Deferred income tax liabilities
882,257


643,426

Taxes payable


1,198,315

Preferred stock (note 12)
174,973



Indemnification obligation (note 6)
84,921



Other liabilities
51,063


95,841

Total liabilities
4,540,225


1,948,177

Equity





Stockholders’ equity:





Series A common stock, $.01 par value. Authorized 500,000,000 shares; issued and outstanding 104,564,844 shares at June 30, 2018
1,046



Series B common stock, $.01 par value. Authorized 20,000,000 shares; issued and outstanding 4,444,127 shares at June 30, 2018
44



Series C common stock, $.01 par value. Authorized 1,040,000,000 shares; no issued and outstanding shares at June 30, 2018



Parent's investment


2,305,440

Additional paid-in capital
3,367,534



Accumulated other comprehensive earnings (loss), net of taxes
(13,118
)
 

Retained earnings
1,441,199


1,914,963

Total stockholders' equity
4,796,705


4,220,403

Non-controlling interests
7,167


3,633

Total equity
4,803,872


4,224,036

Commitments and contingencies




Total liabilities and equity
$
9,344,097


6,172,213

 
 
 
 
 See accompanying notes to interim condensed consolidated financial statements.

4



GCI LIBERTY, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,

2018

2017
 
2018
 
2017

amounts in thousands, except per share amounts
Revenue
$
233,490

 
6,177

 
294,694

 
10,146

Operating costs and expenses:


 


 
 
 
 
Operating expense (exclusive of depreciation and amortization shown separately below)
69,294

 
2,838

 
89,113

 
5,597

Selling, general and administrative, including stock-based compensation (note 4)
100,401

 
14,134

 
133,134

 
25,942

Depreciation and amortization expense
64,388

 
822

 
80,409

 
1,575


234,083

 
17,794

 
302,656

 
33,114

Operating income (loss)
(593
)
 
(11,617
)
 
(7,962
)
 
(22,968
)
Other income (expense):


 


 
 
 
 
Interest expense (including amortization of deferred loan fees)
(35,442
)
 
(5
)
 
(43,690
)
 
(5
)
Share of earnings (losses) of affiliates, net (note 8)
10,350

 
1,600

 
7,858

 
3,323

Realized and unrealized gains (losses) on financial instruments, net (note 6)
(428,356
)
 
60,449

 
(499,837
)
 
798,001

Other, net
(1,845
)
 
541

 
(148
)
 
750


(455,293
)
 
62,585

 
(535,817
)
 
802,069

Earnings (loss) before income taxes
(455,886
)
 
50,968

 
(543,779
)
 
779,101

Income tax (expense) benefit
152,406

 
(19,367
)
 
69,568

 
(296,846
)
Net earnings (loss)
(303,480
)
 
31,601

 
(474,211
)
 
482,255

Less net earnings (loss) attributable to the non-controlling interests
(154
)
 
(1
)
 
(193
)
 
(1
)
Net earnings (loss) attributable to GCI Liberty, Inc. shareholders
$
(303,326
)
 
31,602

 
(474,018
)
 
482,256

Basic net earnings (loss) attributable to Series A and Series B GCI Liberty, Inc. shareholders per common share (note 5)
$
(2.82
)
 
0.29

 
(4.40
)
 
4.42

Diluted net earnings (loss) attributable to Series A and Series B GCI Liberty, Inc. shareholders per common share (note 5)
$
(2.82
)
 
0.29

 
(4.40
)
 
4.42

 
 
 
 
 
 
 
 
 See accompanying notes to interim condensed consolidated financial statements.

5



GCI LIBERTY, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Earnings (Loss)
(Unaudited)
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
 
amounts in thousands
Net earnings (loss)
$
(303,480
)
 
31,601

 
(474,211
)
 
482,255

Other comprehensive earnings (loss), net of taxes:
 
 
 
 
 
 
 
Comprehensive earnings (loss) attributable to debt credit risk adjustments
(13,118
)
 

 
(13,118
)
 

Comprehensive earnings (loss)
(316,598
)
 
31,601

 
(487,329
)
 
482,255

Less comprehensive earnings (loss) attributable to the non-controlling interests
(154
)
 
(1
)
 
(193
)
 
(1
)
Comprehensive earnings (loss) attributable to GCI Liberty, Inc. shareholders
$
(316,444
)
 
31,602

 
(487,136
)
 
482,256

 
 
 
 
 
 
 
 
 See accompanying notes to interim condensed consolidated financial statements.


6



GCI LIBERTY, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
 
Six Months Ended
 
June 30,
 
2018

2017
 
amounts in thousands
Cash flows from operating activities:
 
 
 
Net earnings (loss)
$
(474,211
)
 
482,255

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


 


Depreciation and amortization
80,409

 
1,575

Stock-based compensation expense
13,165

 
6,599

Share of (earnings) losses of affiliates, net
(7,858
)
 
(3,323
)
Realized and unrealized (gains) losses on financial instruments, net
499,837

 
(798,001
)
Deferred income tax expense (benefit)
(97,203
)
 
296,846

Intergroup tax payments

 
155,480

Other, net
3,377

 
539

Change in operating assets and liabilities:


 


Current and other assets
(38,681
)
 
1,150

Payables and other liabilities
68,562

 
2,301

Net cash provided (used) by operating activities
47,397

 
145,421

Cash flows from investing activities:


 


GCI Holdings cash and restricted cash acquired in consolidation
147,958

 

Capital expended for property and equipment
(40,303
)
 
(1,751
)
Purchases of investments


(76,815
)
Sales of investments


1,606

Net cash provided (used) by investing activities
107,655

 
(76,960
)
Cash flows from financing activities:


 


Borrowings of debt
1,477,250

 

Repayment of debt, capital lease, and tower obligations
(84,971
)
 

Contributions from (distributions to) parent, net
(1,124,660
)
 
(70,624
)
Distribution to non-controlling interests
(3,273
)
 

Indemnification payment to Qurate Retail
(132,725
)
 

Derivative payments
(80,001
)
 

Other financing activities, net
(11,973
)
 
(325
)
Net cash provided (used) by financing activities
39,647

 
(70,949
)
Net increase (decrease) in cash, cash equivalents and restricted cash
194,699

 
(2,488
)
Cash, cash equivalents and restricted cash at beginning of period
574,148

 
488,127

Cash, cash equivalents and restricted cash at end of period
$
768,847

 
485,639


7



GCI LIBERTY, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Equity
Six Months Ended June 30, 2018
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Series A common stock
 
Series B common stock
 
Parent's investment
 
Additional paid-in capital
 
Accumulated other comprehensive earnings (loss)
 
Retained earnings
 
Non-controlling interest in equity of subsidiaries
 
Total equity
 
amounts in thousands
Balances at January 1, 2018
$

 

 
2,305,440

 

 

 
1,914,963

 
3,633

 
4,224,036

Net earnings (loss)

 

 

 

 

 
(474,018
)
 
(193
)
 
(474,211
)
Other comprehensive earnings (loss)

 

 

 

 
(13,118
)
 

 

 
(13,118
)
Stock-based compensation

 

 

 
11,885

 

 

 

 
11,885

Contribution of taxes in connection with HoldCo Split-Off

 

 
1,346,217

 

 

 

 

 
1,346,217

Contributions from (distributions to) former parent, net

 

 
(1,124,660
)
 

 

 

 

 
(1,124,660
)
Change in Capitalization in connection with HoldCo Split-Off
1,046

 
44

 
(2,526,997
)
 
2,525,907

 

 

 
7,000

 
7,000

Issuance of GCI Liberty Stock in connection with the Transactions

 

 

 
1,111,206

 

 

 

 
1,111,206

Issuance of Indemnification Agreement

 

 

 
(281,255
)
 

 

 

 
(281,255
)
Distribution to non-controlling interests

 

 

 

 

 

 
(3,273
)
 
(3,273
)
Other

 

 

 
(209
)
 

 
254

 

 
45

Balances at June 30, 2018
$
1,046

 
44

 

 
3,367,534

 
(13,118
)
 
1,441,199

 
7,167

 
4,803,872

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 See accompanying notes to interim condensed consolidated financial statements.

8



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



(1)
Basis of Presentation

On April 4, 2017, Liberty Interactive Corporation, now known as Qurate Retail, Inc. ("Qurate Retail"), entered into an Agreement and Plan of Reorganization (as amended, the "reorganization agreement" and the transactions contemplated thereby, the "Transactions") with General Communication, Inc. ("GCI"), an Alaska corporation and parent company of GCI Holdings, LLC ("GCI Holdings"), and Liberty Interactive LLC, a Delaware limited liability company and a direct wholly‑owned subsidiary of Qurate Retail ("LI LLC"). Pursuant to the reorganization agreement, GCI amended and restated its articles of incorporation (which resulted in GCI being renamed GCI Liberty, Inc. ("GCI Liberty")) and effected a reclassification and auto conversion of its common stock. Following these events, Qurate Retail acquired GCI Liberty on March 9, 2018 through a reorganization in which certain Qurate Retail interests, assets and liabilities attributed to its Ventures Group (following the reattribution by Qurate Retail of certain assets and liabilities from its Ventures Group to its QVC Group (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. In July 2018, the Internal Revenue Service completed its review of the HoldCo Split-Off and informed Qurate Retail that it agreed with the nontaxable characterization of the transactions. Qurate Retail received an Issue Resolution Agreement from the IRS documenting this conclusion.

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

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

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

9



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


Company. All significant intercompany accounts and transactions have been eliminated in the condensed consolidated financial statements.

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

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

Split‑Off from Qurate Retail

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

The reorganization agreement provides for, among other things, the principal corporate transactions (including the internal restructuring) required to effect the Transactions and certain conditions to and provisions governing the relationship between GCI Liberty and Qurate Retail 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 $2.2 million and $3.9 million was reimbursable to Liberty Media for the three and six months ended June 30, 2018, respectively.

See note 6 for information related to the indemnification agreement. In addition, Qurate Retail and GCI Liberty have agreed to indemnify each other with respect to certain potential losses in respect of the HoldCo Split‑Off.

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.

10



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



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 determinable fair values and will perform a qualitative assessment of these instruments to identify potential impairments. See note 7 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:
 
June 30,
 
December 31,
 
2018
 
2017
 
amounts in thousands
Cash and cash equivalents
$
767,873

 
573,210

Restricted cash included in other current assets
974

 
938

Total cash and cash equivalents and restricted cash at end of period
$
768,847

 
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. In January 2018, the FASB issued an additional amendment that provides a practical expedient that gives companies the option to not evaluate existing or expired land easements that were not previously accounted for as leases under the current leases guidance. The amendments in these updates are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and early adoption is permitted. The Company plans to adopt this guidance on January 1, 2019. The new guidance requires the recognition and measurement of leases at the beginning of the earliest comparative period presented in the financial statements using a modified retrospective approach, with an option to apply the transition provisions of the new guidance at the adoption date without adjusting the comparative periods presented. The Company is considering the method of transition upon adoption of 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

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

11



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


assets and liabilities (and the determination of estimated lives of depreciable tangible and identifiable intangible assets) requires significant judgment.
    
The preliminary acquisition price allocation for GCI Liberty is as follows (amounts in thousands):
 
 
 
Cash and cash equivalents
 
$
132,563

Receivables
 
184,601

Property and equipment
 
1,211,392

Goodwill
 
932,403

Intangible assets not subject to amortization
 
572,500

Intangible assets subject to amortization
 
503,737

Other assets
 
97,279

Deferred revenue
 
(92,561
)
Debt, including capital leases
 
(1,707,002
)
Other liabilities
 
(251,692
)
Deferred income tax liabilities
 
(290,092
)
Preferred stock
 
(174,922
)
Non-controlling interest
 
(7,000
)
 
 
$
1,111,206


Goodwill is calculated as the excess of the consideration transferred over the identifiable net assets acquired and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce, value associated with future customers, continued innovation and non-contractual relationships. Amortizable intangible assets of $503.7 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 June 30, 2018, the determination of the estimated acquisition date fair value of the acquired assets and assumed liabilities is preliminary and subject to revision. The primary areas of our acquisition price allocation that changed from the initial allocation relate to an increase in property and equipment of $16.3 million, an increase to intangible assets not subject to amortization of $9.5 million, a decrease to intangible assets subject to amortization of $40.2 million, an increase in deferred revenue of $15.6 million, a decrease in other liabilities of $21.3 million, and an increase to goodwill of $7.8 million. The primary estimated acquisition date fair values 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) attributable to GCI Liberty shareholders for the three and six months ended June 30, 2018 is $6.0 million and $4.5 million in earnings related to GCI Holdings, respectively. The unaudited pro forma revenue, net earnings and basic and diluted net earnings per common share of GCI Liberty, prepared utilizing the historical financial statements of HoldCo, giving effect to acquisition accounting related adjustments made at the time of acquisition, as if the acquisition discussed above occurred on January 1, 2017, are as follows:
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
amounts in thousands, except per share amounts
Revenue
 
$
234,214

 
231,876

 
455,019

 
461,168

Net earnings (loss)
 
$
(296,701
)
 
50,234

 
(475,575
)
 
443,754

Net earnings (loss) attributable to GCI Liberty shareholders
 
$
(296,546
)
 
50,353

 
(475,265
)
 
443,990

Basic net earnings (loss) attributable to Series A and Series B GCI Liberty, Inc. shareholders per common share
 
$
(2.75
)
 
0.46

 
(4.41
)
 
4.07

Diluted net earnings (loss) attributable to Series A and Series B GCI Liberty, Inc. shareholders per common share
 
$
(2.75
)
 
0.46

 
(4.41
)
 
4.07


12



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



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 Liberty during the periods presented.

(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.

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.


13



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


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.

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 June 30, 2018 of $125.5 million in the remainder of 2018, $246.0 million in 2019, $221.7 million in 2020, $134.2 million in 2021 and $113.1 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 $222.0 million and deferred revenue of $21.5 million at June 30, 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 and six months ended June 30, 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 capitalizes them as contract costs.

14



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



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.

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
 
Six Months Ended
 
June 30, 2018
 
June 30, 2018
 
amounts in thousands
GCI Holdings
 
 
 
Consumer Revenue
 
 
 
Wireless
$
28,966

 
36,728

Data
39,243

 
49,269

Video
22,146

 
27,908

Voice
4,710

 
5,878

Business Revenue
 
 
 
Wireless
21,391

 
26,818

Data
76,223

 
94,654

Video
3,487

 
4,509

Voice
6,294

 
7,921

Evite
5,709

 
10,121

Lease, grant, and revenue from subsidies
25,321

 
30,888

Total
$
233,490

 
294,694


(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 $7.9 million and $3.9 million of stock based compensation during the three months ended June 30, 2018 and 2017, respectively, and $13.2 million and $6.6 million during the six months ended June 30, 2018 and 2017, respectively.

During the six months ended June 30, 2018, GCI Liberty granted to GCI Liberty directors five thousand options to purchase shares of GCI Liberty Series A common stock. Such options had a weighted average GDFV of $13.36 per share and vest on December 12, 2018.

Also during the six months ended June 30, 2018, and in connection with our current CEO's employment agreement, GCI Liberty granted 143 thousand options to purchase shares of GCI Liberty Series 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.


15



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


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 GCI Liberty common stock granted to certain officers, employees and directors of 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.
 
 
Series A
 
    
 
    
 
    
Weighted
    
Aggregate
 
 
 
 
 
 
average
 
intrinsic
 
 
Awards
 
 
 
remaining
 
value
 
 
(000's)
 
WAEP
 
life
 
(millions)
Outstanding at January 1, 2018
 
1,670

 
$
47.12

 
 
 
 
 
Granted
 
5

 
$
42.99

 
 
 
 
 
Exercised
 
(17
)
 
$
14.94

 
 
 
 
 
Forfeited/Cancelled
 
(3
)
 
$
56.17

 
 
 
 
 
Outstanding at June 30, 2018
 
1,655

 
$
47.44

 
2.1
years
 
$
8

Exercisable at June 30, 2018
 
1,298

 
$
47.76

 
1.6
years
 
$
7


 
 
Series 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 June 30, 2018
 
1,223

 
$
56.10

 
4.5
years
 
$

Exercisable at June 30, 2018
 
443

 
$
56.38

 
5.3
years
 
$


As of June 30, 2018, the total unrecognized compensation cost related to unvested options and RSAs was approximately $14 million and $19 million, respectively. Such amounts will be recognized in the Company's consolidated statements of operations over a weighted average period of approximately 1.8 years and 2.0 years, respectively.

As of June 30, 2018, GCI Liberty reserved for issuance upon exercise of outstanding stock options approximately 1.7 million shares of GCI Liberty Series A common stock and 1.2 million shares of GCI Liberty Series B common stock.

As of June 30, 2018, GCI Liberty had approximately 1.3 million and 32 thousand unvested RSAs and RSUs, respectively, of GCI Liberty common stock and preferred stock held by certain directors, officers and employees of the Company. These Series A common stock, Series B common stock and Series A Cumulative Redeemable Preferred unvested RSAs, along with the Series A common stock unvested RSUs of GCI Liberty had a weighted average GDFV of $46.75 per share.

The aggregate fair value of all restricted shares of GCI Liberty common and preferred stock that vested during the six months ended June 30, 2018 was $2.2 million.

16



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



(5)
Earnings Attributable to GCI Liberty Stockholders Per Common Share

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

The total number of Series A and Series B common shares outstanding on March 9, 2018, 109,004,250, is being used in the calculation of both basic and diluted earnings per share for all periods prior to the date of the HoldCo Split-Off.

Series A and Series B Common Stock
 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
 
number of shares in thousands
Basic and Diluted WASO
107,743

 
107,743

Antidilutive shares excluded from diluted WASO
1,566

 
1,526


(6)
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

17



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


indirectly. Level 3 inputs are unobservable inputs for the asset or liability. The Company does not have any recurring assets or liabilities measured at fair value that would be considered Level 3.

The Company’s assets and liabilities measured at fair value are as follows:
 
 
June 30, 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
 
$
730,243

 
730,243

 

 
570,526

 
570,526

 

Equity securities
 
$
1,572,136

 
1,572,136

 

 
1,800,208

 
1,800,208

 

Investment in Liberty Broadband
 
$
3,231,869

 
3,231,869

 

 
3,634,786

 
3,634,786

 

Variable forward
 
$
22,255

 

 
22,255

 
94,807

 

 
94,807

Indemnification obligation
 
$
84,921

 

 
84,921

 

 

 

Exchangeable senior debentures
 
$
491,987

 

 
491,987

 

 

 

    
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 current 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.

Pursuant to an indemnification agreement, GCI Liberty has agreed to indemnify LI LLC for certain payments made to a holder of LI LLC's 1.75% exchangeable debentures due 2046 (the "1.75% Exchangeable Debentures"). An indemnity obligation in the amount of $281.3 million was recorded upon completion of the HoldCo Split-Off. Within six months of the HoldCo Split‑Off, Qurate Retail, LI LLC and GCI Liberty agreed to cooperate, and reasonably assist each other, with respect to the commencement and consummation of one or more privately negotiated transactions, a tender offer or other purchase transactions (each, a "Purchase Offer") whereby LI LLC will offer to purchase the 1.75% Exchangeable Debentures on terms and conditions (including maximum offer price) reasonably acceptable to GCI Liberty. GCI Liberty will indemnify LI LLC for each 1.75% Exchangeable Debenture repurchased by LI LLC in a Purchase Offer for an amount by which the purchase price for such debenture exceeds the amount of cash reattributed with respect to such purchased 1.75% Exchangeable Debenture net of certain tax benefits, if any, attributable to such 1.75% Exchangeable Debenture. In June 2018, Qurate Retail repurchased 417,759 of the 1.75% Exchangeable Debentures for approximately $457 million, including accrued interest, and the Company made a payment under the indemnification agreement to Qurate Retail in the amount of $133 million.

Following the initial six month period, the remaining indemnification to LI LLC for certain payments made to a holder of the 1.75% Exchangeable Debentures pertains to the holder’s ability to exercise its exchange right according to the terms of the debentures on or before October 5, 2023. Such amount will equal the difference between the exchange value and par value of the 1.75% Exchangeable Debentures at the time the exchange occurs. The indemnification obligation recorded in the condensed consolidated balance sheets as of June 30, 2018 represents the fair value of the estimated exchange feature included in the 1.75% Exchangeable Debentures primarily based on observable market data as significant inputs (Level 2). As of June 30, 2018, a holder of the 1.75% Exchangeable Debentures does not have the ability to exchange and, accordingly, such indemnification obligation is included as a long-term liability in our condensed consolidated balance sheets. Additionally, as of June 30, 2018, 332,241 bonds of the 1.75% Exchangeable Debentures remain outstanding.


18



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


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 June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
amounts in thousands
Equity securities
 
$
(97,478
)
 
51,212

 
(229,040
)
 
262,497

Investment in Liberty Broadband
 
(425,538
)
 
14,939

 
(402,917
)
 
541,206

Variable forward
 
63,809

 
(5,702
)
 
72,552

 
(5,702
)
Indemnification obligation
 
34,891

 

 
63,608

 

Exchangeable senior debentures
 
(4,040
)
 

 
(4,040
)
 

 
 
$
(428,356
)
 
60,449

 
(499,837
)
 
798,001


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

(7)
Investments in Equity Securities

Investments in equity securities, the majority of which are carried at fair value, are summarized as follows:
 
 
 
June 30,
 
December 31,
 
 
 
2018
 
2017
 
 
 
amounts in thousands
Charter (a)
 
 
$
1,571,137

 
1,800,208

Other investments (b)
 
 
3,075

 
2,856

 
 
 
$
1,574,212

 
1,803,064

(a) A portion of the Charter equity securities are considered covered shares and subject to certain contractual restrictions in accordance with the indemnification agreement. See note 6 for additional discussion of the indemnification agreement.
(b) The Company has elected the measurement alternative for the majority of these securities.

(8)
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 June 30, 2018 and the carrying amount at December 31, 2017:
 
June 30, 2018
 
December 31, 2017
 
Percentage
ownership
 
Market
value
 
Carrying
amount
 
Carrying
amount
 
 
 
dollars in thousands
LendingTree
25.89
%
 
$
689,289

 
$
116,554

 
114,655

Other
various

 
NA

 
5,326

 

 
 
 
 
 
$
121,880

 
114,655


The Company’s share of LendingTree’s earnings (losses) was $7.7 million and $1.6 million for the three months ended June 30, 2018 and 2017, respectively. The Company's share of LendingTree's earnings (losses) was $5.3 million and $3.3 million for the six months ended June 30, 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.

19



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



As of June 30, 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:
 
 
June 30,
 
December 31,
 
 
2018
 
2017
 
 
amounts in thousands
Current assets
 
$
100,985

 
84,054

Investment in Charter, accounted for using the equity method
 
11,891,637

 
11,835,613

Other assets
 
10,306

 
12,122

Total assets
 
12,002,928

 
11,931,789

Long-term debt, including current portion
 
523,159

 
497,370

Deferred income tax liabilities
 
943,401

 
932,593

Other liabilities
 
14,885

 
14,925

Equity
 
10,521,483

 
10,486,901

Total liabilities and shareholders' equity
 
$
12,002,928

 
11,931,789

 
 
Three months ended
 
Six months ended
 
 
June 30,
 
June 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
amounts in thousands
Revenue
 
$
3,371

 
3,073

 
15,162

 
6,213

Operating expenses, net
 
(8,442
)
 
(10,406
)
 
(17,987
)
 
(19,908
)
Operating income (loss)
 
(5,071
)
 
(7,333
)
 
(2,825
)
 
(13,695
)
Share of earnings (losses) of affiliates
 
32,911

 
11,467

 
42,213

 
30,389

Gain (loss) on dilution of investment in affiliate
 
(5,205
)
 
(6,659
)
 
(31,962
)
 
(38,797
)
Realized and unrealized gains (losses) on financial instruments, net
 
(2,019
)
 
1,370

 
(2,019
)
 
2,351

Other income (expense), net
 
(5,842
)
 
(4,364
)
 
(10,654
)
 
(8,582
)
Income tax benefit (expense)
 
(4,194
)
 
2,542

 
757

 
10,912

Net earnings (loss)
 
$
10,580

 
(2,977
)
 
(4,490
)
 
(17,422
)

(9)
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

20



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


CDE. The CDE, in turn, would loan the funds to our wholly owned subsidiary, Unicom, Inc. ("Unicom") as partial financing for the projects.

US Bancorp is entitled to substantially all of the benefits derived from the NMTCs.  All of the loan proceeds to Unicom, net of syndication and arrangement fees, were restricted for use on the projects.  Restricted cash of $1.0 million was held by Unicom at June 30, 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 interest in each investment fund for a nominal amount. 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 June 30, 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 June 30, 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


21



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


(10)
Intangible Assets and Goodwill

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

 
25,569

 
25,569

Acquisitions
 
932,403

 

 
932,403

Balance at June 30, 2018
 
$
932,403

 
25,569

 
957,972


Intangible Assets Subject to Amortization
 
 
June 30, 2018
 
    
Gross
    
 
    
Net
 
 
carrying
 
Accumulated
 
carrying
 
 
amount
 
amortization
 
amount
 
 
amounts in thousands
Customer relationships
 
$
443,268

 
(36,446
)
 
406,822

Other amortizable intangibles
 
112,596

 
(27,100
)
 
85,496

Total
 
$
555,864

 
(63,546
)
 
492,318


Amortization expense for intangible assets with finite useful lives was $16.4 million and $780 thousand for the three months ended June 30, 2018 and 2017, respectively. Amortization expense for intangible assets with finite useful lives was $21.6 million and $1.5 million for the six months ended June 30, 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
$
30,506

2019
$
60,659

2020
$
52,643

2021
$
47,364

2022
$
40,946


(11)
Long-Term Debt

Debt is summarized as follows:
 
 
Outstanding
 
 
 
    
Principal
 
Carrying Value
 
 
June 30,
 
June 30,
 
December 31,
 
 
2018
 
2018
 
2017
 
 
amounts in thousands
Margin Loan
 
$
1,000,000

 
1,000,000

 

Exchangeable senior debentures
 
477,250

 
491,987

 
NA

Senior notes
 
775,000

 
805,596

 
NA

Senior credit facility
 
666,354

 
666,354

 
NA

Wells Fargo note payable
 
7,794

 
7,794

 
NA

Deferred financing costs
 

 
(3,262
)
 

Total debt
 
$
2,926,398

 
2,968,469

 

Debt classified as current (included in other current liabilities)
 
 
 
(2,965
)
 

Total long-term debt
 
 
 
$
2,965,504

 



22



GCI LIBERTY, INC. 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 $3.2 billion were pledged by Broadband Holdco, LLC as collateral for the loan as of June 30, 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 (now the Qurate Retail common stock) or to pay down certain debt at Qurate Retail, and for the payment of fees and other costs and expenses, in each case, pursuant to the terms of the reorganization agreement.  The distributed loan proceeds constituted a portion of the cash reattributed to the QVC Group.

Exchangeable Senior Debentures

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

Senior Notes

Interest on the 6.75% Senior Notes due 2021 (the "2021 Notes") and the 6.875% Senior Notes due 2025, both of which were issued by GCI, Inc., which is now GCI, LLC (collectively, the “Senior Notes”), is payable semi-annually in arrears. The Senior Notes are redeemable at 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 $30.6 million at June 30, 2018. Such premium is being amortized to interest expense in the accompanying consolidated statements of operations.

Senior Credit Facility

GCI, LLC and GCI Holdings, each of which are wholly-owned subsidiaries of the Company, 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.


23



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


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 June 30, 2018, there is $241.4 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.

Wells Fargo Note Payable

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

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

Debt Covenants

GCI, LLC is subject to covenants and restrictions under its Senior Notes and Senior Credit Facility. The Company and GCI, LLC are in compliance with all debt covenants as of June 30, 2018.

Fair Value of Debt

The fair value of the Senior Notes was $797.4 million at June 30, 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 June 30, 2018.

(12)
Preferred Stock

GCI Liberty Series A Cumulative Redeemable Preferred Stock (the "Preferred Stock") was issued as a result of the auto conversion that occurred on March 8, 2018. The Company is required to redeem all outstanding shares of Preferred Stock out of funds legally available, at the liquidation price plus all unpaid dividends (whether or not declared) accrued from the most recent dividend payment date through the redemption date, on the first business day following the twenty-first anniversary of the March 8, 2018 auto conversion. There were 7,500,000 shares of Preferred Stock authorized and 7,250,336 shares issued and outstanding at June 30, 2018. An additional 42,500,000 shares of preferred stock of the Company are authorized and are undesignated as to series.

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

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

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

Accrued dividends are payable quarterly on each dividend payment date, which is January 15, April 15, July 15, and October 15 of each year, commencing on the first such date following the auto conversion, which occurred immediately after the market closed on March 8, 2018. If GCI Liberty fails to pay cash dividends on the Preferred Stock in full for any

24



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


four consecutive or non-consecutive dividend periods then the dividend rate shall increase by 2.00% per annum of the liquidation price until cured. The Company paid a special cash dividend of approximately $0.13 per share of Preferred Stock on May 3, 2018. On June 21, 2018, the Company declared a quarterly cash dividend of approximately $0.31 per share of Preferred Stock which was paid on July 16, 2018 to shareholders of record of the Preferred Stock at the close of business on July 2, 2018.

(13)
Information About the Company's Operating Segments

The Company, through its interests in subsidiaries and other companies, is primarily engaged in the broadband communications services industry. The Company identifies its reportable segments as (A) those consolidated companies that represent 10% or more of its consolidated annual revenue, annual Adjusted OIBDA (as defined below) or total assets and (B) those equity method affiliates whose share of earnings represent 10% or more of the Company’s annual pre‑tax earnings. The 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, and subscriber metrics.
    
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 and six months ended June 30, 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 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.

25



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


Performance Measures
 
Three Months Ended June 30,
 
2018
 
2017
 
Revenue
 
Adjusted OIBDA
 
Revenue
 
Adjusted OIBDA
 
amounts in thousands
GCI Holdings
$
227,781

 
78,915

 

 

Liberty Broadband
3,371

 
(2,776
)
 
3,073

 
(4,955
)
Corporate and other
5,709

 
(7,191
)
 
6,177

 
(6,922
)
 
236,861

 
68,948

 
9,250

 
(11,877
)
Eliminate Liberty Broadband
(3,371
)
 
2,776

 
(3,073
)
 
4,955

 
$
233,490

 
71,724

 
6,177

 
(6,922
)

 
Six Months Ended June 30,
 
2018
 
2017
 
Revenue
 
Adjusted OIBDA
 
Revenue
 
Adjusted OIBDA
 
amounts in thousands
GCI Holdings
$
284,573

 
98,663

 

 

Liberty Broadband
15,162

 
1,784

 
6,213

 
(8,916
)
Corporate and other
10,121

 
(13,051
)
 
10,146

 
(14,794
)
 
309,856

 
87,396

 
16,359

 
(23,710
)
Eliminate Liberty Broadband
(15,162
)
 
(1,784
)
 
(6,213
)
 
8,916

 
$
294,694

 
85,612

 
10,146

 
(14,794
)

Other Information
 
 
June 30, 2018
 
 
Total
 
Investments
 
Capital
 
 
assets
 
in affiliates
 
expenditures
 
 
amounts in thousands
GCI Holdings
 
$
3,530,980

 

 
38,788

Liberty Broadband
 
12,002,928

 
11,891,637

 
24

Corporate and other
 
5,813,117

 
121,880

 
1,515

 
 
21,347,025

 
12,013,517

 
40,327

Eliminate Liberty Broadband
 
(12,002,928
)
 
(11,891,637
)
 
(24
)
Consolidated
 
$
9,344,097

 
121,880

 
40,303


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

26



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


 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
amounts in thousands
Consolidated segment Adjusted OIBDA
$
71,724

 
(6,922
)
 
85,612

 
(14,794
)
Stock‑based compensation
(7,929
)
 
(3,873
)
 
(13,165
)
 
(6,599
)
Depreciation and amortization
(64,388
)
 
(822
)
 
(80,409
)
 
(1,575
)
Operating income
(593
)
 
(11,617
)
 
(7,962
)
 
(22,968
)
Interest expense
(35,442
)
 
(5
)
 
(43,690
)
 
(5
)
Share of earnings (loss) of affiliates, net
10,350

 
1,600

 
7,858

 
3,323

Realized and unrealized gains (losses) on financial instruments, net
(428,356
)
 
60,449

 
(499,837
)
 
798,001

Other, net
(1,845
)
 
541

 
(148
)
 
750

Earnings (loss) from continuing operations before income taxes
$
(455,886
)
 
50,968

 
(543,779
)
 
779,101

 

27



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

For additional risk factors, please see Part II, Item 1A. Risk Factors of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2018. Any forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this Quarterly Report, and we expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein, to reflect any change in our expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based.
The following discussion and analysis provides information concerning our results of operations and financial condition. This discussion should be read in conjunction with our accompanying condensed consolidated financial statements and the notes thereto.
Overview

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

28



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

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

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

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

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

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

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

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


29



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 subsequent requests for additional information. The ongoing review has caused a continuing delay of support payments. While we have presented data to support the rates, it is possible the FCC may require a reduction before it will award funding for the 2017 funding year.
  
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. Since that time, on June 25, 2018, the FCC issued an order resulting in an increase of the annual RHC Program funding cap from $400 to $571 million and applied it to the funding year that ended on June 30, 2018. The FCC also determined that it would annually adjust the RHC Program funding cap for inflation, beginning with the funding year ending on June 30, 2019 and carry-forward unused funds from past funding years for use in future funding years. As a result, funding is available to pay in full any approved funding for the 2017 funding year. As of June 30, 2018, we have maintained a total net reduction of approximately $6 million to the RHC Program support receivable given the continued delay of support payments as discussed in the previous paragraph. We may need to further reduce the RHC Program support receivable as we pursue avenues for payment of the shortfall.

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 June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
amounts in thousands
Revenue
 
 
 
 
 
 
 
GCI Holdings
$
227,781

 

 
284,573

 

Corporate and other
5,709

 
6,177

 
10,121

 
10,146

Consolidated
$
233,490

 
6,177

 
294,694

 
10,146

 
 
 
 
 
 
 
 
Operating Income (Loss)
 
 
 
 
 
 
 
GCI Holdings
$
10,424

 

 
13,520

 

Corporate and other
(11,017
)
 
(11,617
)
 
(21,482
)
 
(22,968
)
Consolidated
$
(593
)
 
(11,617
)
 
(7,962
)
 
(22,968
)
 
 
 
 
 
 
 
 
Adjusted OIBDA
 
 
 
 
 
 
 
GCI Holdings
$
78,915

 

 
98,663

 

Corporate and other
(7,191
)
 
(6,922
)
 
(13,051
)
 
(14,794
)
Consolidated
$
71,724

 
(6,922
)
 
85,612

 
(14,794
)

Revenue. Our consolidated revenue increased $227.3 million and $284.5 million during the three and six months ended June 30, 2018, respectively, as compared to the corresponding periods in the prior year. The increase during the three and six months ended June 30, 2018 is primarily due to an increase of $227.8 million and $284.6 million, respectively, at GCI Holdings for the same periods 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.

30




Operating Income (Loss). Our consolidated operating loss decreased $11.0 million and $15.0 million during the three and six months ended June 30, 2018, respectively, as compared to the corresponding periods in the prior year. The decrease is primarily due to $10.4 million and $13.5 million of operating income at GCI Holdings for the three and six months ended June 30, 2018, respectively, as a result of the acquisition of GCI Holdings on March 9, 2018. Additionally, there was a decrease of $0.6 million and $1.5 million of corporate and other operating loss for the three and six months ended June 30, 2018, respectively, as compared to the corresponding periods in the prior year due to 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 $7.9 million and $3.9 million of stock compensation expense for the three months ended June 30, 2018 and 2017, respectively. We recorded $13.2 million and $6.6 million of stock compensation expense for the six months ended June 30, 2018 and 2017, respectively. The increase for the three and six months ended June 30, 2018 as compared to the corresponding prior year periods 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 June 30, 2018, the total unrecognized compensation cost related to outstanding awards was approximately $33 million. Such amounts will be recognized in the Company's consolidated statements of operations over a weighted average period of approximately 1.8 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 13 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 $78.6 million and $100.4 million during the three and six months ended June 30, 2018, respectively, as compared to the corresponding periods 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.


31



Other Income and Expense

Components of Other income (expense) are presented in the table below.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
amounts in thousands
Interest expense
 
 
 
 
 
 
 
GCI Holdings
$
(20,984
)
 

 
(26,189
)
 

Corporate and other
(14,458
)
 
(5
)
 
(17,501
)
 
(5
)
Consolidated
$
(35,442
)
 
(5
)
 
(43,690
)
 
(5
)
 
 
 
 
 
 
 
 
Share of earnings (losses) of affiliates, net
 
 
 
 
 
 
 
GCI Holdings
$
(50
)
 

 
(50
)
 

Corporate and other
10,400

 
1,600

 
7,908

 
3,323

Consolidated
$
10,350

 
1,600

 
7,858

 
3,323

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

 

 

 

Corporate and other
(428,356
)