UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ x ANNUAL REPORT PURSUANT TO SECTION 13 orOR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20172018
OR
or
☐ o TRANSITION REPORT PURSUANT TO SECTION 13 orOR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period fromto
Commission File No. 0-5890000-05890
GCI, LLC
(Exact name of Registrant as specified in its charter)
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| | GCI, INC.State of Delaware | | 92-0072737 | |
| | (Exact nameState or other jurisdiction of registrant as specified in its charter) | | (I.R.S Employer | |
| incorporation or organization) | | Identification No.) | |
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| | State of Alaska | | 91-1820757 | |
| (State or other jurisdiction of
incorporation or organization)
| | (I.R.S Employer
Identification No.)
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| 12300 Liberty Boulevard | | | |
| | 2550 Denali Street
Suite 1000
Anchorage, Alaska
Englewood, Colorado | | 9950380112 | |
| | (Address of principal executive offices) | | (Zip Code) | |
Registrant’s telephone number, including area code: (907) 868-5600(720) 875-5900
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐o No ☒
x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Act. Yes o No x
Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405232.504 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 x No o
Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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.
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Large accelerated filer ☐o | Accelerated filer ☐o |
Non-accelerated filer ☒ (Do not check if a smaller reporting company)x | Smaller reporting company ☐o |
Emerging growth company ☒x | |
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. ☒x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐o No ☒x
As of January 31, 2019, GCI, LLC is a wholly-owned subsidiary of GCI Liberty, Inc.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS I(1)(a) AND (b) OF FORM 10-k10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.FORMAT PERMITTED BY GENERAL INSTRUCTION I(2)
GCI, INC.LLC
A WHOLLY OWNED SUBSIDIARIY OF GCI LIBERTY, INC.
20172018 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Table of Contents
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| | Items 10, 11, 12 13, and 1413 are omitted per General Instruction I(1)(a) and (b)I(2)(c) of Form 10-k10-K. | |
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Cautionary Statement Regarding Forward-Looking Statements
You should carefully review the information contained in this Annual Report, but should particularly consider any risk factors that we set forth in this Annual Report and in other reports or documents that we file from time to time with the Securities and Exchange Commission (“SEC”). In this Annual Report, in addition to historical information, we state our future strategies, plans, objectives or goals and our beliefs of future events and of our future operating results, financial position and cash flows. In some cases, you can identify those so-called “forward-looking statements” by words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “project,” or “continue” or the negative of those words and other comparable words. All forward-looking statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance, achievements, plans and objectives to differ materially from any future results, performance, achievements, plans and objectives expressed or implied by these forward-looking statements. In evaluating those statements, you should specifically consider various factors, including those identified under “Risk Factors,” and elsewhere in this Annual Report. Those factors may cause our actual results to differ materially from any of our forward-looking statements. For these forward-looking statements, we claim the protection of the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995.
You should not place undue reliance on any such forward-looking statements. Further, any forward-looking statement, and the related risks, uncertainties and other factors speak only as of the date on which they were originally made and we expressly disclaim any obligation or undertaking to update or revise any forward-looking statement to reflect any change in our expectations with regard to these statements or any other change in events, conditions or circumstances on which any such statement is based. New factors emerge from time to time, and it is not possible for us to predict what factors will arise or when. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
PartPART I
Item 1. BusinessBusiness.
In this Annual Report, “we,” “us,” “our,” and “the Company” refer to GCI, Inc. and its direct and indirect subsidiaries.General Development of Business
GCI, Inc. was incorporated in 1997 to effect the issuance of Senior Notes as further described in note 7 to the accompanying "Consolidated Financial Statements" included in Part IV of this Report. GCI, Inc. asLLC is a wholly ownedwholly-owned subsidiary of GCI Liberty, Inc. On April 4, 2017, Liberty Interactive Corporation, now known as Qurate Retail, Inc. ("GCI"Qurate Retail"), received through its initial capitalization all ownership interests in subsidiaries previously held by GCI.entered into an Agreement and Plan of Reorganization (as amended, the "reorganization agreement" and the transactions contemplated thereby, the "Transactions") with GCI, was incorporated in 1979 under the laws of the State of Alaska and has its principal executive offices at 2550 Denali Street, Suite 1000, Anchorage, AK 99503-2781 (telephone number 907-868-5600).
Prior to February 20, 2018, GCI was known asLLC's parent company, General Communication, Inc. On February 20,("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 Statereattribution by Qurate Retail of Alaska approved new Articlescertain assets and liabilities from its Ventures Group to its QVC Group) were contributed to GCI Liberty in exchange for a controlling interest in GCI Liberty (the "contribution"). Qurate Retail and LI LLC contributed to GCI Liberty their entire equity interests in Liberty Broadband Corporation ("Liberty Broadband"), Charter Communications, Inc. ("Charter"), and LendingTree, Inc. ("LendingTree"), the Evite, Inc. ("Evite") operating business and other assets and liabilities (collectively, "HoldCo"), in exchange for (a) the issuance to LI LLC of Incorporation that were approved by GCI's shareholders at a special meeting held on February 2, 2018. The name change is a resultnumber of the Transactions described in "Part 1 - Item 1. Business - Narrative Descriptionshares of our Business - Development of our Business During the Past Fiscal Year." Additionally, as of February 20, 2018, GCI'sGCI Liberty Class A common stock and a number of shares of GCI Liberty Class B common stock were reclassified into Class A-1equal to the number of outstanding shares of Qurate Retail's Series A Liberty Ventures common stock and Class B-1Qurate Retail's Series B Liberty Ventures common stock respectively.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, Inc. is primarilyLLC's parent company, GCI Liberty, in the contribution based, among other considerations, upon the fact that in exchange for the contribution of HoldCo, Qurate Retail received a holdingcontrolling interest in the combined company of GCI Liberty.
Following the contribution and togetheracquisition 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 ("IRS") 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 directwholly owned Delaware subsidiary, which was the surviving corporation (the “Reincorporation Merger”). References to GCI Liberty 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”), an indirect subsidiaries, iswholly-owned subsidiary of GCI, LLC, non controlling interests in Liberty Broadband, Charter and LendingTree, a diversified communications provider with operations primarilycontrolling interest in Evite, and certain other assets and liabilities as the “Company”, “us”, “we” and “our.”
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Certain statements in this Annual Report on Form 10-K constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding the Company's business, product and marketing strategies; new service offerings; revenue growth; the recoverability of the Company's goodwill and other long-lived assets; the Company's projected sources and uses of cash; renewal of licenses; the effects of regulatory developments; the Rural Healthcare Program; the new customer billing system and the anticipated impact of certain contingent liabilities related to legal and tax proceedings and other matters arising in the Stateordinary course of Alaska.business. In particular, statements under Item 1. "Business," Item 1A. "Risk-Factors," Item 2. "Properties," Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Item 7A. "Quantitative and Qualitative Disclosures About Market Risk" contain forward-looking statements. Where, in any forward-looking statement, the Company expresses an expectation or belief as to
Availability
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 Reportsthe factors that could cause actual results or events to differ materially from those anticipated:
The ability of the Company to successfully integrate and Otherrecognize anticipated efficiencies and benefits from the Transactions;
customer demand for the Company's products and services and the Company's ability to adapt to changes in demand;
the ability of GCI Holdings to recognize anticipated efficiencies and benefits from its new billing system;
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 ("FCC"), and adverse outcomes from regulatory proceedings;
changes in the nature of key strategic relationships with partners, distributors, suppliers and vendors;
domestic and international economic and business conditions and industry trends, specifically the state of the Alaska economy;
consumer spending levels, including the availability and amount of individual consumer debt;
rapid technological changes;
failure to protect the security of personal information about the Company's and its businesses' customers, subjecting the Company and its businesses to potentially costly government enforcement actions or private litigation and reputational damage; and
the regulatory and competitive environment of the industries in which the Company operates.
These forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this Annual Report, and the Company expressly disclaims 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. When considering such forward-looking statements, you should keep in mind the factors described in Item 1A, "Risk Factors" and other cautionary statements contained in this Annual Report. Such risk factors and statements describe circumstances which could cause actual results to differ materially from those contained in any forward-looking statement.
This Annual Report includes information concerning companies in which the Company has controlling and non-controlling interests that file reports and other information with the Securities and Exchange Commission (“SEC”) in accordance with the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Information
Our in this Annual Report concerning those companies has been derived from the reports and other information filed by them with the SEC. If you would like further information about these companies, the reports and other information they file with the SEC can be accessed on the Internet website address is www.gci.com. Themaintained by the SEC at www.sec.gov. Those reports and other information on our website isare not incorporated by reference in this annual report on Form 10-K. We make available, free of charge, access to our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, GCI's Proxy Statement on Schedule 14A and amendments to those materials filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934 as soon as reasonably practicable after we electronically submit such material to the SEC.Report.
Narrative Description of our Business
The following table identifies the Company's more significant subsidiaries and minority investments:
Consolidated Subsidiaries
GCI Holdings, LLC
Evite, Inc.
Equity Method Investments GeneralLiberty Broadband Corporation (Nasdaq: LBRDA; LBRDK)
We areLendingTree, Inc. (Nasdaq: TREE)
GCI Holdings, LLC
GCI Holdings, LLC, a wholly owned subsidiary of the largest Alaska-based communications provider as measured by revenues. We provideCompany, provides 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 under ourthe GCI brand. Due to the unique nature of the markets we serve,it serves, including harsh winter weather and remote geographies, ourits customers rely extensively on ourits systems to meet their communication and entertainment needs.
Since GCI'sits founding in 1979 as a competitive long distance provider, we haveGCI Holdings has consistently expanded ourits product portfolio and facilities to become the leading integrated communication services provider in our markets. Ourmarkets it serves. Its facilities include redundant and geographically diverse digital undersea fiber optic cable systems linking ourits Alaska terrestrial networks to the networks of other carriers in the lower 48 contiguous states. We operate the onlystates and a statewide wireless network.
For the year ended December 31, 2017, we generated consolidated revenues of $919.2 million. We ended the period with 219,400 wireless subscribers and 134,800 cable modem subscribers.
Development of our Business During the Past Fiscal Year
Transaction with Liberty Interactive Corporation. On April 4, 2017, General Communication, Inc., Liberty Interactive Corporation, a Delaware corporation (“Liberty”) and Liberty Interactive LLC, a Delaware limited liability company and a direct wholly-owned subsidiary of Liberty (“Liberty LLC”), entered into an Agreement and Plan of Reorganization (as may be amended from time to time, the “Reorganization Agreement” and the transactions contemplated thereby, the “Transactions”). Pursuant to the Reorganization Agreement, General Communication, Inc. amended and restatedThroughout its articles of incorporation resulting in General Communication, Inc. being renamedhistory, GCI Liberty, Inc. and a reclassification and auto conversion of its common stock. Following these events, Liberty will acquire GCI through a reorganization in which certain interests, assets and liabilities of the Liberty Ventures Group (“Liberty Ventures”) will be contributed to GCI Liberty in exchange for a controlling interest in GCI Liberty. The assets to be contributed to GCI Liberty are expected to include Liberty’s equity interests in Liberty Broadband and Charter Communications, Inc., along with certain other equity interests, together with the operating business of Evite, Inc. and certain other assets and liabilities, in exchange for (a) the issuance to Liberty LLC of (i) 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 Series A Liberty Ventures common stock and Series B Liberty Ventures common stock outstanding on the closing date of the contribution, respectively, and (ii) cash, and (b) the assumption by GCI Liberty of certain liabilities attributed to Liberty Ventures.
Following the contribution and acquisition of GCI Liberty, Liberty will then effect a tax-free separation of its controlling interest in GCI Liberty to the holders of Liberty Ventures common stock in full redemption of all outstanding shares of such stock. As a result of the Transactions, holders of GCI common stock (regardless of class) each will receive (i) 0.63 of a share of GCI Liberty Class A common stock and (ii) 0.20 of a share of new GCI Liberty Series A Cumulative Redeemable preferred stock in exchange for each share of their existing GCI common stock. The exchange ratios were determined based on total consideration of $32.50 per share in respect of each share of existing GCI common stock, comprised of $27.50 per share in GCI Liberty Class A common stock and $5.00 per share in newly issued GCI Liberty Series A Cumulative Redeemable preferred stock, based upon a Liberty Ventures reference price of $43.65 (with no premium paid for shares of GCI Class B common stock) and an initial liquidation price of $25.00 per share of GCI Liberty Series A Cumulative Redeemable preferred stock. The GCI Liberty Series A Cumulative Redeemable preferred stock will accrue dividends at an initial rate of 5% per annum (which would increase to 7% in connection with a future reincorporation of GCI Liberty in Delaware) and will be redeemable upon the 21st anniversary of the closing. The closing of the Transactions are expected to be consummated on March 9, 2018, subject to the satisfaction of customary closing conditions.
You should see “Part I — Item 1. Business — Regulation” for additional regulatory developments.
Business Strategy
We intend to grow the company using the following strategies:
Expand Our Product Portfolio and Footprint in Alaska. Throughout our history, we haveHoldings has successfully added and expectexpects to continue to add new products to ourits product portfolio. We haveGCI Holdings has a demonstrated history of new product evaluation, development and deployment for ourits customers, and we continueit continues to assess revenue-enhancing opportunities that create value for ourits customers. Where feasible and where economic analysis supports geographic expansion of ourits network coverage, we areit is currently pursuing or expectexpects to pursue opportunities to increase the scale of ourits facilities, enhance ourits ability to serve our existing customers’ needs and attract new customers. Additionally, due to the unique market conditions in Alaska, we,GCI Holdings, and in some cases ourits customers, participate in several federal (and to a lesser extent locally) subsidized programs designed to financially support the implementation and purchase of telecommunications services like ours in high cost areas. With these programs we haveGCI Holdings has been able to expand ourits network into previously undeveloped areas of Alaska and for the first time, offer comprehensive communications services in many rural parts of the state where weit would not otherwise be able to construct facilities within appropriate return-on-investment requirements.
Make Strategic Acquisitions. We haveGCI Holdings' revenue was comprised of 49% from data services, 22% from wireless services and 29% from video, voice and other services from March 9, 2018 through December 31, 2018.
GCI Holdings has a history of making and integrating acquisitions of telecommunications providers and other providers of complementary services. OurIts management team will continue to actively pursue and make investments that we believeit believes fit with ourits strategy and networks and that enhance earnings.
Maximize Sales Opportunities. We sellGCI Holdings sells new and enhanced services and products to ourits existing customer base to achieve increased revenuesrevenue and penetration of ourits services. Through close coordination of ourits customer service and sales and marketing efforts, ourits customer service representatives suggest to ourits customers other services they can purchase or enhanced versions of services they already purchase. Many calls into ourthe customer service centers or visits into one of ourthe retail stores result in sales of additional services and products.
Deliver Industry Leading Customer Service. We have positioned ourselves as a customer service leader in the Alaska communications market. We operate ourGCI Holdings operates its own customer service department and havehas empowered ourits customer service representatives to handle most service issues and questions on a single call. We prioritize ourGCI Holdings prioritizes its customer services to expedite handling of ourits most valuable customers’ issues, particularly for ourits largest commercial customers. We believe ourGCI Holdings believes its integrated approach to customer service, including service set-up, programming various network databases with the customer’s information, installation, and ongoing service, allows usit to provide a customer experience that fosters customer loyalty.
Leverage Communications Operations. We continueGCI Holdings continues to expand and evolve ourits integrated network for the delivery of ourits services. OurGCI Holdings' bundled strategy and integrated approach to serving our customers creates efficiencies of scale and maximizes network utilization. By offering multiple services, we areGCI Holdings is better able to leverage ourits network assets and increase returns on our its
invested capital. WeGCI Holdings periodically evaluate ourevaluates its network assets and continually monitormonitors technological developments that weit can potentially deploy to increase network efficiency and performance.
GCI Holdings does not hold franchises (with the exception of video services as described below) or concessions for communications services or local access services. GCI Holdings holds a number of federally registered service marks used by its business. It owns two utility patents issued in 2017 pertaining to device diagnostics and network connectivity. The Communications Act of 1934, as amended (the "Communications Act"), gives the FCC the authority to license and regulate the use of the electromagnetic spectrum for radio communications. GCI Holdings holds licenses for its satellite and microwave transmission facilities for provision of long-distance services. GCI Holdings holds various licenses for spectrum and broadcast television use. These licenses may be revoked and license renewal applications may be denied for cause. However, GCI Holdings expects these licenses to be renewed in due course when, at the end of the license period, a renewal application will be filed. We operate our business under
GCI Holdings has licenses for earth stations that are generally licensed for fifteen years. The FCC also issues a single reportable segment. Effectiveblanket license for a large number of technically identical earth stations. Its operations may require additional licenses in the first quarter of 2017, we reassessed and reorganized our management and internal reporting structures in order to make our operations more efficient, which triggered an analysis of our reportable segments. As a result of our assessment, we merged our former Wireless and Wireline segments into one operating segment. We realigned our external financial reporting to support this change. Our chief operating decision maker assesses our financial performance as follows:
Capital expenditure decisions are based on the support they provide to all revenue streams
Revenues are managed on the basis of specific customers and customer groups
Costs are generally managed and assessed by function and generally support the organization across all customer groups or revenue streams
Profitability is assessed at the consolidated levelfuture.
PriorGCI Holdings is certified through the Regulatory Commission of Alaska ("RCA") to 2017, we operated our business under two reportable segments - Wirelineprovide local, long distance, and Wireless. As a resultvideo service by Certificates of the reorganization of our reporting structure, assets, including goodwill,Public Convenience and liabilities were reassignedNecessity (“CPCN”). These CPCNs are nonexclusive certificates defining each authorized service area. Although CPCNs have no stated expiration date, they may be revoked due to a single reporting unit.cause.
Services and Products
We offer services and products to two major customer groups as follows:
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| Customer Group |
Services and Products | Consumer | Business |
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Wireless | | |
| Retail | X | X |
| Wholesale | | X |
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Data: | | |
| Internet | X | X |
| Data networks | | X |
| Managed services | | X |
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Video | X | X |
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Voice: | | |
| Long-distance | X | X |
| Local access | X | X |
Consumer - We offer a full range of retail wireless, data, video, and voice services to residential customers.
Business - We offer a full range of wireless, data, video, voice, and managed services to businesses, governmental entities, and educational institutions, wholesale data, voice, and wireless services to common carrier customers, and regulated voice services to residential and commercial customers in rural communities primarily in Southwest Alaska.
Sales and Marketing
We offer our services directly to consumer and business customers through our call center, direct mail advertising, television advertising, Internet advertising, local media advertising, and through our retail stores. Our sales efforts are primarily directed toward increasing the number of subscribers we serve, selling bundled services, and generating incremental revenues through product and feature up-sell opportunities. We sell our managed services, wholesale data, voice, and wireless services, and data services to rural schools and health organizations through direct contact marketing.
Our sales and marketing strategy hinges on our ability to leverage (i) our unique position as an integrated provider of multiple communications, data and video services, (ii) our well-recognized and respected brand names in the Alaskan marketplace and (iii) our leading market positions in the services and products we offer. By continuing to pursue a marketing strategy that takes advantage of these characteristics, we believe we can increase our customer market penetration and retention rates, increase our share of our customers’ aggregate voice, video, data and wireless services expenditures and managed services expenditures, and achieve continued growth in revenues and operating cash flow.
Facilities
We operateFacilities.GCI Holdings operates a modern, competitive communications network providing switched and dedicated voice and broadband services. OurIts fiber network employs digital transmission technology over ourits fiber optic facilities within Alaska and between Alaska and the lower 48 states.
We serveGCI Holdings serves many rural and remote Alaska locations solely via satellite communications. Each of our satellite transponders is backed up on alternate spacecraft with multiple backup transponders. We operateIt operates a hybrid fiber
optic cable and digital microwave system (“TERRA”) linking Anchorage with the Bristol Bay, Yukon-Kuskokwim, and northwest regions of the state.
We ownGCI Holdings owns and operateoperates a statewide network providing voice and data services to the urban and rural communities of Alaska. OurIts statewide wireless network provides 4G LTE data service, EVDO, 3G UMTS/HSPA+, 2G CDMA, and 2G GSM/EDGE service. We continueIt continues to expand and upgrade these services to provide a modern network for Alaska. We own and operate Wi-Fi access points that create a Wi-Fi network branded as TurboZone in Anchorage, Fairbanks, Juneau, Kenai-Soldotna, Matanuska-Susitna Valley, and other areas of the State ("TurboZone").
Our
GCI Holdings' dedicated Internet access and Internet protocol data services are delivered to an Ethernet port located at the service end-point. OurGCI Holdings' management platform continuously monitors the network and service end-points for performance. The availability and quality of service, as well as statistical information on traffic loading, are continuously monitored for quality assurance. The management platform has the capability to remotely access network elements and service end-points, permitting changes in configuration without the need to physically be at the service end-point. This management platform allows usGCI Holdings to offer network monitoring and management services to businesses and governmental entities.
OurGCI Holdings' video businesses are located throughout Alaska and serve the majority of the population. OurIts facilities include hybrid-fiber-coax plant and head-end distribution equipment. The majority of ourits locations on the fiber routes are served from head-end distribution equipment in Anchorage. All of ourits cable systems are completely digital.
Competition
We operate in intensely competitive industries and compete with a number of companies that provide a broad range of communication, entertainment, and information products and services. Technological changes are further intensifying and complicating the competitive landscape and consumer behavior.Evite
Retail Wireless ServicesEvite is a digital invitation platform focused on bringing people together. With thousands of free and Products Competition
We compete with AT&T, Verizon,premium customizable designs which can be sent by email or text message, Evite makes celebrating face-to-face easier and other community or regional-based wireless providers,more memorable for its over one hundred million annual users and resellers of those services in Anchoragetheir guests. The company has sent nearly 3 billion invitations. Real-time messaging and other markets. Regulatory policies favor robust competition in wireless markets. Wireless local number portability helpsRSVP tracking continue to maintain a high level of competition inmake planning easier. Evite generates revenue primarily from the industry because it allows subscribers to switch carriers without having to change their telephone numbers.
The communications industry continues to experience significant technological changes, as evidenced by the increasing pace of improvements in the capacity and qualitysale of digital technology, shorter cyclesadvertising for new productspublication on its platform, including custom display advertising, native advertising content, custom video and enhancementsbrand partnerships. Evite conducts advertising sales through its direct regional sales teams and changesprogrammatically through ad exchanges. Additionally, through Evite® Donations which has raised over $10 million dollars, users can invite guests to support a favorite charity or personal cause without leaving their invitation. Launched in consumer preferences1998, Evite is headquartered in Los Angeles. Evite's competitors include Paperless Post and expectations. Accordingly, we expect competition in the wireless communications industry to continue to be dynamic and intense as a result of the development of new technologies, services and products.
The national wireless carriers with whom we compete, AT&T and Verizon, have resources that are greater than ours. These companies have significantly greater capital, financial, marketing, human capital, distribution and other resources than we do. Specifically, as a regional wireless carrier we may not have immediate access to some wireless handsets that are available to these national wireless carriers.
We compete for customers based principally upon price, service bundles, the services and enhancements offered, network quality, customer service, billing services, statewide network coverage and capacity, TurboZone, the type of wireless handsets offered, and perceived quality, reliability and availability. Our ability to compete successfully will depend, in part, on our marketing efforts and our ability to anticipate and respond to various competitive factors affecting the industry.
Data Services and Products Competition
The Internet industry is highly competitive, rapidly evolving and subject to constant technological change. Competition is based upon price, service bundles, the services and enhancements offered, the technologies used, customer service, billing services, and perceived quality, reliability and availability. We compete with other providers some of which are headquartered outside of Alaska and have substantially greater financial, technical and marketing resources than we do.
We expect to continue to provide, at reasonable prices and in competitive bundles, a greater variety of data services than are available through other alternative delivery sources. Additionally, we believe we offer superior technical
performance and speed, and responsive community-based customer service. Increased competition, however, may adversely affect our market share and results of operations from our data services product offerings.
Presently, there are a number of competing companies in Alaska that actively sell and maintain data and voice communications systems. Our ability to integrate communications networks and data communications equipment has allowed us to maintain our market position based on customer support services rather than price competition alone. These services are blended with other transport products into unique customer solutions, including managed services and outsourcing.
Video Services and Products Competition
Our video systems face competition from services and devices that offer distribution of movies, television shows and other video programming, using alternative methods such as Internet video streaming and direct broadcast satellite ("DBS"). Our video systems also face competition from potential overbuilds of our existing cable systems. The extent to which our video systems are competitive depends, in part, upon our ability to provide quality programming and other services at competitive prices.
Internet video streaming is a major source of competition for our video services. Additionally, some online video services produce or acquire their own original content. However, as a major Internet-provider ourselves, the competition may result in additional data service subscriber revenue to the extent we grow average Internet revenue per subscriber.
The DBS industry is another major source of competition for our video services. Two major companies, AT&T-owned DIRECTV and DISH DBS Corporation, are currently offering high-power DBS services in Alaska.
Competitive forces may be counteracted by offering subscribers expanded programming. We have retransmission agreements with various broadcasters and provide for the uplink/downlink of their signals into certain of our systems, and local programming for our customers. Additionally, our ownership of television stations provides us the opportunity to create unique content for our subscribers.
Video systems generally operate pursuant to franchises granted on a non-exclusive basis. The 1992 Cable Act gives local franchising authorities jurisdiction over basic video service rates and equipment in the absence of “effective competition.” The 1992 Cable Act also prohibits franchising authorities from unreasonably denying requests for additional franchises and permits franchising authorities to operate video systems. Well-financed businesses from outside the video industry may become competitors for franchises or providers of competing services.
We expect to continue to provide, at reasonable prices and in competitive bundles, a greater variety of video services than are available off-air or through other alternative delivery sources. Additionally, we believe we offer superior technical performance and responsive community-based customer service. Increased competition, however, may adversely affect our market share and results of operations from our video services product offerings.
Voice Services and Products Competition
Our most significant competition for local access and long-distance comes from wireless substitution and voice over Internet protocol services. Wireless local number portability allows consumers to retain the same phone number as they change service providers allowing for interchangeable and portable fixed-line and wireless numbers. A growing number of consumers now use wireless service as their primary voice phone service for local calling. We also compete against Incumbent Local Exchange Carriers ("ILECs"), long-distance resellers and certain smaller rural local telephone companies for local access and long-distance. We have competed by offering what we believe is excellent customer service and by providing desirable bundles of services.
See “Regulation — Wireline Voice Services and Products” below for more information.
Seasonality
Our services and products do not exhibit significant seasonality. Our ability to implement construction projects is hampered during the winter months because of cold temperatures, snow and short daylight hours.social media platforms.
Major CustomerLiberty Broadband
We had no major
Liberty Broadband consists of its wholly owned subsidiary Skyhook Holding, Inc. (“Skyhook”) and an interest in Charter Communications, Inc. ("Charter"). Skyhook provides mobile positioning and contextual location intelligence solutions.
Charter is the second largest cable operator in the United States and a leading broadband communications services company providing video, Internet and voice services to approximately 28.1 million residential and small and medium business customers at December 31, 2018. Charter also recently launched its Spectrum mobile services to residential customers. In addition, Charter sells video and online advertising inventory to local, regional and national advertising customers and fiber-delivered communications and managed information technology (“IT”) solutions to large enterprise customers. Charter also owns and operates regional sports networks and local sports, news and community channels.
The Company owns an approximate 23.5% economic interest in Liberty Broadband as of December 31, 2018. 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 (see note 7 of the Company's consolidated financial statements found in Part II of this report for additional information). The Company has elected to apply the fair value option for its investment in Liberty Broadband as it is believed that the Company’s investors value this investment based on the trading price of Liberty Broadband.
LendingTree
LendingTree operates an online loan marketplace for consumers seeking loans and other credit-based offerings. LendingTree offers consumers tools and resources, including free credit scores, that facilitate comparison-shopping for mortgage loans, home equity loans, lines of credit, reverse mortgage loans, auto loans, credit cards, personal loans, deposit accounts, student loans, small business loans and other related offerings. LendingTree primarily seeks to match in-market consumers with multiple lenders on its marketplace who can provide them with competing quotes for the loans, deposits or credit-based offerings they are seeking. LendingTree also serves as a valued partner to lenders seeking an efficient, scalable and flexible source of customer acquisition with directly measurable benefits, by matching the consumer loan inquiries it generates with these lenders. LendingTree is headquartered in 2017 and 2016. Verizon was a major customer in 2015.Charlotte, North Carolina.
The Company owns approximately 26.6% of the outstanding common stock of LendingTree as of December 31, 2018. The Company has entered into an agreement with LendingTree pursuant to which, among other things, it has the right to nominate 20% of the members of LendingTree’s board of directors. The Company has nominated two of the ten current board members.
Environmental Regulations
We undertake activities that may, under certain circumstances, affect the environment. Accordingly, they may be subject to federal, state, and local laws designed to preserve or protect the environment, including the Clean Water Act and the Emergency Planning and Community Right-to-Know Act. The FCC, Bureau of Land Management, U.S. Forest Service, U.S. Fish and Wildlife Service, U.S. Army Corps of Engineers, Bureau of Indian Affairs, and National Park Service are among the federal agencies required by the National Environmental Policy Act of 1969 and National Historic Preservation Act to consider the environmental impact of actions they authorize, including facility construction.Regulatory Matters
The principal effect of our facilities on the environment would be in the form of construction of facilities and networks at various locations in Alaska and between Alaska, Washington, and Oregon. Our facilities have been constructed in accordance with federal, state and local building codes and zoning regulations whenever and wherever applicable. We obtain federal, state, and local permits, as required, for our projects and operations. We are unaware of any material violations of federal, state or local regulations or permits.
Patents, Trademarks, and Licenses
We do not hold franchises (with the exception of video services as described below) or concessions for communications services or local access services. We hold a number of federally registered service marks used by our business. We own two utility patents issued in 2017 pertaining to device diagnostics and network connectivity. The Communications Act of 1934, as amended, gives the FCC the authority to license and regulate the use of the electromagnetic spectrum for radio communications. We hold licenses for our satellite and microwave transmission facilities for provision of long-distance services. We hold various licenses for spectrum and broadcast television use. These licenses may be revoked and license renewal applications may be denied for cause. However, we expect these licenses to be renewed in due course when, at the end of the license period, a renewal application will be filed.
We hold licenses for earth stations that are generally licensed for fifteen years. The FCC also issues a single blanket license for a large number of technically identical earth stations. Our operations may require additional licenses in the future.
We are certified through the Regulatory Commission of Alaska ("RCA") to provide local, long distance, and video service by Certificates of Public Convenience and Necessity (“CPCN”). These CPCNs are nonexclusive certificates defining each authorized service area. Although CPCNs have no stated expiration date, they may be revoked due to cause.
Regulation
OurCompany's businesses are subject to substantial government regulation and oversight. The following summary of regulatory issues does not purport to describe all existing and proposed federal, state, and local laws and regulations, or judicial and regulatory proceedings that affect ourthe Company's businesses. Existing laws and regulations are reviewed frequently by legislative bodies, regulatory agencies, and the courts and are subject to change. WeThe Company cannot predict at this time the outcome of any present or future consideration of proposed changes to governing laws and regulations.
Wireless Services and Products
General. The FCC regulates the licensing, construction, interconnection, operation, acquisition, and transfer of wireless network systems in the United States pursuant to the Communications Act. AsThe Company's wireless licensees, welicensee subsidiaries are subject to regulation by the FCC, and must comply with certain build-out and other license conditions, as well as with the FCC’s specific regulations governing wireless services. The FCC does not currently regulate rates for services offered by commercial mobile radio service providers (the official legal description for wireless service providers).
Commercial mobile radio service wireless systems are subject to Federal Aviation Administration ("FAA") and FCC regulations governing the location, lighting, construction, modification, and registration of antenna structures on which ourGCI Holdings' antennas and associated equipment are located and are also subject to regulation under federal
environmental laws and the FCC’s environmental regulations, including limits on radio frequency radiation from wireless handsets and antennas.
Universal Service. The High Cost Program of the Universal Service Fund ("USF") pays Eligible Telecommunications Carriers ("ETCs") to support the provision of facilities-based wireless telephone service in high cost areas. A wireless carrier
may seek ETC status so that it can receive support from the USF. Under FCC regulations and RCA orders, we areGCI Holdings is an authorized ETC for purposes of providing wireless telephone service in Anchorage, Juneau, Fairbanks, the Matanuska-Susitna Valley, and other small areas throughout Alaska. Without ETC status, weGCI Holdings would not qualify for USF support in these areas or other rural areas where we proposeit proposes to offer facilities-based wireless telephone services, and ourits net cost of providing wireless telephone services in these areas would be materially adversely affected.
On August 31, 2016, the FCC published the Alaska High Cost Order. Per the Alaska High Cost Order, as of January 1, 2017, Remote high cost support payments to Alaska High Cost participants are frozen on a per-company basis at adjusted December 2014 levels for a ten-year term in exchange for meeting individualized performance obligations to offer voice and broadband services meeting the service obligations at specified minimum speeds by five-year and ten-year service milestones to a specified number of locations. Remote high cost support is no longer dependent upon line counts and line count filings are no longer required. Prior to the Alaska High Cost Order, Urban high cost support payments were frozen and had phased down to 60% of the monthly average of the 2011 annual support. The Alaska High Cost Order mandated that as of January 1, 2017, Urban high cost support for 2017 and 2018 would be two-thirds and one-third of the December 2014 level of support received, respectively, with Urban high cost support ending effective December 31, 2018.
On April 27, 2016,December 1, 2017, the FCC released a ThirdFourth Report and Order to reform and modernize the USF’s Lifeline program ("Lifeline Order"). The Lifeline program is administered by the Universal Service Administrative Company ("USAC") and is designed to ensure that quality telecommunications services are available to low-income customers at just, reasonable, and affordable rates. The current Lifeline program provides an enhanced $25 monthly subsidy to qualifying subscribers that live on tribal lands ("Enhanced Tribal Subsidy"), which includes all of Alaska. The Lifeline Order adopted several reforms, including incentivizing and sometimes requiring broadband providersbut, most significantly, it limited the Enhanced Tribal Subsidy to offer fixed and/or mobile broadband service to Lifeline subscribers. Theonly those subscribers living in "rural" tribal areas. On February 1, 2019, the United States Court of Appeals for the D.C. Circuit ("D.C. Circuit") vacated the Lifeline Order also limitedas arbitrary and capricious, remanding the number of federal programs that confer Lifeline eligibility, and made small changesmatter to the requirementFCC for annual recertification of all Lifeline subscribers. Failure to correctly judge eligibility and recertify Lifeline subscribers could materially adversely affect our Lifeline revenues and/or increase our costs in the form of FCC fines for failure to comply with Lifeline rules.a new notice-and-comment-rulemaking proceeding.
Interconnection. We haveGCI Holdings has completed negotiations and the RCA has approved current direct wireless interconnection agreements with all of the major Alaska ILECs.Incumbent Local Exchange Carriers ("ILECs"). These are in addition to indirect interconnection arrangements utilized elsewhere.
See “Description“Narrative Description of Our Business — RegulationRegulatory Matters — Wireline Voice Services and Products — Regulatory Regime Applicable to IP-based Networks” for more information.
Emergency 911. The FCC has imposed rules requiring carriers to provide emergency 911 services, including enhanced 911 (“E911”) services that provide to local public safety dispatch agencies the caller’s phone number and approximate location. Providers are required to transmit the geographic coordinates of the customer’s location, either by means of network-based or handset-based technologies, within accuracy parameters revised by the FCC, to be implemented over a phase-in period. Due to Alaska’s relatively low population and low cell-site densities, we haveGCI Holdings has excluded certain areas from E911 coverage where cell triangulation is not feasible, pursuant to FCC rule. We haveGCI Holdings has also filed for a waiver, which remains pending, for remaining areas where triangulation may be technically feasible, but where the cell-site densities are insufficient to reach the FCC’s standard. The FCC also imposed requirements to allow users to text-to-911 if the local public safety dispatch agency requests and is able to receive such texts. We haveGCI Holdings has developed a text-to-911 technical solution and havehas certified to the FCC that we areit is now capable of meeting the FCC requirements. Providers may not demand cost recovery as a condition of providing E911, although they are permitted to negotiate cost recovery if it is not mandated by the state or local governments.
State and Local Regulation. While the Communications Act generally preempts state and local governments from regulating the entry of, and the rates charged by, wireless carriers, it also permits a state to petition the FCC to allow it to impose commercial mobile radio service rate regulation when market conditions fail to adequately protect customers and such service is a replacement for a substantial portion of the telephone wireline exchange service within a state. No state currently has such a petition on file, and all prior efforts have been rejected.
In addition, the Communications Act does not expressly preempt the states from regulating the “terms and conditions” of wireless service. Several states have invoked this “terms and conditions” authority to impose or propose various consumer protection regulations on the wireless industry. State attorneys general have also become more active in enforcing state consumer protection laws against sales practices and services of wireless carriers. States also may impose their own universal service support requirements on wireless and other communications carriers, similar to the contribution requirements that have been established by the FCC.
States have become more active in attempting to impose new taxes and fees on wireless carriers, such as gross receipts taxes. Where successful, these taxes and fees are generally passed through to customers and result in higher costs to customers.
At the local level, wireless facilities typically are subject to zoning and land use regulation. Neither local nor state governments may categorically prohibit the construction of wireless facilities in any community or take actions, such as indefinite moratoria, which have the effect of prohibiting construction. Pursuant to Section 6409(a) of the Middle Class Tax Relief Act of 2012, state and local governments are further constrained in their regulation of changes to existing wireless infrastructure. Nonetheless, securing state and local government approvals for new antenna structures has been and is likely to continue to be difficult, lengthy and costly.
Data Services and Products
General. There is no one entity or organization that governs the global operation of the Internet. Each facilities-based network provider that is interconnected with the global Internet controls operational aspects of theirits own network. Certain functions, such as IP addressing, domain name routing, and the definition of the TCP/IP protocol, are coordinated by an array of quasi-governmental, intergovernmental, and non-governmental bodies. The legal authority of these bodies is not precisely defined.
The vast majority of users connect to the Internet over facilities of existing communications carriers. Those communications carriers are subject to varying levels of regulation at both the federal and state level. Thus, non-Internet-specific regulatory decisions exercise a significant influence over the economics of the Internet market.
Many aspects of the coordination and regulation of Internet activities and the underlying networks over which those activities are conducted are evolving. Internet-specific and non-Internet-specific changes in the regulatory environment, including changes that affect communications costs or increase competition from ILECs or other communications services providers, could adversely affect our costs and the prices at which we sellGCI Holdings sells Internet-based services.
On February 26, 2015, the FCC adopted an order reclassifying Internet service as a telecommunications service under Title II of the Communications Act. This order prohibited broadband providers from blocking or throttling most lawful public Internet traffic, from engaging in paid prioritization of that traffic, and from unreasonably interfering with or disadvantaging end users' and edge providers’ ability to send traffic to, from, and among each other. The order also strengthened the FCC’s transparency rules, which require accurate and truthful service disclosures, sufficient for consumers to make informed choices, for example, about speed, price and fees, latency, and network management practices. The order allowed broadband providers to engage in reasonable network management, including using techniques to address traffic congestion. These rules applied equally to wired and wireless broadband services. The order refrained from applying rate regulation and tariff requirements on broadband services. On January 4, 2018, the FCC released an order that returned to a Title I classification of Internet service and eliminated many of the requirements described above. There are various efforts in Congress, through the federal courts of appeal, and through state legislation to re-impose the rules adopted in 2015. For example, on September 30, 2018, California enacted the California Internet Consumer Protection and Net Neutrality Act of 2018, which establishes many of the requirements adopted by the FCC in 2015. California has agreed not to enforce the new law pending the resolution of a petition for review of the FCC’s January 4, 2018 order in the D.C. Circuit, and any subsequent proceedings before the U.S. Supreme Court. While we doGCI Holdings does not believe that the 2015 FCC order conflicts with ourits existing practices or offerings, the re-imposition of that regulatory framework would impose regulatory burdens, likely would increase ourits costs, and could adversely affect the manner and price of providing service.
On October 27, 2016, the FCC adopted rules governing how broadband internet access service providers may use and disclose certain customer information. Those rules were more restrictive in certain respects than the rules that apply to other entities in the internet economy, including Google and Facebook. On April 3, 2017, the President signed Pub. Law 115-22, which repealed the FCC’s rules under the Congressional Review Act. Various efforts in Congress, at the FTC, and in state legislatures seek to regulate how service providers in the internet economy may use and disclose customer information. Those efforts could impact GCI Holdings ability to use customer data and impose costs and operational challenges.
Rural Health Care Program. The USF Rural Health Care ("RHC") Program subsidizes the rates for services provided to rural health care providers. ForIn November 2017, USAC requested further information in support of the rural rates charged to a number of GCI Holdings' RHC customers in connection with the funding requests for the year that runs July 1, 2017 through June 30, 2018. On October 10, 2018, GCI Holdings received a letter from the FCC's Wireline Competition Bureau (“Bureau”) notifying it of the Bureau’s decision to reduce the rural rates charged to RHC customers for the funding year that ranended on June 30, 2018 by approximately 26% resulting in a reduction of total support payments of $27.8 million. The FCC also informed
GCI Holdings that the same cost methodology used for the funding year that ended on June 30, 2018 would be applied to rates charged to RHC customers in subsequent funding years. In response to the letter from the Bureau, GCI Holdings filed an Application for Review of the Bureau’s decision with the FCC. In the third quarter of 2018, GCI Holdings recorded a $19.1 million reduction in its receivables balance as part of its acquisition accounting and recorded a reduction in revenue in the current period for the funding year that ended on June 30, 2018 of approximately $8.6 million. GCI Holdings expects to reduce future RHC program revenue by a similar rate as to the funding year that ended on June 30, 2018, which based on a current run rate would approximate $7 million per quarter until it can reach a final resolution with the FCC regarding the funding amounts.
On March 15, 2018, USAC announced that the funding requests for the year that runs July 1, 20162017 through June 30, 2017, USAC received requests for funds that2018 exceeded the funding available for the RHC Program. USAC allocatedSince that time, on June 25, 2018, the FCC issued an order resulting in an increase of the annual RHC Program funding cap from $400 million to $571 million and applied it to the funding on a pro-rata basis to rural health care providers who submitted their funding requests during a certain period. We provide services to rural health care providers who were impacted by the pro-rata allocation and as a result certain of our customers did not receive the full subsidyyear that was expected under the program. Under the program rules, we are forbidden from lowering our rates for services previously provided, however, the FCC
published an orderended on June 30, 20172018. 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, aggregate funding was available to assist eligible remote Alaskapay in full the approved funding under the RHC program for the funding year ended on June 30, 2018.
In addition, on March 23, 2018, GCI Holdings received a separate letter of inquiry and request for information from the Enforcement Bureau of the FCC, to which it is in the process of responding. This inquiry into the rates charged by GCI Holdings is still pending, and presently it is unable to assess the ultimate resolution of this matter. The ongoing uncertainty in program funding could have an adverse effect on its business, financial position, results of operations or liquidity.
On November 30, 2018, GCI Holdings received multiple funding denial notices from USAC, denying requested funding from the RHC Program operated by a rural health care providers by allowing Alaska service providers, such as us, to retroactively lower their rates, or effectively giving a credit against amounts owed, for services provided. Based on these specific circumstances, we decided to retroactively lower our rates to these customers pursuant to the FCC waiver, and as a result we reduced revenue by $5.5 million during the year ended December 31, 2017, to aid our rural health care provider customers who were impacted by the pro-rata allocation.
The FCC issued an Order and Notice of Proposed Rulemaking (“NPRM”customer (the “Customer”) on December 18, 2017 and announced that requests for funds has exceeded the amount available for the funding year that runsended on June 30, 2018. At the rates approved by the Bureau in a letter received on October 10, 2018, the funding at issue under the denials is approximately $13 million. In November 2017, USAC requested information from the Customer related to bidding process documentation for two separate service contracts GCI Holdings has with the Customer. Although the Customer timely responded, USAC found that bids previously received were not submitted with the original funding request and/or that bidding information submitted was related to the wrong bidding year. The Customer filed an appeal with USAC on January 29, 2019. At this time, GCI Holdings has no reason to believe that there was any violation of the FCC’s competitive bidding rules, but without further information from the Customer and/or USAC, it cannot assess whether the USAC denials will be overturned. If the denial notices are upheld for reasons relating to the Customer’s competitive bidding process, funding issued under one or both contracts for prior years could be subject to further review, as well as funding for services already being delivered or to be delivered for the period from July 1, 20172018 through June 30, 2019. GCI Holdings has accounts receivable of approximately $18 million outstanding as of December 31, 2018 (“FY2017”).associated with these two service contracts. The Order specifically addresses relief ifoutstanding accounts receivable includes the approximate $13 million of funding at issue as discussed above and additional amounts for services provided for the period from July 1, 2018 through December 31, 2018. Given the uncertainty of whether the USAC denials will be overturned, it is reasonably possible that GCI Holdings may incur a FY2017 prorationloss. The amount of a potential loss could range from zero to the full amount of the accounts receivable balance as of December 31, 2018. No amount within this range of a potential loss is needed and directs USAC to use unused RHC program funding available ata better estimate than any other amount. Accordingly, no loss was recorded as of December 31, 2018 given the time of proration to lower or eliminate the proration factor first for all qualifying funding requests from non-consortia health care providers. All of our customersminimum amount in the FY2017 and included in our December 31, 2017 accounts receivable are non-consortia health care providers. The FCC and USAC have given no guidance as to the amount of unused funding available, thus we cannot predict the amount of any such shortfall.range is zero.
The NPRM seeksIn addition, on December 4, 2018, the FCC issued a public notice seeking further comment about potential reformson an earlier proposal to determine the rural rates for services supported by the RHC program to address future program shortfalls. WeProgram in a different manner than it does today. GCI Holdings and others submitted comments on January 30, 2019, but GCI Holdings cannot predictassess at this time what changes, if any, that the FCC will adoptsubstance, impact on funding, or the impacttiming of any such changes.future rule changes that may be adopted by the FCC.
Schools and Libraries Program. In 2014, the FCC adopted orders modernizing the USF Schools and Libraries Program ("E-Rate"). These orders, among other things, increased the annual E-Rate cap by approximately $1.5 billion, designated funds for internal connections within schools and libraries, and eliminated funding for certain legacy services, such as voice, to increase the availability of 21st century connectivity to support digital learning in schools nationwide. These orders did not have a material effect on the overall E-Rate support available to ourGCI Holdings' schools and libraries customers, and therefore did not materially affect ourits revenue from such customers.
Other Federal Activities. Congress and certain federal agencies are considering ways to streamline federal permitting obligations and to provide additional financial support for broadband services in areas that are difficult to serve. GCI Holdings continues to monitor these activities and cannot predict at this time whether those efforts will make a material difference on its ability to deploy broadband infrastructure.
Video Services and Products
General. Because video communications systems use local streets and rights-of-way, they generally are operated pursuant to franchises (which can take the form of certificates, permits or licenses) granted by a municipality or other state or local government entity. The RCA is the franchising authority for all of Alaska. We believeGCI Holdings believes that we haveit has generally met the terms of ourits franchises, which do not require periodic renewal, and have provided quality levels of service. Military franchise requirements also affect ourits ability to provide video services to military bases.
Must Carry/Retransmission Consent. The Cable Television Consumer Protection Act of 1992 (the "1992 Cable ActAct") contains broadcast signal carriage requirements that allow local commercial television broadcast stations to elect once every three years to require a cable system to carry the station, subject to certain exceptions, or to negotiate for “retransmission consent” to carry the station.
The FCC has adopted rules to require cable operators to carry the digital programming streams of broadcast television stations. Further, the FCC has declined to require any cable operator to carry multiple digital programming streams from a single broadcast television station, but should the FCC change this policy, weGCI Holdings would be required to devote additional cable capacity to carrying broadcast television programming streams, a step that could require the removal of other programming services.
Pole Attachments. The Communications Act requires the FCC to regulate the rates, terms and conditions imposed by public utilities for cable systems’ use of utility pole and conduit space unless state authorities can demonstrate that they adequately regulate pole attachment rates. In the absence of state regulation, the FCC administers pole attachment rates on a formula basis. This formula governs the maximum rate certain utilities may charge for attachments to their poles and conduit by companies providing communications services, including cable operators. The RCA, however, does not use the federal formula and instead has adopted its own formula that has been in place since 1987. This formula could be subject to further revisions upon petition to the RCA. In addition, in 2011, the FCC adopted an order to rationalize different pole attachment rates among types of services, and on November 17, 2015, took further steps to bring telecommunications and cable pole attachment rates into parity. Though the general purpose of the rule changes was to ensure pole attachment rates as low and as uniform as possible, we doGCI Holdings does not expect the rules to have an immediate impact on the terms under which we accessit accesses poles. WeGCI Holdings cannot predict the likelihood of the RCA changing its formula, adopting the federal formula, or relinquishing its oversight of pole attachments to the FCC, any of which could increase the cost of ourits operations.
Copyright. Cable television systems are subject to federal copyright licensing covering carriage of television and radio broadcast signals. In exchange for filing certain reports and contributing a percentage of their revenuesrevenue to a
federal copyright royalty pool that varies depending on the size of the system, the number of distant broadcast television signals carried, and the location of the cable system, cable operators can obtain blanket permission to retransmit copyrighted material included in broadcast signals. The possible modification or elimination of this compulsory copyright license is the subject of continuing legislative review. WeGCI Holdings cannot predict the outcome of this legislative review, which could adversely affect ourits ability to obtain desired broadcast programming. Copyright clearances for non-broadcast programming services are arranged through private negotiations.
Wireline Voice Services and Products
General. As an interexchange carrier, we areGCI Holdings is subject to regulation by the FCC and the RCA as a non-dominant provider of interstate, international, and intrastate long-distance services. As a state-certificated competitive local exchange carrier, we areGCI Holdings is subject to regulation by the FCC and the RCA as a non-dominant provider of local communications services. Military franchise requirements also affect ourGCI Holdings' ability to provide communications services to military bases.
Universal Service. The USF pays ETCs to support the provision of facilities-based wireline telephone service in high cost areas. Under FCC regulations and RCA orders, we areGCI Holdings is an authorized ETC for purposes of providing wireline local exchange service in Anchorage, Juneau, Fairbanks, the Matanuska-Susitna Valley, and other small areas throughout Alaska. Without ETC status, weGCI Holdings would not qualify for USF support in these areas or other rural areas where we proposeit proposes to offer facilities-based wireline telephone services, and ourits net cost of providing local telephone services in these areas would be materially adversely affected. See “Description of Our Business - Regulation - Wireless Services and Products - Universal Service” for information on USF reform.
Rural Exemption and Interconnection. A Rural Telephone Company is exempt from compliance with certain material interconnection requirements under Section 251(c) of the 1996 Telecom Act, including the obligation to negotiate Section 251(b) and (c) interconnection requirements in good faith, unless and until a state regulatory commission lifts such “rural exemption” or otherwise finds it not to apply. All ILECs in Alaska are Rural Telephone Companies except Alaska Communications Systems Group, Inc.'s (“ACS”) in its Anchorage study area. WeGCI Holdings participated in numerous proceedings regarding the rural exemptions of various ILECs in order to achieve the necessary interconnection agreements with the remaining ILECs. In other cases the interconnection agreements were reached by negotiation without regard to the implications of the ILEC’s rural exemption.
We haveGCI Holdings has completed negotiation and/or arbitration of the necessary interconnection provisions and the RCA has approved current wireline Interconnection Agreements between GCI Holdings and all of the major ILECs. We haveGCI Holdings has entered all of the major Alaskan markets with local access services.
See “Description“Narrative Description of Our Business — Competition — Voice Services and Products Competition” for more information.
Access Charges and Other Regulated Fees. The FCC regulates the fees that local telephone companies charge long-distance companies for access to their local networks. In 2011, the FCC released rules to restructure and reduce over time originatingterminating interstate access charges, along with a proposal to adopt similar reforms applicable to terminatingoriginating interstate access charges. The details of implementation in general and between different classes of technology continue to be addressed, and could affect the economics of some aspects of ourGCI Holdings' business. WeGCI Holdings cannot predict at this time the impact of this implementation or future implementation of adopted reforms, but we doGCI Holdings does not expect it to have a material adverse impact on ourits operations.
Unbundled Network Elements. The ability to obtain unbundled network elements ("UNEs") is an important element of ourGCI Holdings' local access services business. WeThere is an open proceeding before the FCC to consider changes to UNE obligations. GCI Holdings cannot predict the extent to which existing FCC rules governing access to and pricing for UNEs will be changed in the face of additional legal action and the impact of any further rule modifications that are yet to be determined by the FCC. Moreover, the future regulatory classification of services that are transmitted over facilities may impact the extent to which weGCI Holdings will be permitted access to such facilities. Changes to the applicable regulations could result in a change in ourits cost of serving new and existing markets. On July 7, 2017, ACS filed a petition in which it asked the FCC to regulate usGCI Holdings as an ILEC pursuant to section 251(h)(2) of the Communications Act, including the requirement to provide competitors with access to unbundled network elements. WeGCI Holdings cannot predict at this time the outcome of this proceeding. However, grant of the petition in its entirety may subject usGCI Holdings to regulatory burdens that could materially impact ourits costs.
Local Regulation. WeGCI Holdings may be required to obtain local permits for street opening and construction permits to install and expand ourits networks. Local zoning authorities often regulate ourGCI Holdings' use of towers for microwave and other communications sites. WeGCI Holdings is also are subject to general regulations concerning building codes and local licensing. The Communications Act requires that fees charged to communications carriers be applied in a competitively neutral manner, but there can be no assurance that ILECs and others with whom weGCI Holdings will be competing will bear costs similar to those we will bearit bears in this regard.
Regulatory Regime Applicable to IP-based Networks. In 2014, the FCC adopted an order calling for experiments to examine how best to accelerate the technological and regulatory transitions from traditional TDM-based networks to IP-based technologies. Although no entity has proposed conducting a technology transition experiment in ourGCI Holdings' service territory in response to the FCC’s 2014 order, additional proposals for experiments are possible. WeGCI Holdings cannot predict whether additional proposals for experiments might be submitted to the FCC nor any resulting proceedings or their effect on us.it. The FCC also has other open dockets through which it might make changes to the regulatory regime applicable to IP-based networks. A change in regulatory obligation or classification that interferes with ourGCI Holdings' ability to exchange traffic with other providers, that raises the cost of doing so, or that adversely affects eligibility for USF support could materially affect ourGCI Holdings' net cost of and revenue from providing local services.
Environmental Regulations Financial Information about our Foreign
GCI Holdings undertakes activities that may, under certain circumstances, affect the environment. Accordingly, they may be subject to federal, state, and Domestic Operationslocal laws designed to preserve or protect the environment, including the Clean Water Act and Export Salesthe Emergency Planning and Community Right-to-Know Act. The FCC, Bureau of Land Management, U.S. Forest
We do not have significant foreign operations or export sales. We conduct our operations throughout
Service, U.S. Fish and Wildlife Service, U.S. Army Corps of Engineers, Bureau of Indian Affairs, and National Park Service are among the contiguous United Statesfederal agencies required by the National Environmental Policy Act of 1969 and National Historic Preservation Act to consider the environmental impact of actions they authorize, including facility construction.
The principal effect of GCI Holdings' facilities on the environment would be in the form of construction of facilities and networks at various locations in Alaska and believe thatbetween Alaska, Washington, and Oregon. GCI Holdings' facilities have been constructed in accordance with federal, state and local building codes and zoning regulations whenever and wherever applicable. GCI Holdings obtains federal, state, and local permits, as required, for its projects and operations. GCI Holdings is unaware of any subdivisionmaterial violations of our operations into distinct geographic areas would not be meaningful.federal, state or local regulations or permits.
Company-Sponsored ResearchCompetition
We
The Company operates in intensely competitive industries and competes with a number of companies that provide a broad range of communication, entertainment, and information products and services. Technological changes are further intensifying and complicating the competitive landscape and consumer behavior.
Retail Wireless Services and Products Competition
The Company competes with AT&T, Verizon, and community or regional-based wireless providers, and resellers of those services in Anchorage and other markets. Regulatory policies favor robust competition in wireless markets. Wireless local number portability helps to maintain a high level of competition in the industry because it allows subscribers to switch carriers without having to change their telephone numbers.
The communications industry continues to experience significant technological changes, as evidenced by the increasing pace of improvements in the capacity and quality of digital technology, shorter cycles for new products and enhancements and changes in consumer preferences and expectations. Accordingly, the Company expects competition in the wireless communications industry to continue to be dynamic and intense as a result of the development of new technologies, services and products.
The national wireless carriers with whom the Company competes, AT&T and Verizon, have resources that are greater than the Company's resources. These companies have significantly greater capital, financial, marketing, human capital, distribution and other resources than the Company. Specifically, as a regional wireless carrier the Company may not expended material amounts duringhave immediate access to some wireless handsets that are available to these national wireless carriers.
The Company competes for customers based principally upon price, service bundles, the last three fiscal yearsservices and enhancements offered, network quality, customer service, billing services, statewide network coverage and capacity, the type of wireless handsets offered, and perceived quality, reliability and availability. The Company's ability to compete successfully will depend, in part, on company-sponsored research activities.its marketing efforts and its ability to anticipate and respond to various competitive factors affecting the industry.
Data Services and Products Competition
The Internet industry is highly competitive, rapidly evolving and subject to constant technological change. Competition is based upon price, service bundles, the services and enhancements offered, the technologies used, customer service, billing services, and perceived quality, reliability and availability. The Company competes with other providers some of which are headquartered outside of Alaska and have substantially greater financial, technical and marketing resources.
The Company expects to continue to provide, at reasonable prices and in competitive bundles, a greater variety of data services than are available through other alternative delivery sources. Additionally, the Company believes it offers superior technical performance and speed, and responsive community-based customer service. Increased competition, however, may adversely affect the Company's market share and results of operations from its data services product offerings.
Presently, there are a number of competing companies in Alaska that actively sell and maintain data and voice communications systems. The Company's ability to integrate communications networks and data communications equipment has allowed it to maintain its market position based on customer support services rather than price competition alone. These services are blended with other transport products into unique customer solutions, including managed services and outsourcing.
Video Services and Products Competition
The Company's video systems face competition from services and devices that offer distribution of movies, television shows and other video programming, using alternative methods such as Internet video streaming and direct broadcast satellite ("DBS"). The Company's video systems also face competition from potential overbuilds of its existing cable systems. The
extent to which the Company's video systems are competitive depends, in part, upon its ability to provide quality programming and other services at competitive prices.
Internet video streaming is a major source of competition for the Company's video services. Additionally, some online video services produce or acquire their own original content. However, as a major Internet-provider, the competition may result in additional data service subscriber revenue for the Company to the extent it grows average Internet revenue per subscriber.
The DBS industry is another major source of competition for the Company's video services. Two major companies, AT&T-owned DIRECTV and DISH DBS Corporation, are currently offering high-power DBS services in Alaska.
Video systems generally operate pursuant to franchises granted on a non-exclusive basis. The 1992 Cable Act gives local franchising authorities jurisdiction over basic video service rates and equipment in the absence of “effective competition.” The 1992 Cable Act also prohibits franchising authorities from unreasonably denying requests for additional franchises and permits franchising authorities to operate video systems. Well-financed businesses from outside the video industry may become competitors for franchises or providers of competing services.
The Company expects to continue to provide, at reasonable prices and in competitive bundles, a greater variety of video services than are available off-air or through other alternative delivery sources. Additionally, the Company believes it offers superior technical performance and responsive community-based customer service. Increased competition, however, may adversely affect the Company's market share and results of operations from its video services product offerings.
Voice Services and Products Competition
The Company's most significant competition for local access and long-distance comes from wireless substitution and voice over Internet protocol services. Wireless local number portability allows consumers to retain the same phone number as they change service providers allowing for interchangeable and portable fixed-line and wireless numbers. A growing number of consumers now use wireless service as their primary voice phone service for local calling. The Company also competes against ILECs, long-distance resellers and certain smaller rural local telephone companies for local access and long-distance. The Company has competed by offering what it believes is excellent customer service and by providing desirable bundles of services.
See “Regulatory Matters — Wireline Voice Services and Products” above for more information.
Employees
We employed 2,208 persons as
GCI, LLC currently does not have any corporate employees. Liberty Media Corporation ("Liberty Media") provides GCI, LLC with certain management services pursuant to a services agreement between Liberty Media and GCI Liberty and certain of Liberty Media’s corporate employees and executive officers provide services to GCI, LLC for a determined fee. As of December 31, 2017,2018, the Company's consolidated subsidiaries had an aggregate of approximately 2,270 full and we arepart-time employees and the Company is not subjectparty to any collective bargaining agreementsunion contracts with ourits employees. We believe our future success will depend upon our continued ability to attract and retain highly skilled and qualified employees. We believeThe Company believes that its employee relations with our employees are satisfactory.good.
Other
No material portion of our business is subject to renegotiation of profits or termination of contracts at the election of the federal government.
Item 1A. Risk Factors.
The risks described below and elsewhere in this Annual Report on Form 10-K are not the only ones that relate to our businesses or our capitalization. The risks described below are considered to be the most material. However, there may be other unknown or unpredictable economic, business, competitive, regulatory or other factors that also could have material adverse effects on our businesses. Past financial performance may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods. If any of the events described below were to occur, our businesses, prospects, financial condition, results of operations and/or cash flows could be materially adversely affected.
Factors That May AffectRelating to Our Corporate History and Structure
The historical financial information of our Company prior to the Transactions and the historical financial information of Holdco is not necessarily representative of our future financial position, future results of operations or future cash flows, nor does it reflect what our financial position, results of operations or cash flows would have been as a combined, stand-alone company during the periods presented.
The historical financial information of our Company as presented in our filings under the Exchange Act, including our
Forms 10-K and 10-Q, made prior to the completion of the Transactions includes only the financial information of our pre-Transaction legacy operations (the “pre-Transaction GCI financial information”). Due to the treatment of a portion of the Transactions as a “reverse acquisition” under the acquisition method of accounting in accordance with GAAP, for accounting purposes, Holdco was considered to acquire GCI Liberty (the entity formerly known as GCI) in the Transactions. Therefore, the historical financial information of the Company is the historical financial information of HoldCo, and not the pre-Transaction GCI financial information. As a result, neither the current historical financial information of our Company nor the pre-Transaction GCI financial information is representative of our future financial position, future results of operations or future cash flows, nor do they reflect what our financial position, results of operations or cash flows would have been as a combined, stand-alone company, pursuing independent strategies, during the periods presented.
Our Company will conduct its operations to maintain its exclusion from the 40 Act, but nevertheless, may become subject to the Investment Company Act of 1940.
Following the completion of the Transactions, GCI, LLC is in the business of selling communications and
entertainment services to subscribers, and its economic success will be based on its ability to retain current subscribers and attract new subscribers. Further, the GCI Holdings operating subsidiaries are expected to generate substantially all of the cash flow of the consolidated GCI, LLC. GCI, LLC intends to continue to conduct its operations so that neither it nor any of its subsidiaries is required to register as an investment company under the Investment Company Act of 1940, as amended, and the rules and regulations promulgated thereunder (the “40 Act”). To ensure that GCI, LLC does not become subject to regulation under the 40 Act, GCI, LLC may be limited in the type of assets that it may continue to own or acquire and, further, may need to dispose of or acquire certain assets (through a purchase, sale, merger or other transaction) at such times or on such terms as may be less favorable to GCI, LLC than if it were not required to enter into such transaction to maintain its exclusion from regulation under the 40 Act. If for any reason, however, GCI, LLC were to become subject to regulation under the 40 Act (such as due to significant accretion in the value of its interests in certain publicly traded securities coupled with a reduction in the value of the GCI Holdings operations or a change in circumstance which results in a reclassification of certain of its operating assets as investment securities for purposes of the 40 Act), after giving effect to any applicable grace periods, GCI, LLC may be required to register as an investment company, which could result in significant registration and compliance costs, could require changes to its corporate governance structure and financial reporting, and could restrict its activities going forward. In addition, if GCI, LLC were to become inadvertently subject to the 40 Act, any violation of the 40 Act could subject it to material adverse consequences, including potentially significant regulatory penalties and the possibility that certain of its contracts could be deemed unenforceable.
The market value of GCI, LLC's interests in publicly-traded securities may be affected by market conditions beyond its control that could cause it to record losses for declines in such market value.
Substantially all of the contributed HoldCo assets consist of equity interests in publicly-traded companies. The contributed HoldCo assets included shares of Charter valued at approximately $1.5 billion, as of December 31, 2018, and shares of Liberty Broadband, which is Charter's largest shareholder with a 25.01% voting interest in Charter, valued at approximately $3.1 billion, as of December 31, 2018. Our Company has no ability to exercise control over either Charter or Liberty Broadband, and therefore we cannot cause either investee to take actions which may be in the best interest of our Company and our investment in these companies. Although many of the risks described below relating to our operating business similarly affect Charter and Liberty Broadband, for additional information regarding the risks and uncertainties specific to Charter and Liberty Broadband, holders of GCI, LLC's securities should please see “Part I-Item 1A. Risk Factors-Factors Relating to Our Corporate History and Structure” and “Part I-Item 1A. Risk Factors-Factors Relating to Charter” of Liberty Broadband's Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 8, 2019. In addition, as of the completion of the Transactions, the contributed HoldCo assets included an interest in the publicly traded equity of LendingTree with a market value of approximately $756.2 million, as of December 31, 2018. The value of these interests may be affected by economic and market conditions that are beyond our control, and our ability to liquidate or otherwise monetize these interests without adversely affecting their value may be limited.
Factors Relating to Our GCI Holdings' Business and Future Results
Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect ourthe business operations.operations of GCI Holdings, which we refer to as "GCI" in the following risk factors relating to the business of GCI Holdings. Any of the following risks could materially and adversely affect our business, financial position, results of operations or liquidity.
We faceGCI faces competition that may reduce our market share and harm our financial performance.
There is substantial competition in the telecommunications and entertainment industries. Through mergers, various service integration strategies, and business alliances, major providers are striving to strengthen their competitive positions. We faceGCI faces increased wireless services competition from national carriers in the Alaska market and increasing video services competition from DBS providers and over-the-top content providers who are often able to offer more flexible subscription packages and exclusive content.
We expect competition to increase as a result of the rapid development of new technologies, services and products. We cannot predict which of many possible future technologies, products or services will be important to maintain ourGCI’s competitive position or what expenditures will be required to develop and provide these technologies, products or services. OurGCI’s ability to compete successfully will depend on marketing and on ourits ability to anticipate and respond to various competitive factors affecting the industry, including new services that may be introduced, changes in consumer preferences, economic conditions and pricing strategies by competitors. To the extent we do
GCI does not keep pace with technological advances or failfails to timely respond to changes in competitive factors in ourits industry and in ourits markets, weGCI could lose market share or experience a decline in ourits revenue and net income. Competitive conditions create a risk of market share loss and the risk that customers shift to less profitable lower margin services. Competitive pressures also create challenges for ourits ability to grow new businesses or introduce new services successfully and execute ourits business plan. WeGCI also facefaces the risk of potential price cuts by our competitors that could materially adversely affect ourits market share and gross margins.
OurGCI’s wholesale customers including ourits major roaming customers may construct facilities in locations where they contract with usGCI to use ourits network to provide service on their behalf. We would experience a decline in revenue and net income if any of ourGCI’s wholesale customers constructed or expanded their existing networks in places where service is provided on ourGCI’s network. Some of ourGCI’s wholesale customers have greater access to financial, technical, and other resources than we do. We expectit does. GCI expects to continue to offer competitive alternatives to such customers in order to retain significant traffic on ourits network. We cannot predict whether such negotiations will be successful. OurGCI’s inability to negotiate such contracts could have a material adverse effect on our business, financial condition and results of operations.
For more information about competition, see the section titled “Competition” included in “Part 1 — Item 1 — Business — Description of our Business.”
If we experienceGCI experiences low or negative rates of subscriber acquisition or high rates of turnover, our financial performance will be impaired.
We areGCI is in the business of selling communications and entertainment services to subscribers, and ourits economic success is based on ourits ability to retain current subscribers and attract new subscribers. If we areGCI is unable to retain and attract subscribers, its and our financial performance will be impaired. OurGCI’s rates of subscriber acquisition and turnover are affected by a number of competitive factors including the size of ourits service areas, network performance and reliability issues, ourits device and service offerings, subscribers’ perceptions of ourits services, and customer care quality. Managing these factors and subscribers’ expectations is essential in attracting and retaining subscribers. Although we haveGCI has implemented programs to attract new subscribers and address subscriber turnover, we cannot assure you that these programs or ourGCI’s strategies to address subscriber acquisition and turnover will be successful. A high rate of turnover or low or negative rate of new subscriber acquisition would reduce revenuesrevenue and increase the total marketing expenditures required to attract the minimum number of subscribers required to sustain ourGCI’s business plan which, in turn, could have a material adverse effect on our business, financial condition and results of operations.
WeGCI may be unable to obtain or maintain the roaming services we needit needs from other carriers to remain competitive.
Some of ourGCI’s competitors have national networks that enable them to offer nationwide coverage to their subscribers at a lower cost than weGCI can offer. The networks we operateGCI operates do not, by themselves, provide national coverage and weGCI must pay fees to other carriers who provide roaming services to us. Weit. GCI currently relyrelies on roaming agreements with several carriers for the majority of ourits roaming services.
The FCC requires commercial mobile radio service providers to provide roaming, upon request, for voice and SMS text messaging services on just, reasonable and non-discriminatory terms. The FCC also requires carriers to offer data roaming services. The rules do not provide or mandate any specific mechanism for determining the reasonableness of roaming rates for voice, SMS text messaging or data services and require that roaming complaints be resolved on a case-by-case basis, based on a non-exclusive list of factors that can be taken into account in determining the reasonableness of particular conduct or rates. If weGCI were to lose the benefit of one or more key roaming or wholesale agreements unexpectedly, weit may be unable to obtain similar replacement agreements and as a result may be unable to continue providing nationwide voice and data roaming services for ourits customers or may be unable to provide such services on a cost-effective basis. OurGCI’s inability to obtain new or replacement roaming services on a cost-effective basis may limit ourits ability to compete effectively for wireless customers, which
may increase ourits turnover and decrease our revenues,its revenue, which in turn could materially adversely affect our business, financial condition and results of operations.
OurGCI’s business is subject to extensive governmental legislation and regulation. Applicable legislation and regulations and changes to them could adversely affect our business, financial position, results of operations or liquidity.
Wireless Services. The licensing, construction, operation, sale and interconnection arrangements of wireless communications systems are regulated by the FCC and, depending on the jurisdiction, state and local regulatory agencies. In particular, the FCC imposes significant regulation on licensees of wireless spectrum with respect to:
How radio spectrum is used by licensees;
The nature of the services that licensees may offer and how such services may be offered; and
Resolution of issues of interference between spectrum bands.
Although the Communications Act of 1934, as amended, preempts state and local regulation of market entry and the rates charged by commercial mobile radio service providers, states may exercise authority over such things as certain billing practices and consumer-related issues. These regulations could increase the costs of ourGCI’s wireless operations. The FCC grants wireless licenses for terms of generally ten years that are subject to renewal and revocation. FCC rules require all wireless licensees to meet certain build-out requirements and substantially comply with applicable FCC rules and policies and the Communications Act of 1934, as amended, in order to retain their licenses. Failure to comply with FCC requirements in a given license area could result in revocation of the license for that license area. There is no guarantee that ourGCI’s licenses will be renewed.
Commercial mobile radio service providers must implement E911 capabilities in accordance with FCC rules. While we believe that we are currently in compliance with such FCC rules, the failure to deploy E911 service consistent with FCC requirements could subject us to significant fines.
We useGCI uses tower facilities for the provision of ourits wireless services. The FCC, together with the Federal Aviation Administration,FAA, also regulates tower marking and lighting. In addition, tower construction is affected by federal, state and local statutes addressing zoning, environmental protection and historic preservation. The FCC requires local notice in any community in which an applicant is seeking FCC Antenna Structure Registrationantenna structure registration to build a tower. Local notice provides members of the community with an opportunity to comment on or challenge the tower construction for environmental reasons. This rule could cause delay for certain tower construction projects.
Internet Services. In 2015, the FCC adopted an order reclassifying Internet service as a telecommunications service under Title II of the Communications Act. The order prohibited broadband providers from blocking or throttling most lawful public Internet traffic, from engaging in paid prioritization of that traffic, and from unreasonably interfering with or disadvantaging end users' and edge providers' ability to send traffic to, from, and among each other. The order also strengthened the FCC's transparency rules, which require accurate and truthful service disclosures, sufficient for consumers to make informed choices, for example, about speed, price and fees, latency, and network management practices. The order allowed broadband providers to engage in reasonable network management, including using techniques to address traffic congestion. The new rules applied equally to wired and wireless broadband services. The order refrained from imposing rate regulation or tariff requirements on broadband services.
On January 4, 2018, the FCC released an order that returned to a Title I classification of Internet service and eliminated many of the requirements described above. There are various efforts in Congress, through the federal courts of appeal, and through state legislation to re-impose net neutrality requirements or some variation thereof. For example, on September 30, 2018, California enacted the rulesCalifornia Internet Consumer Protection and Net Neutrality Act of 2018, which establishes many of the requirements adopted by the FCC in 2015. California has agreed not to enforce the new law pending the resolution of a petition for review of the FCC’s January 4, 2018 order in the D.C. Circuit, and any subsequent proceedings before the U.S. Supreme Court. We cannot predict whether the FCC or Congress will re-impose the 2015 rules but if it did, itor some variation thereof. It is possible that the FCC could interpret or apply thoseany re-imposed rules in a way that has a material adverse effect on ourGCI’s business, financial position, results of operations, or liquidity.
Video Services. The cable television industry is subject to extensive regulation at various levels, and manyvarious aspects of such regulation often are currently the subject of judicial proceedings and administrative or legislative proposals. It is possible that rate reductions or refunds of previously collected fees may be required of usGCI in the future.
Other existing federal regulations, currently the subject of judicial, legislative, and administrative review, could
change, in varying degrees, the manner in which video systems operate. Neither the outcome of these proceedings nor their impact on the cable television industry in general, or on ourGCI’s activities and prospects in the cable television business in particular, can be predicted at this time. There can be no assurance that future regulatory actions taken
by Congress, the FCC or other federal, state or local government authorities will not have a material adverse effect on ourGCI’s business, financial position, results of operations or liquidity.
Local Access Services. OurGCI’s success in the local telephone market depends on ourits continued ability to obtain interconnection, access and related services from local exchange carriers on terms that are reasonable and that are based on the cost of providing these services. Our local telephone services business faces the risk of unfavorable changes in regulation or legislation or the introduction of new regulations. OurGCI’s ability to provide service in the local telephone market depends on ourits negotiation or arbitration with local exchange carriers to allow interconnection to the carrier’s existing local telephone network (in some Alaska markets at cost-based rates), to establish dialing parity, to obtain access to rights-of-way, to resell services offered by the local exchange carrier, and in some cases, to allow the purchase, at cost-based rates, of access to unbundled network elements. Future negotiations or arbitration proceedings with respect to new or existing markets could result in a change in ourGCI’s cost of serving these markets via the facilities of the ILECIncumbent Local Exchange Carriers or via wholesale offerings. GCI’s local telephone services business faces the risk of unfavorable changes in regulation or legislation or the introduction of new regulations.
For more information about Regulations affecting our operations, see “Part 1 —Item 1 — Business — Regulation.”
Loss of ourGCI’s ETC status would disqualify usit for USF support.
The USF pays support to ETCs to support the provision of facilities-based wireline and wireless telephone service in high cost areas. If weGCI were to lose ourits ETC status in any of the study areas where we areit is currently an authorized ETC whether due to legislative or regulatory reform or ourits failure to comply with applicable laws and regulations, weGCI would be ineligible to receive USF support for providing service in that area. Loss of our ETC status could have an adverse effect on our business, financial position, results of operations or liquidity.
RevenuesRevenue and accounts receivable from USF support may be reduced or lost.
We receiveGCI receives support from each of the various USF programs: high cost, low income, rural health care, and schools and libraries. This support was 26%, 24%, and 19%23% of ourthe Company's revenue for the years endedperiod following the date of the Transactions through December 31, 2017, 2016 and 2015, respectively. We2018. The support received by pre-Transaction GCI during prior years was comparable. GCI had USF net receivables of $131.8 million and $100.5$91 million at December 31, 2017 and 2016, respectively.2018. The USF programs are subject to change by regulatory actions taken by the FCC, interpretations of or compliance with USF program rules, or legislative actions. Changes to any of the USF programs that we participateGCI participates in could result in a material decrease in revenue and accounts receivable, which could have an adverse effect on GCI's business and the Company's financial position, results of operations or liquidity.
In November 2017, 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. On October 10, 2018, GCI received a letter from the Bureau notifying it of the Bureau’s decision to reduce the rural rates charged to RHC customers for the funding year that ended on June 30, 2018 by approximately 26% resulting in a reduction of total support payments of $27.8 million. The FCC also informed GCI that the same cost methodology used for the funding year that ended on June 30, 2018 would be applied to rates charged to RHC customers in subsequent funding years. In response to the letter from the Bureau, GCI filed an Application for Review of the Bureau’s decision with the FCC. In the third quarter of 2018, GCI recorded a $19.1 million reduction in its receivables balance as part of its acquisition accounting and recorded a reduction in revenue in the current period for the funding year that ended on June 30, 2018 of approximately $8.6 million. GCI expects to reduce future RHC program revenue by a similar rate as to the funding year that ended on June 30, 2018, which based on a current run rate would approximate $7 million per quarter until it can reach a final resolution with the FCC regarding the funding amounts.
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 million 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, aggregate funding was available to pay in full the approved funding under the RHC program for the funding year ended on June 30, 2018.
In addition, on March 23, 2018, GCI received a separate letter of inquiry and request for information from the Enforcement Bureau of the FCC, to which it is in the process of responding. This inquiry into the rates charged by GCI is still
pending, and presently it is unable to assess the ultimate resolution of this matter. The ongoing uncertainty in program funding could have an adverse effect on its business, financial position, results of operations or liquidity.
Additionally,On November 30, 2018, GCI received multiple funding denial notices from USAC, denying requested funding from the USF RHC Program subsidizes the rates for services provided tooperated by a rural health care providers. USAC received requestscustomer (the “Customer”) for support that exceeded the available RHC Program funding for the first time in the funding year that ranended on June 30, 2018. At the rates approved by the Bureau in a letter received on October 10, 2018, the funding at issue under the denials is approximately $13 million. In November 2017, USAC requested information from the Customer related to bidding process documentation for two separate service contracts GCI has with the Customer. Although the Customer timely responded, USAC found that bids previously received were not submitted with the original funding request and/or that bidding information submitted was related to the wrong bidding year. The Customer filed an appeal with USAC on January 29, 2019. At this time, GCI has no reason to believe that there was any violation of the FCC’s competitive bidding rules, but without further information from the Customer and/or USAC, it cannot assess whether the USAC denials will be overturned. If the denial notices are upheld for reasons relating to the Customer’s competitive bidding process, funding issued under one or both contracts for prior years could be subject to further review, as well as funding for services already being delivered or to be delivered for the period from July 1, 20162018 through June 30, 2017. We expect that2019. GCI has accounts receivable of approximately $18 million outstanding as of December 31, 2018 associated with these two service contracts. The outstanding accounts receivable includes the support requests will continue to exceed the program's annual capapproximate $13 million of funding at issue as discussed above and additional amounts for services provided for the period from July 1, 2018 through December 31, 2018. Given the uncertainty of whether the USAC denials will be overturned, it is reasonably possible that GCI may incur a loss. The amount of a potential loss could range from zero to the full amount of the accounts receivable balance as of December 31, 2018. No amount within this range of a potential loss is a better estimate than any other amount. Accordingly, no loss was recorded as of December 31, 2018 given the minimum amount in the range is zero.
In addition, on December 4, 2018, the FCC issued a public notice seeking further comment on an earlier proposal to determine the rural rates for services supported by the RHC Program in a different manner than it does today. GCI and others submitted comments on January 30, 2019, but GCI cannot assess at this time the substance, impact on funding, year ending June 30, 2018 and possibly subsequent funding years. We provide services to rural health care providers whoor timing of any future rule changes that may be impactedadopted by funding caps and as a result may not receive the full subsidy that was expected under the program. We cannot predict the impact of future RHC Program funding caps but they may negatively affect our financial position, results of operations, or liquidity.FCC.
See “Description of Our Business — Regulation — Wireless Services and Products — Universal Service” and “Description of Our Business — Regulation — Wireline Voice Services and Products — Universal Service” for more information.
WeGCI may not meet ourits performance plan milestones under the Alaska High Cost Order.
As an ETC, we receiveGCI receives support from the USF to support the provision of wireline local access and wireless service in high cost areas. On August 31, 2016, the FCC published the Alaska High Cost Order which requires usGCI to submit to the FCC a performance plan with five-year and ten-year commitments. If we areGCI is unable to meet the final performance plan milestones approved by the FCC weit will be required to repay 1.89 times the average amount of support per location received over the ten-year term for the relevant number of locations that weGCI failed to deploy to, plus ten percent of ourits total Alaska High Cost Order support received over the ten-year term. Inability to meet ourGCI’s performance plan milestones could have an adverse effect on ourits business, financial position, results of operations or liquidity.
WeGCI may lose USF high cost support if another carrier adds 4G LTE service in an area where weit currently provideprovides 4G LTE service.
Under the Alaska High Cost Order, the FCC adopted a process for revisiting after five years whether and to what extent there is duplicative support for 4G LTE service in rural Alaska and to take steps to eliminate such duplicative support levels in the second half of the ten-year term. As a result, if another carrier builds 4G LTE service in an area where we areGCI is the sole provider and the FCC decides to redistribute the support then ourGCI’s high cost support may be reduced, which could have an adverse effect on ourits business, financial position, results of operations or liquidity.
Programming expenses for ourGCI’s video services are increasing, which could adversely affect our business.
We expect programming expenses for ourGCI’s video services to continue to increase in the foreseeable future. The multichannel video provider industry has continued to experience an increase in the cost of programming, especially sports programming and costs to retransmit local broadcast stations. As ourGCI’s contracts with content providers expire, there can be no assurance that they will be renewed on acceptable terms or that they will be renewed at all, in which case weGCI may be unable to provide such content as part of ourits video services and our business could be adversely affected. If we addGCI adds programming to ourits video services or if we chooseGCI chooses to distribute existing programming to ourits customers through additional delivery platforms, weGCI may incur increased programming expenses. If we areGCI is unable to raise ourits customers’ rates or offset such programming cost increases through the sale of additional services, the increasing cost of programming could have an adverse impact on our business, financial condition, or results of operations.
The decline in ourGCI’s voice services’ results of operations, which include long-distance and local access services, may accelerate.
We expect ourGCI’s voice services’ results of operations, which include long-distance and local access services, will continue to decline. As competition from wireless carriers, such as ourselves,GCI, increases we expect ourGCI’s long-distance and local access services' subscribers and revenuesrevenue will continue to decline and the rate of decline may accelerate.
WeGCI may not be able to satisfy the requirements of ourits participation in a New Markets Tax Credit ("NMTC"(“NMTC”) program for funding ourits TERRA project.
We haveGCI has entered into five separateseveral arrangements under the NMTC program with US Bancorp to help fund various phases of ourits TERRA project. In connection with the NMTC transactions weGCI received proceeds which were restricted for use on TERRA. The NMTCs are subject to 100% recapture of the tax credit for a period of seven years as provided in the Internal Revenue Code. We are required to be in compliance with various regulations and contractual provisions that apply to the NMTC arrangements. We have agreed to indemnify US Bancorp for any loss or recapture of its $65.8$35.1 million in NMTCs plus interest and penalties until such time as our obligation to deliver tax benefits is relieved. Our obligation to deliver tax benefits is relieved in various stages from August 2018October 2019 through December 2024. Non-compliance with applicable requirements could result in projected tax benefits not being realized by US Bancorp and could have an adverse effect on our financial position, results of operations or liquidity.
Failure to stay abreast of new technology could affect ourGCI’s ability to compete in the industry.
We testGCI tests and deploydeploys various new technologies and support systems intended to enhance ourits competitiveness and increase the utility of ourits services. As ourGCI’s operations grow in size and scope, weit must continuously improve and upgrade ourits systems and infrastructure while maintaining or improving the reliability and integrity of ourits systems and infrastructure. The emergence of alternative platforms such as mobile or tablet computing devices and the emergence of niche competitors who may be able to optimize products, services or strategies for such platforms will require new investment in technology. WeGCI may not successfully complete the rollout of new technology and related features or services in a timely manner, and they may not be widely accepted by ourGCI’s customers or may not be profitable, in which case weGCI could not recover ourits investment in the technology. There can be no assurance that weGCI will be able to compete with advancing technology or introduce new technologies and systems as quickly as weit would like or in a cost effective manner. Deployment of technology supporting new service offerings may also adversely affect the performance or reliability of ourits networks with respect to both the new and existing services. Any resulting customer dissatisfaction could affect ourGCI’s ability to retain customers and may have an adverse effect on our financial position, results of operations, or liquidity. In addition to introducing new technologies
and offerings, weGCI must phase out outdated and unprofitable technologies and services. If we areGCI is unable to do so on a cost-effective basis, weGCI could experience reduced profits.
Our business isGCI’s operations are geographically concentrated in Alaska and isare impacted by the economic conditions in Alaska.
We offerGCI offers products and services to customers primarily throughout Alaska. Because of this geographic concentration, growth of ourGCI’s business and operations depends upon economic conditions in Alaska. The economy of Alaska is dependent upon the oil industry, state government spending, United States military spending, investment earnings and tourism. Prolonged periods of low oil prices will adversely impactimpacts the Alaska economy, which in turn could have an adverse impact on the demand for ourGCI’s products and services and on our results of operations and financial condition. OilLow oil prices have continued to remain low which has put significant pressure on the Alaska state government budget since the majority of its revenuesrevenue come from the oil industry. While the Alaska state government has significant reserves that we believe willcould help fund the state government, for the next couple of years, major structural budgetary reforms will need to be implemented in order to offset the impact of lower oil prices.
The Alaska economy is in a recession that started in late 2015. While it is difficult for us to predict the future impact of the continuing recession on ourGCI’s business, these conditions have had an adverse impact on ourGCI’s business and could continue to adversely affect the affordability of and demand for some of ourits products and services and cause customers to shift to lower priced products and services or to delay or forgo purchases of ourits products and services. Additionally, ourits customers may not be able to obtain adequate access to credit, which could affect their ability to make timely payments to us.GCI. If that were to occur, we could be required to increase our allowance for doubtful accounts, and the number of days outstanding for our accounts receivable could increase. If the recession continues, it could continue to negatively affect ourGCI’s business including our financial position, results of operations, or liquidity, as well as our ability to service debt and pay other obligations and enhance shareholder returns.obligations.
The customer base in Alaska is limited and we haveGCI has already achieved significant market penetration with respect to our its
service offerings in Anchorage and other locations in Alaska. WeGCI may not be able to continue to increase ourits share of the existing markets for ourits services, and no assurance can be given that the Alaskan economy will grow and increase the size of the markets we serveGCI serves or increase the demand for the services we offer.it offers. The markets in Alaska for wireless and wireline telecommunications and video services are unique and distinct within the United States due to Alaska’s large geographical size, its sparse population located in a limited number of clusters, and its distance from the rest of the United States. The expertise we haveGCI has developed in operating ourits businesses in Alaska may not provide usGCI with the necessary expertise to successfully enter other geographic markets.
Natural or man-made disasters or terrorist attacks could have an adverse effect on ourGCI’s business.
OurGCI’s technical infrastructure (including our communications network infrastructure and ancillary functions supporting ourits network such as service activation, billing and customer care) is vulnerable to damage or interruption from technology failures, power surges or outages, natural disasters, fires, human error, terrorism, intentional wrongdoing or similar events. As a communications provider, there is an increased risk that ourGCI’s technological infrastructure may be targeted in connection with terrorism or cyberattacks, either as a primary target, or as a means of facilitating additional attacks on other targets.
In addition, earthquakes, floods, fires and other unforeseen natural disasters or events could materially disrupt ourGCI’s business operations or ourits provision of service in one or more markets. Specifically, the majority of GCI’s facilities are located in areas with known significant seismic activity. Costs we incurGCI incurs to restore, repair or replace ourits network or technical infrastructure, as well as costs associated with detecting, monitoring or reducing the incidence of unauthorized use, may be substantial and increase ourGCI’s cost of providing service. AnyMany of the areas in which GCI operates have limited emergency response services and may be difficult to reach in an emergency situation. Should a natural disaster or other event occur, it could be weeks or longer before remediation efforts could be implemented, if they could be implemented at all. Further, any failure in or interruption of systems that weGCI or third parties maintain to support ancillary functions, such as billing, point of sale, inventory management, customer care and financial reporting, could materially impact ourGCI’s ability to timely and accurately record, process and report information important to our business. If any of the above events were to occur, weGCI could experience higher churn, reduced revenuesrevenue and increased costs, any of which could harm ourits reputation and have a material adverse effect on our business, financial condition or results of operations.
Additionally, our insurance may not be adequate to cover the costs associated with a natural disaster or terrorist attack.
Cyberattacks or other network disruptions could have an adverse effect on ourGCI’s business.
Cyberattacks against ourGCI’s technological infrastructure or breaches of network information technology may cause equipment failures, disruption of ourits operations, and potentially unauthorized access to confidential customer data. Cyberattacks, which include the use of malware, computer viruses, and other means for service disruption or unauthorized access to confidential customer data, have increased in frequency, scope, and potential harm for businesses in recent years. It is possible for such cyberattacks to go undetected for an extended period of time, increasing the potential harm to ourGCI’s customers, our assets, and our reputation.
To date, we haveGCI has not been subject to cyberattacks or network disruptions that, individually or in the aggregate, have been material to ourGCI’s operations or financial condition. Nevertheless, we engageGCI engages in a variety of preventive measures at an increased cost to us,GCI, in order to reduce the risk of cyberattacks and safeguard ourits infrastructure and confidential customer information. Such measures include, but are not limited to the following industry best practices: application whitelisting, anti-malware, message and spam filtering, encryption, advanced firewalls, threat detection, and URL filtering. Despite these preventive and detective actions, ourGCI’s efforts may be insufficient to repel a major cyberattack or network disruption in the future.
Some of the most significant risks to ourGCI’s information technology systems, networks, and infrastructure include:
Cyberattacks that disrupt, damage, and gain unauthorized access to ourGCI’s network and computer systems including data breaches caused by criminal or terrorist activities;
Undesired human actions including intentional or accidental errors;
Malware (including viruses, worms, cryptoware, and Trojan horses), software defects, unsolicited mass advertising, denial of service, ransomware, and other malicious or abusive attacks by third parties; and
Unauthorized access to ourGCI’s information technology, billing, customer care, and provisioning systems and networks and those of ourits vendors and other providers.
If hackers or cyberthieves gain improper access to ourGCI’s technology systems, networks, or infrastructure, they may be able to access, steal, publish, delete, misappropriate, modify or otherwise disrupt access to confidential customer data. Moreover, additional harm to customers could be perpetrated by third parties who are given access to the confidential customer data. A network disruption (including one resulting from a cyberattack) could cause an interruption or degradation of service as well as permit access, theft, publishing, deletion, misappropriation, or modification to or of confidential customer data. Due to the evolving techniques used in cyberattacks to disrupt or gain unauthorized access to technology networks, weGCI may not be able to anticipate or prevent such disruption or unauthorized access.
The costs imposed on us as a result of a cyberattack or network disruption could be significant. Among others, such costs could include increased expenditures on cyber security measures, litigation, fines, and sanctions, lost revenuesrevenue from business interruption, and damage to the public’s perception regarding our ability to provide a secure service. As a result, a cyberattack or network disruption could have a material adverse effect on our business, financial condition, and operating results.
Increases in data usage on ourGCI’s wired and wireless networks may cause network capacity limitations, resulting in service disruptions, reduced capacity or slower transmission speeds for ourGCI’s customers.
Video streaming services and peer-to-peer file sharing applications use significantly more bandwidth than traditional Internet activity such as web browsing and email. As use of these services continues to grow, ourGCI’s customers will likely use more bandwidth than in the past. Additionally, new wireless handsets and devices may place a higher demand for data on ourGCI’s wireless network. If this occurs, weGCI could be required to make significant capital expenditures to increase network capacity in order to avoid service disruptions, service degradation or slower transmission speeds for ourits customers. Alternatively, weGCI could choose to implement network management practices to reduce the network capacity available to bandwidth-intensive activities during certain times in market areas experiencing congestion, which could negatively affect ourits ability to retain and attract customers in affected areas. While we believe demand for these services may drive customers to pay for faster speeds, competitive or regulatory constraints may preclude usGCI from recovering the costs of the necessary network investments which could result in an adverse impact to our business, financial condition, and operating results.
Prolonged service interruptions or system failures could affect ourGCI’s business.
We relyGCI relies heavily on ourits network equipment, communications providers, data and software to support all of ourits functions. We relyGCI relies on ourits networks and the networks of others for substantially all of our revenues. We areits revenue. GCI is able to deliver services and serve ourits customers only to the extent that weit can protect ourits network systems against damage from power or communication failures, computer viruses, natural disasters, unauthorized access and other disruptions. While we endeavorGCI endeavors to provide for failures in the network by providing back-up systems and procedures, weGCI cannot guarantee that these back-up systems and procedures will operate satisfactorily in an emergency. Disruption to ourits billing systems due to a failure of existing hardware and backup protocols could have an adverse effect on our revenue and cash flow. Should weGCI experience a prolonged failure, it could seriously jeopardize ourits ability to continue operations. In particular, should a significant service interruption occur, ourGCI’s ongoing customers may choose a different provider, and ourits reputation may be damaged, reducing ourits attractiveness to new customers.
If failures occur in ourGCI’s undersea fiber optic cable systems or ourGCI’s TERRA facilities and its extensions, ourGCI’s ability to immediately restore the entirety of ourGCI’s service may be limited and we could incur significant costs.
OurGCI’s communications facilities include undersea fiber optic cable systems that carry a large portion of ourits traffic to and from the contiguous lower 48 states, one of which provides an alternative geographically diverse backup communication facility to the other. OurGCI’s facilities also include TERRA and its extensions some of which are unringed, operating in a remote environment and are at times difficult to access for repairs. Damage to an undersea fiber optic cable system or TERRA and its extensions could result in significant unplanned expense. If a failure of both sides of the ring of ourGCI’s undersea fiber optic facilities or ourGCI’s ringed TERRA facility and its unringed extensions occurs and we areGCI is not able to secure alternative facilities, some of the communications services we offerGCI offers to ourits customers could be interrupted, which could have a material adverse effect on our business, financial position, results of operations or liquidity.
If a failure occurs in ourGCI’s satellite communications systems, ourGCI’s ability to immediately restore the entirety of ourits service may be limited.
OurGCI’s communications facilities include satellite transponders that we useGCI uses to serve many rural and remote Alaska
locations. Each of ourGCI’s C-band and Ku-band satellite transponders isare backed up using on-board transponder redundancy. In the event of a complete spacecraft failure the services are restored using capacity on other spacecraft that are held in reserve. If a failure of ourGCI’s satellite transponders occurs and we areGCI is not able to secure alternative facilities, some of the communications services we offerGCI offers to ourits customers could be interrupted which could have a material adverse effect on our business, financial position, results of operations or liquidity.
We dependGCI depends on a limited number of third-party vendors to supply communications equipment. If we doGCI does not obtain the necessary communications equipment, weGCI will not be able to meet the needs of ourits customers.
We dependGCI depends on a limited number of third-party vendors to supply wireless, Internet, video and other telephony-related equipment. If ourGCI’s providers of this equipment are unable to timely supply the equipment necessary to meet ourGCI’s needs or provide them at an acceptable cost, weGCI may not be able to satisfy demand for ourits services and competitors may fulfill this demand. Due to the unique characteristics of the Alaska communications markets (i.e., remote locations, rural, satellite-served, low density populations, and our leading edge services and products), in many situations we deployGCI deploys and utilizeutilizes specialized, advanced technology and equipment that may not have a large market or demand. OurGCI’s vendors may not succeed in developing sufficient market penetration to sustain continuing production and may fail. Vendor bankruptcy, or acquisition without continuing product support by the acquiring company, may require usGCI to replace technology before its otherwise useful end of life due to lack of on-going vendor support and product development.
The suppliers and vendors on which we relyGCI relies may also be subject to litigation with respect to technology on which we depend,GCI depends, including litigation involving claims of patent infringement. Such claims have been growing rapidly in the communications industry. We are unable to predict whether ourGCI’s business will be affected by any such litigation. We expect ourGCI’s dependence on key suppliers to continue as they develop and introduce more advanced generations of technology. The failure of ourGCI’s key suppliers to provide products or product support could have a material adverse effect on our business, financial position, and results of operations.
We doGCI does not have insurance to cover certain risks to which we areit is subject, which could lead to the occurrence of uninsured liabilities.
As is typical in the communications industry, we areGCI is self-insured for damage or loss to certain of ourits transmission facilities, including ourits buried, undersea and above-ground fiber optic cable systems. If we becomeGCI becomes subject to substantial uninsured liabilities due to damage or loss to such facilities, our financial position, results of operations or liquidity may be adversely affected.
We are inGCI recently completed the process of transferring ourits customer billing systems to a new third-party vendor. Any unanticipated difficulties, disruption or significant delays could have adverse operational, financial and reputational effects on our business.
We are currently implementingGCI recently implemented a new customer billing system, which involvesinvolved moving to a new third-party billing services vendor and platform in 2018. TheBecause the implementation was effected recently, the implementation may cause unforeseen major system or business disruptions or we may fail to implement the new billing system in a timely or effective manner.disruptions. In addition, the third-party billing services vendor may experience errors, cyber-attacks or other operational disruptions that could negatively impact usGCI and over which weGCI may have limited control. Interruptions and/or failure of this new billing services system could disrupt ourGCI’s operations and impact ourits ability to provide or bill for ourits services, retain customers, or attract new customers, and negatively impact overall customer experience. Any occurrence of the foregoing could cause material adverse effects on our operations and financial condition, material weaknesses in our internal control over financial reporting and reputational damage.
Concerns about health/safety risks associated with wireless equipment may reduce the demand for GCI’s wireless services.
GCI does not manufacture devices or other equipment it sells, and GCI depends on its suppliers to provide defect-free and safe equipment. Suppliers are required by applicable law to manufacture their devices to meet certain governmentally imposed safety criteria. However, even if the devices GCI sells meet the regulatory safety criteria, GCI could be held liable with the equipment manufacturers and suppliers for any harm caused by products GCI sells if such products are later found to have design or manufacturing defects. We cannot guarantee that GCI will be fully protected against all losses associated with a product that is found to be defective.
Portable communications devices have been alleged to pose health risks, including cancer, due to radio frequency emissions from these devices. Purported class actions and other lawsuits have been filed from time to time against other
wireless companies seeking not only damages but also remedies that could increase the cost of doing business. GCI cannot be sure of the outcome of any such cases or that the industry will not be adversely affected by litigation of this nature or public perception about health risks. The actual or perceived risk of mobile communications devices could adversely affect GCI through a reduction in subscribers. Further research and studies are ongoing, with no linkage between health risks and mobile phone use established to date by a credible public source. However, we cannot be sure that additional studies will not demonstrate a link between radio frequency emissions and health concerns.
Additionally, there are safety risks associated with the use of wireless devices while operating vehicles or equipment. Concerns over any of these risks and the effect of any legislation, rules or regulations that have been and may be adopted in response to these risks could limit GCI’s ability to sell its wireless services.
Risk Related to Our Company as a Whole
We are a holding company with a substantial portion of our debt and other obligations held outside of our operating subsidiaries, and our ability to service that debt and such other obligations will require access to funds of our operating subsidiaries, which may be restricted.
In connection with the Transactions, our Company incurred substantial indebtedness, in addition to the indebtedness that GCI, LLC had outstanding prior to the completion of the Transactions, of $1.0 billion in term loan borrowings pursuant to the margin loan facility entered into by Broadband Holdco LLC (“Broadband HoldCo”), which margin loan facility includes the ability to request additional term loan facilities or increase the amount of the initial loan in an aggregate principal amount of up to $300 million (the “Margin Loan”). Subsequently, in October 2018, Broadband Holdco entered into Amendment No. 1 (the “Amendment”) to the Margin Loan (the “Margin Loan Agreement”). The Amendment established a revolving credit facility in an aggregate principal amount of up to $200 million (the “Revolving Credit Facility”) and reduced the existing term loan credit facility under the Margin Loan Agreement to $800 million (the “Term Loan Facility” and, together with Revolving Credit Facility, the “Margin Loan Facility”). The Margin Loan Facility is secured by a pledge of approximately 42.7 million shares of Series C common stock of Liberty Broadband, which constitutes all of the assets of Broadband Holdco. We expect that the GCI Holdings operating subsidiaries will generate substantially all of the cash flow of our consolidated company. As of December 31, 2018, the indebtedness of GCI, LLC consists of $900.0 million in borrowings under the Margin Loan Facility, $775.0 million in outstanding 6.75% senior notes due 2021 and the 6.875% senior notes due 2025 (together, the “Senior Notes”) and $715.1 million in outstanding term and revolving loans under a senior secured credit facility with a syndicate of banks (the “Senior Credit Facility”).
The ability of GCI, LLC, and Broadband Holdco to service their respective financial obligations will depend on their ability to access cash. The ability of GCI, LLC to access the cash of GCI's legacy operating subsidiaries will depend on those subsidiaries individual operating results and any statutory or regulatory restrictions. Additionally, as of December 31, 2018, GCI, LLC exceeded the maximum leverage threshold, as measured by the terms of the Senior Notes, and therefore does not have access to any additional funding under the revolving portion of the Senior Credit Facility. GCI, LLC's other potential sources of cash include its available cash balances, dividends and interest from its investments, monetization of the public investment portfolio contributed in the Transactions, and proceeds from asset sales. There can be no assurance that we will continue to maintain the amounts of cash or marketable securities that we have.
Our significant debt and lease obligations could adversely affect our business.
We have and will continue to have a significant amount of debt and lease obligations including capital, operating, and the tower obligationobligations (see Note 2 includednote 14 of the Company's consolidated financial statements found in "PartPart II - Item 8 - Consolidated Financial Statements and Supplementary Data"of this report for additional information). Our high level of debt and lease obligations could have important consequences, including the following:
Increasing our vulnerability to adverse economic, industry, or competitive developments;
Requiring a substantial portion of our cash flows from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use our cash flows to fund operations, capital expenditures, and future business opportunities;
Exposing us to the risk of increased interest rates to the extent of any future borrowings at variable rates of interest;
Making it more difficult for us to satisfy our obligations with respect to our indebtedness;
Restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;
Limiting our ability to obtain additional financing for working capital, capital expenditures, product and service development, debt service requirements, acquisitions, and general corporate or other purposes; and
Limiting our flexibility in planning for, or reacting to, changes in our business or market conditions and placing us at a competitive disadvantage compared to our competitors who are less highly leveraged and who, therefore, may be able to take advantage of opportunities that our leverage may prevent us from exploiting.
We will require a significant amount of cash to service our debt and to meet other obligations. Our ability to generate cash depends on many factors beyond our control. If we are unable to meet our future capital needs it may be necessary for us to curtail, delay or abandon our business growth plans. If we incur significant additional indebtedness to fund our plans, it could cause a decline in our credit rating and could increase our borrowing costs or limit our ability to raise additional capital.
We will continue to require a significant amount of cash to satisfy our debt service requirements and to meet other obligations. As of December 31, 2018, we have outstanding approximately $2.4 billion of indebtedness. Our ability to make payments on and to refinance our debt and to fund planned capital expenditures and acquisitions will depend on our ability to generate cash and to arrange additional financing in the future. These abilities are subject to, among other factors, our credit rating, our financial performance, general economic conditions, prevailing market conditions, the state of competition in our market, the outcome of certain legislative and regulatory issues and other factors that may be beyond our control. Our business may not generate sufficient
cash flow from operations and future borrowings may not be available to us in an amount sufficient to enable us to pay our debt or to fund our other liquidity needs. We may need to refinance all or a portion of our debt on or before maturity. We may not be able to refinance any of our debt on commercially reasonable terms or at all.
The terms of our debt obligations impose restrictions on us that may affect our ability to successfully operate our business and our ability to make payments on the debt obligations.
The indentures governing our Senior Notes and/or the credit agreements governing our Senior Credit Facility and other loans contain various covenants that could materially and adversely affect our ability to finance our future operations or capital needs and to engage in other business activities that may be in our best interest. For example, as of December 31, 2018, GCI, LLC exceeded the maximum leverage threshold, as measured by the terms of the Senior Notes, and therefore does not have access to any additional funding under the revolving portion of the Senior Credit Facility.
All ofThis restriction, along with these other covenants, may restrict our ability to expand or to pursue our business strategies. Our ability to comply with these covenants may be affected by events beyond our control, such as prevailing economic conditions and changes in regulations, and if such events occur, we cannot be sure that we will be able to comply. A breach of these covenants could result in a default under the indentures and/or the credit agreements. If there were an event of default under the indentures and/or the credit agreements, holders of such defaulted debt could cause all amounts borrowed under these instruments to be due and payable immediately. Additionally, if we fail to repay the debt under the Senior Credit Facility when it becomes due, the lenders under the Senior Credit Facility could proceed against certain of our assets and capital stock of our subsidiaries that we have pledged to them as security. Our assets or cash flow may not be sufficient to repay borrowings under our outstanding debt instruments in the event of a default thereunder.
When our Senior Credit Facility and Senior Notes mature, we may not be able to refinance or replace one or both.
When our Senior Credit Facility and Senior Notes mature, we will likely need to refinance them and may not be able to do so on favorable terms or at all. In addition, if the 6.75% senior notes due 2021 are not refinanced prior to December 3, 2020, the full principal revolving credit facility included in the Senior Credit Facility will mature on that date. If we are able to refinance maturing indebtedness, the terms of any refinancing or alternate credit arrangements may contain terms and covenants that restrict our financial and operating flexibility.
Variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.
Our borrowings under our Senior Credit Facility are at variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on the variable rate indebtedness could increase even though the amount borrowed remained the same, and our net income and cash flow could decrease.
In order to manage our exposure to interest rate risk, in the future, we may enter into derivative financial instruments, typically interest rate swaps and caps, involving the exchange of floating for fixed rate interest payments. If we are unable to enter into interest rate swaps, it may adversely affect our cash flow and may impact our ability to make required principal and interest payments on our indebtedness.
Any significant impairment of our indefinite-lived intangible assets would lead to a decrease in our assets and a reduction in our net operating performance.performance and a decrease in our assets.
We had $530.8 million$1.4 billion of indefinite-lived intangible assets at December 31, 2017,2018, consisting of goodwill of $242.3$844.2 million, cable certificates of $191.6$305.0 million, wireless licenses of $93.8$190.0 million and broadcast licensesother intangibles of $3.1$16.5 million. However, these valuations are not final and the acquisition price allocation is preliminary and subject to revision. Goodwill represents the excess of cost over fair value of net assets acquired in connection with business acquisitions.acquisitions and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition. Our cable certificates represent agreements with government entities to construct and operate a video business. Our wireless licenses are from the FCC and give us the right to provide wireless service within a certain geographical area. Our broadcast licenses represent permission to use a portion of the radio frequency spectrum in a given geographical area for broadcasting purposes.
If we make changes in our business strategy or if market or other conditions adversely affect our operations, we may be forced to record an impairment charge, which would lead to a decrease in our assets and a reduction in our net operating performance. Our indefinite-lived intangible assets are tested annually for impairment during the fourth quarter and at any time upon the occurrence of certain events or substantive changes in circumstances that indicate the assets might be impaired. If the testing performed indicates that impairment has occurred, we are required to record an impairment charge for the difference between the carrying value and the fair value of the
goodwill and/or the indefinite-lived intangible assets, as appropriate, in the period in which the determination is made. The testing of goodwill and indefinite-lived intangible assets for impairment requires us to make significant estimates about our future performance and cash flows, as well as other assumptions. These estimates can be affected by numerous factors, including changes in economic, industry or market conditions, changes in underlying business operations, future operating performance, changes in competition, or changes in technologies. Any changes to key assumptions, or actual performance compared with those assumptions, about our business and its future prospects or other assumptions could affect the fair value, resulting in an impairment charge.
Due to certain market factors impacting GCI Holdings' operating results, impairment losses of $147 million and $65 million were recorded during the year ended December 31, 2018 related to goodwill and cable certificates, respectively, related to the GCI Holdings reporting unit. The fair value of the cable certificates and the GCI Holdings reporting unit was determined using an income approach (Level 3). As of December 31, 2018, accumulated goodwill impairment losses for GCI Holdings totaled $147 million.
Our ability to use net operating loss carryforwards to reduce future tax payments could be negatively impacted if there is an “ownership change” as defined under Section 382 of the Internal Revenue Code.
GCI, Inc. asLLC is a wholly owned subsidiary and member of the GCI Liberty controlled group of corporations, and it files its income tax
returns as part of the consolidated group of corporations under GCI.GCI Liberty. Accordingly, all discussions regarding income
taxes reflect the consolidated group's activity. At December 31, 2017,2018, we have taxhad federal and state net operating losslosses and interest expense carryforwards of $361.9$150.0 million for U.S. federal income(on a tax purposeseffected basis) and, under the Internal Revenue Code, we may carry forward these net operating losses in certain circumstances to offset any current and future taxable income and thus reduce our federal income tax liability, subject to certain requirements and restrictions. If GCI Liberty experiences an “ownership change,” as defined in Section 382 of the Internal Revenue Code and related Treasury regulations at a time when its market capitalization is below a certain level, our ability to use the net operating loss carryforwards could be substantially limited. This limit could impact the timing of the usage of the net operating loss carryforwards, thus accelerating cash tax payments or causing net operating loss carryforwards to expire prior to their use, which could affect the ultimate realization of that deferred tax asset.
Concerns about health/safety risks associated with wireless equipment may reduceWe have identified two material weaknesses in GCI Holdings’ internal control over financial reporting, that, if not properly remediated, could adversely affect our business and results of operations.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the demandCompany’s annual or interim consolidated financial statements will not be prevented or detected on a timely basis. As described in “Item 9A. Controls and Procedures,” we have concluded that our internal control over financial reporting was ineffective as of December 31, 2018 due to the two material weaknesses at our wholly-owned subsidiary, GCI Holdings. The material weaknesses, at December 31, 2018, were identified at GCI Holdings, a wholly owned subsidiary, as discussed below.
Information technology general controls (“ITGCs”) around financially significant information technology systems were not effective. Specifically, the ITGCs around system access were not operating consistently to ensure that access to applications and data was adequately restricted to appropriate personnel. Because of the deficiency in ITGCs for our wireless services.
these systems, the business process controls (automated and manual) that are dependent on these systems were also deemed ineffective because they could have been adversely impacted. We believe that these control deficiencies were a result of an inadequate assessment of IT risks, which in turn contributed to inappropriate reliance on manual business process controls rather than ITGCs.
Internal controls around the payroll processes were ineffective due to an aggregation of deficiencies relating to the IT deficiencies described above, ineffectively designed controls over payroll changes, and ineffective review and monitoring controls. We believe that these control deficiencies were a result of an inadequate assessment of risk related to outsourcing payroll processing to a third-party provider, which contributed to the ineffective design of controls intended to validate that manual changes to payroll inputs were appropriate.
The control deficiencies did not result in any identified misstatements.
As further described in “Item 9A. Controls and Procedures,” we and GCI Holdings have taken the necessary steps to remediate the material weakness, subsequent to the assessment date. However, as the reliability of the internal control process requires repeatable execution, the successful on-going remediation of these material weaknesses will require on-going training, monitoring and evidence of effectiveness prior to concluding that the controls are effective. Therefore, we cannot assure you that the remediation efforts will remain effective in the future or that additional or similar material weaknesses will not develop or be identified.
Implementing any further changes to GCI Holdings’ internal controls may distract its officers and employees and entail material costs to implement new processes and/or modify its existing processes. Moreover, these changes do not manufacture devices or other equipment sold by us, and we depend on our suppliers to provide defect-free and safe equipment. Suppliers are required by applicable law to manufacture their devices to meet certain governmentally imposed safety criteria. However, even if the devices we sell meet the regulatory safety criteria, we could be held liable with the equipment manufacturers and suppliers for any harm caused by products we sell if such products are later found to have design or manufacturing defects. We cannot guarantee that we will be fully protected against all losses associated witheffective in maintaining the adequacy of GCI Holdings’ internal controls, and any failure to maintain that adequacy, or consequent inability to produce accurate financial statements on a product that is found to be defective.timely basis, could harm our business.
Portable communications devicesWe have been alleged to pose health risks, including cancer, due to radio frequency emissions from these devices. Purported class actionsnot voluntarily implemented various corporate governance measures, in the absence of which you may have more limited protections against interested transactions, conflicts of interest and other lawsuits have been filed from time to time against other wireless companies seeking not only damages but also remedies that could increase the cost of doing business. We cannot be sure of the outcome of any such cases or that the industry will not be adversely affected by litigation of this nature or public perception about health risks. The actual or perceived risk of mobile communications devices could adversely affect us through a reduction in subscribers. Further research and studies are ongoing, with no linkage between health risks and mobile phone use established to date by a credible public source. However, we cannot be sure that additional studies will not demonstrate a link between radio frequency emissions and health concerns.similar matters.
Additionally, there are safety risks associated withFederal legislation, including the useSarbanes-Oxley Act of wireless devices while operating vehicles or equipment. Concerns over any2002, encourages the adoption of various corporate governance measures designed to promote the integrity of corporate management and the securities markets. Some of these risks and the effect of any legislation, rules or regulations thatmeasures have been and may be adopted in response to legal requirements. Others have been adopted by companies in response to the requirements of national securities exchanges on which their securities are listed. Among the corporate governance measures that are required under the rules of national securities exchanges are those that address board of directors' independence and audit committee oversight.
We are a limited liability company under Delaware law and our sole member, GCI Liberty, rather than a board of directors, manages our business. Meaning that we do not have any independent governing body. In addition, we have not adopted corporate governance measures such as the implementation of an audit committee or other independent governing body. It is possible that if we were to appoint a board of directors and include one or more independent directors and adopt some or all of these risks could limitcorporate governance measures, there may be somewhat greater assurances that internal corporate decisions were being made by disinterested directors and that policies had been implemented to define responsible conduct. However, our sole member has the ability to sellmake decisions regarding transactions with related parties and corporate actions that could involve conflicts of interest. In addition, our wireless services.Chief Executive Officer and President, Gregory B. Maffei, is the Chief Executive Officer and President and a director of GCI Liberty. Investors should bear in mind our current lack of independent directors, the positions with GCI Liberty that are held by Mr. Maffei and corporate governance measures in formulating their investment decisions.
A significant percentageThe interests of GCI's voting securities are owned by a small number of shareholdersGCI Liberty may not coincide with your interests and these shareholders can control shareholderGCI Liberty may make decisions on very important matters.with which you may disagree.
Our sole member is GCI Liberty. As a limited liability company under Delaware law that is managed by our member, rather than a board of December 31, 2017, GCI's executive officers and directors, and their affiliates owned 15%GCI Liberty controls certain aspects of its combined outstanding common stock, representing 25% of the combined voting power of that stock. These shareholders can significantly influence, if not control, our management, policyincluding the approval of significant transactions such as a change of control. The interests of GCI Liberty may not coincide with our interests or your interests. For example, GCI Liberty's dependence on our cash flow for servicing GCI Liberty's debt and all fundamental corporate actions,for other purposes, including mergers, substantialpayments of dividends on GCI Liberty's capital stock, stock repurchases or to fund acquisitions or other operational requirements of GCI Liberty and dispositions,its subsidiaries is likely to result in our payment of large dividends to GCI Liberty when permitted by law or the terms of our Senior Credit Facility and election of directorsthe indentures governing our outstanding Senior Notes, which may increase our accumulated deficit or require us to GCI's Board.borrow under our Senior Credit Facility, increasing our leverage and decreasing our liquidity.
We expect to incur significant costs and expenses in connection with the Transactions.
We expect to incur certain nonrecurring costs in connection with the consummation of the Transactions contemplated by the Reorganization Agreement, including advisory, legal and other transaction costs. A majority of these costs have already been incurred or will be incurred regardless of whether the Transactions are completed. While many of the expenses that will be incurred, by their nature, are difficult to estimate accurately at the present time, we continue to assess the magnitude of these costs, and additional unanticipated costs may be incurred in connection with the Transactions. Although we expect that the realization of benefits related to the Transactions will offset such costs and expenses over time, no assurances can be made that this net benefit will be achieved in the near term, or at all.
Additionally, the inputs that impact the estimate of value of our derivative stock appreciation rights have been impacted and may continue to be impacted by the Transactions with Liberty which could adversely affect our financial position or results of operations.
The announcement and pendency of the Transactions could divert the attention of management and cause disruptions in our business, which could have an adverse effect on our business and financial results.
Liberty and GCI are unaffiliated companies that are currently operated independently of each other. Our management may be required to divert a disproportionate amount of attention away from their respective day-to-day activities and operations, and devote time and effort to consummating the Transactions. The risks, and adverse effects, of such disruptions and diversions could be exacerbated by a delay in the completion of the Transactions. These factors could adversely affect our financial position or results of operations, regardless of whether the Transactions are completed.
We are subject to contractual restrictions while the Transactions are pending, which could adversely affect our business.
The Reorganization Agreement imposes certain restrictive interim covenants on us. For instance, the consent of Liberty is required in respect of, among other things, amendments to our organizational documents, repurchases of GCI common stock on GCI's behalf, certain actions relating to material contracts, certain employee benefit changes, limitations on capital expenditures and limitations on dispositions, and payments of dividends on GCI's behalf. These restrictions may prevent us from taking certain actions before the closing of the Transactions or the termination of the Reorganization Agreement, including making certain acquisitions or otherwise pursuing certain business opportunities that GCI's board of directors may deem beneficial.
Failure to complete the Transactions could negatively impact our future business and financial results.
If the Transactions are not completed for any reason, we may be subject to numerous risks, including the following:
We may experience negative reactions from the financial markets, customers, regulators, and employees;
We may be required to pay Liberty a termination fee in connection with the termination of the Reorganization Agreement under certain circumstances;
We may experience reputational harm due to the adverse perception of any failure to successfully complete the Transactions; and
We may experience harm to our business due to the following: (i) operating under the restrictions on the conduct of our business set forth in the Reorganization Agreement, (ii) having our management divert attention away from their respective day-to-day activities and operations and devoting time and effort to consummating the Transactions and (iii) incurring significant costs, including advisory, legal and other transaction costs, each as explained above, without realizing any of the benefits of having completed the Transactions.
In addition, we could be subject to the cost of litigation related to any dispute regarding an alleged failure of a closing condition or any related enforcement proceeding commenced against us to perform our obligations under the Reorganization Agreement or any of the other transaction documents, as well as any judgment potentially sustained against us in any such action. All of these risks, expenses and contingencies could adversely affect our financial position and results of operation.
Item 1B. Unresolved Staff Comments.
Not applicable.
None.
Item 2. Properties
Our
GCI, LLC
In connection with the Transactions, a wholly-owned subsidiary of Liberty Media entered into a facilities sharing agreement with GCI Liberty, pursuant to which GCI Liberty and the Company shares office facilities with Liberty Media located at 12300 Liberty Boulevard, Englewood, Colorado 80112.
GCI Holdings
GCI Holdings' properties do not lend themselves to description by location of principal units. The majority of ourGCI Holdings' properties are located in Alaska.
We leaseGCI Holdings leases most of ourits executive, corporate and administrative facilities and business offices. OurGCI Holdings' operating, executive, corporate and administrative properties are in good condition. We consider ourGCI Holdings considers its properties suitable and adequate for ourits present needs and they are being fully utilized.
OurGCI Holdings' properties consist primarily of undersea and terrestrial fiber optic cable networks, switching equipment, satellite transponders and earth stations, microwave radio, cable and wire facilities, cable head-end equipment, wireless towers and equipment, coaxial distribution networks, connecting lines (aerial, underground and buried cable), routers, servers, transportation equipment, computer equipment, general office equipment, land, land improvements, landing stations and other buildings. See Note 5 includednote 2 of the Company's consolidated financial statements found in “PartPart II — Item 8 — Consolidated Financial Statements and Supplementary Data”of this report for moreadditional information on ourits properties. Substantial amounts of ourGCI Holdings' properties are located on or in leased real property or facilities. Substantially all of ourGCI Holdings' properties secure ourthe Senior Credit Facility. See Note 7 includednote 9 of the Company's consolidated financial statements found in “PartPart II — Item 8 — Consolidated Financial Statements and Supplementary Data”of this report for moreadditional information on ourthe Senior Credit Facility.
Item 3. Legal Proceedings
We are
The Company is involved in various lawsuits, billing disputes, legal proceedings, and regulatory matters that have arisen from time to time in the normal course of business. Management believes there are no proceedings from asserted and unasserted claims which if determined adversely would have a material adverse effect on ourthe Company's financial position, results of operations or liquidity.
Item 4. Mine Safety Disclosures
Not Applicable.
Part
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market InformationThere is no established public trading market for Common Stock
All issued and outstanding sharesour equity securities. There is one holder of record of our equity, GCI Inc's Class A common stock are held by GCI and are not publicly traded. GCI's Class A-1 and Class B-1 common stock are publicly traded.Liberty, Inc.
Dividends
GCI and GCI, Inc. have never paid cash dividends on GCI's common stock, and we have no present intention of doing so. Payment of cash dividends in the future, if any, will be determined by GCI's Board of Directors in light of our earnings, financial condition and other relevant considerations. Our existing debt agreements contain provisions that limit payment of dividends on common stock, other than stock dividends (see Note 7 included in “Part II — Item 8 — Consolidated Financial Statements and Supplementary Data” for more information).
Stock Transfer Agent and Registrar
Computershare is GCI's stock transfer agent and registrar.
Item 6. Selected Financial Data
The following table presents selected historical information relating to financial condition and results
Omitted under the reduced disclosure format permitted by General Instruction I(2)(a) of operations over the past five years.
|
| | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| (Amounts in thousands) | | | | | | | | | |
| Revenues | $ | 919,204 |
| | 933,812 |
| | 978,534 |
| | 910,198 |
| | 811,648 |
|
| Income (loss) before income taxes | $ | (9,802 | ) | | 5,404 |
| | (9,951 | ) | | 69,273 |
| | 42,684 |
|
| Net income (loss) | $ | 31,315 |
| | (1,676 | ) | | (10,032 | ) | | 59,244 |
| | 31,727 |
|
| Net income (loss) attributable to non-controlling interest | $ | (476 | ) | | (469 | ) | | 159 |
| | 51,687 |
| | 22,321 |
|
| Net income (loss) attributable to GCI, Inc. common stockholder | $ | 31,791 |
| | (1,207 | ) | | (10,191 | ) | | 7,557 |
| | 9,406 |
|
| Total assets | $ | 2,093,500 |
| | 2,065,939 |
| | 1,966,940 |
| | 1,992,761 |
| | 1,961,536 |
|
| Long-term debt, including current portion and net of unamortized discount and deferred loan fees | $ | 1,323,317 |
| | 1,280,132 |
| | 1,277,928 |
| | 1,027,061 |
| | 1,037,462 |
|
| Obligations under capital leases, including current portion | $ | 50,316 |
| | 59,647 |
| | 68,359 |
| | 76,456 |
| | 74,605 |
|
| Tower obligation, excluding current portion | $ | 93,606 |
| | 87,653 |
| | — |
| | — |
| | — |
|
| Total GCI, Inc. stockholder's equity | $ | 147,247 |
| | 110,388 |
| | 179,097 |
| | 167,356 |
| | 157,144 |
|
| Dividends declared per common share | $ | — |
| | — |
| | — |
| | — |
| | — |
|
The Selected Financial Data should be read in conjunction with “Part II — Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations.”Form 10-K.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate our estimates and judgments, including those described in Note 1 in the "Notes to Consolidated Financial Statements" included in Part IV of of this annual report on Form 10-K. We base our estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. See also our “Cautionary Statement Regarding Forward-Looking Statements.”
GCI, Inc. was incorporated under the laws of the State of Alaska in 1997 to affect the issuance of Senior Notes. GCI, Inc., a wholly owned subsidiary of GCI, received through its initial capitalization all ownership interests in subsidiaries previously held by GCI. Shares of GCI’s Class A-1 common stock are traded on the Nasdaq National Market tier of the Nasdaq Stock Market under the symbol of GNCMA. Shares of GCI’s Class B-1 common stock are traded on the OTCQX market. Shares of GCI, Inc.’s common stock are wholly owned by GCI and are not publicly traded. The GCI and GCI, Inc. consolidated financial statements include substantially the same account activity.
Emerging Growth Company
We qualify as an “emerging growth company” under the Jumpstart Our Business Startups Act (the “JOBS
Act”) enacted on April 5, 2012. As a result, we are permitted to rely on exemptions from certain disclosure requirements that are applicable to companies that are not emerging growth companies.
In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we are choosing to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.
The following discussion and analysis of financial condition andprovides information concerning our results of operations and financial condition. This discussion should be read inconjunction with our accompanying consolidated financial statements and supplementary datathe notes thereto. Additionally, see note 2 in the accompanying consolidated financial statements for an overview of new accounting standards that the Company has adopted or that it plans to adopt that have had or may have an impact on its financial statements.
Overview
GCI, LLC is a wholly-owned subsidiary of GCI Liberty, Inc. On April 4, 2017, Liberty Interactive Corporation, now known as presentedQurate 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 GCI, LLC's parent company, General Communication, Inc. ("GCI"), an Alaska corporation, and Liberty Interactive LLC, a Delaware limited liability company and a direct wholly owned subsidiary of Qurate Retail ("LI LLC"). Pursuant to the reorganization agreement, GCI amended and restated its articles of incorporation (which resulted in Part IVGCI being renamed GCI Liberty, Inc. ("GCI Liberty")) and effected a reclassification and auto conversion of this Form 10-K.its common stock. Following these events, Qurate Retail acquired GCI Liberty on March 9, 2018 through a reorganization in which certain Qurate Retail interests, assets and liabilities attributed to its Ventures Group (following the reattribution by Qurate Retail of certain assets and liabilities from its Ventures Group to its QVC Group) were contributed to GCI Liberty in exchange for a controlling interest in GCI Liberty (the "contribution"). Qurate Retail and LI LLC contributed to GCI Liberty their entire equity interests in Liberty Broadband Corporation ("Liberty Broadband"), Charter Communications, Inc. ("Charter"), and LendingTree, Inc. ("LendingTree"), the Evite, Inc. ("Evite") operating business and other assets and liabilities (collectively, "HoldCo"), in exchange for (a) the issuance to LI LLC of a number of shares of GCI Liberty Class A common stock and a number of shares of GCI Liberty Class B common stock equal to the number of outstanding shares of Qurate Retail's Series A Liberty Ventures common stock and Qurate Retail's Series B Liberty Ventures common stock on March 9, 2018, respectively, (b) cash and (c) the assumption of certain liabilities by GCI Liberty.
The contribution was treated as a reverse acquisition under the acquisition method of accounting in accordance with generally accepted accounting principles in the United States ("GAAP"). For accounting purposes, HoldCo is considered to have acquired GCI, LLC's parent company, 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 ("IRS") 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 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"), an indirect wholly-owned subsidiary of GCI, LLC, non controlling interests in Liberty Broadband, Charter and LendingTree, a controlling interest in Evite, and certain other assets and liabilities as the "Company", "us", "we"and "our." Although HoldCo was reported as a combined company until the date of the HoldCo Split-Off, the accompanying financial statements and the following discussion present all periods as consolidated by the Company.
Customer Billing Systems
On August 4, 2018, GCI Holdings transferred its customer billing systems for business and consumer voice, data, video, and wireless services to a new third-party billing system to better meet its needs. The new billing system has many benefits including a single invoice for customers, meaningful efficiencies for processing transactions, and the ability to accelerate the introduction of new products and promotions.
Update on Economic Conditions
We offer
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 ourGCI 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 ourGCI Holdings' products and services and on ourits results of operations and financial condition.
OilLow oil prices have continued to remain low which has put significant pressure on the Alaska state government budget since the majority of its revenues have historically comerevenue comes from the oil industry. While the Alaska state government has significant reserves that we believeGCI 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 lowerlow oil prices.
The Alaska economy is in a recession that started in late 2015. While it is difficult for usGCI Holdings to predict the future impact of the continuing recession on ourits business, these conditions have had an adverse impact on ourits business and could continue to adversely affect the affordability of and demand for some of ourits products and services and cause customers to shift to lower priced products and services or to delay or forgo purchases of ourits products and services. Additionally, ourGCI Holdings' customers may not be able to obtain adequate access to credit, which could affect their ability to make timely payments to us.GCI Holdings. If that were to occur, weGCI Holdings could be required to increase ourits allowance for doubtful accounts, and the number of days outstanding for ourits accounts receivable could increase. If the recession continues, it could continue to negatively affect ourGCI Holdings' business including ourits financial position, results of operations, or liquidity, as well as ourits ability to service debt and pay other obligations and enhance shareholder returns. obligations.
General Overview
Through our focus on long-term results, acquisitions, and strategic capital investments, we strive to consistently grow our earnings before interest, taxes, depreciation, and amortization. We have historically met our cash needs for operations and regular and maintenance capital expenditures through our cash flows from operating activities. Historically, cash requirements for significant acquisitions and major capital expenditures have been provided largely through our financing activities.Rural Health Care (“RHC”) Program
Major Developments
On April 4, 2017, General Communication, Inc., Liberty and Liberty LLC, entered into an Agreement and Plan of Reorganization (as may be amendedGCI Holdings receives support from timevarious Universal Service Fund ("USF") programs including the RHC Program. The USF programs are subject to time,change by regulatory actions taken by the “Reorganization Agreement” and the transactions contemplated thereby, the “Transactions”Federal Communications Commission ("FCC"). Pursuant or legislative actions. The following paragraphs describe certain separate matters related to the Reorganization Agreement, General Communication, Inc. amended and restated its articles of incorporation resultingRHC Program that impact or could impact the revenue earned by the Company.
In November 2017, the Universal Service Administrative Company ("USAC") requested further information in General Communication, Inc. being renamed GCI Liberty, Inc. and a reclassification and auto conversion of its common stock. Following these events, Liberty will acquire GCI through a reorganization in which certain interests, assets and liabilitiessupport of the Liberty Ventures will be contributedrural rates charged to GCI Liberty in exchange for a controlling interest in GCI Liberty. The assets to be contributed to GCI Liberty are expected to include Liberty’s equity interests in Liberty Broadband and Charter Communications, Inc., along with certain other equity interests, together with the operating business of Evite, Inc. and certain other assets and liabilities, in exchange for (a) the issuance to Liberty LLC of (i) 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 Series A Liberty Ventures common stock and Series B Liberty Ventures common stock outstanding on the
closing date of the contribution, respectively, and (ii) cash, and (b) the assumption by GCI Liberty of certain liabilities attributed to Liberty Ventures.
Following the contribution and acquisition of GCI Liberty, Liberty will then effect a tax-free separation of its controlling interest in GCI Liberty to the holders of Liberty Ventures common stock in full redemption of all outstanding shares of such stock. As a result of the Transactions, holders of GCI common stock (regardless of class) each will receive (i) 0.63 of a share of GCI Liberty Class A common stock and (ii) 0.20 of a share of new GCI Liberty Series A Cumulative Redeemable preferred stock in exchange for each share of their existing GCI common stock. The exchange ratios were determined based on total consideration of $32.50 per share in respect of each share of existing GCI common stock, comprised of $27.50 per share in GCI Liberty Class A common stock and $5.00 per share in newly issued GCI Liberty Series A Cumulative Redeemable preferred stock, based upon a Liberty Ventures reference price of $43.65 (with no premium paid for shares of GCI Class B common stock) and an initial liquidation price of $25.00 per share of GCI Liberty Series A Cumulative Redeemable preferred stock. The GCI Liberty Series A Cumulative Redeemable preferred stock will accrue dividends at an initial rate of 5% per annum (which would increase to 7%Holdings' RHC customers in connection with the funding requests for the year that runs July 1, 2017 through June 30, 2018. On October 10, 2018, GCI Holdings received a future reincorporation of GCI Liberty in Delaware) and will be redeemable uponletter from the 21st anniversaryFCC's Wireline Competition Bureau (“Bureau”) notifying it of the closing.Bureau’s decision to reduce the rural rates charged to RHC customers for the funding year that ended on June 30, 2018 by approximately 26% resulting in a reduction of total support payments of $27.8 million. The closingFCC also informed GCI Holdings that the same cost methodology used for the funding year that ended on June 30, 2018 would be applied to rates charged to RHC customers in subsequent funding years. In response to the letter from the Bureau, GCI Holdings filed an Application for Review of the Transactions are expected to be consummated on March 9, 2018, subject toBureau’s decision with the satisfaction of customary closing conditions.
FCC. In the third quarter of 2016, we received $90.82018, GCI Holdings recorded a $19.1 million forreduction in its receivables balance as part of its acquisition accounting and recorded a reduction in revenue in the initial closing to sell to Vertical Bridge Towers II, LLC (“Vertical Bridge”) the majority of our urban wireless rooftop and tower sites ("Tower Transaction"). Additionally, we entered into a Master Lease Agreement with Vertical Bridge to lease collocation space on communications towers and facilities that were sold to Vertical Bridge. We sold additional tower sites to Vertical Bridge in 2017current period for total consideration of $6.8 million.
The USF RHC Program subsidizes the rates for services provided to rural health care providers. USAC received requests for support that exceeded the available RHC Program funding for the first time in the funding year that ran fromended on June 30, 2018 of approximately $8.6 million. GCI Holdings expects to reduce future RHC program revenue by a similar rate as to the funding year that ended on June 30, 2018, which based on a current run rate would approximate $7 million per quarter until it can reach a final resolution with the FCC regarding the funding amounts.
On March 15, 2018, USAC announced that the funding requests for the year that runs July 1, 20162017 through June 30, 2017. We expect2018 exceeded the funding available for the RHC Program. Since that time, on June 25, 2018, the support requests will continueFCC issued an order resulting in an increase of the annual RHC Program funding cap from $400 million to exceed$571 million and applied it to the program's annualfunding 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, aggregate funding was available to pay in full the approved funding under the RHC program for the funding year endingended on June 30, 2018.
In addition, on March 23, 2018, GCI Holdings received a separate letter of inquiry and possibly subsequentrequest for information from the Enforcement Bureau of the FCC, to which it is in the process of responding. This inquiry into the rates charged by GCI Holdings is still pending, and presently it is unable to assess the ultimate resolution of this matter. The ongoing uncertainty in program funding years. We provide services to rural health care providers who may be impacted by funding caps and as a result may not receive the full subsidy that was expected under the program. We cannot predict the impact of future RHC Program funding caps but they may negatively affect ourcould have an adverse effect on its business, financial position, results of operations or liquidity.
On November 30, 2018, GCI Holdings received multiple funding denial notices from USAC, denying requested funding from the RHC Program operated by a rural health customer (the “Customer”) for the funding year that ended on June 30, 2018. At the rates approved by the Bureau in a letter received on October 10, 2018, the funding at issue under the denials is approximately $13 million. In August 2016,November 2017, USAC requested information from the FCC publishedCustomer related to bidding process documentation for two separate service contracts GCI Holdings has with the Alaska High Cost Order which mandatesCustomer. Although the Customer timely responded, USAC found that Urban high cost supportbids previously received were not submitted with the original funding request and/or that bidding information submitted was related to the wrong bidding year. The Customer filed an appeal with USAC on January 29, 2019. At this time, GCI Holdings has no reason to believe that there was any violation of the FCC’s competitive bidding rules, but without further information from the Customer and/or USAC, it cannot assess whether the USAC denials will endbe overturned. If the denial notices are upheld for reasons relating to the Customer’s competitive bidding process, funding issued under one or both contracts for prior years could be subject to further review, as well as funding for services already being delivered or to be delivered for the period from July 1, 2018 through June 30, 2019. GCI Holdings has accounts receivable of approximately $18 million outstanding as of December 31, 2018 associated with these two service contracts. The outstanding accounts receivable includes the approximate $13 million of funding at issue as discussed above and additional amounts for services provided for the beginningperiod from July 1, 2018 through December 31, 2018. Given the uncertainty of 2019. We recognized $9.9 million for Urban high cost supportwhether the USAC denials will be overturned, it is reasonably possible that GCI Holdings may incur a loss. The amount of a potential loss could range from zero to the full amount of the accounts receivable balance as of December 31, 2018. No amount within this range of a potential loss is a better estimate than any other amount. Accordingly, no loss was recorded as of December 31, 2018 given the minimum amount in 2017 and expect to recognize $9.9 million in 2018 and $0 in 2019.the range is zero.
In February 2015, we purchased ACS' interestaddition, on December 4, 2018, the FCC issued a public notice seeking further comment on an earlier proposal to determine the rural rates for services supported by the RHC Program in The Alaska Wireless Network, LLC ("AWN")a different manner than it does today. GCI Holdings and substantially allothers submitted comments on January 30, 2019, but GCI Holdings cannot assess at this time the assetssubstance, impact on funding, or timing of ACS and its affiliates related to ACS’s wireless operations (“Acquired ACS Assets”) (collectivelyany future rule changes that may be adopted by the "Wireless Acquisition"). Under the terms of the agreement, we transfered to ACS a cash payment of $293.2 million excluding working capital adjustments and agreed to terminate or amend certain agreements related to the use of ACS network assets that were included as part of the original transaction that closed in July 2013. The Acquired ACS Assets included substantially all of ACS’s wireless subscriber assets, including subscriber contracts, and certain of ACS’s CDMA network assets, including fiber strands and associated cell site electronics and microwave facilities and associated electronics. We assumed from ACS post-closing liabilities of ACS and its affiliates under contracts assumed by us and liabilities with respect to the ownership by ACS of its equity interest in AWN to the extent accruing and related to the period after closing. All other liabilities were retained by ACS and its affiliates. Following the close of the Wireless Acquisition, AWN is a wholly owned subsidiary and we are entitled to 100% of the future cash flows from AWN. We funded the purchase with a $275.0 million Term Loan B under our Senior Credit Facility and a contribution from GCI.FCC.
Results of Operations - Consolidated
Revenues
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 components"Corporate and other" category consists of revenue arethose assets or businesses which do not qualify as follows (amounts in thousands):
|
| | | | | | | | | | | |
| | 2017 | 2016 | 2015 | Percentage
Change 2017 vs. 2016 | Percentage
Change 2016 vs. 2015 |
Consumer1 | | | | | |
| Wireless | $ | 167,733 |
| 177,801 |
| 199,862 |
| (6 | )% | (11 | )% |
| Data | 145,757 |
| 140,196 |
| 130,213 |
| 4 | % | 8 | % |
| Video | 99,609 |
| 107,305 |
| 115,074 |
| (7 | )% | (7 | )% |
| Voice | 23,783 |
| 26,734 |
| 30,110 |
| (11 | )% | (11 | )% |
Business2 | | | | | |
| Wireless | 104,614 |
| 105,355 |
| 151,710 |
| (1 | )% | (31 | )% |
| Data | 308,480 |
| 296,202 |
| 269,472 |
| 4 | % | 10 | % |
| Video | 18,039 |
| 20,102 |
| 18,819 |
| (10 | )% | 7 | % |
| Voice | 51,189 |
| 60,117 |
| 63,274 |
| (15 | )% | (5 | )% |
| Total revenue | $ | 919,204 |
| 933,812 |
| 978,534 |
| (2 | )% | (5 | )% |
| | | | | | |
1 Includes revenues from sales to residential customers and, for 2017, also includes sales to small business customers. |
2 Includes revenues from sales to businesses, governmental entities, educational and medical institutions, and common carrier customers and for 2016 and 2015 includes sales to small business customers. |
Selected key performance indicators follow:Operating Results
|
| | | | | | | | | | |
| | 2017 | 2016 | 2015 | Percentage
Change 2017 vs. 2016 | Percentage
Change 2016 vs. 2015 |
| Consumer | | | | | |
| Data: | | | | | |
Cable modem subscribers1 | 124,900 |
| 129,500 |
| 129,000 |
| (4 | )% | — | % |
| Video: | | | | |
| |
|
Basic subscribers2 | 97,200 |
| 107,600 |
| 113,900 |
| (10 | )% | (6 | )% |
| Homes passed | 252,500 |
| 250,800 |
| 251,900 |
| 1 | % | — | % |
| Voice: | | | | |
| |
|
Total local access lines in service3 | 48,900 |
| 53,400 |
| 55,200 |
| (8 | )% | (3 | )% |
| Business | | | | |
| |
|
| Data: | | | | |
| |
|
Cable modem subscribers1 | 9,900 |
| 10,100 |
| 9,600 |
| (2 | )% | 5 | % |
| Voice: | | | | |
| |
|
Total local access lines in service3 | 38,500 |
| 41,100 |
| 41,800 |
| (6 | )% | (2 | )% |
| Consumer and Business Combined | | | | |
| |
|
| Wireless | | | | |
| |
|
Consumer wireless lines in service4 | 196,800 |
| 198,600 |
| 201,900 |
| (1 | )% | (2 | )% |
Business wireless lines in service4 | 22,600 |
| 23,900 |
| 25,900 |
| (5 | )% | (8 | )% |
| Total wireless lines in service | 219,400 |
| 222,500 |
| 227,800 |
| (1 | )% | (2 | )% |
| | | | | | |
1 A cable modem subscriber is defined by the purchase of cable modem service regardless of the level of service purchased. If one entity purchases multiple cable modem service access points, each access point is counted as a subscriber. On January 1, 2017, we transferred 3,100 small business cable modem subscribers from Business to Consumer. We adjusted the previously reported subscriber numbers as of December 31, 2016 and 2015 for the number of subscribers that were transferred on January 1, 2017 and for database cleanup in preparation for our new billing system. |
2 A basic subscriber is defined as one basic tier of service delivered to an address or separate subunits thereof regardless of the number of outlets purchased. On January 1, 2017, we transferred 500 small business basic subscribers from Business to Consumer. We adjusted the previously reported subscriber numbers as of December 31, 2016 and 2015 for the number of subscribers that were transferred on January 1, 2017 and for database cleanup in preparation for our new billing system. |
3 A local access line in service is defined as a revenue generating circuit or channel connecting a customer to the public switched telephone network. On January 1, 2017, we transferred 4,800 small business local access lines from Business to Consumer. We adjusted the previously reported subscriber numbers as of December 31, 2016 and 2015 for the number of subscribers that were transferred on January 1, 2017. |
4 A wireless line in service is defined as a revenue generating wireless device. On January 1, 2017, we transferred 3,700 small business wireless lines from Business to Consumer. We adjusted the previously reported subscriber numbers as of December 31, 2016 and 2015 for the number of subscribers that were transferred on January 1, 2017. |
|
| | | | | | | | | |
| | Years ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | amounts in thousands |
| Revenue | | | | | |
| GCI Holdings | $ | 715,842 |
| | — |
| | — |
|
| Corporate and other | 23,920 |
| | 23,817 |
| | 22,552 |
|
| Consolidated | $ | 739,762 |
| | 23,817 |
| | 22,552 |
|
| | | | | | |
| Operating Income (Loss) | | | | | |
| GCI Holdings | $ | (220,590 | ) | | — |
| | — |
|
| Corporate and other | (35,787 | ) | | (55,597 | ) | | (35,155 | ) |
| Consolidated | $ | (256,377 | ) | | (55,597 | ) | | (35,155 | ) |
| | | | | | |
| Adjusted OIBDA | | | | | |
| GCI Holdings | $ | 217,832 |
| | — |
| | — |
|
| Corporate and other | (19,461 | ) | | (25,762 | ) | | (16,063 | ) |
| Consolidated | $ | 198,371 |
| | (25,762 | ) | | (16,063 | ) |
Consumer
The recession in Alaska has impacted our ability to increase our number of subscribersRevenue. Our consolidated revenue increased $715.9 million and customers cutting back on$1.3 million for the services the receive from us, which have impacted our revenues.
The items contributingyears ended December 31, 2018 and 2017, respectively, as compared to the decrease in wireless revenue for 2017 and 2016 include:
A $6.5 million or 9% and $15.9 million or 18% decrease in plan fee revenue in 2017 and 2016, respectively,corresponding prior year periods. The increase during the year ended December 31, 2018 is primarily due to discounts givenan increase of $715.8 million at GCI Holdings as compared to customers who finance or bring their own devicethe prior period as a result of the acquisition of GCI Holdings on March 9, 2018. See “Results of Operations-GCI Holdings, LLC” below for a more complete discussion of the results of operations of GCI Holdings.
Operating Income (Loss). Our consolidated operating loss increased $200.8 million and a$20.4 million for the years ended December 31, 2018 and 2017, respectively, as compared to the corresponding prior year periods. The decrease in the number of subscribersoperating income for 2018 is primarily due to the recessionacquisition of GCI Holdings on March 9, 2018 and its subsequent impairment of intangibles and long-lived assets (see note 8 in Alaska,the accompanying consolidated financial statements for more information) and associated depreciation and amortization as a result of purchase accounting. See “Results of Operations-GCI Holdings, LLC” below for a more complete discussion of the results of operations of GCI Holdings.
A $4.9
Operating losses for corporate and other decreased $19.8 million or 16% and $2.4increased $20.4 million or 7% decrease in equipment sales revenue infor the years ended December 31, 2018 and 2017, and 2016, respectively.respectively, as compared to the corresponding prior year periods. The decrease in equipment sales revenue in 2017 was primarily due to the absence of the adjustment explained in the following discussion. The decrease in equipment sales revenue in 2016 was partially offset by a $4.1 million adjustment to lower the guarantee liability for our Upgrade Now program (please see Note 1 in the "Notes to Consolidated Financial Statements" included in Part IV of this annual report on Form 10-K for additional information on the guarantee liability) that was recorded in the third quarter of 2016. Based on a review of historical information, we determined that our customers were not trading their devices in as early and frequently as originally estimated. Additionally, we found that we were
able to resell the used handsets for prices higher than originally estimated. Based on this new information, we determined that it was appropriate to reduce the guarantee liability recorded for financed devices in our Upgrade Now program. The decreases in 2017 and 2016 were also partially2018 is due to a decrease in costs associated with the number of wireless devices sold.
TheTransactions partially offset by an increase in data revenuecosts as a wholly owned subsidiary increased investment in its business and increased public company costs. The increase in 2017 is primarily due to subscribers' selectioncosts related to the Transactions.
Stock-based compensation. Stock based compensation includes compensation related to restricted shares of plans that offer higher speedsGCI Liberty's common stock and higher usage limitspreferred stock, restricted stock units with respect to GCI Liberty's common stock, and revenue from small business subscribers transferred from our Business customer group.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 $28.2 million, $26.6 million and $16.1 million of stock compensation expense for the years ended December 31, 2018, 2017 and 2016, respectively. The increase wasfor the year ended December 31, 2018 as compared to the corresponding prior year period is primarily due to the acquisition of GCI Holdings on March 9, 2018 partially offset by a decrease in one-time costs associated with an option exchange between HoldCo and certain of its officers. See “Results of Operations-GCI Holdings, LLC” below for a more complete discussion of the overall numberresults of subscribers.operations of GCI Holdings. The increase in data revenue in 2016 is primarily due to a $12.8 million or 11% increase in cable modem revenue for 2016 due to an increase in the average number of subscribers and our subscribers’ selection of plans that offer higher speeds and higher usage limits.
Consumer video revenue faces challengesyear ended December 31, 2017 as more customers choose to have their video content delivered via the Internet. However, as a major Internet-provider ourselves, this selection may result in additional data service revenuecompared to the extent we grow average Internet revenue per subscriber.
We expect Consumer voice revenue to continue to decrease due to a growing number of customers using wireless service as their primary voice phone service for local and long distance calling.
Business
The recession in Alaska has had an impact on both the number of businesses in Alaska as well as the services that business customers have chosen. The decrease in the number of businesses and services have impacted our revenues and we expect it to continue impacting us until the recession in Alaska ends.
Business data revenue is comprised of monthly recurring charges for data services and charges billed on a time and materials basis largely for personnel providing on-site customer support. This latter category can vary significantly based on project activity. This revenue faces challenges due to the decline in oil prices which negatively impacts certain of our customers.
The increase in data revenue in 2017 and 2016 is primarily due to a $5.8 million or 2% and $32.4 million or 15% increase, respectively, in data transport and storage revenue due to new customers and increased purchases by our existing customers. The increase in data revenue in 2017 was also partially due to a $6.8 million or 17% increase in time and materials revenue primarily due to an acquisition that was completed during the first quarter of 2017.
The increases in data revenue for 2017 were partially offset by decreases due to rate compression and a $5.5 million reduction of revenue recorded during 2017 as a result of a credit we provided to certain of our rural health care provider customers. For the fundingcorresponding prior year that ran from July 1, 2016 through June 30, 2017, USAC received requests for funds that exceeded the funding available for the RHC Program. USAC allocated the funding on a pro-rata basis to rural health care providers who submitted their funding requests during a certain period. We provide services to rural health care providers who were impacted by the pro-rata allocation and as a result certain of our customers did not receive the full subsidy that was expected under the program. Under the program rules, we are forbidden from lowering our rates for services previously provided, however, the FCC published an order on June 30, 2017 to assist eligible remote Alaska rural health care providers by allowing Alaska service providers, such as us, to retroactively lower their rates, or effectively giving a credit against amounts owed, for services provided. Based on these specific circumstances, we decided to retroactively lower our rates to these customers pursuant to the FCC waiver, and as a result we reduced revenue by $5.5 million during 2017, to aid our rural health care provider customers who were impacted by the pro-rata allocation.
The increases in data revenue for 2016 were partially offset by a $5.3 million or 11% decrease in time and materials revenue due to a decrease in special project work for 2016.
The decrease in wireless revenue in 2016period is primarily due to the following:
A $53.2option exchange that was discussed above. As of December 31, 2018, the total unrecognized compensation cost related to unvested options and restricted stock was approximately $9.4 million or48%decreaseand $24.2 million, respectively. Such amounts will be recognized in roaming revenue due to long-term roaming agreements we have entered into with our largest roaming partners,the Company's consolidated statements of operations over a weighted average period of approximately 1.2 years and 2.0 years, respectively.
A $6.1 million or 36% decrease in plan fee revenue primarily due to discounts given to customers who finance or bring their own device and a decrease in subscribers.
Business voiceAdjusted OIBDA. The Company defines Adjusted OIBDA as revenue continues to face competitionless cost of sales, operating expenses, and rate compression and to a lesser extent the substitution of wireless devices.
Cost of Goods Sold
Cost of Goods Sold are as follows (amounts in thousands): |
| | | | | | | | | | | |
| | 2017 | 2016 | 2015 | Percentage
Change 2017 vs. 2016 | Percentage
Change 2016 vs. 2015 |
| Cost of Goods Sold | $ | 280,200 |
| 302,578 |
| 322,338 |
| (7 | )% | (6 | )% |
The individually significant items contributing to the 2017 and 2016 decreases in Cost of Goods Sold include:
A $10.7 million or 16% decrease in wireless Cost of Goods Sold for 2017 primarily due to savings from a decrease in tariff rates, the migration of circuits to our own facilities, and a reduction of tower related costs due to our sales of towers in the third quarter of 2016,
A $15.6 million or 27% decrease in wireless device Cost of Goods Sold for 2016 primarily due to a decrease in the number of handsets sold,
A $7.1 million or 20% decrease in time and materials Cost of Goods Sold for 2017 due to process efficiencies partially offset by an increase due to an acquisition that was completed during the first quarter of 2017,
A $4.6 million or 11% decrease in time and materials Cost of Goods Sold for 2016 primarily due to a reduction in special project work,
A $3.9 million or 5% decrease in video distribution and programming costs in 2017 primarily due to a decrease in subscribers,
A $3.2 million or 12% and $3.3 million or 11% decrease in voice Cost of Goods Sold for 2017 and 2016, respectively, primarily due to a decrease in minutes, a decrease in the number of local access lines, and the movement of more traffic to our own facilities.
We expect to face continued increases in programming costs that may require us to drop certain channels or increase the rates paid by our customers that may result in a loss of additional video customers.
Selling, General and Administrative Expenses
Selling, general and administrative expenses are as follows (amounts in thousands):
|
| | | | | | | | | | | |
| | 2017 | 2016 | 2015 | Percentage
Change 2017 vs. 2016 | Percentage
Change 2016 vs. 2015 |
| Selling, general and administrative expenses | $ | 370,639 |
| 358,356 |
| 338,379 |
| 3 | % | 6 | % |
Individually significant items contributing to the increases in selling, general and administrative expenses include:(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, including the chief operating decision maker, 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 15 in the accompanying consolidated financial statements for a reconciliation of Adjusted OIBDA to operating income (loss) and earnings (loss) from continuing operations before income taxes.
A $15.5
Consolidated Adjusted OIBDA increased $224.1 million increase in transaction costs relatedand decreased $9.7 million during the years ended December 31, 2018 and 2017, respectively, as compared to the Transactions with Liberty incorresponding prior year periods. The increase for the year ended December 31, 2018 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. The decrease for the year ended December 31, 2017
A $6.4 million increase in share-based compensation for 2017 is primarily due to an increase in our stock price,expenses at Corporate and other as a result of the Transactions.
A $4.0 million
Other Income and $11.5 million increase in labor and health insurance costs for 2017 and 2016, respectively, andExpense
A $8.0 million increase
Components of Other income (expense) are presented in the use of contract labor for 2016.table below. |
| | | | | | | | | |
| | Years ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | amounts in thousands |
| Interest expense | | | | | |
| GCI Holdings | $ | (69,478 | ) | | — |
| | — |
|
| Corporate and other | (35,737 | ) | | — |
| | — |
|
| Consolidated | $ | (105,215 | ) | | — |
| | — |
|
| | | | | | |
| Share of earnings (losses) of affiliates, net | | | | | |
| GCI Holdings | $ | (111 | ) | | — |
| | — |
|
| Corporate and other | 25,883 |
| | 7,001 |
| | 11,831 |
|
| Consolidated | $ | 25,772 |
| | 7,001 |
| | 11,831 |
|
| | | | | | |
| Realized and unrealized gains (losses) on financial instruments, net | | | | | |
| GCI Holdings | $ | — |
| | — |
| | — |
|
| Corporate and other | (758,836 | ) | | 637,164 |
| | 1,309,365 |
|
| Consolidated | $ | (758,836 | ) | | 637,164 |
| | 1,309,365 |
|
| | | | | | |
| Other, net | | | | | |
| GCI Holdings | $ | 1,376 |
| | — |
| | — |
|
| Corporate and other | (9,476 | ) | | 2,467 |
| | 30,773 |
|
| Consolidated | $ | (8,100 | ) | | 2,467 |
| | 30,773 |
|
The increases discussed above are partially offset byInterest Expense. Consolidated interest expense increased $105.2 million during the following items:
The absence of $2.4 million for costs in 2016 to support a campaign to encourage public action relatedyear ended December 31, 2018 as compared to the State of Alaska budget, and
The absence of $9.0 million for costs relatedcorresponding prior year period primarily due to the acquisition of ACS' wireless subscribersGCI Holdings on March 9, 2018 and its non-controlling interest in AWN for 2016.the $1.0 billion margin loan.
As a percentageShare of total revenues, selling, generalearnings (losses) of affiliates, net. Share of earnings (losses) of affiliates, net increased $18.8 million and administrative expenses were 40%, 38%, and 35% of revenue for 2017, 2016, and 2015, respectively. The 2017 increase in selling, general and administrative expenses as a percentage of total revenues is primarily due to the costs related to the Transactions with Liberty. The 2016
increase in selling, general and administrative expenses as percentage of total revenues is primarily due to increases in labor and contract labor costs without corresponding increases in revenue due to spending on our billing system conversion.
Depreciation and Amortization Expense
Depreciation and amortization expense follows (amounts in thousands):
|
| | | | | | | | | | | |
| | 2017 | 2016 | 2015 | Percentage
Change 2017 vs. 2016 | Percentage
Change 2016 vs. 2015 |
| Depreciation and amortization expense | $ | 197,115 |
| 193,775 |
| 181,767 |
| 2 | % | 7 | % |
The increases in 2017 and 2016 are primarily due to new assets placed in service in those years partially offset by assets which became fully depreciateddecreased $4.8 million during those years.
Software Impairment Charge
Software impairment charge decreased $29.8 million or 100% in 2016 primarily due to the absence of an impairment charge recorded in 2015 as discussed below.
During the years ended December 31, 20132018 and 2014, we internally developed computer software to replace our wireless, Internet, video, local service, and long distance customer billing systems. In early 2015, we completed a detailed assessment of our progress to date and determined it was no longer probable that the computer software being developed would be completed and placed in service. Our assessment concluded that the cost of continuing the development would be much higher than originally estimated, and the timing and scope risks were substantial. We identified development work, hardware, and software recorded2017, respectively, as Construction in Progress in early 2015, that may be applicable to our replacement customer billing solution, future internally developed software, and other system needs and therefore should remain capital assets. We considered the remaining capital expenditures for this billing system to have a fair value of $0 and recorded an impairment charge of $20.7 million during 2015 by recording an expense which is included in Software Impairment Charge in our Consolidated Statements of Operations. Subsequently we signed a contract with an established billing solution provider and a multi-year implementation is in process.
In early 2015, we reassessed our plans for our internally developed machine-to-machine billing system and decided to no longer market this system to third parties. Accordingly we recognized an impairment of $7.1 million during 2015 by recording an expense which is included in Software Impairment Charge in our Consolidated Statements of Operations.
In late 2015, we evaluated user management software we purchased in 2014 and determined that we would not be able to use the software. Accordingly we recognized an impairment of $1.0 million during 2015 by recording an expense which is included in Software Impairment Charge in our Consolidated Statement of Operations.
Other Expense, Net
Other expense, net of other income, follows (amounts in thousands):
|
| | | | | | | | | | | |
| | 2017 | 2016 | 2015 | Percentage
Change 2017 vs. 2016 | Percentage
Change 2016 vs. 2015 |
| Other expense, net | $ | 81,052 |
| 73,699 |
| 116,162 |
| 10 | % | (37 | )% |
Items contributingcompared to the corresponding prior year periods. The increase in 2017 include:
A $4.7 million increase in interest expense due to increased borrowings during 2017, and
The absence of a $3.2 million gain recorded in 2016 for adjusting to fair value assets that were included in the consideration paid to acquire a fiber system.
Items contributingyear ended December 31, 2018 as compared to the decrease in 2016 include:corresponding prior year period is due
A $27.1 millionto increases in LendingTree's results. The decrease in lossthe year ended December 31, 2017 as compared to the corresponding prior year period is due to decreases in LendingTree's results.
Realized and unrealized gains (losses) on extinguishmentfinancial instruments, net. Realized and unrealized gains (losses) on financial instruments, net are comprised of debtchanges in the fair value of the following: |
| | | | | | | | | | |
| | | Years ended December 31, |
| | | 2018 | | 2017 | | 2016 |
| | | amounts in thousands |
| Equity securities | | $ | (274,393 | ) | | 258,629 |
| | 547,921 |
|
| Investment in Liberty Broadband | | (560,413 | ) | | 473,342 |
| | 761,444 |
|
| Variable forward | | 75,970 |
| | (94,807 | ) | | NA |
|
| | | $ | (758,836 | ) | | 637,164 |
| | 1,309,365 |
|
The changes in these accounts are primarily due to the retirement of our 2019 Notesmarket factors and changes in 2015 (please see Part II - Item 7 - "Liquidity and Capital Resources" for additional information),
The absence of a $12.6 million impairment charge recorded in 2015 to reflect an other than temporary decline inthe fair value of an equity investment, and
A $3.2 million gain recordedthe underlying stocks or financial instruments to which they are related. The decrease for adjustingthe year ended December 31, 2018 as compared to fair value assets that were includedthe corresponding prior year period was primarily driven by a decrease in the consideration paidmarket value of our investments in Liberty Broadband and Charter. The decrease for the year ended December 31, 2017 as compared to acquire a fiber system.the corresponding prior year period was primarily driven by less growth in the market value of our investments in Liberty Broadband and Charter than the prior period.
Income Tax (Expense) Benefit
GCI, Inc., as a wholly owned subsidiary and member of the GCI controlled group of corporations, files itstaxes. The Company had an income tax return as partbenefit of $184.9 million and $133.5 million for the consolidated group of corporations under GCI. Accordingly, all discussions regarding income taxes reflect the consolidated group's activity. Ouryears ended December 31, 2018 and 2017, respectively, and income tax expense and deferred income tax assets and liabilities are presented herein usingof $496.2 million for the separate-entity method.
|
| | | | | | | | | | | |
| (Amounts in thousands) | 2017 | 2016 | 2015 | Percentage
Change 2017 vs. 2016 | Percentage
Change 2016 vs. 2015 |
| Income tax (expense) benefit | $ | 41,117 |
| (7,080 | ) | (81 | ) | (681 | )% | (8,641 | )% |
| Effective income tax rate | 419 | % | 131 | % | (1 | )% | | |
Theyear ended December 31, 2016. For the year ended December 31, 2018, the income tax benefit was lower than the U.S. statutory tax rate of 21% primarily due to a change in the effective tax rate used to measure deferred taxes due to the acquisition as discussed in notes 1 and 4 to the accompanying consolidated financial statements and a goodwill impairment that is not deductible for tax purposes, partially offset by a change in the state effective tax rate used to measure deferred taxes resulting from a state law change.
For the year ended December 31, 2017, was primarilythe most significant reconciling item is a resultnet tax benefit for the effect of the enactment of the Tax Cuts & Jobs Act (“Tax Reform”)change in December 2017. The primary provisions of Tax Reform impacting us are the reduction to the U.S. federal corporate income tax rate from 35% to 21% on deferred taxes. Income tax expense was higher than the U.S. statutory tax rate of 35% in 2016 due to state expense related to unrealized gains on the Company’s investments.
Net earnings (loss). The Company had a net loss of $917.5 million for the year ended December 31, 2018 and temporary 100% bonus depreciationnet earnings of $724.6 million and $820.7 million for certain assets.the years ended December 31, 2017, and 2016, respectively. The change in the tax law required us to remeasure existing net deferred tax liabilities using the lower rate in the year of enactment resulting in an income tax benefit of $43.5 million for 2017 to reflect these changes.
Partially off-setting the impact of Tax Reform on our effective income tax rate in 2017 and primarily impacting our effective income tax rates for 2016 and 2015earnings was the volatilityresult of the above-described fluctuations in our revenue, expenses, and other income (loss) before income taxes and permanent differences.expenses.
At December 31, 2017, we have income tax net operating loss carryforwards of $361.9 million that will begin expiring in 2020 if not utilized. We have recorded deferred tax assets of $102.0 million associated with income tax net operating losses that were generated from 2000 to 2017 and that expire from 2020 to 2037.
Tax benefits associated with recorded deferred tax assets are considered to be more likely than not realizable through future reversals of existing temporary differences and future taxable income exclusive of reversing temporary differences and carryforwards. The amount of deferred tax assets considered realizable, however, could be reduced if estimates of future taxable income during the carryforward period are reduced which would result in additional income tax expense. We estimate that our effective annual income tax rate for financial statement purposes will be (15%) to (20%) in the year ending December 31, 2018.
Liquidity and Capital Resources
Our principal sources
As of current liquidity areDecember 31, 2018, substantially all of our cash and cash equivalents.equivalents were invested in U.S. Treasury securities, other government agencies, AAA rated money market funds and other highly rated financial and corporate debt instruments.
The following are potential sources of liquidity: available cash balances, proceeds from asset sales, monetization of our investments, outstanding or anticipated debt facilities, and debt issuances. To the extent that the Company recognizes any taxable gains from the sale of assets, the Company may incur tax expense and be required to make tax payments, thereby reducing any cash proceeds. As of December 31, 2018, GCI, LLC exceeded the maximum leverage threshold, as measured by the terms of its Senior Notes (as defined below), and therefore does not have access to any additional funding under the revolving portion of the Senior Credit Facility. See note 9 in the accompanying consolidated financial statements for additional information on the Senior Credit Facility. We believe but can provide no assurances, that we will be able to meet our current and long-term liquidity, capital requirements and fixed charges through ourhave sufficient cash flows from operating activities existingand cash on hand to fund our business.
As of December 31, 2018, the Company had a cash and cash equivalents credit facilities, and other external financing and equity sources. Should operating cash flows be insufficient to support additional borrowings and principal payments scheduled under our existing credit facilities, capital expenditures will likely be reduced, which would likely reduce future revenues.
In the first and fourth quartersbalance of 2017, we entered into additional financing arrangements under the NMTC program, which provided $6.6 million in net cash to help fund the continued expansion of our TERRA network (see Note 13 included in "Part II - Item 8 - Consolidated Financial Statements and Supplementary Data" for additional information).
In the fourth quarter of 2016, we amended our Senior Credit Facility. The amended Senior Credit Facility provided a $215.0 million Term Loan A, a $245.9 million Term Loan B, and a $200.0 million revolving credit facility, with a $50.0 million sub-limit for standby letters of credit. The borrowings under the Term Loan A and revolving credit facility are scheduled to mature on November 17, 2021, and the Term Loan B is scheduled to mature on February 2, 2022;$170.7 million.
provided that, if the 2021 Senior Notes are not refinanced by December 3, 2020, then all of the loans under the Senior Credit Facility become due on such date. We paid $4.1 million in fees associated with the amendment. |
| | | | | | | | | |
| | Years ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | amounts in thousands |
| Cash flow information | | | | | |
| Net cash provided (used) by operating activities | $ | 31,015 |
| | 304,864 |
| | 292,225 |
|
| Net cash provided (used) by investing activities | (32,276 | ) | | (78,123 | ) | | (1,504,771 | ) |
| Net cash provided (used) by financing activities | (401,371 | ) | | (140,720 | ) | | (300,808 | ) |
| | $ | (402,632 | ) | | 86,021 |
| | (1,513,354 | ) |
As discussed above inDuring the General Overview section, inyear ended December 31, 2018, the third quarterCompany’s primary uses of 2016 we received $90.8 million for the Tower Transaction.
In the first quarter of 2016, we entered into new long-term roaming and backhaul agreements with our largest roaming partners. The revenue recognized for these contracts was determined by calculating the cumulative minimum cash payments and recognizing the amount evenly over the life of the contracts. In the early years of the contracts, the cash received is in excess of the revenue recognized resulting inincluded a significant increase in long-term deferred revenue; in the later years the cash received will be less than the revenue recognized and will lower long-term deferred revenue.
In the first quarter of 2015, we completed the Wireless Acquisition$1.1 billion distribution to purchase ACS' wireless subscriber base and its one-third ownership interest in AWN for $293.2 million excluding working capital adjustments and the termination or amendment of certain agreements related to the use of ACS network assets that were included as part of the original transaction that closed in July 2013. Following the close of the transaction, AWN is our wholly owned subsidiary and we are entitled to 100% of the future cash flows from AWN. We used proceeds from our Senior Credit Facility and a contribution from GCI to fund the purchase from ACS.
In the second quarter of 2015, we closed on the issuance of $450.0 million of new 6.875% Senior Notes due 2025 ("2025 Notes") at an issue price of 99.105%. The net proceeds of the offering were used to retire our existing 2019 Notes. We paid closing costs totaling $7.9 millionformer parent in connection with the offering.Transactions, $347 million in distributions to GCI Liberty, and $179 million in repayments of debt. The Company’s primary sources of cash included cash from operations, borrowing $1.1 billion under the Company's margin loan and senior credit facility, cash from the acquisition of GCI Holdings on March 9, 2018 and borrowing $104 million from GCI Liberty.
While our short-term and long-term financing abilities are believed to be adequate as a supplement to internally generated cash flows to fund capital expenditures and acquisitions as opportunities arise, turmoil in the global financial markets may negatively impact our ability to further access the capital markets in a timely manner and on attractive terms, which may have a negative impact on our ability to grow our business.
We monitor the third-party depository institutions that hold our cash and cash equivalents. Our emphasis is primarily on safety of principal and secondarily on maximizing yield on those funds.
Investing Activities
Net cash used for investing activities consists primarily of cash paid for capital expenditures.expenditures and investments. Our most significant recurring investing activity has been GCI Holdings' capital expenditures and wethe purchase of investments. We expect that this will continue in the future. A significant portion of our capital expenditures isare based on the level of GCI Holdings' customer growth and the technology being deployed. Purchases of investments are based on what we believe are good opportunities for growth.
Our cash expenditures for property and equipment, including construction in progress, totaled $189.4 million and $194.5 million during 2017 and 2016, respectively. Depending on available opportunities and the amount of cash flow we generate during 2018, we expect our 2018 capital expenditures to total approximately $170.0 million. This estimate is based on purchases in 2018 regardless of the timing of cash payments.
Financing Activities
Net cash provided by financing activities in 2017 consists primarily of borrowingsProceeds from our Senior Credit Facility, net of payments partially offset by repurchases of GCI's stock. Net cash provided by financing activities in 2016 consists primarily of cash received from the Tower Transaction partially offset by repurchases of GCI's stock, payments on our Senior Credit Facility, net of borrowings, and costs paid for the amendment to our Senior Credit Facility. Our borrowings fluctuate from year to year based on our liquidity needs. We may use excess cash to make optional repayments on our debt or repurchase GCI'sof GCI Liberty's common stock depending on various factors, such as market conditions.
Available Borrowings Under Senior Credit FacilityThe projected uses of the Company's cash are capital expenditures of approximately $165 million, approximately $126 million for interest payments on outstanding debt, repurchases of GCI Liberty Series A common stock, and potential additional investments in existing or new businesses.
Exhibit 99.2 shows the net assets and net earnings of GCI, LLC and its Restricted Subsidiaries under and as defined in its bond indentures.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
We had a $100.0 million outstanding balancehave contingent liabilities related to legal and $21.0 milliontax proceedings and other matters arising in lettersthe ordinary course of creditbusiness. Although it is reasonably possible we may incur losses upon conclusion of such matters, an estimate of any loss or range of loss cannot be made. In the opinion of management, it is expected that amounts, if any, which may be required to satisfy such contingencies will not be material in relation to the accompanying consolidated financial statements.
Information concerning the amount and timing of required payments, both accrued and off-balance sheet, under the $200.0 million Senior Credit Facility Revolver at December 31, 2017, which leaves $79.0 million available for borrowing as of December 31, 2017.our contractual obligations, is summarized below.
Debt Covenants
We are subject to covenants and restrictions applicable to our $325.0 million in aggregate principal amount of 6.75% Senior Notes due 2021 (“2021 Notes”), our 2025 Notes, Senior Credit Facility, and Wells Fargo note payable. We are in compliance with the covenants, and we believe that neither the covenants nor the restrictions in our indentures or loan documents will limit our ability to operate our business.
Share Repurchases
GCI’s Board of Directors has authorized a common stock buyback program for the repurchase of GCI common stock in order to reduce the outstanding shares of its common stock. During 2017 we repurchased, on GCI's behalf, 0.2 million shares of GCI common stock under the stock buyback program at a cost of $4.0 million excluding shares withheld to cover employee tax liabilities resulting from the vesting of restricted stock awards. GCI temporarily suspended the buyback program due to the Reorganization Agreement that it entered into with Liberty.
Schedule of Certain Known Contractual Obligations
The following table details future projected payments associated with certain known contractual obligations as of December 31, 2017 (amounts in thousands):
|
| | | | | | | | | | | | | | | |
| | Payments Due by Period |
| | Total | | Less Than 1 Year | | 1 to 3 Years | | 4 to 5 Years | | More Than 5 Years |
| Long-term debt | $ | 1,340,631 |
| | 2,989 |
| | 6,040 |
| | 876,418 |
| | 455,184 |
|
| Interest on long-term debt | 403,917 |
| | 75,188 |
| | 150,031 |
| | 107,057 |
| | 71,641 |
|
| Capital lease obligations, including interest | 60,097 |
| | 13,440 |
| | 26,909 |
| | 17,337 |
| | 2,411 |
|
| Tower obligations, including interest | 188,150 |
| | 7,465 |
| | 15,382 |
| | 16,003 |
| | 149,300 |
|
| Operating lease commitments | 174,087 |
| | 48,409 |
| | 65,859 |
| | 31,521 |
| | 28,298 |
|
| Purchase obligations | 55,134 |
| | 55,134 |
| | — |
| | — |
| | — |
|
| Total contractual obligations | $ | 2,222,016 |
| | 202,625 |
| | 264,221 |
| | 1,048,336 |
| | 706,834 |
|
Long-term debt listed in the table above includes principal payments on our 2021 and 2025 Notes, Senior Credit Facility, and the Wells Fargo note payable. Interest on the amounts outstanding under our Senior Credit Facility and Wells Fargo note payable are based on variable rates. We used the current rate paid on our Senior Credit Facility to estimate our future interest payments. Our 2021 Notes require semi-annual interest payments of $11.0 million through June 2021 and our 2025 Notes require semi-annual interest payments of $15.5 million through April 2025. For a discussion of our long-term debt see Note 7 in the accompanying “Notes to Consolidated Financial Statements.”
Capital lease obligations consist primarily of our obligation to lease transponder capacity on Galaxy 18. For a discussion of our capital and operating leases, see Note 14 in the accompanying “Notes to Consolidated Financial Statements.”
Tower obligations consist of our obligation to Vertical Bridge for the Master Lease Agreement that we entered into as part of the Tower Transaction.
Purchase obligations include cancelable open purchase orders for goods and services for capital projects and normal operations, which are not included in our Consolidated Balance Sheets at December 31, 2017, because the goods had not been received or the services had not been performed at December 31, 2017.
Off-Balance Sheet Arrangements
We have not created, and are not party to, any special-purpose and off-balance sheet entities for the purpose of raising capital, incurring debt or operating parts of our business that are not consolidated into our financial statements. We do not have any arrangements or relationships with entities that are not consolidated into our financial statements that are reasonably likely to materially affect our liquidity or the availability of our capital resources.
Recently Issued Accounting Pronouncements
See Note 1 included in “Part II — Item 8 — Consolidated Financial Statements and Supplementary Data” for recently issued accounting pronouncements.
|
| | | | | | | | | | | | | | | |
| | Payments Due by Period |
| | Total | | Less Than 1 Year | | 1 to 3 Years | | 4 to 5 Years | | More Than 5 Years |
| | amounts in thousands |
| Consolidated contractual obligations | | | | | | | | | |
| Debt (1) | $ | 2,397,678 |
| | 902,934 |
| | 1,038,687 |
| | 1,124 |
| | 454,933 |
|
| Borrowings from GCI Liberty | 107,682 |
| | — |
| | 107,682 |
| | — |
| | — |
|
| Interest on long-term debt (2) | 362,810 |
| | 129,968 |
| | 129,593 |
| | 62,402 |
| | 40,847 |
|
| Capital lease obligations, including interest | 46,658 |
| | 13,450 |
| | 25,503 |
| | 5,971 |
| | 1,734 |
|
| Tower obligations, including interest | 182,592 |
| | 7,644 |
| | 15,750 |
| | 16,386 |
| | 142,812 |
|
| Operating lease commitments | 140,430 |
| | 40,487 |
| | 56,788 |
| | 21,829 |
| | 21,326 |
|
| Purchase obligations | 51,139 |
| | 51,139 |
| | — |
| | — |
| | — |
|
| Total contractual obligations | $ | 3,288,989 |
| | 1,145,622 |
| | 1,374,003 |
| | 107,712 |
| | 661,652 |
|
| | | | | | | | | | |
| (1) Amounts are reflected in the table at the outstanding principal amount, assuming the debt instrument will remain outstanding until the stated maturity date, and may differ from the amounts stated in our consolidated balance sheet to the extent debt instruments (i) were issued at a discount or premium or (ii) have elements which are reported at fair value in our consolidated balance sheets. Amounts do not assume additional borrowings or refinancings of existing debt. |
| (2) Amounts (i) are based on our outstanding debt at December 31, 2018, (ii) assume the interest rates on our variable rate debt remain constant at the December 31, 2018 rates and (iii) assume that our existing debt is repaid at maturity. |
Critical Accounting Policies and Estimates
Our accounting and reporting policies comply with GAAP. The preparation of our financial statements in conformity with GAAP requires managementus to make estimates and assumptions. Ourassumptions that affect the reported amounts of assets and liabilities at the date of the financial positionstatements and resultsthe reported amounts of operations can be affected byrevenue and expenses during the reporting period. Listed below are the accounting estimates that we believe are critical to our financial statements due to the degree of uncertainty regarding the estimates or assumptions involved and the magnitude of the asset, liability, revenue or expense being reported. All of these accounting estimates and assumptions, which are integralas well as the resulting impact to understanding reported results. Critical accounting policies are those policies that management believes areour financial statements, have been discussed with the most important to the portrayalaudit committee of our financial conditionboard of directors.
Fair Value of Non-Financial Instruments. Our non-financial instrument valuations are primarily comprised of our determination of the estimated fair value allocation of net tangible and results,identifiable intangible assets acquired in business combinations, our annual assessment of the recoverability of our goodwill and require managementother nonamortizable intangibles, and our evaluation of the recoverability of our other long-lived assets upon certain triggering events.
The Company periodically reviews the carrying value of its intangible assets with definite lives and other long-lived assets to be used in operations whenever events or changes in circumstances indicate that the carrying amount of the assets or asset groups might not be recoverable. Factors that would necessitate an impairment assessment include a significant adverse change in the extent or manner in which an asset is used, a significant adverse change in legal factors or the business climate that could affect the value of the asset group, or a significant decline in the observable market value of an asset group, among others. If such facts indicate a potential impairment, the recoverability of the asset group is assessed by determining whether the carrying value of the asset group exceeds the sum of the projected undiscounted cash flows expected to result from the use and eventual disposition of the asset group over the remaining economic life of the asset group. If the carrying amount of the asset group is greater than the expected undiscounted cash flows to be generated by such asset group, including its ultimate disposition, an impairment adjustment is recognized.
If the carrying value of our intangible or long-lived assets exceeds their estimated fair value, we are required to write the carrying value down to fair value. Any such write down is included in impairment expense in our consolidated statement of operations. A high degree of judgment is required to estimate the fair value of our intangible and long-lived assets. We may use quoted market prices, prices for similar assets, present value techniques and other valuation techniques to prepare these estimates. We may need to make estimates that are difficult, subjective or complex. Most accounting policies are not considered by management to be critical accounting policies. Several factors are considered in determining whether or not a policy is critical in the preparation of financial statements. These factors include, among other things, whether the estimates are significant to the financial statements, the nature of the estimates, the ability to readily validate the estimates with other information including third parties or available prices,future cash flows and sensitivity of the estimates to changes in economic conditions and whether alternative accounting methods may be utilized under GAAP. For all of these policies, management cautions that future events rarely develop exactly as forecast, and the best estimates routinely require adjustment. Management has discussed the development and the selection of critical accounting policies with GCI's Audit Committee.
Those policies and estimates considered to be critical for the year ended December 31, 2017 are described below.
Allowance for Doubtful Receivables
We record expense to maintain an allowance for doubtful receivables for estimated losses that result from the failure or inability of our customers to make required payments. When determining the allowance, we consider the probability of recoverability based on past experience, economic data, and changes in our collections processes. Credit risks are assessed based on historical write-offs, net of recoveries,discount rates as well as other assumptions in order to implement these valuation techniques. Due to the high degree of judgment involved in our estimation techniques, any value ultimately derived from our intangible or long-lived assets may differ from our estimate of fair value.
We utilize the cost approach as the primary method used to establish fair value for our property and equipment in connection with business combinations. The cost approach considers the amount required to replace an analysisasset by constructing or purchasing a new asset with similar utility, then adjusts the value in consideration of physical depreciation and functional and technological obsolescence as of the aged accounts and installment receivable balances with reserves generally increasing as the receivable ages. Accounts receivable may be fully reserved when specific collection issues are known to exist, such as pending bankruptcy or catastrophes.appraisal date. The cost approach relies on management’s assumptions regarding current
Impairment
material and Useful Liveslabor costs required to rebuild and repurchase significant components of Intangible Assetsour property and equipment along with assumptions regarding the age and estimated useful lives of our property and equipment.
We had $530.8 millionThe accounting guidance permits entities to first perform a qualitative assessment to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. If the qualitative assessment supports that it is more likely than not that the carrying value of the Company's indefinite-lived intangible assets, atother than goodwill, exceeds its fair value, then a quantitative assessment is performed. At December 31, 2017, consisting2018, the Company determined that it was necessary to perform a quantitative impairment assessment of goodwill of $242.3 million,its cable certificates and wireless licenses. An impairment was recorded in the amount of $191.6$65 million (see note 8 in the accompanying consolidated financial statements).
We utilize an income approach as the primary method used to establish fair value for our customer relationships, cable certificates, and wireless licenses of $93.8 million and broadcast licenses of $3.1 million.
Goodwill represents the excess of cost over fair value of net assets acquired in connection with a business acquisition. We have determined thatcombinations. The income approach quantifies the expected earnings of our reporting unit is the same as our reportable segment. Ourcustomer relationships, cable certificates, represent agreements with government entitiesand wireless licenses by isolating the after tax cash flows attributable to constructthe respective asset and operatethen discounting the cash flows to their present value. The income approach relies on management’s assumptions such as projected revenue, market penetration, expenses, capital expenditures, customer trends, and a video business. The valuediscount rate applied to the estimated after tax cash flows.
We perform our annual assessment of the recoverability of our cable certificates is derived from the economic benefits we receive from the right to solicit new customers and to market new services. The amount we have recorded for cable certificates is from cable system acquisitions. Our wireless licenses are from the FCC and give us the right to provide wireless service within a certain geographical area. The amount we have recorded is from acquisitions of wireless companies and auctions of wireless spectrum. Our broadcast licenses are from the FCC and give us the right to broadcast television stations within a certain geographical area. The amount we have recorded for broadcast licenses is from broadcast television station acquisitions.
We assess our indefinite-lived intangible assets including goodwill for impairment on an annual basis duringin the fourth quarter using October 31 aseach year. The Company utilizes a measurement date unless circumstances require a more frequent measurement. When evaluating our indefinite-lived intangible assetsqualitative assessment for determining whether the quantitative goodwill impairment we mayanalysis is necessary. The accounting guidance permits entities to first perform an assessment qualitativelyassess qualitative factors to determine whether it is more likely than not that the carrying amount exceeds its fair value, referred to as a “step zero” approach. If, based on the review of the qualitative factors, we determine it is not more likely than not that the fair value of one of our indefinite-lived intangible assetsa reporting unit is less than its carrying value, we would bypassamount as a basis for determining whether it is necessary to perform the two-stepquantitative goodwill impairment test. EventsIn evaluating goodwill on a qualitative basis, the Company reviews the business performance of each reporting unit and circumstances we considerevaluates other relevant factors as identified in performing the “step zero” qualitative assessment include macro-economic conditions, market and industry conditions, internal forecasts, share price fluctuations, and operational stability and overall financial performance.
For goodwill, if we conclude thatrelevant accounting guidance to determine whether it is more likely than not that aan indicated impairment exists for any of our reporting unit'sunits. The Company considers whether there are any negative macroeconomic conditions, industry specific conditions, market changes, increased competition, increased costs in doing business, management challenges, legal environments and how these factors might impact company specific performance in future periods. As part of the analysis, the Company also considers fair value is less than itsdeterminations for certain reporting units that have been made at various points throughout the current and prior year for other purposes. At December 31, 2018, the Company determined that it was necessary to perform a quantitative goodwill impairment assessment for the GCI Holdings reporting unit. An impairment was recorded in the amount of $147 million (see note 8 in the accompanying consolidated financial statements). Due to this impairment, the carrying amount, we would perform the first step (“step one”)value of the two-step impairment testGCI Holdings reporting unit approximates fair value as of December 31, 2018.
The fair value of goodwill is determined using an income approach. The Company’s income approach model used for its goodwill valuation is consistent with that used for the cable certificates except that cash flows from the entire business enterprise are used for the goodwill valuation.
Income Taxes. We are required to estimate the amount of tax payable or refundable for the current year and calculate the estimateddeferred income tax liabilities and assets for the future tax consequences of events that have been reflected in our financial statements or tax returns for each taxing jurisdiction in which we operate. This process requires our management to make judgments regarding the timing and probability of the ultimate tax impact of the various agreements and transactions that we enter into. Based on these judgments we may record tax reserves or adjustments to valuation allowances on deferred tax assets to reflect the expected realizability of future tax benefits. Actual income taxes could vary from these estimates due to future changes in income tax law, significant changes in the jurisdictions in which we operate, our inability to generate sufficient future taxable income or unpredicted results from the final determination of each year's liability by taxing authorities. These changes could have a significant impact on our financial position.
Results of Operations - GCI Holdings, LLC
GCI Holdings provides a full range of wireless, data, video, voice, and managed services to residential, businesses, governmental entities, and educational and medical institutions primarily in Alaska. We have seen a general decrease in subscriber metrics primarily due to the recession in Alaska as discussed in the Overview section. The following table highlights selected key performance indicators used in evaluating GCI Holdings.
|
| | | | | |
| | December 31, |
| | 2018 | | 2017 |
| Consumer | | | |
| Wireless: | | | |
Wireless lines in service1 | 192,700 |
| | 196,800 |
|
| Data: | | | |
Cable modem subscribers2 | 125,700 |
| | 124,900 |
|
| Video: | | | |
| Basic subscribers | 89,100 |
| | 97,200 |
|
| Homes passed | 253,400 |
| | 252,500 |
|
| Voice: | | | |
Total local access lines in service3 | 44,500 |
| | 48,900 |
|
| Business | | | |
| Wireless: | | | |
Wireless lines in service1 | 21,500 |
| | 22,600 |
|
| Data: | | | |
Cable modem subscribers2 | 9,200 |
| | 9,900 |
|
| Voice: | | | |
Total local access lines in service3 | 36,500 |
| | 38,500 |
|
| | | | |
1 A wireless line in service is defined as a revenue generating wireless device. On January 1, 2018, we transferred 600 small business wireless lines from Business to Consumer. |
2 A cable modem subscriber is defined by the purchase of cable modem service regardless of the level of service purchased. If one entity purchases multiple cable modem service access points, each access point is counted as a subscriber. On January 1, 2018, we transferred 700 small business cable modem subscribers from Business to Consumer. |
3 A local access line in service is defined as a revenue generating circuit or channel connecting a customer to the public switched telephone network. On January 1, 2018, we transferred 1,600 small business local access lines from Business to Consumer. |
As described in notes 1 and 4 to the accompanying consolidated financial statements, for accounting purposes, HoldCo is considered to have acquired GCI, LLC's parent company, GCI Liberty in the contribution. Although GCI Holdings’ results are only included in the Company’s results beginning on March 9, 2018, we believe a discussion of GCI Holdings’ results for all periods presented promotes a better understanding of the reporting unit by using discounted cash flow valuation modelsoverall results of its business. For comparison and by comparing our reporting unitsdiscussion purposes we are presenting the pro forma results of GCI Holdings for the years ended December 31, 2018 and 2017, inclusive of acquisition accounting adjustments. The pro forma financial information was prepared based on the historical financial information of GCI Holdings and assuming the acquisition of GCI Holdings took place on January 1, 2017. The acquisition price allocation related to guideline publicly-traded companies. These methods require estimatesthe GCI Holdings business combination is preliminary. Accordingly, the pro forma adjustments are based on the preliminary acquisition price allocation and have been made solely for the purpose of ourproviding comparative pro forma financial information. We have made pro forma adjustments to the results for the year ended December 31, 2017 for the impact of the new revenue standard (as described in note 2) to assist in the comparability of the year ended December 31, 2018. We have made pro forma adjustments to the results for the year ended December 31, 2018 and 2017 to reflect the impact of the FCC's decision in regards to RHC funding as described above in the Overview section. The financial information below is presented for illustrative purposes only and does not purport to represent what the results of operations of GCI Holdings would actually have been had the business combination occurred on January 1, 2017, or to project the results of operations of GCI Holdings for any future revenues, profits, capital expenditures, working capital,periods. The pro forma adjustments are based on available information and other relevant factors, as well as selecting appropriate guideline publicly-traded companies for each reporting unit. We estimate these amounts by evaluating historical trends, current budgets, operating plans, industry data, and other relevant factors. Usingcertain assumptions that the Company's management believes are different from those usedreasonable. The pro forma adjustments are directly attributable to the business combination including adjustments related to the amortization of acquired tangible and intangible assets, stock-based compensation, and the exclusion of transaction related costs; RHC funding as described above; and the new revenue standard and are expected to have a continuing impact on the results of operations of GCI Holdings.
GCI Holdings’ pro forma operating results were as follows:
|
| | | | | | |
| | Years ended December 31, |
| | 2018 | | 2017 |
| | amounts in thousands |
| Revenue | $ | 875,290 |
| | 894,909 |
|
| Operating expenses (excluding stock-based compensation included below): | | | |
| Operating expense | (259,516 | ) | | (276,885 | ) |
| Selling, general and administrative expenses | (348,903 | ) | | (333,023 | ) |
| Adjusted OIBDA | 266,871 |
| | 285,001 |
|
| Stock-based compensation | (6,088 | ) | | (14,230 | ) |
| Impairment of intangibles and long-lived assets | (219,595 | ) | | — |
|
| Legal settlement | (3,600 | ) | | — |
|
| Depreciation and amortization | (241,687 | ) | | (240,206 | ) |
| Operating income | $ | (204,099 | ) | | 30,565 |
|
Pro forma revenue
The components of pro forma revenue are as follows: |
| | | | | | |
| | Years ended December 31, |
| | 2018 | | 2017 |
| | amounts in thousands |
| Consumer | | | |
| Wireless | $ | 166,847 |
| | 169,601 |
|
| Data | 159,667 |
| | 145,757 |
|
| Video | 89,553 |
| | 99,609 |
|
| Voice | 20,601 |
| | 21,858 |
|
| Business | | | |
| Wireless | 95,649 |
| | 99,940 |
|
| Data | 278,315 |
| | 290,194 |
|
| Video | 19,449 |
| | 18,039 |
|
| Voice | 45,209 |
| | 49,911 |
|
| Total pro forma revenue | $ | 875,290 |
| | 894,909 |
|
Pro forma consumer wireless revenue decreased $2.8 million for the year ended December 31, 2018 as compared to the corresponding prior year period. The decrease was partially due to a $4.2 million decrease in our estimates, butwireless plan fee revenue for the year ended December 31, 2018 as compared to the corresponding prior year period, which was primarily driven by a decrease in each case reasonable, could produce significantly different resultsthe number of subscribers and materially affect the determinationforgiveness of fair value and/or impairmenta month of service for our indefinite-lived intangible assets.
For 2017 and 2016,wireless customers due to the implementation of the new billing system. During the third quarter of 2018, we performedconverted to a step zero qualitative analysisnew third-party billing system. The billing system implementation included a transition of wireless customers from billing in arrears to billing in advance. To ease the transition for our annual assessmentcustomers, we chose to forgive one month of impairmentservice for goodwill and our indefinite-lived intangible assets. After evaluating and weighing all relevant events and circumstances, we concluded that it is not more likely than not thatthose customers who would have otherwise received an invoice for two months of service. Additionally, there was a decrease of $2.2 million in USF high cost support ("High Cost Support") for the fair value of our reporting unit or indefinite-lived intangible assets were less than their carrying amounts. Consequently, we did not performyear ended December 31, 2018 as compared to the corresponding prior year period due to a step one quantitative analysisscheduled decrease in 2017 or 2016.
Valuation Allowancecash received for Net Operating Loss Deferred Tax Assets
Our income tax policy providesHigh Cost Support for deferred income taxes to show the effect of temporary differences between the recognition of revenue and expensesurban areas. As previously disclosed, High Cost Support for financial and income tax reporting purposes and between the tax basis of assets and liabilities and their reported amounts in the financial statements. Significant management judgment is required in developing our provision for income taxes, including the determination of deferred tax assets and liabilities and any valuation allowances that may be required against the deferred tax assets. We have not recorded a valuation allowance on the deferred tax assetsurban areas ends as of December 31, 2017,2018. We expect High Cost Support to decrease by $4.1 million in 2019 as compared to 2018 due to the end of High Cost Support provided for certain urban areas previously included. The decreases discussed above were partially offset by a $5.1 million increase in wireless equipment revenue for the year ended December 31, 2018 as compared to the corresponding prior year period, which was primarily driven by an increase in the number of higher priced wireless devices sold.
Pro forma consumer data revenue increased $13.9 million for the year ended December 31, 2018 as compared to the corresponding prior year period. The increase was primarily attributable to an increase in prices for lower tier cable modem plans, which has led to subscribers moving to plans with higher recurring monthly charges that offer higher speeds and higher usage limits.
Pro forma consumer video revenue decreased $10.1 million for the year ended December 31, 2018 as compared to the corresponding prior year period. The decrease was primarily due to a 8.3% decrease in the number of subscribers.
Pro forma consumer voice revenue decreased $1.3 million for the year ended December 31, 2018 as compared to the corresponding prior year period. The decrease for the year ended December 31, 2018 was primarily due to a decrease in High Cost Support due to a scheduled decrease in funding for urban areas.
Pro forma business wireless revenuedecreased $4.3 million for the year ended December 31, 2018 as compared to the corresponding prior year period. The decrease is due to wholesale customers moving backhaul circuits off our network and a reduction of roaming traffic due to a wholesale customer's construction of its own facilities.
Pro forma business data revenue decreased $11.9 million for the year ended December 31, 2018 as compared to the corresponding prior year period. The decrease was primarily due to a $7.3 million decrease in data and transport service revenue due to the reduction from the RHC Program as discussed above in the Overview section and a $4.3 million decrease in professional services revenue due to a decrease in special project work.
Pro forma business video revenue increased $1.4 million for the year ended December 31, 2018 as compared to the corresponding prior year period primarily due to an increase in political advertising revenue partially offset by a decrease in video plan fee revenue due to a decrease in business video subscribers.
Pro forma business voice revenuedecreased $4.7 million year ended December 31, 2018 as compared to the corresponding prior year period. The decrease is primarily due to a $2.1 million decrease in long distance revenue as a result of decreased long distance traffic and rate compression and a $2.6 million decrease in local voice revenue due to a decrease in the number of business access lines in service.
Pro forma Operating expensesdecreased $17.4 million for the year ended December 31, 2018 as compared to the corresponding prior year period. The decrease for the year ended December 31, 2018 was primarily due to a $3.9 million decrease in video distribution and programming costs primarily due to a decrease in the number of video subscribers; a $5.1 million decrease in wireless costs due to a decrease in wireless distribution costs driven by construction of facilities that allowed us to move traffic to our network; a $3.1 million decrease in professional services expense due to a decrease in special project work; and a $2.7 million decrease in voice costs due to the decrease in long distance traffic and a reduction of local access lines in service.
Pro forma Selling, general and administrative expenses increased $15.9 million for the year ended December 31, 2018, as compared to the corresponding prior year period primarily due to a $4.0 million write-off of costs associated with an abandoned project, a $3.3 million increase in labor costs driven by severance payments to employees who were laid off and annual merit increases, and a $3.3 million increase in software contracts due to additional work as part of the billing system implementation.
Pro forma Stock based compensation decreased $8.1 million for the year ended December 31, 2018 as compared to the corresponding prior year period due to awards for which, based on management’s belief that future reversals of existing temporary differences and estimated future taxable income exclusive of reversing temporary differences and carryforwards will, more likely than not, be sufficient to realize the benefit of these assets over time. In the event that actual results differ from these estimates or if our historical trends change, we may be required to record a valuation allowance on deferred tax assets, which could have a material adverse effect in our consolidated financial position or results of operations.purchase accounting, amortization was completely recognized during 2017.
Other significant accounting policies, not involvingPro forma Impairment of intangibles and long-lived assets increased $219.6 million primarily due to the same levelimpairment of measurement uncertaintiesgoodwill and cable certificates as those discussed above, are nevertheless importanta result of unanticipated program revenue changes and certain other market factors impacting GCI Holdings' operating results.
Pro forma Depreciation and amortization increased $1.5 million during the year ended December 31, 2018 as compared to the corresponding prior year period. The increase was primarily due to new assets placed in service since March 9, 2018, which was partially offset due to lower amortization expense because of an understanding of the financial statements. A complete discussion of our significant accounting policies can be found in Note 1 in the accompanying “Notes to Consolidated Financial Statements.”accelerated recognition pattern for amortizing intangibles.
Regulatory Developments
See “Part I — Item 1. Business — Regulation” for more information about regulatory developments affecting us.
Inflation
We do not believe that inflation has a significant effect on our operations.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are
The Company is exposed to various types of market risk in the normal course of business including the impact of interest rate changes.due to its ongoing investing and financial activities. Market risk isrefers to the potentialrisk of loss arising from adverse changes in stock prices and interest rates. The risk of loss can be assessed from the perspective of adverse changes in fair values, cash flows and future earnings. The Company has established policies, procedures and internal processes governing our management of market ratesrisks and prices. We do not hold or issuethe use of financial instruments for trading purposes.to manage its exposure to such risks.
Interest Rate Risk
Our Senior Credit FacilityThe Company is exposed to changes in interest rates primarily as a result of its borrowing and Wells Fargo note payable carryinvestment activities, which include investments in fixed and floating rate debt instruments and borrowings used to maintain liquidity and to fund business operations. The nature and amount of its long-term and short-term debt are expected to vary as a result of future requirements, market conditions and other factors. The Company manages its exposure to interest rates by maintaining what it believes is an appropriate mix of fixed and variable rate debt. The Company believes this best protects it from interest rate risk. Our Senior Credit Facility consists ofThe Company has achieved this mix by (i) issuing fixed rate debt that it believes has a low stated interest rate and significant term loan, Term Loan B,to maturity, (ii) issuing variable rate debt with appropriate maturities and revolving credit facility. Amounts borrowed under the term loan bear interest at London Interbank Offered Rate (“LIBOR”) plus 3.00% or less depending upon our Total Leverage Ratio (as defined in the Senior Credit Facility agreement). Amounts borrowed under the Term Loan B bearrates and (iii) entering into interest at LIBOR plus 2.25%. Amounts borrowed under the Wells Fargo note payable bear interest at LIBOR plus 2.25%. Should the LIBOR rate change, our interest expense will increase or decrease accordingly.swap arrangements when it deems appropriate. As of December 31, 2017, we have borrowed $565.6 million subject2018, the Company's debt is comprised of the following amounts:
|
| | | | | | | | | | | | | |
| | Variable rate debt | | Fixed rate debt |
| | Principal amount | | Weighted average interest rate | | Principal amount | | Weighted average interest rate |
| | dollar amounts in thousands |
| GCI Holdings | $ | 722,678 |
| | 4.8 | % | | $ | 775,000 |
| | 6.8 | % |
| Corporate and other | $ | 1,000,906 |
| | 4.2 | % | | $ | 6,776 |
| | 3 | % |
The Company is exposed to interest rate risk. On this amount, each 1% increasechanges in stock prices primarily as a result of its significant holdings in publicly traded securities. The Company continually monitors changes in stock markets, in general, and changes in the LIBOR interest ratestock prices of its holdings, specifically. The Company believes that changes in stock prices can be expected to vary as a result of general market conditions, technological changes, specific industry changes and other factors. The Company periodically uses equity collars and other financial instruments to manage market risk associated with certain investment positions. These instruments are recorded at fair value based on option pricing models.
At December 31, 2018, the fair value of the Company's equity securities was $1.5 billion. Had the market price of such securities been 10% lower at December 31, 2018, the aggregate value of such securities would resulthave been $153 million lower. At December 31, 2018, the fair value of the Company's investment in $5.7Liberty Broadband was $3.1 billion. Had the market price of such security been 10% lower at December 31, 2018, the fair value of such security would have been $307 million of additional gross interest cost on an annualized basis. All of our other material borrowings have a fixed interest rate.lower.
Item 8. Consolidated Financial Statements and Supplementary Data |
|
Our The Company's consolidated financial statements are filed under this Item, beginning on page 42II-17. Our supplementary data is filed under Item 7, beginning on page 27. |
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial DisclosureDisclosure.
None.
Item 9A. Controls and ProceduresProcedures.
Evaluation of
Disclosure Controls and Procedures
We maintain
In accordance with Exchange Act Rules 13a-15 and 15d-15, the Company carried out an evaluation, under the supervision and with the participation of management, including its chief executive officer and its principal accounting and financial officer (the “Executives”), of the effectiveness of its disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 (“Exchange Act”) is recorded, processed, summarized, accumulated and communicated to our management, including our principal executive and financial officers, to allow timely decisions regarding required financial disclosure, and reported as specified in the SEC’s rules and forms. As of the end of the period covered by this Annual Report on Form 10-K, we carried out an evaluation of the effectiveness of the design and operation of our “disclosure controls and procedures” (as defined in Exchange Act Rule 13a - 15(e)) under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer.report. Based on that evaluation, the Executives concluded that the Company's disclosure controls and procedures were not effective as of December 31, 2018 because of two material weaknesses in its internal control over financial reporting that are described below underin “Management’s Report on Internal Control Over Financial Reporting," ourReporting.”
However, giving full consideration to the two material weaknesses, the Company’s management including our Chief Executive Officer and our Chief Financial Officer,has concluded that our disclosure controlsthe consolidated financial statements included in this Annual Report on Form 10-K present fairly, in all material respects, the Company’s financial position, results of operations and procedures were effective as of December 31, 2017.
The certifications attached as Exhibits 31 and 32 to thiscash flows for the periods disclosed in conformity with U.S. generally accepted accounting principles ("GAAP"). KPMG LLP has issued its report should be read in conjunction with the disclosures set forth herein.dated February 28, 2019, which expressed an unqualified opinion on those consolidated financial statements.
Management’s Report on Internal Control Over Financial Reporting
Our management
Management of the Company is responsible for establishing and maintaining adequate internal control over the Company’s financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of the effectiveness of ourExchange Act. The Company’s internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations (COSO) in 2013.
Based on our evaluation of the effectiveness of our internal control over financial reporting, our management concluded that as of December 31, 2017, we maintained effective internal control over financial reporting.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) identified in connection with the evaluation of our controls performed during the quarter ended December 31, 2017, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. A company'sBecause of inherent limitations, internal control over financial reporting includes thosemay not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.may deteriorate.
InternalThe Company’s management assessed the effectiveness of internal control over financial reporting as of December 31, 2018, using the criteria in Internal Control-Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management has inherent limitations. Internalconcluded that, as of December 31, 2018, the Company's internal control over financial reporting is not effective due to the two material weaknesses described below.
A material weakness is a process that involves human diligence and compliance and is subject to lapsesdeficiency, or a combination of deficiencies, in judgment and breakdowns resulting from human failures. Internalinternal control over financial reporting, also can be circumvented by collusion or improper management override. Because of such limitations,that there is a riskreasonable possibility that a material misstatementsmisstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis bybasis. Based on management's evaluation of internal control over financial reporting, two material weaknesses were identified as described below at GCI Holdings, a wholly owned subsidiary.
| |
| 1. | Information technology general controls ("ITGCs") around financially significant information technology ("IT") systems were not effective. Specifically, the ITGCs around system access were not operating consistently to ensure that access to applications and data was adequately restricted to appropriate personnel. Because of the deficiency in ITGCs for these systems, the business process controls (automated and manual) that are dependent on these systems were also deemed ineffective because they could have been adversely impacted. We believe that these control deficiencies were a result of an inadequate assessment of IT risks, which in turn contributed to inappropriate reliance on manual business process controls rather than ITGCs. |
| |
| 2. | Internal controls around the payroll process were ineffective due to an aggregation of deficiencies relating to the IT deficiencies described above, ineffectively designed controls over payroll changes, and ineffective review and monitoring controls. We believe that these control deficiencies were a result of an inadequate assessment of risk related to outsourcing payroll processing to a third-party provider, which contributed to the ineffective design of controls intended to validate that manual changes to payroll inputs were appropriate. |
As part of the control environment improvements disclosed in our Quarterly Reports on Form 10-Q for the quarters ended June 30, 2018 and September 30, 2018, there was an emphasis on improving the strength of the Company’s ITGCs. In several cases, the strengthened controls were not fully operational until the fourth quarter of 2018. Due to the newness of the controls and personnel constraints and due to the control operators' dedication to supporting the launch of GCI Holdings’ new billing and payroll systems, several of the improved access controls were not consistently executed in the fourth quarter of 2018.
The control deficiencies did not result in any identified misstatements.
This Annual Report on Form 10-K does not include an audit report of the Company's independent registered public accounting firm regarding internal control over financial reporting. However, these inherent limitations are known featuresManagement's Report On Internal Control Over Financial Reporting was not subject to audit by the Company's independent registered public accounting firm pursuant to the rules of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
We may enhance, modify,Securities and supplement internal controls and disclosure controls and procedures based on experience.Exchange Commission.
Changes in Internal Control Over Financial Reporting
In March 2018, the Company completed the Transactions, pursuant to which the contribution was treated as a reverse acquisition under the acquisition method of accounting in accordance with GAAP. The Transactions resulted in changes to the management of the Company. As a result, management made significant enhancements to internal controls over financial reporting, especially to the ITGCs as management shifted from a highly manual control environment to more reliance on ITGCs.
Except for certain of the remediation activities described below, and changes that resulted from the Transactions, there was no change in the Company’s internal control over financial reporting that occurred during the Company’s quarter ended December 31, 2018 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Remediation Plan for Material Weaknesses in Internal Control Over Financial Reporting
In response to the two material weaknesses identified in “Management’s Report on Internal Control Over Financial Reporting,” the Company, with oversight from the Audit Committee of the Board of Directors, has developed a plan to remediate the material weaknesses at GCI Holdings. The remediation actions included the following:
Improvement of the design and operation of control activities and procedures associated with user access to the affected IT systems, including removing all inappropriate IT system access associated with the material weakness and ensuring no inappropriate activity occurred during the period.
Enhance management’s risk assessment to emphasize and evaluate the interdependencies of business processes, automated control activities, and effective ITGCs.
Enhance controls related to the review of payroll changes and of payroll calculations after payroll is processed by the third-party processing company, but before payments are disbursed to employees.
The Company believes the foregoing efforts remediated the two material weaknesses described in “Management’s Report on Internal Control Over Financial Reporting” after the assessment date and prior to the filing of this Annual Report on Form 10-K. However, because the reliability of the internal control process requires repeatable execution, the successful on-going remediation of these material weaknesses will require on-going training, monitoring, and evidence of effectiveness prior to concluding that the controls are effective.
Additionally, the Company and GCI Holdings intend to continue to monitor information system access and the assessment of process level risks to determine whether additional adjustments should be made to ensure controls are effective in the future.
Item 9B. Other InformationInformation.
None.
Part III
Items 10, 11, 12, 13, and 14 are omitted per General Instruction l(1)(a) and (b) of Form 10-K.
Part IV
Item 15. Exhibits, Consolidated Financial Statement Schedules
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| |
(1) Consolidated Financial Statements | Page No. |
| |
Included in Part II of this Report: | |
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| |
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(2) Consolidated Financial Statement Schedules | |
| |
Schedules are omitted, as they are not required or are not applicable, or the required information is shown in the applicable financial statements or notes thereto. | |
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| |
Report of Independent Registered Public Accounting Firm
Board of Directors and ShareholderTo the Member
GCI, Inc.LLC:
Opinion on the financial statementsConsolidated Financial Statements
We have audited the accompanying consolidated balance sheets of GCI, Inc. (an Alaska corporation)LLC and subsidiaries (the “Company”)Company) as of December 31, 20172018 and 2016, and2017, the related consolidated statements of operations, stockholder’s equity, and cash flows, and equity for each of the three years in the three‑year period ended December 31, 2017,2018, and the related notes(collectively referred to as (collectively, the “financial statements”)consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20172018 and 2016,2017, and the results of its operations and its cash flows for each of the three years in the three‑year period ended December 31, 2017,2018, in conformity with accounting principlesU.S. generally accepted in the United States of America.accounting principles.
Basis for opinionOpinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’sthese consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ GRANT THORNTONKPMG LLP
We have served as the Company’s auditor since 2009.2017.
Seattle, WashingtonDenver, Colorado
February 28, 2018
2019
GCI, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS |
| | | | | | |
| GCI, LLC AND SUBSIDIARIES |
| |
| Consolidated Balance Sheets |
| |
| December 31, 2018 and 2017 |
| |
|
| | 2018 |
| 2017 |
| | amounts in thousands |
| Assets |
|
|
|
| Current assets: |
|
|
|
| Cash and cash equivalents | $ | 170,741 |
|
| 573,210 |
|
| Trade and other receivables, net of allowance for doubtful accounts of $7,555 and $0, respectively | 182,600 |
|
| 6,803 |
|
| Other current assets | 40,100 |
|
| 1,265 |
|
| Total current assets | 393,441 |
|
| 581,278 |
|
| Investments in equity securities (note 6) | 1,533,517 |
|
| 1,803,064 |
|
| Investments in affiliates, accounted for using the equity method (note 7) | 177,030 |
|
| 114,655 |
|
| Investment in Liberty Broadband measured at fair value (note 7) | 3,074,373 |
|
| 3,634,786 |
|
| Property and equipment, net | 1,184,606 |
|
| 624 |
|
| Intangible assets not subject to amortization |
|
|
|
|
|
| Goodwill (note 8) | 844,182 |
|
| 25,569 |
|
| Cable certificates | 305,000 |
|
| — |
|
| Wireless licenses | 190,000 |
|
| — |
|
| Other | 16,500 |
|
| 4,000 |
|
| 1,355,682 |
|
| 29,569 |
|
| Intangible assets subject to amortization, net (note 8) | 436,006 |
|
| 4,237 |
|
| Other assets, at cost, net of accumulated amortization | 71,514 |
|
| 4,000 |
|
| Total assets | $ | 8,226,169 |
|
| 6,172,213 |
|
| |
|
|
|
|
|
| | | | (Continued) |
|
| See accompanying notes to consolidated financial statements. |
|
| | | | | | |
| (Amounts in thousands) | December 31, |
| ASSETS | 2017 |
| 2016 |
| Current assets: |
|
|
|
| Cash and cash equivalents | $ | 15,622 |
|
| 19,297 |
|
|
|
|
|
|
|
| Receivables | 188,580 |
|
| 184,296 |
|
| Less allowance for doubtful receivables | 3,992 |
|
| 4,407 |
|
| Net receivables | 184,588 |
|
| 179,889 |
|
|
|
|
|
|
|
| Prepaid expenses | 21,206 |
|
| 18,599 |
|
| Inventories | 12,996 |
|
| 11,945 |
|
| Other current assets | 71 |
|
| 167 |
|
| Total current assets | 234,483 |
|
| 229,897 |
|
|
|
|
|
|
|
| Property and equipment | 2,754,667 |
|
| 2,614,875 |
|
| Less accumulated depreciation | 1,599,956 |
|
| 1,452,957 |
|
| Net property and equipment | 1,154,711 |
|
| 1,161,918 |
|
|
|
|
|
|
|
| Goodwill | 242,264 |
|
| 239,263 |
|
| Cable certificates | 191,635 |
|
| 191,635 |
|
| Wireless licenses | 93,753 |
|
| 92,347 |
|
| Other intangible assets, net of amortization | 75,697 |
|
| 74,444 |
|
| Other assets | 100,957 |
|
| 76,435 |
|
| Total other assets | 704,306 |
|
| 674,124 |
|
| Total assets | $ | 2,093,500 |
|
| 2,065,939 |
|
| | | | |
| See accompanying notes to consolidated financial statements. | | | |
GCI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
|
| | | | | | |
| (Amounts in thousands) | December 31, |
| LIABILITIES AND STOCKHOLDER'S EQUITY | 2017 |
| 2016 |
| Current liabilities: |
|
|
|
| Current maturities of obligations under long-term debt, capital leases, and tower obligations | $ | 13,972 |
|
| 13,229 |
|
| Accounts payable | 54,073 |
|
| 72,937 |
|
| Deferred revenue | 38,047 |
|
| 37,618 |
|
| Accrued payroll and payroll related obligations | 32,044 |
|
| 30,305 |
|
| Accrued liabilities | 14,147 |
|
| 14,729 |
|
| Accrued interest | 8,843 |
|
| 8,794 |
|
| Subscriber deposits | 1,271 |
|
| 917 |
|
| Total current liabilities | 162,397 |
|
| 178,529 |
|
|
|
|
|
|
|
| Long-term debt, net | 1,320,328 |
|
| 1,276,806 |
|
| Obligations under capital leases, excluding current maturities (including $1,702 and $1,769 due to a related party at December 31, 2017 and 2016, respectively) | 40,288 |
|
| 50,316 |
|
| Long-term deferred revenue | 138,022 |
|
| 135,877 |
|
| Deferred income taxes | 94,683 |
|
| 141,785 |
|
| Tower obligations | 93,606 |
| | 87,653 |
|
| Other liabilities | 60,093 |
|
| 54,056 |
|
| Total liabilities | 1,909,417 |
|
| 1,925,022 |
|
|
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|
|
|
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| Commitments and contingencies |
|
|
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| Stockholder's equity: |
|
|
|
|
|
| Class A common stock (no par). Authorized 10 shares; issued and outstanding 0.1 shares at December 31, 2017 and 2016 | 206,622 |
|
| 206,622 |
|
| Paid-in capital | 177,219 |
|
| 161,310 |
|
| Retained deficit | (236,594 | ) |
| (257,544 | ) |
| Total GCI, Inc. stockholder's equity | 147,247 |
|
| 110,388 |
|
| Non-controlling interests | 36,836 |
|
| 30,529 |
|
| Total stockholder's equity | 184,083 |
|
| 140,917 |
|
| Total liabilities and stockholder's equity | $ | 2,093,500 |
|
| 2,065,939 |
|
| | | | |
| See accompanying notes to consolidated financial statements. |
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| GCI, LLC AND SUBSIDIARIES |
| |
| Consolidated Balance Sheets (Continued) |
| |
| December 31, 2018 and 2017 |
| | |
| | 2018 | | 2017 |
| | amounts in thousands |
| Liabilities and Equity |
|
|
|
| Current liabilities: |
|
|
|
| Accounts payable and accrued liabilities | $ | 99,424 |
|
| 718 |
|
| Deferred revenue | 31,743 |
|
| — |
|
| Current portion of debt, net of deferred financing costs (note 9) | 900,759 |
|
| — |
|
| Other current liabilities | 44,799 |
|
| 9,747 |
|
| Total current liabilities | 1,076,725 |
|
| 10,465 |
|
| Long-term debt, net (note 9) | 1,522,939 |
|
| — |
|
| Loans from GCI Liberty | 107,682 |
| | — |
|
| Obligations under capital leases and tower obligations, excluding current portion (note 14) | 122,245 |
|
| — |
|
| Long-term deferred revenue | 65,954 |
|
| 130 |
|
| Deferred income tax liabilities | 792,064 |
|
| 643,426 |
|
| Taxes payable | — |
|
| 1,198,315 |
|
| Other liabilities | 50,543 |
|
| 95,841 |
|
| Total liabilities | 3,738,152 |
|
| 1,948,177 |
|
| Equity |
|
|
|
|
|
| Member's equity: |
|
|
|
|
|
| Member's investment | 3,478,744 |
|
| 2,305,440 |
|
| Retained earnings | 999,706 |
|
| 1,914,963 |
|
| Total member's equity | 4,478,450 |
|
| 4,220,403 |
|
| Non-controlling interests | 9,567 |
|
| 3,633 |
|
| Total equity | 4,488,017 |
|
| 4,224,036 |
|
| Commitments and contingencies |
|
|
|
|
| Total liabilities and equity | $ | 8,226,169 |
|
| 6,172,213 |
|
| | | | |
| See accompanying notes to consolidated financial statements. |
GCI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2017, 2016, AND 2015
|
| | | | | | | | | |
| (Amounts in thousands) | 2017 |
| 2016 |
| 2015 |
| Revenues: |
|
|
|
|
|
|
|
|
| Non-related party | $ | 919,204 |
|
| 933,812 |
|
| 973,251 |
|
| Related party | — |
|
| — |
|
| 5,283 |
|
| Total revenues | 919,204 |
|
| 933,812 |
|
| 978,534 |
|
|
|
|
|
|
|
|
|
|
| Cost of goods sold (exclusive of depreciation and amortization shown separately below): |
|
|
|
|
|
|
|
|
| Non-related party | 280,200 |
|
| 302,578 |
|
| 321,457 |
|
| Related party | — |
|
| — |
|
| 881 |
|
| Total cost of goods sold | 280,200 |
|
| 302,578 |
|
| 322,338 |
|
|
|
|
|
|
|
| Selling, general and administrative expenses |
|
|
|
|
|
|
|
|
| Non-related party | 370,639 |
|
| 358,356 |
|
| 337,839 |
|
| Related party | — |
|
| — |
|
| 540 |
|
| Total selling, general and administrative expenses | 370,639 |
|
| 358,356 |
|
| 338,379 |
|
|
|
|
|
|
|
|
|
|
| Depreciation and amortization expense | 197,115 |
|
| 193,775 |
|
| 181,767 |
|
| Software impairment charge | — |
|
| — |
|
| 29,839 |
|
| Operating income | 71,250 |
|
| 79,103 |
|
| 106,211 |
|
|
|
|
|
|
|
|
|
|
| Other income (expense): |
|
|
|
|
|
|
|
|
| Interest expense (including amortization of deferred loan fees) | (83,341 | ) |
| (78,628 | ) |
| (78,786 | ) |
| Loss on extinguishment of debt | (649 | ) |
| (640 | ) |
| (27,700 | ) |
| Impairment of equity method investment | — |
|
| — |
|
| (12,593 | ) |
| Other | 2,938 |
|
| 5,569 |
|
| 2,917 |
|
| Other expense, net | (81,052 | ) |
| (73,699 | ) |
| (116,162 | ) |
| Income (loss) before income taxes | (9,802 | ) |
| 5,404 |
|
| (9,951 | ) |
| Income tax (expense) benefit | 41,117 |
|
| (7,080 | ) |
| (81 | ) |
| Net income (loss) | 31,315 |
|
| (1,676 | ) |
| (10,032 | ) |
| Net income (loss) attributable to non-controlling interests | (476 | ) |
| (469 | ) |
| 159 |
|
| Net income (loss) attributable to GCI, Inc. | $ | 31,791 |
|
| (1,207 | ) |
| (10,191 | ) |
| | | | | | |
| See accompanying notes to consolidated financial statements. | | | | | |
|
| | | | | | | | | |
| GCI, LLC AND SUBSIDIARIES |
| |
| Consolidated Statements of Operations |
| |
| Years ended December 31, 2018, 2017 and 2016 |
| | | | | | |
| 2018 |
| 2017 |
| 2016 |
| | amounts in thousands |
| Revenue | $ | 739,762 |
|
| 23,817 |
| | 22,552 |
|
| Operating costs and expenses: |
|
|
|
|
| | |
| Operating expense (exclusive of depreciation and amortization shown separately below) | 227,192 |
|
| 11,541 |
| | 11,702 |
|
| Selling, general and administrative, including stock-based compensation (note 12) | 342,406 |
|
| 64,621 |
| | 43,041 |
|
| Depreciation and amortization expense | 206,946 |
|
| 3,252 |
| | 2,964 |
|
| Impairment of intangibles and long-lived assets | 219,595 |
|
| — |
| | — |
|
| 996,139 |
|
| 79,414 |
| | 57,707 |
|
| Operating income (loss) | (256,377 | ) |
| (55,597 | ) | | (35,155 | ) |
| Other income (expense): |
|
|
|
|
| | |
| Interest expense (including amortization of deferred loan fees) | (105,215 | ) |
| — |
| | — |
|
| Share of earnings (losses) of affiliates, net (note 7) | 25,772 |
|
| 7,001 |
| | 11,831 |
|
| Realized and unrealized gains (losses) on financial instruments, net (note 5) | (758,836 | ) |
| 637,164 |
| | 1,309,365 |
|
| Other, net | (8,100 | ) |
| 2,467 |
| | 30,773 |
|
| (846,379 | ) |
| 646,632 |
| | 1,351,969 |
|
| Earnings (loss) before income taxes | (1,102,756 | ) |
| 591,035 |
| | 1,316,814 |
|
| Income tax (expense) benefit | 184,875 |
|
| 133,522 |
| | (496,245 | ) |
| Net earnings (loss) | (917,881 | ) |
| 724,557 |
| | 820,569 |
|
| Less net earnings (loss) attributable to the non-controlling interests | (351 | ) |
| (29 | ) | | (114 | ) |
| Net earnings (loss) attributable to member | $ | (917,530 | ) |
| 724,586 |
| | 820,683 |
|
| | | | | | |
| See accompanying notes to consolidated financial statements. |
GCI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
|
| | | | | | | | | | | | | | | | | | |
| (Amounts in thousands) | Shares of Class A Common Stock | | Class A Common Stock | | Paid-in Capital | | Retained Deficit | | Non- controlling Interests | | Total Stockholder's Equity |
| Balances at January 1, 2015 | 0.1 |
| | $ | 206,622 |
| | 88,802 |
| | (128,068 | ) | | 299,866 |
| | 467,222 |
|
| Net income (loss) | — |
| | — |
| | — |
| | (10,191 | ) | | 159 |
| | (10,032 | ) |
| Distribution to GCI Liberty, Inc. | — |
| | — |
| | — |
| | (53,774 | ) | | — |
| | (53,774 | ) |
| Contribution from GCI Liberty, Inc. | — |
| | — |
| | 86,218 |
| | — |
| | — |
| | 86,218 |
|
| Distribution to non-controlling interest | — |
| | — |
| | — |
| | — |
| | (765 | ) | | (765 | ) |
| Investment by non-controlling interest | — |
| | — |
| | — |
| | — |
| | 3,209 |
| | 3,209 |
|
| Non-controlling interest acquisition | — |
| | — |
| | (10,282 | ) | | — |
| | (271,521 | ) | | (281,803 | ) |
| Other | — |
| | — |
| | (230 | ) | | — |
| | 50 |
| | (180 | ) |
| Balances at December 31, 2015 | 0.1 |
| | 206,622 |
| | 164,508 |
| | (192,033 | ) | | 30,998 |
| | 210,095 |
|
| Net loss | — |
| | — |
| | — |
| | (1,207 | ) | | (469 | ) | | (1,676 | ) |
| Distribution to GCI Liberty, Inc. | — |
| | — |
| | — |
| | (64,304 | ) | | — |
| | (64,304 | ) |
| Contribution from GCI Liberty, Inc. | — |
| | — |
| | 11,247 |
| | — |
| | — |
| | 11,247 |
|
| Non-controlling interest acquisition | — |
| | — |
| | (14,445 | ) | | — |
| | — |
| | (14,445 | ) |
| Balances at December 31, 2016 | 0.1 |
| | 206,622 |
| | 161,310 |
| | (257,544 | ) | | 30,529 |
| | 140,917 |
|
Cumulative effect of ASU 2016-09 adoption
| — |
| | — |
| | 18 |
| | 7,077 |
| | — |
| | 7,095 |
|
| Net loss | — |
| | — |
| | — |
| | 31,791 |
| | (476 | ) | | 31,315 |
|
| Distribution to GCI Liberty, Inc. | — |
| | — |
| | — |
| | (17,918 | ) | | — |
| | (17,918 | ) |
| Contribution from GCI Liberty, Inc. | — |
| | — |
| | 17,029 |
| | — |
| | — |
| | 17,029 |
|
| Investment by non-controlling interest | — |
| | — |
| | — |
| | — |
| | 6,783 |
| | 6,783 |
|
| Non-controlling interest acquisition | — |
| | — |
| | (1,138 | ) | | — |
| | — |
| | (1,138 | ) |
| Balances at December 31, 2017 | 0.1 |
| | $ | 206,622 |
| | 177,219 |
| | (236,594 | ) | | 36,836 |
| | 184,083 |
|
| | | | | | | | | | | | |
| See accompanying notes to consolidated financial statements. |
|
| | | | | | | | | |
| GCI, LLC AND SUBSIDIARIES |
| |
| Consolidated Statements of Cash Flows |
| |
| Years ended December 31, 2018, 2017 and 2016 |
| | | | | | |
| | 2018 | | 2017 | | 2016 |
| | amounts in thousands (See note 3) |
| Cash flows from operating activities: | |
| | | |
| Net earnings (loss) | $ | (917,881 | ) |
| 724,557 |
| | 820,569 |
|
| Adjustments to reconcile net earnings (loss) to net cash from operating activities: |
|
|
|
|
| | |
| Depreciation and amortization | 206,946 |
|
| 3,252 |
| | 2,964 |
|
| Stock-based compensation expense | 28,207 |
|
| 26,583 |
| | 16,128 |
|
| Share of (earnings) losses of affiliates, net | (25,772 | ) |
| (7,001 | ) | | (11,831 | ) |
| Realized and unrealized (gains) losses on financial instruments, net | 758,836 |
|
| (637,164 | ) | | (1,309,365 | ) |
| Deferred income tax expense (benefit) | (184,293 | ) |
| (133,522 | ) | | 496,820 |
|
| Intergroup tax payments | — |
|
| 287,763 |
| | 294,708 |
|
| Impairment of intangibles and long-lived assets | 219,595 |
|
| — |
| | — |
|
| Other, net | 13,441 |
|
| 1,040 |
| | (18,044 | ) |
| Change in operating assets and liabilities: |
|
|
|
|
| | |
| Current and other assets | (36,314 | ) |
| 31,772 |
| | 5,881 |
|
| Payables and other liabilities | (31,750 | ) |
| 7,584 |
| | (5,605 | ) |
| Net cash provided (used) by operating activities | 31,015 |
|
| 304,864 |
| | 292,225 |
|
| Cash flows from investing activities: |
|
|
|
|
| | |
| Cash and restricted cash from acquisition of GCI Holdings | 147,957 |
|
| — |
| | — |
|
| Capital expended for property and equipment | (134,352 | ) |
| (3,488 | ) | | (2,642 | ) |
| Purchases of investments | (48,581 | ) |
| (76,815 | ) | | (264,703 | ) |
| Sales of investments | — |
|
| 2,180 |
| | 1,161,596 |
|
| Investment in Liberty Broadband | — |
|
| — |
| | (2,400,000 | ) |
| Other investing activities, net | 2,700 |
|
| — |
| | 978 |
|
| Net cash provided (used) by investing activities | (32,276 | ) |
| (78,123 | ) | | (1,504,771 | ) |
| Cash flows from financing activities: |
|
|
|
|
| | |
| Borrowings of debt | 1,111,653 |
|
| — |
| | — |
|
| Borrowing from GCI Liberty | 104,000 |
| | — |
| | — |
|
| Repayment of debt, capital lease, and tower obligations | (179,233 | ) |
| — |
| | — |
|
| Contributions from (distributions to) member | (346,991 | ) | | — |
| | — |
|
| Contributions from (distributions to) Qurate retail | (1,077,061 | ) |
| (109,540 | ) | | (302,797 | ) |
| Distribution to non-controlling interests | (3,625 | ) |
| — |
| | — |
|
| Other financing activities, net | (10,114 | ) |
| (31,180 | ) | | 1,989 |
|
| Net cash provided (used) by financing activities | (401,371 | ) |
| (140,720 | ) | | (300,808 | ) |
| Net increase (decrease) in cash, cash equivalents and restricted cash | (402,632 | ) |
| 86,021 |
| | (1,513,354 | ) |
| Cash, cash equivalents and restricted cash at beginning of period | 574,148 |
|
| 488,127 |
| | 2,001,481 |
|
| Cash, cash equivalents and restricted cash at end of period | $ | 171,516 |
|
| 574,148 |
| | 488,127 |
|
| | | | | | |
| See accompanying notes to consolidated financial statements. |
GCI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
|
| | | | | | | | | |
| (Amounts in thousands) | 2017 | | 2016 | | 2015 |
| Cash flows from operating activities: | | | | | |
| Net income (loss) | $ | 31,315 |
| | (1,676 | ) | | (10,032 | ) |
| Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | |
| Depreciation and amortization expense | 197,115 |
| | 193,775 |
| | 181,767 |
|
| Deferred income tax expense (benefit) | (41,117 | ) | | 7,080 |
| | 81 |
|
| Share-based compensation expense | 17,453 |
| | 11,043 |
| | 10,902 |
|
| Loss on extinguishment of debt | 649 |
| | 640 |
| | 27,700 |
|
| Software impairment charge | — |
| | — |
| | 29,839 |
|
| Impairment of equity method investment | — |
| | — |
| | 12,593 |
|
| Other noncash income and expense items | 11,021 |
| | 9,866 |
| | 14,672 |
|
| Change in operating assets and liabilities | (24,270 | ) | | (14,827 | ) | | (13,567 | ) |
| Net cash provided by operating activities | 192,166 |
| | 205,901 |
| | 253,955 |
|
| Cash flows from investing activities: | | | | | |
| Purchases of property and equipment | (189,366 | ) | | (194,478 | ) | | (176,235 | ) |
| Restricted cash, net | (14,532 | ) | | 175 |
| | 65 |
|
| Purchases of other assets and intangible assets | (12,952 | ) | | (17,486 | ) | | (13,955 | ) |
| Grant proceeds | 2,188 |
| | 1,527 |
| | 14,007 |
|
| Proceeds from the sale of investment | 591 |
| | — |
| | 7,551 |
|
| Purchase of businesses, net of cash received | (6,802 | ) | | — |
| | (12,736 | ) |
| Purchase of KKCC assets | — |
| | (19,700 | ) | | — |
|
| Purchase of investments | — |
| | (1,800 | ) | | — |
|
| Note receivable issued to an equity method investee | — |
| | — |
| | (3,000 | ) |
| Other | — |
| | 4,599 |
| | (4,760 | ) |
| Net cash used for investing activities | (220,873 | ) | | (227,163 | ) | | (189,063 | ) |
| Cash flows from financing activities: | | | | | |
| Borrowing on Senior Credit Facility | 127,000 |
| | 125,000 |
| | 295,000 |
|
| Repayment of debt, capital lease, and tower obligations | (95,122 | ) | | (132,205 | ) | | (494,982 | ) |
| Net contribution from (distribution to) GCI Liberty, Inc. | (17,905 | ) | | (64,108 | ) | | 21,700 |
|
| Proceeds from Tower Transactions | 6,839 |
| | 90,795 |
| | — |
|
| Investment by non-controlling interest | 6,783 |
| | — |
| | — |
|
| Payment of debt issuance costs | (2,563 | ) | | (5,451 | ) | | (13,979 | ) |
| Issuance of 2025 Notes | — |
| | — |
| | 445,973 |
|
| Purchase of non-controlling interests | — |
| | — |
| | (282,505 | ) |
| Payment of bond call premium | — |
| | — |
| | (20,244 | ) |
| Distribution to non-controlling interest | — |
| | — |
| | (4,932 | ) |
| Other | — |
| | — |
| | 203 |
|
| Net cash provided by (used for) financing activities | 25,032 |
| | 14,031 |
| | (53,766 | ) |
| Net increase (decrease) in cash and cash equivalents | (3,675 | ) | | (7,231 | ) | | 11,126 |
|
| Cash and cash equivalents at beginning of period | 19,297 |
| | 26,528 |
| | 15,402 |
|
| Cash and cash equivalents at end of period | $ | 15,622 |
| | 19,297 |
| | 26,528 |
|
| | | | | | |
| See accompanying notes to consolidated financial statements. | | | | | |
|
| | | | | | | | | | | | |
| GCI, LLC AND SUBSIDIARIES |
| |
| Consolidated Statement of Equity |
| |
| Years ended December 31, 2018, 2017, and 2016 |
| |
| | Member's investment | | Retained earnings | | Non-controlling interest in equity of subsidiaries | | Total equity |
| | amounts in thousands |
| Balances at January 1, 2016 | $ | 2,684,850 |
| | 347,811 |
| | 3,776 |
| | 3,036,437 |
|
| Net earnings (loss) | — |
| | 820,683 |
| | (114 | ) | | 820,569 |
|
| Cumulative effect of accounting change | — |
| | 21,576 |
| | — |
| | 21,576 |
|
| Stock-based compensation | 14,906 |
| | — |
| | — |
| | 14,906 |
|
| Contributions from (distributions to) former parent, net | (272,195 | ) | | — |
| | — |
| | (272,195 | ) |
| Intergroup (payments) receipts | (30,602 | ) | | — |
| | — |
| | (30,602 | ) |
| Other | 1,493 |
| | 498 |
| | — |
| | 1,991 |
|
| Balances at December 31, 2016 | 2,398,452 |
| | 1,190,568 |
| | 3,662 |
| | 3,592,682 |
|
| Net earnings (loss) | — |
| | 724,586 |
| | (29 | ) | | 724,557 |
|
| Stock-based compensation | 26,243 |
| | — |
| | — |
| | 26,243 |
|
| Withholding taxes on net share settlements of stock-based compensation | (27,793 | ) | | — |
| | — |
| | (27,793 | ) |
| Contributions from (distributions to) former parent, net | (146,680 | ) | | — |
| | — |
| | (146,680 | ) |
| Intergroup (payments) receipts | 37,140 |
| | — |
| | — |
| | 37,140 |
|
| Other | 18,078 |
| | (191 | ) | | — |
| | 17,887 |
|
| Balances at December 31, 2017 | 2,305,440 |
| | 1,914,963 |
| | 3,633 |
| | 4,224,036 |
|
| Net earnings (loss) | — |
| | (917,530 | ) | | (351 | ) | | (917,881 | ) |
| Stock-based compensation | 25,399 |
| | — |
| | — |
| | 25,399 |
|
| Contribution of taxes in connection with HoldCo Split-Off | 1,146,750 |
| | — |
| | — |
| | 1,146,750 |
|
| Distribution to Qurate Retail | (1,079,689 | ) | | — |
| | — |
| | (1,079,689 | ) |
| Contributions from (distributions to) member, net | (346,955 | ) | | 2,019 |
| | — |
| | (344,936 | ) |
| Allocated consideration in connection with the Transactions | 1,441,669 |
| | — |
| | 7,000 |
| | 1,448,669 |
|
| Distribution to non-controlling interests | — |
| | — |
| | (3,625 | ) | | (3,625 | ) |
| Other | (13,870 | ) | | 254 |
| | 2,910 |
| | (10,706 | ) |
| Balances at December 31, 2018 | $ | 3,478,744 |
| | 999,706 |
| | 9,567 |
| | 4,488,017 |
|
| | | | | | | | |
| See accompanying notes to consolidated financial statements. |
|
| | |
| | GCI, INC.LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018, 2017 and 2016 | |
| |
(1) | Business and Summary of Significant Accounting Principles |
In the following discussion, GCI, Inc. and its direct and indirect subsidiaries are referred to as “we,” “us” and “our.”
(1) Basis of Presentation
We were incorporated in Alaska in 1997 to affect the issuance of Senior Notes. As
GCI, LLC is a wholly ownedwholly-owned subsidiary of GCI Liberty, Inc. On April 4, 2017, Liberty Interactive Corporation, now known as Qurate Retail, Inc. ("GCI"Qurate Retail"), we received through our initial capitalization all ownership interests in subsidiaries previously held by GCI. Theentered into an Agreement and Plan of Reorganization (as amended, the "reorganization agreement" and the transactions contemplated thereby, the "Transactions") with GCI, and GCI, Inc. consolidated financial statements include substantially the same operating activities. Prior to February 20, 2018, GCI was known asLLC's parent company, General Communication, Inc. On February 20,("GCI"), an Alaska corporation and indirect parent company of GCI Holdings, LLC ("GCI Holdings"), and Liberty Interactive LLC, a Delaware limited liability company and a direct wholly‑owned subsidiary of Qurate Retail ("LI LLC"). Pursuant to the reorganization agreement, GCI amended and restated its articles of incorporation (which resulted in GCI being renamed GCI Liberty, Inc. ("GCI Liberty")) and effected a reclassification and auto conversion of its common stock. Following these events, Qurate Retail acquired GCI Liberty on March 9, 2018 through a reorganization in which certain Qurate Retail interests, assets and liabilities attributed to its Ventures Group (following the Statereattribution by Qurate Retail of Alaska approved new Articlescertain assets and liabilities from its Ventures Group to its QVC Group), were contributed to GCI Liberty in exchange for a controlling interest in GCI Liberty (the "contribution"). Qurate Retail and LI LLC contributed to GCI Liberty their entire equity interests in Liberty Broadband Corporation ("Liberty Broadband"), Charter Communications, Inc. ("Charter"), and LendingTree, Inc. ("LendingTree"), the Evite, Inc. ("Evite") operating business and other assets and liabilities (collectively, "HoldCo"), in exchange for (a) the issuance to LI LLC of Incorporation that were approved by its shareholders at a special meeting held on February 2, 2018. The name change is a resultnumber of the Transactions described in Note 14shares of this Form 10-K. Additionally, as of February 20, 2018, GCI'sGCI Liberty Class A common stock and a number of shares of GCI Liberty Class B common stock were reclassified into Class A-1equal to the number of outstanding shares of Qurate Retail's Series A Liberty Ventures common stock and Class B-1Qurate Retail's Series B Liberty Ventures common stock respectively.on March 9, 2018, respectively, (b) cash and (c) the assumption of certain liabilities by GCI Liberty.
We provideThe 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, LLC's parent company, 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 ("LVNTA") 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 ("LVNTB") 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 Internal Revenue Service ("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 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 consolidated financial statements refer to the combination of GCI Holdings, an indirect wholly-owned subsidiary of GCI, LLC, non‑controlling interests in Liberty Broadband, Charter and LendingTree, a controlling interest in Evite, and certain other assets and liabilities as the "Company", "us", "we" and "our." Although HoldCo was reported as a combined company until the date of the HoldCo Split-Off, these financial statements present all periods as consolidated by the Company. All significant intercompany accounts and transactions have been eliminated in the 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.
| |
(b) | Basis of Presentation and Principles of Consolidation |
Our consolidated financial statements include the consolidated accounts of GCI, Inc. and its wholly owned subsidiaries, The Alaska Wireless Network, LLC ("AWN") of which we owned a two-third interest through February 2, 2015 when we purchased the remaining one-third interest, and seven variable interest entities (“VIEs”) for which we are the primary beneficiary after providing certain loans and guarantees. These VIEs are as follows:
•Terra GCI Investment Fund, LLC (“TIF”)
•Terra GCI 2 Investment Fund, LLC (“TIF 2”)
•Terra GCI 2-USB Investment Fund, LLC (“TIF 2-USB”)
•Terra GCI 3 Investment Fund, LLC (“TIF 3”)
•Twain Investment Fund 210, LLC ("TIF 4")
•Terra GCI 5 Investment Fund 1, LLC ("TIF 5-1")
•Terra GCI 5 Investment Fund 2, LLC ("TIF 5-2")
We also include in our consolidated financial statements non-controlling interests in consolidated subsidiariesThe Company holds investments that are accounted for which our ownership is less than 100 percent. All significant intercompany transactions between non-regulated affiliates of our company are eliminated. Intercompany transactions generated between regulated and non-regulated affiliates of our company are not eliminated in consolidation.
| |
(c) | Non-controlling Interests |
Non-controlling interests representusing the equity ownership interestsmethod. 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 consolidated subsidiaries not owned by us. Non-controlling interests are adjusted for contributions, distributions, and income and loss attributable toaccordance with GAAP that the non-controlling interest partnersCompany uses in the application of the consolidated entities. Income and loss is allocated toequity method. In addition, the non-controlling interests basedCompany relies on audit reports that are provided by the respective governing documents.
Wireless Acquisition
On February 2, 2015, we purchased Alaska Communications Systems Group, Inc.'s (“ACS”) interest in AWN ("AWN NCI Acquisition") and substantially all the assets of ACS and its affiliates related to ACS’s wireless operations (“Acquired ACS Assets”) (collectively the "Wireless Acquisition"). Under the terms of the agreement, we paid ACS $293.2 million, excluding working capital adjustments and agreed to terminate certain agreements related to the use of ACS network assets that were included as part of the original transaction that closed in July 2013. The Acquired ACS Assets included substantially all of ACS’s wireless subscriber assets, including subscriber contracts, and certain of ACS’s CDMA network assets, including fiber strands and associated cell site electronics and microwave facilities and associated electronics. We assumed from ACS post-closing liabilities of ACS and its affiliates under contracts assumed by us and liabilities with respect to the ownership by ACS of its equity interest in AWN to theaffiliates'
|
| | |
| | GCI, INC.LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018, 2017 and 2016 | |
extent accruingindependent 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 consolidated financial statements.
Loans from GCI Liberty
Broadband Holdco, LLC ("Broadband Holdco"), a wholly-owned subsidiary of GCI, LLC, entered into a Master Revolving Subordinated Promissory Note with GCI Liberty where it may borrow up to $200.0 million on a revolving basis (the "Subordinated Revolving Note"). The interest rate on the Subordinated Revolving Note is the applicable interest rate on the Margin Loan (as defined in note 9). The Subordinated Revolving Note has an outstanding balance of $101.0 million as of December 31, 2018 and matures on the one year anniversary of the date that the Margin Loan is paid in full.
Evite, a wholly-owned subsidiary of GCI, LLC, entered into a master promissory note with GCI Liberty where it may borrow up to $10.0 million on a revolving basis. The master promissory note has a fixed interest rate of 3.0% and matures on March 9, 2020. The line of credit had an outstanding balance of $6.7 million as of December 31, 2018.
Split‑Off from Qurate Retail
Following the HoldCo Split‑Off, Qurate Retail and GCI Liberty operate as separate, publicly traded companies, and neither have any stock ownership, beneficial or otherwise, in the other. In connection with the HoldCo Split‑Off, Qurate Retail, Liberty Media Corporation ("Liberty Media") (or its subsidiary) and GCI Liberty entered into certain agreements in order to govern certain of the ongoing relationships among the companies after the HoldCo Split‑Off and to provide for an orderly transition. These agreements include an indemnification agreement, a reorganization agreement, a services agreement, a facilities sharing agreement and a tax sharing agreement.
The reorganization agreement provides for, among other things, the principal corporate transactions (including the internal restructuring) required to effect the Transactions and certain conditions to and provisions governing the relationship between GCI Liberty and Qurate Retail (for accounting purposes a related party of GCI, LLC) with respect to and resulting from the Transactions. The tax sharing agreement provides for the allocation and indemnification of tax liabilities and benefits between Qurate Retail and GCI Liberty and other agreements related to tax matters. Pursuant to the services agreement, Liberty Media provides GCI Liberty with general and administrative services including legal, tax, accounting, treasury and investor relations support. Under the facilities sharing agreement, GCI Liberty shares office space with Liberty Media and related amenities at its corporate headquarters. GCI Liberty reimburses Liberty Media for direct, out‑of‑pocket expenses incurred by Liberty Media in providing these services and for costs that will be negotiated semi‑annually. Liberty Media is a related party of GCI Liberty for accounting purposes as a result of services agreement. Under these agreements, approximately $8.3 million was reimbursable to the period after closing. All other liabilities were retained by ACS and its affiliates.
We accounted for the AWN NCI Acquisition as the acquisition of a non-controlling interest in accordance with Accounting Standards Codification ("ASC") 810, Consolidation, and the Acquired ACS Assets as the acquisition of assets that do not constitute a business in accordance with ASC 805-50, Business Combinations - Related Issues. Total consideration transferred to ACS in the transaction consisted of the cash payment, settlement of working capital, and the fair market value of certain rights to receive future capacity terminated as part of the Wireless Acquisition agreement. The future capacity receivable assets transferred as consideration were adjusted to fair value as of the acquisition date resulting in a gain of $1.2 million recorded in Other Income (Expense) in our Consolidated Statement of OperationsLiberty Media for the year ended December 31, 2015. We allocated the total consideration transferred to ACS between the AWN NCI Acquisition and the Acquired ACS Assets based on the relative fair values of the assets and non-controlling interest received.2018.
The following table summarizes the allocation(2) Summary of total consideration transferred to ACS between the AWN NCI Acquisition and the Acquired ACS Assets excluding working capital adjustments (amounts in thousands):
|
| | | | | |
| Total consideration transferred to ACS | | $ | 304,838 |
|
| | | |
| Allocation of consideration between wireless assets and non-controlling interest acquired: | | |
| AWN non-controlling interest | | $ | 303,831 |
|
| Property and equipment | | 746 |
|
| Other intangible assets | | 261 |
|
| Total consideration | | $ | 304,838 |
|
We accounted for the AWN NCI Acquisition as an equity transaction, with the carrying amount of the non-controlling interest adjusted to reflect the change in ownership of AWN. The difference between the fair value of consideration paidCash and the total of the additional deferred taxes incurred as a result of the transaction and the carrying amount of the non-controlling interest was recognized as additional paid-in capital in our Consolidated Statement of Stockholder's Equity. The impact of the AWN NCI Acquisition is summarized in the following table (amounts in thousands):
|
| | | | | |
| Reduction of non-controlling interest | | $ | 268,364 |
|
| Increase in deferred tax assets | | 8,445 |
|
| Additional paid-in capital | | 27,022 |
|
| Fair value of consideration paid for acquisition of equity interest | | $ | 303,831 |
|
Pursuant to the accounting guidance in ASC 805-50, we determined that the Acquired ACS Assets did not meet the criteria necessary to constitute a business combination and was therefore accounted for as an asset purchase. We recognized the assets acquired in our Consolidated Balance Sheet at their allocated cost on the day of acquisition. The deferred tax assets and additional paid-in capital were adjusted in 2016 as a result of the reallocation of partnership tax basis as determined when preparing the 2015 federal tax return.
In conjunction with the Wireless Acquisition, we amended certain agreements related to the right to use ACS network assets. We adjusted the related right to use asset to fair value as of the acquisition date resulting in a loss of $3.8 million recorded in Other Income (Expense) in our Consolidated Statement of Operations for the year ended December 31, 2015.
Other Acquisitions
During the year ended December 31, 2015, we completed three additional business acquisitions for total cash consideration of $12.7 million, net of cash received. We accounted for the transactions using the acquisition method of accounting under ASC 805, Business Combinations. Accordingly, the assets received, liabilities assumed and any non-controlling interests were recorded at their estimated fair value
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| GCI, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements | |
as of the acquisition date. We determined the estimated fair values using a combination of the discounted cash flows method and estimates made by management.
| |
(e) | Recently Issued Accounting Pronouncements |
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers. This standard provides guidance for the recognition, measurement and disclosure of revenue resulting from contracts with customers and will supersede virtually all of the current revenue recognition guidance under GAAP. In August 2015, the FASB issued ASU 2015-14, which deferred the effective date to fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. In March 2016, the FASB issued ASU 2016-08, which amended the guidance in the new standard in order to clarify the principal versus agent assessment and is intended to make the guidance more operable and lead to more consistent application. In April 2016, the FASB issued ASU 2016-10, which clarifies the identification of performance obligations and the licensing implementation guidance in ASU 2014-09. In May 2016, the FASB issued ASU 2016-11, which rescinds SEC paragraphs pursuant to SEC staff announcements regarding ASU 2014-09. These rescissions include changes to topics pertaining to accounting for shipping and handling fees and costs and accounting for consideration given by a vendor to a customer. In May 2016, the FASB issued ASU 2016-12, which provides clarifying guidance in certain narrow areas and adds some practical expedients to ASU 2014-09. In December 2016, the FASB issued ASU 2016-20 which makes minor corrections or improvements to ASU 2014-09 that are not expected to have a significant effect on accounting practices under ASU 2014-09. In September 2017, the FASB issued ASU 2017-13 which allows certain public business entities to use the non-public business entities effective dates to adopt ASU 2014-09. In November 2017, the FASB issued ASU 2017-14 which supersedes ASC 605-10-S25-1 (Staff Accounting Bulletin ("SAB") Topic 13) as a result of SEC SAB No. 116 and adding ASC 606-10-S25-1 as a result of SEC Release No. 33-10403.
The standard permits the use of either the retrospective or cumulative effect transition method. We will use the modified retrospective method to adopt this standard. We have completed our assessment of revenues earned with the exception of our roaming contracts. We are still completing our quantitative assessment of costs to obtain contracts. Upon adoption, we may recognize a cumulative increase to retained earnings of up to $33.3 million as of January 1, 2018 to adjust revenue for roaming contracts and costs to obtain contracts. We will have additional revenue recognition disclosures upon adoption of the new standard.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The new standard establishes a right-of-use ("ROU") model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. Lease accounting by the lessor remains largely unchanged by the new standard. In January 2018, the FASB issued ASU 2018-01 which amends Topic 842 to include a practical expedient for transitioning land easements that were not previously accounted for as leases to Topic 842. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and is required to be adopted using the modified retrospective approach. We are currently evaluating the impact of the provisions of this new standard on our financial position and results of operations, but we expect that adoption will have a material impact on our long-term assets and liabilities.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The update introduces a new forward-looking approach, based on expected losses, to estimate credit losses on certain types of financial instruments, including trade receivables. The estimate of expected credit losses will require entities to incorporate consideration of historical information, current information and reasonable and supportable forecasts. This ASU also expands the disclosure requirements to enable users of financial statements to understand the entity’s assumptions, models and methods for estimating expected credit losses. ASU 2016-13 is effective for annual and interim reporting periods beginning after December 15, 2019, and is required to be adopted using the modified retrospective approach. Early adoption is permitted for annual and interim reporting periods beginning after December 15, 2018. We are currently evaluating the impact of the provisions of this new standard on our financial position and results of operations.
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| GCI, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements | |
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This update addresses eight specific cash flow issues with the objective of reducing diversity in practice. The issues identified within the ASU include: debt prepayments or extinguishment costs; contingent consideration made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (including bank-owned life insurance policies); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identified cash flows and application of the predominance principle. ASU 2016-15 is effective for annual and interim reporting periods beginning after December 15, 2017, and interim periods within those fiscal years. The adoption of this guidance is not expected to have a material effect on our statement of cash flows.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. This update provides guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flows. ASU 2016-08 is effective for annual and interim preporting periods beginning after December 15, 2017, and interim periods within those fiscal years. Upon adoption of this standard, we will include restricted cash with total cash in our Consolidated Statements of Cash Flows.
In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment. The update eliminates step 2 of the goodwill impairment test. Instead, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, with the maximum impairment being the total value of goodwill allocated to the reporting unit. ASU 2017-04 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The adoption of this guidance is not expected to have a material effect on our financial position or results of operations.
In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718) — Scope of Modification Accounting. ASU 2017-09 applies to entities that change the terms or conditions of a share-based payment award. The FASB adopted ASU 2017-09 to provide clarity and reduce diversity in practice as well as cost and complexity when applying the guidance in Topic 718, Compensation—Stock Compensation, to the modification of the terms and conditions of a share-based payment award. The amendments provide guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. Effective for all entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2017. The adoption of this guidance is not expected to have a material effect on our financial position or results of operations.
| |
(f) | Recently Adopted Accounting Pronouncements |
In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends ASC 718, Compensation - Stock Compensation. The update includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. ASU 2016-09 requires all excess tax benefits to be recorded in income even if they have not yet been realized. ASU 2016-09 also provides an election to account for forfeitures as they occur as opposed to estimating the amount of forfeitures. We adopted ASU 2016-09 as of January 1, 2017 on a modified retrospective basis. We have elected to account for forfeitures as they occur. As a result of adoption of this standard, we have recorded a $7.1 million adjustment to Retained Earnings (Deficit) as of January 1, 2017.
We account for the regulated operations of our incumbent local exchange carriers in accordance with the accounting principles for regulated enterprises. This accounting recognizes the economic effects of rate regulation by recording cost and a return on investment as such amounts are recovered through rates authorized by regulatory authorities. Accordingly, plant and equipment is depreciated over lives approved by regulators and certain costs and obligations are deferred based upon approvals received from regulators to permit recovery of such amounts in future years. Our cost studies and depreciation rates for our regulated operations are subject to periodic audits that could result in a change to recorded revenues.
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| GCI, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements | |
| |
(h) | Earnings per Common Share |
We are a wholly owned subsidiary of GCI and, accordingly, are not required to present earnings per share. Our common stock is not publicly traded.
Cash equivalents consist of certificates of depositinvestments which are readily convertible into cash and have an original maturitymaturities of three months or less at the date acquiredtime of acquisition. Financial instruments, which potentially subject the Company to concentration of credit risk, consist primarily of cash and cash equivalents and corporate debt securities. The Company maintains some cash and cash equivalents balances with financial institutions that are readily convertible into cash.in excess of Federal Deposit Insurance Corporation insurance limits.
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(j) | Accounts Receivable and Allowance for Doubtful Receivables |
Accounts Receivable and Allowance for Doubtful Receivables
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful receivables is ourthe Company's best estimate of the amount of probable credit losses in ourits existing accounts receivable. We base ourThe Company bases its estimates on the aging of ourits accounts receivable balances, financial health of specific customers, regional economic data, changes in ourits collections process, regulatory requirements and ourits customers’ compliance with Universal Service Administrative Company rules. We review ourThe Company reviews its allowance for doubtful receivables methodology at least annually.
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| GCI, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018, 2017 and 2016 | |
Depending upon the type of account receivable ourthe Company's allowance is calculated using a pooled basis with an allowance for all accounts greater than 120 days past due, a pooled basis using a percentage of related accounts, or a specific identification method. When a specific identification method is used, potentially uncollectible accounts due to bankruptcy or other issues are reviewed individually for collectability. Account balances are charged off against the allowance when we feelit determines that it is probable the receivable will not be recovered. We doThe Company does not have any off-balance-sheet credit exposure related to ourits customers.
Changes in the allowance for doubtful receivables during the years ended December 31, 2018, 2017 and 2016 are summarized below (amounts in thousands):
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| | | | | | | | | | | | | | | |
| | | | Additions | | Deductions | | |
| Description | Balance at beginning of year | | Charged to costs and expenses | | Charged to other accounts | | Write-offs net of recoveries | | Balance at end of year |
| 2018 | $ | — |
| | 8,741 |
| | — |
| | 1,186 |
| | 7,555 |
|
| 2017 | $ | 1,100 |
| | — |
| | — |
| | 1,100 |
| | — |
|
| 2016 | $ | 244 |
| | 1,100 |
| | — |
| | 244 |
| | 1,100 |
|
Investments
All marketable equity and debt securities held by the Company are carried at fair value, generally based on quoted market prices and changes in the fair value of such securities are reported in realized and unrealized gain (losses) on financial instruments in the accompanying consolidated statements of operations. The Company elected the measurement alternative (defined as the cost of the security, adjusted for changes in fair value when there are observable prices, less impairments) for its equity securities without readily determinable fair values.
For those investments in affiliates in which the Company has the ability to exercise significant influence, the equity method of accounting is used. Under this method, the investment, originally recorded at cost, is adjusted to recognize the Company’s share of net earnings or losses of the affiliate as they occur rather than as dividends or other distributions are received. Losses are limited to the extent of the Company’s investment in, advances to and commitments for the investee. In the event the Company is unable to obtain accurate financial information from an equity affiliate in a timely manner, the Company records its share of earnings or losses of such affiliate on a lag.
Changes in the Company’s proportionate share of the underlying equity of an equity method investee, which result from the issuance of additional equity securities by such equity investee, are recognized in the statements of operations through the Other, net line item. To the extent there is a difference between the Company's ownership percentage in the underlying equity of an equity method investee and the Company's carrying value, such difference is accounted for as if the equity method investee were a consolidated subsidiary.
The Company continually reviews its equity method investments to determine whether a decline in fair value below the carrying value is other than temporary. The primary factors the Company considers in its determination are the length of time that the fair value of the investment is below the Company’s carrying value; the severity of the decline; and the financial condition, operating performance and near term prospects of the investee. In addition, the Company considers the reason for the decline in fair value, be it general market conditions, industry specific or investee specific; analysts’ ratings and estimates of 12-month share price targets for the investee; changes in stock price or valuation subsequent to the balance sheet date; and the Company’s intent and ability to hold the investment for a period of time sufficient to allow for a recovery in fair value. If the decline in fair value is deemed to be other than temporary, the carrying value of the equity method investment is written down to fair value. In situations where the fair value of an investment is not evident due to a lack of a public market price or other factors, the Company uses its best estimates and assumptions to arrive at the estimated fair value of such investment. The Company’s assessment of the foregoing factors involves a high degree of judgment and accordingly, actual results may differ materially from the Company’s estimates and judgments. Writedowns for equity method investments are included in share of earnings (losses) of affiliates.
The Company performs a qualitative assessment each reporting period for its equity securities without readily determinable fair values to identify whether an equity security could be impaired. When the Company's qualitative assessment
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| GCI, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018, 2017 and 2016 | |
indicates that an impairment could exist, it estimates the fair value of the investment and to the extent the fair value is less than the carrying value, it records the difference as an impairment in the consolidated statements of operations.
Derivative Instruments
The Company’s derivative is recorded on the balance sheet at fair value. The Company's derivative is not designated as a hedge, and changes in the fair value of the derivative are recognized in earnings.
The fair value of the Company’s derivative instrument is estimated using the Black-Scholes-Merton model. The Black-Scholes-Merton model incorporates a number of variables in determining such fair values, including expected volatility of the underlying security and an appropriate discount rate. The Company obtains volatility rates from pricing services based on the expected volatility of the underlying security over the remaining term of the derivative instrument. A discount rate is obtained at the inception of the derivative instrument and updated each reporting period, based on the Company’s estimate of the discount rate at which it could currently settle the derivative instrument. The Company considered its own credit risk as well as the credit risk of its counterparties in estimating the discount rate. Management judgment is required in estimating the Black-Scholes-Merton model variables.
Property and Equipment
Property and equipment is stated at depreciated cost less impairments, if any. Construction costs of facilities are capitalized. Equipment financed under a capital lease is recorded at the lower of fair market value or the present value of future minimum lease payments at inception of the lease. Construction in progress represents transmission equipment and support equipment and systems not placed in service on December 31, 2018, that management intends to place in service during 2019. Depreciation is computed using the straight-line method based upon the shorter of the estimated useful lives of the assets or the lease term, if applicable.
Net property and equipment consists of the following:
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| | | | | | |
| | December 31, |
| | 2018 | | 2017 |
| | amounts in thousands |
| Land and buildings (25 years) | $ | 105,525 |
| | 441 |
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| Telephony transmission equipment and distribution facilities (5-20 years) | 763,957 |
| | — |
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| Cable transmission equipment and distribution facilities (5-30 years) | 100,391 |
| | — |
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| Studio equipment (10-15 years) | 3,315 |
| | — |
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| Support equipment and systems (3-20 years) | 118,230 |
| | 921 |
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| Transportation equipment (5-13 years) | 16,066 |
| | — |
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| Customer premise equipment (2-20 years) | 21,351 |
| | — |
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| Fiber optic cable systems (15-25 years) | 53,384 |
| | — |
|
| Property and equipment under capital leases | 41,084 |
| | — |
|
| Construction in progress | 113,819 |
| | — |
|
| | 1,337,122 |
| | 1,362 |
|
| Less accumulated depreciation | 145,321 |
| | 738 |
|
| Less accumulated amortization on property and equipment under capital leases | 7,195 |
| | — |
|
| Net property and equipment | $ | 1,184,606 |
| | 624 |
|
Amortization of property and equipment under capital leases is included in Depreciation and Amortization Expense in the Consolidated Statements of Operations. Depreciation expense for the years ended December 31, 2018, 2017 and 2016 was $153.5 million, $0.2 million and $0.1 million, respectively.
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| GCI, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018, 2017 and 2016 | |
Repairs and maintenance are charged to expense as incurred. Expenditures for major renewals and betterments are capitalized. Accumulated depreciation is removed and gains or losses are recognized at the time of sales or other dispositions of property and equipment.
Material interest costs incurred during the construction period of non-software capital projects are capitalized. Interest is capitalized in the period commencing with the first expenditure for a qualifying capital project and ending when the capital project is substantially complete and ready for its intended use. Capitalized interest costs for the year ended December 31, 2018 was $3.9 million.
Impairment of Long-lived Assets
The Company periodically reviews the carrying amounts of its property and equipment and its intangible assets (other than goodwill and indefinite-lived intangible assets) to determine whether current events or circumstances indicate that such carrying amounts may not be recoverable. If the carrying amount of the asset group is greater than the expected undiscounted cash flows to be generated by such asset group, including its ultimate disposition, an impairment adjustment is to be recognized. Such adjustment is measured by the amount that the carrying value of such asset groups exceeds their fair value. The Company generally measures fair value by considering sale prices for similar asset groups or by discounting estimated future cash flows using an appropriate discount rate. Considerable management judgment is necessary to estimate the fair value of asset groups. Accordingly, actual results could vary significantly from such estimates. Asset groups to be disposed of are carried at the lower of their financial statement carrying amount or fair value less costs to sell.
Asset Retirement Obligations
The Company records the fair value of a liability for an asset retirement obligation in the period in which it is incurred in Other Liabilities on the Consolidated Balance Sheets. When the liability is initially recorded, the Company capitalizes a cost by increasing the carrying amount of the related long-lived asset. In periods subsequent to initial measurement, changes in the liability for an asset retirement obligation resulting from revisions to either the timing or the amount of the original estimate of undiscounted cash flows are recognized. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, the Company either settles the obligation for its recorded amount or incurs a gain or loss upon settlement.
The majority of the Company's asset retirement obligations are the estimated cost to remove telephony transmission equipment and support equipment from leased property. Following is a reconciliation of the beginning and ending aggregate carrying amounts of the liability for asset retirement obligations (amounts in thousands):
|
| | | |
| Balance at January1, 2018 | $ | — |
|
| Liability acquired | 38,686 |
|
| Liability incurred | 113 |
|
| Accretion expense | 1,662 |
|
| Liability settled | — |
|
| Balance at December 31, 2018 | $ | 40,461 |
|
Certain of the Company's network facilities are on property that requires it to have a permit and the permit contains provisions requiring the Company to remove its network facilities in the event the permit is not renewed. The Company expects to continually renew its permits and therefore cannot estimate any liabilities associated with such agreements. A remote possibility exists that the Company would not be able to successfully renew a permit, which could result in it incurring significant expense in complying with restoration or removal provisions.
Intangible Assets
Internally used software, whether developed or purchased and installed as is, is capitalized and amortized using the straight-line method over an estimated useful life of three to five years. The Company capitalizes certain costs associated with internally developed software such as payroll costs of employees devoting time to the projects, external direct costs for materials and services, and interest costs incurred. Costs associated with internally developed software to be used internally are
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| GCI, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018, 2017 and 2016 | |
expensed until the point the project has reached the development stage. Subsequent additions, modifications or upgrades to internal-use software are capitalized only to the extent that they allow the software to perform a task it previously did not perform. Software maintenance and training costs are expensed in the period in which they are incurred. The capitalization of software requires judgment in determining when a project has reached the development stage.
The Company has Software as a Service ("SaaS") arrangements which are accounted for as service agreements, and are not capitalized. Internal and other third party costs for SaaS arrangements are expensed as incurred. Data migration costs for such arrangements are expensed consistent with the same type of costs for internally developed and modified software. Additionally, configuration costs paid to the vendor are recorded as a prepaid expense and expensed over the term of the SaaS arrangement.
Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment upon certain triggering events. Intangible assets with estimable useful lives are being amortized over 1 to 20 year periods with a weighted-average life of 14 years.
Goodwill, cable certificates (certificates of convenience and public necessity), wireless licenses and other intangible assets with indefinite useful lives are not amortized, but instead are tested for impairment at least annually. Cable certificates represent certain perpetual operating rights to provide cable services. Wireless licenses represent the right to utilize certain radio frequency spectrum to provide wireless communications services. Goodwill represents the excess of cost over fair value of net assets acquired in connection with a business acquisition. The Company's annual impairment assessment of its indefinite-lived intangible assets is performed during the fourth quarter of each year.
In evaluating goodwill on a qualitative basis, the Company reviews the business performance of each reporting unit and evaluates other relevant factors as identified in the relevant accounting guidance to determine whether it was more likely than not that an indicated impairment exists for any of its reporting units. The Company considers whether there are any negative macroeconomic conditions, industry specific conditions, market changes, increased competition, increased costs in doing business, management challenges, the legal environments and how these factors might impact company specific performance in future periods. As part of the analysis the Company also considers fair value determinations for certain reporting units that have been made at various points throughout the current year and prior year for other purposes. If based on the qualitative analysis it is more likely than not that an impairment exists, the Company performs the quantitative impairment test.
The quantitative goodwill impairment test compares the estimated fair value of a reporting unit to its carrying value and to the extent the carrying value is greater than the fair value, the difference is recorded as an impairment in the consolidated statements of operations. Developing estimates of fair value requires significant judgments, including making assumptions about appropriate discount rates, perpetual growth rates, relevant comparable market multiples, public trading prices and the amount and timing of expected future cash flows. The cash flows employed in the Company's valuation analyses are based on management's best estimates considering current marketplace factors and risks as well as assumptions of growth rates in future years. There is no assurance that actual results in the future will approximate these forecasts.
The accounting guidance also permits entities to first perform a qualitative assessment to determine whether it is more likely than not that an indefinite-lived intangible asset, other than goodwill, is impaired. The accounting guidance also allows entities the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to the quantitative impairment test. The entity may resume performing the qualitative assessment in any subsequent period. If the qualitative assessment supports that it is more likely than not that the carrying value of the Company’s indefinite-lived intangible assets, other than goodwill, exceeds its fair value, then a quantitative assessment is performed. If the carrying value of an indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.
See note 8 for information on impairments recorded during the year ended December 31, 2018.
Revenue Recognition
In May 2014, the Financial Accounting Standards Board (the "FASB") issued new accounting guidance on revenue from contracts with customers. The Company adopted the new guidance, which established Accounting Standards Codification
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| GCI, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018, 2017 and 2016 | |
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 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 consolidated financial statements related to GCI Holdings’ adoption of the new guidance.
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 the Company determines the time period between when it transfers a promised good or service to a customer and when the customer pays for that good or service is one year or less, the Company does not adjust the promised amount of consideration for the effects of a significant financing component.
Certain of the Company's customers have guaranteed levels of service. If an interruption in service occurs, the Company does not recognize revenue for any portion of the monthly service fee that will be refunded to the customer or not billed to the customer due to these service level agreements.
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 in advance, recorded as deferred revenue on the balance sheet, and recognized as the associated services are provided to the customer. Equipment Installment Plan ("EIP") Receivablessales 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.
We offer new
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 EIPwireless 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.
At the time of sale, we impute interestData
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 receivablesbalance sheet, and recognized as the associated with Upgrade Now. We record the imputed interest as a reductionservices are provided to the related accounts receivable. Interest income, which is included in Other Income and (Expense) in our Consolidated Statements of Operations,customer. Internet service excess usage revenue is recognized overwhen the financed installment term.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.
We assess the collectability of our EIP receivables based upon a variety of factors, including payment trends and other qualitative factors. Customers with a credit profile which carries a higher risk are required to make a down payment for equipment financed through Upgrade Now.
Wireless handset inventories are stated at the lower of cost or net realizable value. Cost is determined using the average cost method. Handset costs in excess of the revenues generated from handset sales, or handset subsidies, are expensed at the time of sale. We do not recognize the expected handset subsidies prior to the time of sale because the promotional discount decision is made at the point of sale and/or because we expect to recover the handset subsidies through service revenue.Video
Inventories of other merchandise for resaleVideo revenue is generated primarily from residential and partsbusiness 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 stated atprovided to the lower of cost or net realizable value. Cost is determined using the average cost method.
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(l) | Property and Equipment |
Property and equipment is stated at cost. Construction costs of facilities are capitalized. Equipment financed under a capital lease is recorded at the lower of fair market value or the present value of future minimum lease payments at inception of the lease. Construction in progress represents transmission equipment and support equipment and systems not placed in service on December 31, 2017, that management intends to place in service during 2018.customer.
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| | GCI, INC.LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018, 2017 and 2016 | |
Depreciation is computed using the straight-line method based upon the shorter of the estimated useful lives of the assets or the lease term, if applicable, in the following ranges: |
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Asset Category | Asset Lives |
Telephony transmission equipment and distribution facilities | 5-20 years |
Fiber optic cable systems | 15-25 years |
Cable transmission equipment and distribution facilities | 5-30 years |
Support equipment and systems | 3-20 years |
Transportation equipment | 5-13 years |
Property and equipment under capital leases | 12-20 years |
Buildings | 25 years |
Customer premise equipment | 2-20 years |
Studio equipment | 10-15 years |
Voice
Amortization of property and equipment under capital leasesVoice revenue is included in Depreciation and Amortization Expense in our Consolidated Statements of Operations.
Repairs and maintenance are charged to expense as incurred. Expenditures for major renewals and betterments are capitalized. Accumulated depreciation is removed and gains or losses are recognized at the time of sales or other dispositions of property and equipment.
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(m) | Intangible Assets and Goodwill |
Goodwill, cable certificates (certificates of convenience and public necessity), wireless licenses and broadcast licenses are not amortized. Cable certificates represent certain perpetual operating rights to provide cable services. Wireless licenses represent the right to utilize certain radio frequency spectrum to provide wireless communications services. Broadcast licenses represent the right to broadcast television stations in certain areas. Goodwill represents the excess of cost over fair value of net assets acquired in connection with a business acquisition.
All other amortizable intangible assets are being amortized over 2 to 20 year periods using the straight-line method.
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(n) | Impairment of Intangibles, Goodwill, and Long-lived Assets |
Cable certificates, wireless licenses and broadcast licenses are treated as indefinite-lived intangible assets and are tested annuallyfixed monthly fees for impairment or more frequently if events and circumstances indicate that the asset might be impaired. We assessed qualitative factors (“Step Zero”) in our annual test over our cable certificate, wireless license and broadcast license assets as of October 31, 2017 and 2016 to determine if it is more likely than not that those intangible assets are impaired and require further analysis. As part of our Step Zero analysis, we considered our own economic position, estimated future growth, and geographic and industry economic outlooks. These estimates and assumptions have a significant impact on our analysis.
The quantitative impairment test ("Step One") for identifiable indefinite-lived intangible assets other than goodwill consists of a comparison of the estimated fair value of the intangible asset with its carrying value. If the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. After an impairment loss is recognized, the adjusted carrying amount of the asset becomes its new accounting basis. This approach requires us to make estimates and assumptions including projected cash flows and discount rates. These estimates and assumptions could have a significant impact on whether an impairment charge is recognized and also the magnitude of any such impairment charge.
Our goodwill is tested annually for impairment, and is tested for impairment more frequently if events and circumstances indicate that the assets might be impaired. We used a Step Zero analysis for goodwill impairment as of October 31, 2017 and 2016 to determine whether it is more likely than not that goodwill is impaired. We considered qualitative factors such as our economic position, estimated future growth, geographic and industry economic outlooks, and the margin by which our fair value exceeded the book
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| GCI, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements | |
value in 2015 as a result of our Step One impairment test in 2015. These estimates and assumptions have a significant impact on our analysis. If it is determined that a goodwill impairment is more likely than not, we use the quantitative two-step process.
We completed our annual goodwill and intangibles review and no impairment charge was recorded for the years ended December 31, 2017, 2016 and 2015.
Long-lived assets, such as property, plant, and equipment, and purchased or developed intangibles subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability of an asset group to be held and used is measured by a comparison of the carrying amount of an asset group to estimated undiscounted future cash flows expected to be generated by the asset group. If the carrying amount of an asset group exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset group exceeds the fair value of the asset group.
During the year ended December 31, 2015, we recorded impairment charges related to our long-lived software assets (see Note 15 of this Form 10-K for detailed information). We recorded no impairment charges related to our long lived assets for the years ended December 31, 2017 and 2016.
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(o) | Amortization and Write-off of Loan Fees |
Debt issuance costs are deferred and amortized using the effective interest method. If a refinancing or amendment of a debt instrument is a substantial modification, all or a portion of the applicable debt issuance costs are written off. If a debt instrument is repaid prior to the maturity date we will write-off the related unamortized amount of debt issuance costs.
Other Assets primarily include broadcast licenses, equity investments that are accounted for using the equity or cost method, restricted cash, long-term deposits, prepayments, long-term EIP receivables, Universal Service Fund ("USF") high cost receivables, and other long-term non-trade accounts receivable.
We hold investments in equity method and cost method investees. Investments in equity method investees are those for which we have the ability to exercise significant influence but do not control and are not the primary beneficiary. Significant influence typically exists if we have a 20% to 50% ownership interest in the venture unless persuasive evidence to the contrary exists. Under this method of accounting, we record our proportionate share of the net earnings or losses of equity method investees and a corresponding increase or decrease to the investment balances. Cash payments to equity method investees such as additional investments, loans and advances and expenses incurred on behalf of investees,voice plans as well as payments from equity method investees such as dividends, distributions and repayments of loans and advances are recorded as adjustments to investment balances. Investments in entities in which we have no control or significant influence are accountedusage based fees for under the cost method.
We review our investment portfolio each reporting period to determine whether there are events or circumstances that would indicate there is a decline in the fair value that would be considered other than temporary. We recorded an impairment loss of $12.6 million related to one of our equity investments during the year ended December 31, 2015 (see "Equity Method Investment" section of Note 13 of this Form 10-K for additional information). We recorded no impairment charges to equity method or cost method investments for the years ended December 31, 2017 and 2016.
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(r) | Asset Retirement Obligations |
We record the fair value of a liability for an asset retirement obligation in the period in which it is incurred in Other Liabilities on the Consolidated Balance Sheets. When the liability is initially recorded, we capitalize a cost by increasing the carrying amount of the related long-lived asset. In periods subsequent to initial measurement, changes in the liability for an asset retirement obligation resulting from revisions to either the timing or the amount of the original estimate of undiscounted cash flows are recognized. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over
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| GCI, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements | |
the useful life of the related asset. Upon settlement of the liability, we either settle the obligation for its recorded amount or incur a gain or loss upon settlement.
The majority of our asset retirement obligations are the estimated cost to remove telephony transmission equipment and support equipment from leased property. Following is a reconciliation of the beginning and ending aggregate carrying amounts of our liability for asset retirement obligations (amounts in thousands):
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| Balance at December 31, 2015 | $ | 35,060 |
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| Liability incurred | 1,580 |
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| Revisions in estimated cash flows, including adjustment from Tower Transaction (Note 2) | 3,368 |
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| Accretion expense | 1,229 |
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| Liability settled | (82 | ) |
| Balance at December 31, 2016 | 41,155 |
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| Liability incurred | 4,655 |
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| Revisions in estimated cash flows | (85 | ) |
| Accretion expense | 1,772 |
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| Liability settled | (163 | ) |
| Balance at December 31, 2017 | $ | 47,334 |
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During the years ended December 31, 2017 and 2016, we recorded additional capitalized costs of $4.7 million and $4.9 million, respectively, in Property and Equipment.
Certain of our network facilities are on property that requires us to have a permit and the permit contains provisions requiring us to remove our network facilities in the event the permit is not renewed. We expect to continually renew our permits and therefore cannot estimate any liabilities associated with such agreements. A remote possibility exists that we would not be able to successfully renew a permit, which could result in us incurring significant expense in complying with restoration or removal provisions.
All revenues are recognized when the earnings process is complete. Revenue recognition is as follows:
Revenues generated from long-distance service usage andusage. Voice plan fees Internet service excess usage, and managed services are recognized when the services are provided,
We recognize unbilled revenues when the service is provided based upon minutes of use processed, and/or established rates, net of credits and adjustments,
Video service package fees, local access and Internet service plan fees, and data network revenues are billed in advance, recorded as Deferred Revenuedeferred revenue on the balance sheet, and are recognized as the associated service isservices are provided
Certain of our wireless services offerings have been determined to be revenue arrangements with multiple deliverables. Revenuesthe customer. Usage based fees are recognized as each element is earned based on objective evidence regarding the relative fair value of each element and when there are no undelivered elements that are essential to the functionality of the delivered elements. Revenues generated from wireless service usage and plan fees are recognized when the services are provided. Revenues generated from the sale of wireless handsets
Arrangements with Multiple Performance Obligations
Contracts with customers may include multiple performance obligations as customers purchase multiple services and accessories are recognized when the amount is known and title to the handset and accessories passes to the customer. As the non-refundable, up-front activation fee charged to the customer does not meet the criteria as a separate unit of accounting, we allocate the additional arrangement consideration received from the activation fee to the handset (the delivered item) to the extent that the aggregate handset and activation fee proceeds do not exceed the fair value of the handset. Any activation fees not allocated to the handset would be deferred upon activation and recognized as service revenue on a straight-line basis over the expected customer relationship period,
We offer new and existing wireless customers the option to participate in Upgrade Now, a program that is described above in Note 1(j) of this Form 10-K. Upgrade Now is a multiple-element arrangement typically consisting of the trade-in right, handset, and one month of wireless service. At the inception of the arrangement,products within those contracts. For such arrangements, revenue is allocated betweento each performance obligation based on the separate units of accounting
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| GCI, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements | |
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.
based upon each components' relative sellingSignificant Judgments
Some contracts with customers include variable consideration, and may require significant judgment to determine the total transaction price, on a standalone basis. This is subjectwhich impacts the amount and timing of revenue recognized. The Company uses historical customer data to estimate the requirement that revenue recognized is limited to the amounts already received from the customer that are not contingent on the deliveryamount of additional products or services to the customervariable consideration included in the future. We recognizetotal transaction price and reassess its estimate at each reporting period. Any change in the full amount oftotal transaction price due to a change in the fair value of the trade-in right (not an allocated value) as a guarantee liability and the remaining allocableestimated variable consideration is allocated to the handsetperformance 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 wireless service. Weservices 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 forin the entire amountfuture related to performance obligations that are unsatisfied (or partially unsatisfied) as of the EIP receivable at the timeDecember 31, 2018 of sale, net of the fair value of the trade-in right guarantee$244.6 million in 2019, $219.3 million in 2020, $130.1 million in 2021, $85.4 million in 2022 and imputed interest. See also$23.4 million in Note 1(ac) of this Form 10-K additional information on guarantee liabilities2023 and EIP receivables.thereafter.
The majority of our non-wireless equipment sale transactions involve the sale of communications equipment with no other services involved. Such equipment is subject to standard manufacturer warrantiesCompany applies certain practical expedients as permitted under ASC 606 and we do not manufacture any of the equipment we sell. In such instances, the customer takes title to the equipment generally upon delivery. We recognize revenue for such transactions when title passes to the customer and the revenue is earned and realizable. On certain occasions we enter into agreements to sell and satisfactorily install or integrate telecommunications equipment for a fixed fee. Customers may have refund rights if the installed equipment does not meet certaindisclose information about remaining performance criteria. We deferobligations that have original expected durations of one year or less, information about revenue recognition until we have received customer acceptance per the contractremaining from usage based performance obligations that are recognized over time as-invoiced, or agreement,variable consideration allocated to wholly unsatisfied performance obligations.
Contract Balances
The Company had receivables of $198.8 million and all other requireddeferred revenue recognition elements have been achieved. Revenuesof $31.7 million at December 31, 2018 from contracts with multiple element arrangements, such as those including installationcustomers, which amounts exclude receivables and integration services, are recognized as each element is earned based on objective evidence regarding the relative fair value of each element and when there are no undelivered elementsdeferred revenue that are essential to the functionalityout of the delivered elements,
Technicalscope of ASC 606. The Company's customers generally pay for services revenues are derived primarily from maintenance contracts on equipment and are recognized on a prorated basis over the termin advance of the contracts,
We account for fiber capacity Indefeasible Right to Use ("IRU") agreementsperformance obligation and therefore these prepayments are recorded as an operating lease or service arrangement and we defer the revenue and recognize it ratably over the life of the IRU or as service is rendered,
Accessdeferred revenue. The deferred revenue is recognized when earned. We participateas revenue in an intrastate access revenue pool with other telephone companies. The pool is funded by access charges regulated by the Regulatory Commissionaccompanying consolidated statements of Alaska ("RCA") withinoperations as the intrastate jurisdiction These revenuesservices are subject to adjustmentprovided. Changes in future accounting periods as based upon adjustments made by all pool participants and Interexchange carrier customers. To the extent that a dispute arises over revenue settlements, our policy is to defer revenue recognition until the dispute is resolved,
We receive grant revenuecontract liability balance for the purpose of building or operating communication infrastructure in rural areas. We defer the revenue and recognize it over the life of the asset thatCompany during 2018 was constructed using grant funds or the period of grant compliance,not materially impacted by other factors.
We offer sales incentives to new and existing customers as motivation to purchase our products and services. Cash incentives are recorded as an offset to revenue while noncash incentives are recorded as an operating expense. Sales incentives that relate to a customer contract over a specific period of time are recognized using the straight-line method over the contract term. For sales incentives that are earned by the customer over a specific period of time, we accrue an estimated offset to revenue or expense amount over the period that the incentive is earned by the customer,
Other revenues are recognized when the service is provided.
Universal Service Fund
As an Eligible Telecommunications Carrier ("ETC"), we receive supportAssets Recognized from the USFCosts to support the provision of wireline local access and wireless service in high cost areas. On August 31, 2016, the FCC publishedObtain a Report and Order to reform the methodology for distributing USF high cost support for both wireline and wireless voice and broadband service (“Alaska High Cost Order”). The Alaska High Cost Order wasContract with a significant program change that required a reassessment of our high cost support revenue recognition.
Remote High Cost Support
Prior to the Alaska High Cost Order, we accrued estimated program revenue based on current line counts and the frozen per-line rates, reduced as needed by our estimate of the impact of a statewide support cap. Additionally, we also considered our assessment of the impact of current FCC regulations and of the potential outcome of FCC proceedings.Customer
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| | GCI, INC.LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018, 2017 and 2016 | |
As of January 1, 2017, Remote high cost support paymentsManagement expects that incremental commission fees paid to Alaska High Cost participants are frozen on a per-company basis at adjusted December 2014 levels for a ten-year term in exchange for meeting individualized performance obligations to offer voice and broadband services meeting the service obligations at specified minimum speeds by five-year and ten-year service milestones to a specified number of locations. Remote high cost support is no longer dependent upon line counts and line count filings are no longer required.
Asintermediaries as a result of obtaining customer contracts are recoverable and therefore the Alaska High Cost Order, we applied the proportional performance revenue recognition method to account for the transition from accrualsCompany capitalizes them as contract costs.
Capitalized commission fees are amortized based on line countsthe transfer of goods or services to a fixed payment stream while our levelwhich 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 providedofferings follows: |
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| | Year ended December 31, 2018 |
| | amounts in thousands |
| GCI Holdings | |
| Consumer Revenue | |
| Wireless | $ | 63,482 |
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| Data | 223,121 |
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| Video | 16,786 |
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| Voice | 19,820 |
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| Business Revenue | |
| Wireless | 94,713 |
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| Data | 130,631 |
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| Video | 72,826 |
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| Voice | 14,791 |
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| Evite | 23,920 |
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| Lease, grant, and revenue from subsidies | 79,672 |
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| Total | $ | 739,762 |
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Lease, Grant, and associated costs remain constant. Included inRevenue from Subsidies
Universal Service Fund
GCI Holdings receives support from each of the calculation are the scheduled Remotevarious Universal Service Fund ("USF") programs: high cost, support payments from September 2016 through January 2027 net of our Remote accounts receivable balance at August 31, 2016. An equal amount of this result is recognized as Remote support revenue each period. In 2022, the FCC may redistribute support in areas with duplicative LTE service. We will account for any changes made by the FCC to redistribute support prospectively.
Urban High Cost Support
Prior to the Alaska High Cost Order, Urban high cost support payments were frozenlow income, rural health care, and had phased down to 60% of the monthly average of the 2011 annual support.schools and libraries. The Alaska High Cost Order mandated that as of January 1, 2017, Urban high cost support for 2017 and 2018 would be two-thirds and one-third of the December 2014 level of support received, respectively, with Urban high cost support ending effective December 31, 2018.
We applied the proportional performance revenue recognition method to account for the impact of the declining payments while our level of service provided and associated costs remain constant. Included in the calculation are the scheduled Urban high cost support payments from September 2016 through January 2019 net of our Urban accounts receivable balance at August 31, 2016. An equal amount of this result is recognized as Urban support revenue each period.
For both Remote and Urban high cost support revenue, our ability to collect our accrued USF support is contingent upon continuation of the USF program and upon our eligibility to participate in that program, whichprograms are subject to change by future regulatory legislative or judicial actions. We adjust revenue and the account receivable in the period the FCC makes a program change or we assess the likelihood that such a change has increased or decreased revenue. We do not recognize revenue related to a particular service area until our ETC status has been approvedactions taken by the RCA.
We recorded high cost support revenue under the USF program of $62.9 million, $64.1 million and $66.2 million for the years ended December 31, 2017, 2016 and 2015, respectively. At December 31, 2017, we have $41.0 million in high cost accounts receivable.
Rural Health Care (“RHC”) Program
For the funding year that ran from July 1, 2016 through June 30, 2017, USAC received requests for funds that exceeded the funding available for the RHC Program. USAC allocated the funding on a pro-rata basis to rural health care providers who submitted their funding requests during a certain period. We provide services to rural health care providers who were impacted by the pro-rata allocation and as a result certain of our customers did not receive the full subsidy that was expected under the program. Under the program rules, we are forbidden from lowering our rates for services previously provided, however, the Federal Communications Commission ("FCC") published an order on June 30, 2017 to assist eligible remote Alaska rural health care providers by allowing Alaska service providers, such as us, to retroactively lower their rates, or effectively giving a credit against amounts owed, for services provided. Based on these specific circumstances, we decided to retroactively lower our rates to these customers pursuantlegislative actions, therefore, changes to the FCC waiver, and asprograms could result in a result we reducedmaterial decrease in revenue by $5.5 million duringthat the Company has recorded. Revenue recognized from the programs was 23% of the Company's revenue for the year ended December 31, 2017, to aid our rural health care provider customers who were impacted by the pro-rata allocation.
We expense advertising costs in the period during which the first advertisement appears. Advertising expenses were $5.52018. The Company had USF net receivables of $91.3 million $7.0 million and $5.7 million for the years endedat December 31, 2017, 2016 and 2015, respectively.
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| GCI, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements | |
2018.
Leases
Scheduled operating lease rent increases are amortized over the expected lease term on a straight-line basis. Rent holidays are recognized on a straight-line basis over the operating lease term (including any rent holiday period).
Leasehold improvements are amortized over the shorter of their economic lives or the lease term. WeThe Company may amortize a leasehold improvement over a term that includes assumption of a lease renewal if the renewal is reasonably assured. Leasehold improvements acquired in a business combination are amortized over the shorter of the useful life of the assets or a term that includes required lease periods and renewals that are deemed to be reasonably assured at the date of acquisition. Leasehold improvements that are placed in service significantly after and are not contemplated at or near the beginning of the
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| GCI, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018, 2017 and 2016 | |
lease term are amortized over the shorter of the useful life of the assets or a term that includes required lease periods and renewals that are deemed to be reasonably assured at the date the leasehold improvements are purchased. Leasehold improvements made by usthe Company and funded by landlord incentives or allowances under an operating lease are recorded as deferred rent and amortized as reductions to lease expense over the lease term.
Material interest costs incurredStock-Based Compensation
As more fully described in note 12, the Company 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 of the Award, and recognizes that cost over the period during which the constructionemployee is required to provide service (usually the vesting period of non-software capital projects are capitalized. Interest costs incurred during the development periodAward). The Company measures the cost of a software capital project are capitalized. Interest is capitalizedemployee services received in the period commencing with the first expenditureexchange for a qualifying capital projectliability classified Award based on the current fair value of the Award, and ending whenremeasures the capital project is substantially complete and ready for its intended use. We capitalized interest costsfair value of $5.7the Award at each reporting date.
Stock compensation expense was $28.2 million, $3.7$26.6 million and $3.0$16.1 million duringfor the years ended December 31, 2018, 2017, and 2016, respectively, included in selling, general and 2015, respectively.
GCI, Inc., as a wholly owned subsidiary and memberadministrative expense in the accompanying consolidated statements of operations. In March 2016, the FASB issued new guidance which simplifies several aspects of the GCI controlled group of corporations, files itsaccounting for share-based payment award transactions, including the income tax returnsconsequences, forfeitures, classification of awards as parteither equity or liabilities, and classification on the statement of cash flows. The new standard is effective for the Company for fiscal years and interim periods beginning after December 15, 2016, with early application permitted. The Company adopted this guidance in the third quarter of 2016. In accordance with the new guidance, excess tax benefits and tax deficiencies are recognized as income tax benefit or expense rather than as additional paid-in capital. The Company has elected to recognize forfeitures as they occur rather than continue to estimate expected forfeitures. In addition, pursuant to the new guidance, excess tax benefits are classified as an operating activity on the consolidated groupstatements of corporations under GCI. Accordingly, all discussions regarding income taxes reflectcash flows. The recognition of excess tax benefits and deficiencies are applied prospectively from January 1, 2016. For tax benefits that were not previously recognized and for adjustments to compensation cost based on actual forfeitures, the consolidated group's activity. Our income tax expense and deferred income tax assets and liabilities are presented herein using the separate-entity method.Company recorded a cumulative-effect adjustment in retained earnings as of January 1, 2016.
Income Taxes
The Company accounts for income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for theirthe future tax consequences attributable to differences between the financialstatement carrying value amounts and income tax basis of existing assets and liabilities and their respectivethe expected benefits of utilizing net operating loss and tax basis. Deferredcredit carryforwards. The deferred tax assets and liabilities are measuredcalculated using enacted tax rates expected to apply to taxable earningsin effect for each taxing jurisdiction in which the yearsCompany operates for the year in which those temporary differences are expected to be recovered or settled. ANet deferred tax assets are then reduced by a valuation allowance is recognized if the Company believes it is more likely than not that some portion or the entiresuch net deferred tax assetassets will not be realized.
Total comprehensive loss was equal to net loss during the years ended December 31, 2017, 2016 The effect on deferred tax assets and 2015.
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(y) | Share-based Payment Arrangements |
Compensation expenseliabilities of an enacted change in tax rates is recognized in the financial statements for share-based awards based on the grant date fair value of those awards. The fair value of restricted stock awards is determined based on the number of shares granted and the quoted price of GCI's common stock. Share-based compensation expense is recognized over the requisite service periods of the awards on a straight-line basis, which is generally commensurate with the vesting term.
We are required to report the benefits associated with tax deductions in excess of recognized compensation cost as an operating cash flow.
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| GCI, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements | |
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, terms of existing contracts, observance of trends, and other factors, as appropriate. Additionally, changes in accounting estimates are reasonably likely to occur from period to period. These factors could have a material impact on our financial statements.
Significant estimates include, but are not limited to, the following: revenue recognition, impairment and useful lives of intangible assets, and the valuation allowance for net operating loss deferred tax assets.
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(aa) | Concentrations of Credit Risk |
Financial instruments that potentially subject us to concentrations of credit risk are primarily cash and cash equivalents and accounts receivable. Excess cash is invested in high quality short-term liquid money instruments. At December 31, 2017, and 2016, substantially all of our cash and cash equivalents were invested in short-term liquid money instruments and the balances were in excess of Federal Deposit Insurance Corporation insured limits.
Our customers are located primarily throughout Alaska. Because of this geographic concentration, our growth and operations depend upon economic conditions in Alaska.
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(ab) | Software Capitalization Policy |
Internally used software, whether developed or purchased and installed as is, is capitalized and amortized using the straight-line method over an estimated useful life of three to five years. We capitalize certain costs associated with internally developed software such as payroll costs of employees devoting time to the projects and external direct costs for materials and services. Costs associated with internally developed software to be used internally are expensed until the point the project has reached the development stage. Subsequent additions, modifications or upgrades to internal-use software are capitalized only to the extent that they allow the software to perform a task it previously did not perform. Software maintenance and training costs are expensedincome in the period in which they are incurred. The capitalization of software requires judgment in determining when a project has reachedthat includes the development stage.enactment date.
We have Software as a Service ("SaaS") arrangements which are accounted for as service agreements, and are not capitalized. Internal and other third party costs for SaaS arrangements are expensed as incurred. Data migration costs for such arrangements are expensed consistent withWhen the same typetax law requires interest to be paid on an underpayment of costs for internally developed and modified software. Additionally, configuration costs paidincome taxes, the Company recognizes interest expense from the first period the interest would begin accruing according to the vendor are recorded as a prepaidrelevant tax law. Such interest expense and expensed overis included in interest expense in the termaccompanying consolidated statements of operations. Any accrual of penalties related to underpayment of income taxes on uncertain tax positions is included in other income (expense) in the SaaS arrangement.
Certainaccompanying consolidated statements of our customers have guaranteed levels of service. If an interruption in service occurs, we do not recognize revenue for any portion of the monthly service fee that will be refunded to the customer or not billed to the customer due to these service level agreements.operations.
Additionally, we have provided certain guarantees to U.S. Bancorp Community Development Corporation (“US Bancorp”), our tax credit investor in our seven VIEs. We have guaranteed the delivery of $65.8 million of New Markets Tax Credits (“NMTC”) to US Bancorp, as well as certain loan and management fee payments between our subsidiaries and the VIEs, for which we are the primary beneficiary. In the event that the tax credits are not delivered or certain payments not made, we are obligated to provide prompt and complete payment of these obligations. See Note 13 of this Form 10-K for more information about our NMTC transactions.Reclassifications
EIP Trade-in Right
We offer a device trade-in program, "Upgrade Now", which provides eligible customers a specified-price trade-in right to upgrade their device. Participating customers must have purchased a financed device using an equipment installment plan from us and have a qualifying monthly wireless service plan. Upon
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| | |
| GCI, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements | |
qualifying for an Upgrade Now device trade-in, the customer's remaining EIP balance is settled provided they trade in their eligible used device in good working condition and purchase a new device from us on a new EIP.
For customers who enroll in Upgrade Now, we defer the portion of equipment sales revenue which represents the estimated value of the trade-in right guarantee. The estimated value of the guarantees are based on various economic and customer behavioral assumptions, including the customer's estimated remaining EIP balance at trade-in, the expected fair value of the used handset at trade-in and the probability and timing of a trade-in.
We assess facts and circumstances at each reporting date to determine if we need to adjust the guarantee liability. The recognition of subsequent adjustments to the guarantee liability as a result of these assessments are recorded as adjustments to revenue. When customers upgrade their devices, the difference between the trade-in credit to the customer and the fair value of the returned devices is recorded against the guarantee liabilities. Guarantee liabilities are included in Accrued Liabilities in our Consolidated Balance Sheets.
| |
(ad) | Classification of Taxes Collected from Customers |
We report sales, use, excise, and value added taxes assessed by a governmental authority that is directly imposed on a revenue-producing transaction between us and a customer on a net basis in our Consolidated Statements of Operations. The following are certain surcharges reported on a gross basis in our Consolidated Statements of Operations (amounts in thousands): |
| | | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Surcharges reported gross | $ | 3,226 |
| | 3,849 |
| | 5,058 |
|
Reclassifications have been made to the prior years' consolidated financial statements to conform to classifications used in the current year.
| |
(2) | Tower Sale and Leaseback |
In August 2016, March 2017,
The preparation of financial statements in conformity with GAAP requires management to make estimates and July 2017, we sold to Vertical Bridge Towers II, LLC (“Vertical Bridge”) tower sites in exchange for net proceedsassumptions that affect the reported amounts of $90.8 million, $3.7 million,assets and $3.1 million (“Tower Transaction”). The sale included, where applicable, the towers, the land on which the towers were situated if owned by us, the obligation to pay land leases, and other executory costs.
We entered into a master lease agreement in which we lease back spaceliabilities at the tower sites for an initial term of ten years, followed by the option to renew for eight additional five year periods, for a total possible lease term of 50 years. Each lease is subject to a 2% annual increase in lease payments throughout the lifedate of the initial leasefinancial statements and all subsequent lease renewals.
Prior to the Tower Transaction, we had the legal obligation to remove the towers upon termination of the land lease agreements. The obligation is now reduced to the removal of our equipment from the towers. Therefore, we reduced our asset retirement obligation related to the Tower Sites by $3.4 million as of December 31, 2016.
Per the master lease agreement, we have the right to cure land lease defaults on behalf of Vertical Bridge and have negotiated fixed rate lease renewals as described above. Due to this continuing involvement with the Tower Sites, we determined we were precluded from applying sale-leaseback accounting. We recorded long-term financial obligations (“Tower Obligations”) in the amount of the net proceeds received and recognize interest on the Tower Obligations at a rate of 7.1% using the effective interest method. The Tower Obligations are increased by interest expense and amortized through contractual leaseback payments made by us to Vertical Bridge. Our historical tower site asset costs continue to be depreciated and reported in Net Property and Equipment.
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| | GCI, INC.LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018, 2017 and 2016 | |
amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The following table summarizes the impactsCompany considers (i) non-recurring fair value measurements of non-financial instruments and (ii) accounting for income taxes to the Consolidated Balance Sheets (amounts in thousands): |
| | | | | | |
| | December 31, 2017 | December 31, 2016 |
Property and equipment, net (1) | $ | 19,094 |
| $ | 18,792 |
|
Tower obligations(2) | $ | 93,606 |
| $ | 87,653 |
|
(1) Property conveyed to Vertical Bridge as part of the Tower Transaction, but remains on our Consolidated Balance Sheets. |
(2) Excluding current portion and net of deferred transaction costs. |
Future minimum payments related to the Tower Obligations, including expected renewals and excluding deferred transaction costs, are summarized below (amounts in thousands): |
| | | |
| Years ending December 31, | Total |
| 2018 | $ | 7,465 |
|
| 2019 | 7,615 |
|
| 2020 | 7,767 |
|
| 2021 | 7,922 |
|
| 2022 | 8,081 |
|
| 2023 and thereafter | 149,300 |
|
| Total minimum payments | 188,150 |
|
| Less amount representing interest | 91,978 |
|
| Tower obligations | $ | 96,172 |
|
| |
(3) | Consolidated Statements of Cash Flows Supplemental Disclosures |
Changes in operating assets and liabilities consist of (amounts in thousands):
|
| | | | | | | | | |
| Year ended December 31, | 2017 | | 2016 | | 2015 |
| (Increase) decrease in accounts receivable, net | $ | (4,277 | ) | | 27,453 |
| | (4,230 | ) |
| Increase in prepaid expenses | (2,590 | ) | | (6,180 | ) | | (632 | ) |
| (Increase) decrease in inventories | (1,051 | ) | | (623 | ) | | 5,710 |
|
| (Increase) decrease in other current assets | 109 |
| | (38 | ) | | 24 |
|
| Increase in other assets | (10,419 | ) | | (47,105 | ) | | (11,491 | ) |
| Decrease in accounts payable | (1,735 | ) | | (135 | ) | | (5,579 | ) |
| Increase in deferred revenues | 429 |
| | 2,446 |
| | 1,743 |
|
| Increase (decrease) in accrued payroll and payroll related obligations | 1,579 |
| | (979 | ) | | (1,469 | ) |
| Increase (decrease) in accrued liabilities | (583 | ) | | (8,031 | ) | | 8,192 |
|
| Increase in accrued interest | 49 |
| | 271 |
| | 1,869 |
|
| Increase (decrease) in subscriber deposits | 354 |
| | (325 | ) | | (448 | ) |
| Increase (decrease) in long-term deferred revenue | (5,355 | ) | | 18,649 |
| | (8,561 | ) |
| Increase (decrease) in components of other long-term liabilities | (780 | ) | | (230 | ) | | 1,305 |
|
| Total change in operating assets and liabilities | $ | (24,270 | ) | | (14,827 | ) | | (13,567 | ) |
The following itemsCompany has 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 the Company’s consolidated financial statements.
New Accounting Pronouncements Not Yet Adopted
In August 2018, the FASB issued new guidance which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance will be effective for the years ended December 31, 2017, 2016 and 2015 (amountsCompany in thousands):
|
| | | | | | | | | |
| Net cash paid or received: | 2017 | | 2016 | | 2015 |
| Interest paid, net of amounts capitalized | $ | 85,373 |
| | 78,921 |
| | 76,696 |
|
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| GCI, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements | |
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 following itemsamendments in these updates are non-cash investingeffective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and financing activitiesearly adoption is permitted. The Company plans to adopt this guidance on January 1, 2019. The Company expects to adopt using the optional transitional method that allows for a cumulative effect adjustment in the years ended December 31, 2017, 2016 and 2015 (amounts in thousands):
|
| | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Non-cash additions for purchases of property and equipment | $ | 20,630 |
| | 36,854 |
| | 26,799 |
|
| Asset retirement obligation additions to property and equipment | $ | 4,655 |
| | 4,948 |
| | 2,048 |
|
| Non-cash consideration for KKCC assets | $ | — |
| | 13,993 |
| | — |
|
| Non-cash consideration for Wireless Acquisition | $ | — |
| | — |
| | 23,326 |
|
| |
(4) | Receivables and Allowance for Doubtful Receivables |
Receivables consistperiod of adoption without adjusting the comparative periods presented. Additionally, the Company currently expects to elect certain optional practical expedients under the transition guidance. The Company continues to assess the impact of the following at December 31, 2017new lease guidance with respect to its current operating and 2016 (amountscapital leases and specifically are reviewing the impact of a previous failed sale and leaseback tower transaction in thousands):
|
| | | | | | |
| | 2017 | | 2016 |
| Trade | $ | 187,000 |
| | 182,993 |
|
| Other | 1,580 |
| | 1,303 |
|
| Total receivables | $ | 188,580 |
| | 184,296 |
|
As described in Note 1order to determine the appropriate treatment upon transition to the new lease guidance. The Company has identified a technology solution to use for managing the population of leases identified and for making the necessary calculations. The Company continues to work with its consolidated subsidiaries to evaluate the impact of the adoption of this Form 10-K we receive support from eachnew guidance on its consolidated financial statements, including identifying the population of the various USF programs: high cost, low income, rural health care,leases and schools and libraries. This support was 26%, 24%, and 19% of our revenue for the years ended December 31, 2017, 2016 and 2015, respectively. We had USF net receivables of $131.8 million and $100.5 million at December 31, 2017 and 2016, respectively.
Changes in the allowance for doubtful receivables during the years ended December 31, 2017, 2016 and 2015 are summarized below (amounts in thousands):
|
| | | | | | | | | | | | | | | |
| | | | Additions | | Deductions | | |
| Description | Balance at beginning of year | | Charged to costs and expenses | | Charged to other accounts | | Write-offs net of recoveries | | Balance at end of year |
| December 31, 2017 | $ | 4,407 |
| | 5,800 |
| | — |
| | 6,215 |
| | 3,992 |
|
| December 31, 2016 | $ | 3,630 |
| | 8,516 |
| | — |
| | 7,739 |
| | 4,407 |
|
| December 31, 2015 | $ | 4,542 |
| | 6,359 |
| | — |
| | 7,271 |
| | 3,630 |
|
|
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| | GCI, INC.LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018, 2017 and 2016 | |
(3) Supplemental Disclosures to Consolidated Statements of Cash Flows
|
| | | | | | | | | |
| | Years ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | amounts in thousands |
| Cash paid for acquisition: | | | | | |
| Property and equipment | $ | 1,211,392 |
| | — |
| | — |
|
| Intangible assets not subject to amortization | 1,538,544 |
| | — |
| | — |
|
| Intangible assets subject to amortization | 468,737 |
| | — |
| | — |
|
| Receivables and other assets | 254,436 |
| | — |
| | — |
|
| Liabilities assumed | (1,902,714 | ) | | — |
| | — |
|
| Deferred tax assets (liabilities) | (276,683 | ) | | — |
| | — |
|
| Fair value of equity consideration | (1,441,669 | ) | | — |
| | — |
|
| Cash paid (received) for acquisitions, net of cash acquired | $ | (147,957 | ) | | — |
| | — |
|
| | | | | | |
| Cash paid for interest, net of amounts capitalized | $ | 120,726 |
| | 6 |
| | — |
|
| | | | | | |
| Non-cash additions for purchases of property and equipment | $ | 15,916 |
| | — |
| | — |
|
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 consolidated statements of cash flows. The following table reconciles cash and cash equivalents and restricted cash reported in the Company's consolidated balance sheets to the total amount presented in its consolidated statements of cash flows: |
| | | | | | | | | |
| | Years ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | amounts in thousands |
| Cash and cash equivalents | $ | 170,741 |
| | 573,210 |
| | 487,163 |
|
| Restricted cash included in other current assets | 775 |
| | 938 |
| | 964 |
|
| Total cash and cash equivalents and restricted cash at end of period | $ | 171,516 |
| | 574,148 |
| | 488,127 |
|
(4) Acquisition
GCI, LLC's parent company, GCI Liberty was acquired on March 9, 2018. The acquisition of our parent company was accounted for as a reverse acquisition. Under this method, HoldCo is the acquirer of our parent company and is also considered the acquirer of GCI, LLC. We have elected to apply pushdown accounting given there was a change-in-control event related to our parent company. We have reflected the new basis of accounting established by our parent company for the individual assets and liabilities that were acquired by HoldCo using the acquisition method of accounting. The acquisition price was $1.4 billion (level 1). The application of the acquisition method resulted in the assignment of purchase price to the GCI, LLC assets acquired and liabilities assumed based on 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, LLC prior to the completion of the acquisition by HoldCo. The determination of the fair values of the acquired assets and liabilities (and the determination of estimated lives of depreciable tangible and identifiable intangible assets) requires significant judgment.
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(5) | Net PropertyGCI, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018, 2017 and Equipment2016 | |
Net
The preliminary acquisition price allocation for GCI, LLC is as follows (amounts in thousands): |
| | | | |
| | | |
| Cash and cash equivalents including restricted cash | | $ | 147,957 |
|
| Receivables | | 171,014 |
|
| Property and equipment | | 1,211,392 |
|
| Goodwill | | 966,044 |
|
| Intangible assets not subject to amortization | | 572,500 |
|
| Intangible assets subject to amortization | | 468,737 |
|
| Other assets | | 83,422 |
|
| Deferred revenue | | (92,561 | ) |
| Debt, including capital leases | | (1,632,002 | ) |
| Other liabilities | | (171,151 | ) |
| Deferred income tax liabilities | | (276,683 | ) |
| Non-controlling interest | | (7,000 | ) |
| | | $ | 1,441,669 |
|
Goodwill is calculated as the excess of the consideration transferred over the identifiable net assets acquired and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce, value associated with future customers, continued innovation and non-contractual relationships. Amortizable intangible assets of $468.7 million were acquired and are comprised of a tradename with an estimated useful life of approximately 10 years, customer relationships with a weighted average useful life of approximately 16 years and right-to-use assets with a weighted average useful life of 8 years. Approximately $170.0 million of the acquired goodwill will be deductible for income tax purposes. As of December 31, 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 the Company's acquisition price allocation that changed from the initial allocation recorded in the Company's March 31, 2018 financial statements relate to a decrease in receivables of $13.7 million, an increase in property and equipment consists 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 $75.2 million, an increase in deferred revenue of $15.6 million, a decrease in other liabilities of $21.4 million, a decrease in deferred income tax liabilities of $15.6 million, and an increase to goodwill of $41.4 million. The acquisition date fair values related to certain assets, liabilities and tax balances associated with the following at December 31, 2017 and 2016 (amounts in thousands):
|
| | | | | | |
| | 2017 | | 2016 |
| Land and buildings | $ | 119,553 |
| | 114,966 |
|
| Telephony transmission equipment and distribution facilities | 1,402,610 |
| | 1,271,425 |
|
| Cable transmission equipment and distribution facilities | 285,665 |
| | 231,539 |
|
| Studio equipment | 14,825 |
| | 15,456 |
|
| Support equipment and systems | 299,511 |
| | 290,209 |
|
| Transportation equipment | 23,468 |
| | 23,674 |
|
| Customer premise equipment | 152,731 |
| | 158,513 |
|
| Fiber optic cable systems | 353,291 |
| | 351,460 |
|
| Construction in progress | 103,013 |
| | 157,633 |
|
| | 2,754,667 |
| | 2,614,875 |
|
| Less accumulated depreciation | 1,541,264 |
| | 1,385,620 |
|
| Less accumulated amortization on property and equipment under capital leases | 58,692 |
| | 67,337 |
|
| Net property and equipment | $ | 1,154,711 |
| | 1,161,918 |
|
| | | | |
| Gross property and equipment under capital leases | $ | 112,495 |
| | 112,495 |
|
KKCC Asset Acquisition
In November 2016, we acquired Kodiak-Kenai Cable Company, LLC ("KKCC") which through its wholly owned subsidiary ownsSince the only low latency redundant fiber link between Anchorage, the Kenai Peninsula and Kodiak. We adopted ASU 2017-01, which allows us to treat the acquisition of KKCC as an asset acquisition.
Total consideration transferred to the previous owners of KKCC consisted of a cash payment of $19.7 million and the fair market value of $14.1 million for indefeasible right-to-use capacity that we owned on the KKCC fiber system ("IRU Capacity") that was terminated as a result of the acquisition. The IRU Capacity included as consideration was adjusted to fair value asdate of the acquisition, date resultingincluded in a $3.1 million gain recorded in Other Income (Expense) in our Consolidated Statement of Operationsnet earnings (loss) attributable to the GCI, LLC member for the year ended December 31, 2016.2018 is $307.9 million in losses related to GCI Holdings. The unaudited pro forma revenue and net earnings of GCI, LLC, prepared utilizing the historical financial statements of HoldCo, giving effect to acquisition accounting related adjustments made at the time of acquisition, as if the acquisition discussed above occurred on January 1, 2017, are as follows:
|
| | | | | | | |
| | | Years Ended December 31, |
| | | 2018 | | 2017 |
| | | amounts in thousands |
| Revenue | | $ | 899,210 |
| | 918,726 |
|
| Net earnings (loss) | | $ | (913,936 | ) | | 749,959 |
|
| Net earnings (loss) attributable to GCI, LLC member | | $ | (913,469 | ) | | 750,464 |
|
We allocated the total consideration transferredThe pro forma results include adjustments directly attributable to the business combination including adjustments related to the amortization of acquired tangible and intangible assets, revenue, interest expense, stock-based compensation, and the exclusion of transaction related costs; the impact of the FCC's decision to reduce rates paid to the Company under the Rural Health Care Program; and the new revenue standard. The pro forma information is not representative of the Company’s future results of operations nor does it reflect what the Company’s results of operations would have been if the acquisition had occurred previously and the Company consolidated the results of GCI, LLC during the periods presented.
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| GCI, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018, 2017 and 2016 | |
(5) Assets and Liabilities Measured at Fair Value
For assets and liabilities assumed based onrequired 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 relativereporting entity has the ability to access at the measurement date. Level 2 inputs, other than quoted market prices included within Level 1, are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. The Company does not have any recurring assets or liabilities measured at fair value. value that would be considered Level 3.
The following table summarizes the allocation of total consideration (amounts in thousands):
Company’s assets and liabilities measured at fair value are as follows: |
| | | |
| Allocation of consideration to assets acquired and liabilities assumed: | |
| Property and equipment | $ | 49,794 |
|
| Deferred taxes | (12,211 | ) |
| Deferred revenue | (3,815 | ) |
| Total consideration | $ | 33,768 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | | December 31, 2018 | | December 31, 2017 |
| Description | | Total | | Quoted prices in active markets for identical assets (Level 1) | | Significant other observable inputs (Level 2) | | Total | | Quoted prices in active markets for identical assets (Level 1) | | Significant other observable inputs (Level 2) |
| | | amounts in thousands |
| Cash equivalents | | $ | 66,348 |
| | 66,348 |
| | — |
| | 570,526 |
| | 570,526 |
| | — |
|
| Equity securities | | $ | 1,529,901 |
| | 1,529,901 |
| | — |
| | 1,800,208 |
| | 1,800,208 |
| | — |
|
| Investment in Liberty Broadband | | $ | 3,074,373 |
| | 3,074,373 |
| | — |
| | 3,634,786 |
| | 3,634,786 |
| | — |
|
| Variable forward | | $ | 20,340 |
| | — |
| | 20,340 |
| | 94,807 |
| | — |
| | 94,807 |
|
| |
(6) | Intangible Assets and Goodwill |
AsOn June 6, 2017, Qurate Retail purchased an additional 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 October 31, 2017, cable certificates, wireless licenses, broadcast licenses$170.70 per share and goodwill were tested for impairmenthas a floor price of $128.03 per share and we determined that these intangible assets were not impaired at December 31, 2017.a cap price of $211.67 per share. The remaining useful lives of our cable certificates, wireless licenses, broadcast licenses and goodwill were evaluated as of October 31, 2017, and events and circumstances continue to support an indefinite useful life. There are no indicators of impairment of our intangible assets subject to amortizationliability associated with this instrument is included in the Other current liabilities line item as of December 31, 2017.2018 and Other liabilities line item as of December 31, 2017 in the consolidated balance sheets. The fair value of the variable forward was derived from a Black‑Scholes‑Merton model using observable market data as the significant inputs.
Realized and Unrealized Gains (Losses) on Financial Instruments, net
Realized and unrealized gains (losses) on financial instruments, net are comprised of changes in the fair value of the following:
|
| | | | | | | | | | |
| | | Years ended December 31, |
| | | 2018 | | 2017 | | 2016 |
| | | amounts in thousands |
| Equity securities | | $ | (274,393 | ) | | 258,629 |
| | 547,921 |
|
| Investment in Liberty Broadband | | (560,413 | ) | | 473,342 |
| | 761,444 |
|
| Variable forward | | 75,970 |
| | (94,807 | ) | | NA |
|
| | | $ | (758,836 | ) | | 637,164 |
| | 1,309,365 |
|
|
| | |
| GCI, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018, 2017 and 2016 | |
(6) Investments in Equity Securities
Investments in equity securities, the majority of which are carried at fair value, are summarized as follows: |
| | | | | | | | |
| | | | December 31, |
| | | | 2018 | | 2017 |
| | | | amounts in thousands |
| Charter (a) | | | $ | 1,526,984 |
| | 1,800,208 |
|
| Other investments (b) | | | 6,533 |
| | 2,856 |
|
| | | | $ | 1,533,517 |
| | 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 entered into by GCI Liberty. Pursuant to the indemnification agreement, GCI Liberty has agreed to indemnify LI LLC for certain payments made to a holder of LI LLC 1.75% exchangeable debentures due 2046.
(b) The Company has elected the measurement alternative for a portion of these securities.
(7) Investments in Affiliates Accounted for Using the Equity Method
Investment in LendingTree
The Company has various investments accounted for using the equity method. The following table includes the Company’s carrying amount and percentage ownership of the more significant investments in affiliates at December 31, 2018 and the carrying amount at December 31, 2017:
|
| | | | | | | | | | | | | |
| | December 31, 2018 | | December 31, 2017 |
| | Percentage ownership | | Market value | | Carrying amount | | Carrying amount |
| | | | dollars in thousands |
| LendingTree (a) | 26.6 | % | | $ | 756,197 |
| | $ | 174,002 |
| | 114,655 |
|
| Other | various |
| | NA |
| | 3,028 |
| | — |
|
| | | | | | $ | 177,030 |
| | 114,655 |
|
| | | | | | | | |
| (a) Both the Company's ownership interest in LendingTree and the Company's share of LendingTree's earnings (losses) are reported on a three month lag. The market value disclosed is as of December 31, 2018. |
The Company’s share of LendingTree’s earnings (losses) was $21.1 million, $7.0 million, and $11.8 million for the years ended December 31, 2018, 2017, and 2016, respectively.
Investment in Liberty Broadband
On May 18, 2016, Qurate Retail completed a $2.4 billion investment in Liberty Broadband Series C non-voting shares (for accounting purposes a related party of the Company) in connection with the merger of Charter and Time Warner Cable Inc. ("TWC"). The proceeds of this investment were used by Liberty Broadband to fund, in part, its acquisition of $5 billion of stock in the new public parent company, Charter, of the combined enterprises. Qurate Retail, along with third party investors, all of whom invested on the same terms as Qurate Retail, purchased newly issued shares of Liberty Broadband Series C common stock at a per share price of $56.23, which was determined based upon the fair value of Liberty Broadband’s net assets on a sum‑of‑the parts basis at the time the investment agreements were executed (May 2015). Qurate Retail, as part of the merger described above, exchanged, in a tax‑free transaction, its shares of TWC common stock for shares of Charter Class A common stock, on a one‑for‑one basis, and Qurate Retail granted to Liberty Broadband a proxy and a right of first refusal with respect to the shares of Charter Class A common stock held by Qurate Retail following the exchange, which proxy and right of first refusal was assigned to GCI Liberty in connection with the completion of the Transactions.
As of December 31, 2018, the Company has a 23.5% economic ownership interest in Liberty Broadband. Due to overlapping boards of directors and management, the Company has been deemed to have significant influence over Liberty
|
| | |
| GCI, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018, 2017 and 2016 | |
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 consolidated statements of operations. Summarized financial information for Liberty Broadband is as follows:
|
| | | | | | | |
| | | December 31, |
| | | 2018 | | 2017 |
| | | amounts in thousands |
| Current assets | | $ | 84,574 |
| | 84,054 |
|
| Investment in Charter, accounted for using the equity method | | 12,004,376 |
| | 11,835,613 |
|
| Other assets | | 9,487 |
| | 12,122 |
|
| Total assets | | 12,098,437 |
| | 11,931,789 |
|
| Long-term debt | | 522,928 |
| | 497,370 |
|
| Deferred income tax liabilities | | 965,829 |
| | 932,593 |
|
| Other liabilities | | 11,062 |
| | 14,925 |
|
| Equity | | 10,598,618 |
| | 10,486,901 |
|
| Total liabilities and shareholders' equity | | $ | 12,098,437 |
| | 11,931,789 |
|
|
| | | | | | | | | | |
| | | Years ended December 31, |
| | | 2018 | | 2017 | | 2016 |
| | | amounts in thousands |
| Revenue | | $ | 22,256 |
| | 13,092 |
| | 30,586 |
|
| Operating expenses, net | | (34,270 | ) | | (38,570 | ) | | (51,746 | ) |
| Operating income (loss) | | (12,014 | ) | | (25,478 | ) | | (21,160 | ) |
| Share of earnings (losses) of affiliates | | 166,146 |
| | 2,508,991 |
| | 641,544 |
|
| Gain (loss) on dilution of investment in affiliate | | (43,575 | ) | | (17,872 | ) | | 770,766 |
|
| Realized and unrealized gains (losses) on financial instruments, net | | 3,659 |
| | 3,098 |
| | 94,122 |
|
| Other income (expense), net | | (22,339 | ) | | (18,139 | ) | | (9,600 | ) |
| Income tax benefit (expense) | | (21,924 | ) | | (416,933 | ) | | (558,369 | ) |
| Net earnings (loss) | | $ | 69,953 |
| | 2,033,667 |
| | 917,303 |
|
(8) Goodwill and Intangible Assets
Goodwill and Indefinite Lived Assets
Changes in the carrying amount of goodwill are as follows:
|
| | | | | | | | | | |
| | | GCI Holdings | | Corporate and other | | Total |
| | | amounts in thousands |
| Balance at January 1, 2018 | | $ | — |
| | 25,569 |
| | 25,569 |
|
| Acquisitions | | 966,044 |
| | — |
| | 966,044 |
|
| Impairment | | (147,431 | ) | | — |
| | (147,431 | ) |
| Balance at December 31, 2018 | | $ | 818,613 |
| | 25,569 |
| | 844,182 |
|
As presented in the accompanying consolidated balance sheets, cable certificates and wireless licenses are the other significant indefinite lived intangible asset.
|
| | |
| | GCI, INC.LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018, 2017 and 2016 | |
Other Intangible Assets subjectSubject to amortization include the following at December 31, 2017 and 2016 (amounts in thousands):
|
| | | | | |
| | 2017 | 2016 |
| Software license fees | $ | 87,989 |
| 80,839 |
|
| Rights to use | 45,114 |
| 45,114 |
|
| Customer relationships | 4,221 |
| 1,530 |
|
| Right-of-way | 784 |
| 784 |
|
| Trade name | 252 |
| — |
|
| | 138,360 |
| 128,267 |
|
| Less accumulated amortization | 62,663 |
| 53,823 |
|
| Net other intangible assets | $ | 75,697 |
| 74,444 |
|
|
| | | | | | | | | | |
| | | December 31, 2018 |
| | | Gross | | | | Net |
| | | carrying | | Accumulated | | carrying |
| | | amount | | amortization | | amount |
| | | amounts in thousands |
| Customer relationships | | $ | 408,267 |
| | (55,417 | ) | | 352,850 |
|
| Other amortizable intangibles | | 122,759 |
| | (39,603 | ) | | 83,156 |
|
| Total | | $ | 531,026 |
| | (95,020 | ) | | 436,006 |
|
Changes in Goodwill and Other Intangible Assets are as follows (amounts in thousands):
|
| | | | | |
| | Goodwill | Other Intangible Assets |
| Balance at December 31, 2015 | $ | 239,263 |
| 69,290 |
|
| Asset additions | — |
| 17,601 |
|
| Amortization expense | — |
| (12,447 | ) |
| Balance at December 31, 2016 | 239,263 |
| 74,444 |
|
| Additions from acquisitions | 3,001 |
| 2,943 |
|
| Asset additions | — |
| 11,546 |
|
| Amortization expense | — |
| (13,164 | ) |
| Asset deletions | — |
| (72 | ) |
| Balance at December 31, 2017 | $ | 242,264 |
| 75,697 |
|
Amortization expense for definite-life intangible assets with finite useful lives was $53.5 million for the yearsyear ended December 31, 2017, 2016 and 2015 follow (amounts in thousands):
|
| | | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Amortization expense | $ | 13,164 |
| | 12,447 |
| | 10,442 |
|
Amortized intangible assets are definite-life assets, and as such, we record amortization expense based on a method that most appropriately reflects our expected cash flows from these assets. Intangible assets that have finite useful lives are amortized over their useful lives using the straight-line method with a weighted-average life of 12.8 years.
2018. Amortization expense for definite-lifeamortizable intangible assets for each of the five succeeding fiscal years is estimated to be (amounts in thousands):
| | | Years Ending December 31, | | |
| 2018 | $ | 12,695 |
| |
| 2019 | $ | 10,234 |
| $ | 59,790 |
|
| 2020 | $ | 8,188 |
| $ | 49,892 |
|
| 2021 | $ | 5,855 |
| $ | 39,548 |
|
| 2022 | $ | 3,829 |
| $ | 34,428 |
|
| 2023 | | $ | 32,341 |
|
Impairments
Due to unanticipated program revenue changes and certain other market factors impacting GCI Holdings operating results, impairment losses of $147 million and $65 million were recorded during the year ended December 31, 2018 related to goodwill and cable certificates, respectively, related to the GCI Holdings reporting unit. The fair value of the cable certificates and the GCI Holdings reporting unit was determined using an income approach (Level 3). As of December 31, 2018, the GCI Holdings and Corporate and Other segments have accumulated goodwill impairment losses of $147 million and $56 million, respectively.
Based on the quantitative assessment performed during the fourth quarter and the resulting impairment losses recorded, the estimated fair values of the cable certificates and the GCI Holdings reporting unit do not significantly exceed their carrying values as of December 31, 2018.
|
| | |
| | GCI, INC.LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018, 2017 and 2016 | |
(9) Debt
Debt is summarized as follows: |
| | | | | | | | | | | |
| | | Outstanding | | |
| | | Principal | | Carrying Value |
| | | December 31, | | December 31, | | December 31, |
| | | 2018 | | 2018 | | 2017 |
| | | amounts in thousands |
| Margin Loan Facility | | $ | 900,000 |
| | 900,000 |
| | — |
|
| Senior notes | | 775,000 |
| | 803,287 |
| | NA |
|
| Senior credit facility | | 715,124 |
| | 715,124 |
| | NA |
|
| Wells Fargo note payable | | 7,554 |
| | 7,554 |
| | NA |
|
| Deferred financing costs | | — |
| | (2,267 | ) | | — |
|
| Total debt | | $ | 2,397,678 |
| | 2,423,698 |
| | — |
|
| Debt classified as current, net of deferred financing costs | | | | (900,759 | ) | | — |
|
| Total long-term debt | | | | $ | 1,522,939 |
| | — |
|
Margin Loan
On December 29, 2017, Broadband Holdco, a wholly owned subsidiary of, at such time, Qurate Retail, and now the Company, entered into a margin loan agreement with various lender parties consisting of a term loan in an aggregate principal amount of $1 billion (the “Margin Loan”). Approximately 42,681,842 shares of Liberty Broadband Series C common stock were previously pledged by Broadband Holdco, LLC as collateral for the loan. The Margin Loan had a term of two years with an interest rate of LIBOR plus 1.85% and 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, consistsnet in the consolidated balance sheet. In connection with the completion of the following (amounts in thousands):
|
| | | | | | | | | | | | | | |
| | | | | | | | | | December 31, |
| | Issue Date | | Interest Rate | | Principal Payments | | Maturity Date | | 2017 | | 2016 |
| Senior Credit Facility - Term Loan B | November 17, 2016 | | LIBOR plus 2.25% | | 0.25% of the original principal due quarterly | | February 2, 20221 | | $ | 242,583 |
| | 245,187 |
|
| Senior Credit Facility - Term Loan A | November 17, 2016 | | LIBOR plus applicable margin2 | | Due at maturity | | November 17, 20211 | | 215,000 |
| | 215,000 |
|
| Senior Credit Facility - Revolver | November 17, 2016 | | LIBOR plus applicable margin2 | | Due at maturity | | November 17, 20211 | | 100,000 |
| | 55,000 |
|
| 2025 Notes | April 1, 2015 | | 6.875% | | Due at maturity | | April 15, 20253 | | 450,000 |
| | 450,000 |
|
| 2021 Notes | May 20, 2011 | | 6.75% | | Due at maturity | | June 1, 20214 | | 325,000 |
| | 325,000 |
|
| Wells Fargo note | June 30, 2014 | | LIBOR plus 2.25% | | Monthly installments | | July 15, 2029 | | 8,048 |
| | 8,596 |
|
| Total Debt | | 1,340,631 |
| | 1,298,783 |
|
| Less unamortized discount | | 3,197 |
| | 3,518 |
|
| Less unamortized deferred loan fees | | 14,117 |
| | 15,133 |
|
| Less current portion of long-term debt | | 2,989 |
| | 3,326 |
|
| Long-term debt, net | | $ | 1,320,328 |
| | 1,276,806 |
|
1The Senior Credit Facility will mature on December 3, 2020 if our 2021 Notes are not refinanced prior to such date. |
2Applicable margin is based on the company’s leverage ratio and ranges from 2.00% to 3.00%. Our Senior Credit Facility Total Leverage Ratio (as defined) may not exceed 5.95 to one; the Senior Leverage Ratio (as defined) may not exceed 3.00 to one; and our Interest Coverage Ratio (as defined) must not be less than 2.50 to one at any time. |
3The notes are redeemable at our option, in whole or in part, at a redemption price defined in the 2025 Notes agreement, and accrued and unpaid interest (if any) to the date of redemption. |
4The notes are redeemable at our option, in whole or in part, at a redemption price defined in the 2021 Notes agreement, and accrued and unpaid interest (if any) to the date of redemption. |
| |
(a) | Senior Credit Facility |
During 2017, we amended our Senior Credit Facility. We paid loanTransactions, Broadband Holdco borrowed the full principal amount of the Margin Loan. A portion of the proceeds of the Margin Loan were used to make a distribution to Qurate Retail of $1.1 billion to be used within one year for the repurchase of QVC Group stock (now the Qurate Retail common stock) or to pay down certain debt at Qurate Retail, and for the payment of fees and other costs and expenses, in each case, pursuant to the terms of $0.5the reorganization agreement. The distributed loan proceeds constituted a portion of the cash reattributed to the QVC Group.
On October 5, 2018 (the “Closing Date”), Broadband Holdco entered into Amendment No. 1 (the “Amendment”) to the Margin Loan (the “Margin Loan Agreement”). Pursuant to the Amendment, lenders under the Margin Loan have agreed to, among other things, provide commitments (the “Revolving Commitments”) for a new revolving credit facility in an aggregate principal amount of up to $200.0 million that(the “Revolving Credit Facility” and, the loans thereunder, the “Revolving Loans”). The Revolving Credit Facility established under the Margin Loan Agreement is in addition to the existing term loan credit facility under the Margin Loan Agreement (the “Term Loan Facility” and, together with Revolving Credit Facility, the “Margin Loan Facility” and the loans thereunder, the “Loans”). After giving effect to the initial borrowing of Revolving Loans and Term Loan Prepayment (as defined below) on the Closing Date, $800.0 million of loans under the Term Loan Facility were expensed immediatelyoutstanding and $200.0 million of Revolving Loans were outstanding. Subsequent to the Closing Date, the Company repaid $100.0 million of the Revolving Credit Facility. The Amendment also amends certain covenants in our Consolidated Statementsthe Margin Loan to permit, among other things, a designated GCI Liberty subsidiary to enter into a subordinated revolving note with GCI Liberty and certain additional investments. Approximately 42,681,842 shares of OperationsLiberty Broadband Series C common stock with a value of $3.1 billion were pledged by Broadband Holdco, LLC as collateral for the year ended December 31, 2017 and $0.4 million that were deferred and are being amortized over the life of the Senior Credit Facility. We recorded a $0.6 million loss on extinguishment of debt in our Consolidated Statement of Operations for the year ended December 31, 2017 as part of this amendment.
In November 2016, we amended our Senior Credit Facility. We paid loan fees and other expenses of $0.2 million that were expensed immediately in our Consolidated Statement of Operations for the year ended December 31, 2016 and $3.9 million that were deferred and are being amortized over the life of the Senior Credit Facility. We recorded a $0.6 million loss on extinguishment of debt in our Consolidated Statement of Operations for the year ended December 31, 2016 as part of this amendment.
We had a $100.0 million outstanding balance and $21.0 million in letters of credit under the $200.0 million Senior Credit Facility Revolver at December 31, 2017, which leaves $79.0 million available for borrowing as of December 31, 2017.2018.
| |
(b) | 2025 Notes and 2021 Notes |
InterestBroadband Holdco is permitted to use the proceeds of the Revolving Loans for any purpose not prohibited under the Margin Loan, including, without limitation, (i) to make dividends and distributions, (ii) for the purchase of margin stock, (iii) to make investments not prohibited under the Margin Loan, (iv) to repay an intercompany loan to GCI Liberty, and/or (v) otherwise for general corporate purposes, including, without limitation, for payment of interest and fees and other costs and expenses. On the Closing Date, Broadband Holdco drew down on the notes is payable semi-annually in arrears.
In April 2017, we amended our 2025 Notes and 2021 Notes (the "Notes") due to the Reorganization Agreement that we entered into with Liberty (see Note 14). We paid $1.9 million in fees in connection with the amendment to the Notes that were deferred and are being amortized over the remaining lifefull amount of the Notes.
commitments under the Revolving Credit Facility and applied all of the proceeds to prepay, on the Closing Date, a portion of the loans outstanding under the Term Loan Facility (the “Term Loan Prepayment”).
|
| | |
| | GCI, INC.LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018, 2017 and 2016 | |
Upon
The Loans will mature on December 29, 2019 (the “maturity date”) and accrue interest at a rate equal to the occurrence3-month LIBOR rate plus a per annum spread of a change1.85%, subject to certain conditions and exceptions. Undrawn Revolving Commitments shall be available to Broadband Holdco from the Closing Date to but excluding the earlier of control, each holder(i) the date that is one month prior to the maturity date and (ii) the date of the 2025 and 2021 Notes will have the right to require us to purchase all or any parttermination of such holder’sRevolving Commitments pursuant to the terms of the Margin Loan. The obligations under the Revolving Credit Facility, together with the obligations under Term Loan Facility, are secured by first priority liens on the shares of Liberty Broadband owned by Broadband Holdco and certain other cash collateral provided by Broadband Holdco. In addition, the Revolving Credit Facility and the Term Loan Facility are subject to the same affirmative and negative covenants and events of default.
Senior Notes
Interest on the 6.75% Senior Notes due 2021 (the "2021 Notes") and the 6.875% Senior Notes due 2025, both of which were issued by GCI, Inc., which is now GCI, LLC (collectively, the “Senior Notes”), is payable semi-annually in arrears. The Senior Notes are redeemable at the Company's option, in whole or 2021 Notesin part, at a purchaseredemption price equal to 101% ofdefined in the principal amount of such notes, plusrespective indentures, and accrued and unpaid interest on such notes, if any. If we or certain(if any) to the date of our subsidiaries engageredemption. The Senior Notes are stated net of an aggregate unamortized premium of $28.3 million at December 31, 2018. Such premium is being amortized to interest expense in asset sales, we must generally either invest the net cash proceeds from such sales in our business within a periodaccompanying consolidated statements of time, prepay debtoperations. As of December 31, 2018, GCI, LLC exceeded the maximum leverage threshold, as measured by the terms of its Senior Notes, and therefore does not have access to any additional funding under any outstandingthe revolving portion of the Senior Credit Facility, as defined below.
Senior Credit Facility
On December 27, 2018, GCI, LLC amended and restated the Fifth Amended and Restated Credit Agreement dated as of March 9, 2018 and refinanced the revolving credit facility or make an offerand term loan A with a new revolving credit facility, leaving the existing Term Loan B in place (the "Senior Credit Facility"). The Senior Credit Facility provide a $240.7 million term loan B ("Term Loan B") and a $550.0 million revolving credit facility. GCI Liberty contributed $50.0 million to purchase a principal amountGCI Holdings in connection with the refinancing of the notesSenior Credit Facility.
GCI, LLC's Senior Credit Facility Total Leverage Ratio (as defined in the Senior Credit Facility) may not exceed 6.50 to one and the Secured Leverage Ratio (as defined in the Senior Credit Facility) may not exceed 4.00 to one.
The revolving credit facility borrowings that are LIBOR loans bear interest at a per annum rate equal to the excess net cash proceeds,applicable LIBOR plus a margin that varies between 1.50% and 2.75% depending on the total leverage ratio. The full principal revolving credit facility included in the Senior Credit Facility will mature on December 27, 2023 or December 3, 2020 if the 2021 Notes are not refinanced prior to such date.
The interest rate for the Term Loan B is LIBOR plus 2.25%. The Term Loan B requires principal payments of 0.25% of the original principal amount on the last day of each calendar quarter with the purchase price equalfull amount maturing on February 2, 2022 or December 3, 2020 if the Company's 2021 Notes are not refinanced prior to 100% of their principal amount, plus accrued and unpaid interest, if any.such date.
In conjunction with the issuance of our 2025 Notes and the repayment of our 2019 Notes, we recorded a $27.7 million loss on extinguishment of debt in our Consolidated Statement of Operations for the year ended December 31, 2015.
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 our wholly owned subsidiary, GCI Holdings Inc. and the subsidiary guarantors, as defined in the Senior Credit Facility, and on the stock of GCI Holdings, Inc. The Wells Fargo noteHoldings.
As of December 31, 2018, there is subject to similar affirmative and negative covenants as$240.1 million outstanding under the Term Loan B, $475.0 million outstanding under the revolving portion of the Senior Credit Facility and is secured by a security interest and lien on$10.1 million in letters of credit under the building purchased with the funds.
The Notes' covenants restrict us and certain of our subsidiaries from incurring additional debt or entering into sale and leaseback transactions; paying dividends or distributions on capital stock or repurchase capital stock; issuing stock of subsidiaries; making certain investments; creating liens on assets to secure debt; entering into transactions with affiliates; merging or consolidating with another company; and transferring and selling assets. Limitations and exceptions to note covenants and events of default are described in the Notes' indentures.
We were in compliance with all covenants required by our notes and Senior Credit Facility, which leaves $64.9 million available for borrowing when GCI, LLC meets the maximum leverage threshold, as measured by the terms of December 31, 2017.
Maturities of long-term debt as of December 31, 2017 are as follows (amounts in thousands):
|
| | | |
| Years ending December 31, | |
| 2018 | $ | 2,989 |
|
| 2019 | 3,010 |
|
| 2020 | 3,030 |
|
| 2021 | 643,053 |
|
| 2022 | 233,365 |
|
| 2023 and thereafter | 455,184 |
|
| Total debt | 1,340,631 |
|
| Less unamortized discount | 3,197 |
|
| Less unamortized deferred loan fees | 14,117 |
|
| Less current portion of long-term debt | 2,989 |
|
| Long-term debt, net | $ | 1,320,328 |
|
Income tax (expense) benefit consists of the following (amounts in thousands):
|
| | |
| GCI, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements | |
|
| | | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Deferred tax (expense) benefit: | | | | | |
| Federal taxes | $ | 41,537 |
| | (6,058 | ) | | (290 | ) |
| State taxes | (420 | ) | | (1,022 | ) | | 209 |
|
| | $ | 41,117 |
| | (7,080 | ) | | (81 | ) |
Income tax benefit for the year ending December 31, 2017 was recognized primarily as a result of the enactment of the Tax Cuts & Jobs Act (“Tax Reform”) in December 2017. The primary provisions of Tax Reform affecting us are the reduction to the U.S. corporate income tax rate from 35% to 21% and temporary 100% bonus depreciation for certain assets. The change in the tax law required us to remeasure existing net deferred tax liabilities using the lower rate in the year of enactment resulting in an income tax benefit of $43.5 million to reflect these changes in the year ending December 31, 2017. There were no specific impacts of Tax Reform that could not be reasonably estimated which we accounted for under prior law.
Total income tax (expense) benefit differed from the “expected” income tax (expense) benefit determined by applying the statutory federal income tax rate of 35% as follows (amounts in thousands):
|
| | | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| “Expected” statutory tax (expense) benefit | $ | 3,430 |
| | (1,891 | ) | | 3,482 |
|
| Tax reform rate change | 43,484 |
| | — |
| | — |
|
| Employee's excess tax benefit for stock based compensation | 3,397 |
| | — |
| | — |
|
| Nondeductible officer compensation | (1,439 | ) | | (1,424 | ) | | (1,906 | ) |
| Nondeductible transaction costs | (2,760 | ) | | — |
| | — |
|
| Nondeductible entertainment expenses | (1,141 | ) | | (1,029 | ) | | (1,059 | ) |
| Nondeductible lobbying expenses | (345 | ) | | (1,192 | ) | | (442 | ) |
| State income taxes, net of federal (expense) benefit | (420 | ) | | (1,022 | ) | | 209 |
|
| Impact of non-controlling interest attributable to non-tax paying entity | — |
| | — |
| | 220 |
|
| Other, net | (3,089 | ) | | (522 | ) | | (585 | ) |
| | $ | 41,117 |
| | (7,080 | ) | | (81 | ) |
|
| | |
| | GCI, INC.LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018, 2017 and 2016 | |
Wells Fargo Note Payable
GCI Holdings issued a note to Wells Fargo that matures on July 15, 2029 and is payable in monthly installments of principal and interest (the "Wells Fargo Note Payable"). The interest rate is variable at one month LIBOR plus 2.25%.
The note is subject to similar affirmative and negative covenants as the Senior Credit Facility. The obligations under the note are secured by a security interest and lien on the building purchased with the note.
Debt Covenants
GCI, LLC is subject to covenants and restrictions under its Senior Notes and Senior Credit Facility. The Company and GCI, LLC are in compliance with all debt maintenance covenants as of December 31, 2018.
Five Year Maturities
The annual principal maturities of debt, based on stated maturity dates, for each of the next five years is as follows (amounts in thousands):
|
| | | |
| 2019 | $ | 902,934 |
|
| 2020 | 713,163 |
|
| 2021 | 325,524 |
|
| 2022 | 549 |
|
| 2023 | 575 |
|
| 2024 and thereafter | 454,933 |
|
| Total debt | $ | 2,397,678 |
|
Fair Value of Debt
The fair value of the Senior Notes was $763.9 million at December 31, 2018.
Due to the variable rate nature of the Margin Loan, Senior Credit Facility and Wells Fargo Note Payable, the Company believes that the carrying amount approximates fair value at December 31, 2018.
(10) Income Taxes
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) bonus depreciation that will allow for full expensing of qualified property; (3) creating a new limitation on deductible interest expense; (4) eliminating the corporate alternative minimum tax ("AMT") and changing how existing AMT credits can be realized; (5) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017; (6) limitations on the deductibility of certain executive compensation; and (7) requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries that is payable over eight years. The Securities and Exchange Commission ("SEC") issued guidance on accounting for the tax effects of the Tax Act. The Company reflected the income tax effects of those aspects of the Tax Act for which the accounting was known as of December 31, 2017 and made immaterial revisions to such amounts during the allowed one year measurement period. As of December 31, 2018, the Company has completed its analysis of the tax effects of the Tax Act.
Holdco was included in the federal combined income tax return of Qurate Retail prior to the HoldCo Split-Off. For periods prior to the HoldCo Split-Off, the tax provision included in these financial statements was prepared on a stand-alone basis, as if the Company was not part of Qurate Retail. Certain HoldCo income tax related balances as of the date of the HoldCo Split-Off were recorded as equity contributions from Qurate Retail in the net amount of $1.1 billion as shown in the consolidated statement of equity. Subsequent to the HoldCo Split-Off, GCI Liberty's consolidated tax return will include HoldCo. Although the acquisition of GCI Liberty was accounted for as a reverse acquisition under GAAP, the consolidated
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| GCI, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018, 2017 and 2016 | |
income tax return of GCI Liberty for 2018 will include a full year of GCI Liberty’s financials results (including activity prior to the Transactions) and the partial year of financial results of HoldCo for the period subsequent to the HoldCo Split-Off.
Income tax benefit (expense) consists of:
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| | | | | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | amounts in thousands |
| Current: | | | | | |
| Federal | $ | 606 |
| | — |
| | — |
|
| State and local | (24 | ) | | — |
| | 575 |
|
| | 582 |
| | — |
| | 575 |
|
| Deferred: | | | | | |
| Federal | 192,050 |
| | 160,150 |
| | (436,260 | ) |
| State and local | (7,757 | ) | | (26,628 | ) | | (60,560 | ) |
| | 184,293 |
| | 133,522 |
| | (496,820 | ) |
| Income tax benefit (expense) | $ | 184,875 |
| | 133,522 |
| | (496,245 | ) |
Income tax benefit (expense) differs from the amounts computed by applying the U.S. federal income tax rate of 21% for the year ended December 31, 2018 and 35% for both of the years ended December 31, 2017 and 2016 as a result of the following:
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| | | | | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | amounts in thousands |
| Computed expected tax benefit (expense) | $ | 231,579 |
| | (206,862 | ) | | (460,885 | ) |
| State and local income taxes, net of federal income taxes | 74,426 |
| | (17,001 | ) | | (38,991 | ) |
| Dividends received deductions | — |
| | — |
| | 1,969 |
|
| Executive compensation | (7,114 | ) | | — |
| | — |
|
| Change in valuation allowance affecting tax expense | (189 | ) | | (384 | ) | | — |
|
| Change in state tax rate due to acquisition | (117,496 | ) | | — |
| | — |
|
| Change in state tax rate due to law change | 37,108 |
| | — |
| | — |
|
| Change in tax rate due to Tax Act | — |
| | 347,979 |
| | — |
|
| Deductible stock compensation | (131 | ) | | 14,116 |
| | 1,700 |
|
| Goodwill impairment | (30,960 | ) | | — |
| | — |
|
| Other, net | (2,348 | ) | | (4,326 | ) | | (38 | ) |
| Income tax benefit (expense) | $ | 184,875 |
| | 133,522 |
| | (496,245 | ) |
For the year ended December 31, 2018, the income tax benefit was lower than the U.S. statutory tax rate of 21% primarily due to a change in the effective state tax rate used to measure deferred taxes due to the acquisition as discussed in notes 1 and 4 and a goodwill impairment that is not deductible for tax purposes, partially offset by a change in the state effective tax rate used to measure deferred taxes resulting from a state law change.
For the year ended December 31, 2017, the most significant reconciling item is a net tax benefit for the effect of the change in the U.S. federal corporate tax rate from 35% to 21% on deferred taxes. Income tax expense was higher than the U.S. statutory tax rate of 35% in 2016 due to state tax expense related to unrealized gains on the Company’s investments.
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| GCI, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018, 2017 and 2016 | |
The tax effects of temporary differences that give rise to significant portions of the deferred income tax assets and deferred income tax liabilities at December 31, 2017 and 2016 are summarized below (amounts in thousands):presented below:
|
| | | | | | |
| | 2017 | | 2016 |
| Deferred tax assets: | | | |
| Net operating loss carryforwards | $ | 101,995 |
| | 109,577 |
|
| Deferred revenue for financial reporting purposes | 44,853 |
| | 59,993 |
|
| Asset retirement obligations in excess of amounts recognized for tax purposes | 13,328 |
| | 16,808 |
|
| Compensated absences accrued for financial reporting purposes | 2,825 |
| | 3,505 |
|
| Share-based compensation expense for financial reporting purposes in excess of amounts recognized for tax purposes | 2,629 |
| | 3,393 |
|
| Accounts receivable, principally due to allowance for doubtful receivables | 1,023 |
| | 1,965 |
|
| Workers compensation and self-insurance health reserves, principally due to accrual for financial reporting purposes | 1,523 |
| | 1,705 |
|
| Alternative minimum tax credits | 1,735 |
| | 1,735 |
|
| Deferred compensation expense for tax purposes in excess of amounts recognized for financial reporting purposes | 1,370 |
| | 1,687 |
|
| Other | 4,181 |
| | 9,371 |
|
| Total deferred tax assets | $ | 175,462 |
| | 209,739 |
|
| Deferred tax liabilities: | | | |
| Plant and equipment, principally due to differences in depreciation | $ | 192,413 |
| | 245,118 |
|
| Intangible assets | 77,455 |
| | 106,061 |
|
| Other | 277 |
| | 345 |
|
| Total deferred tax liabilities | 270,145 |
| | 351,524 |
|
| Net deferred tax liabilities | $ | 94,683 |
| | 141,785 |
|
|
| | | | | | |
| | December 31, |
| | 2018 | | 2017 |
| | amounts in thousands |
| Deferred tax assets: | | | |
| Loss and capital carryforwards | $ | 150,011 |
| | 48,898 |
|
| Deferred revenue | 23,716 |
| | — |
|
| Inventory | 115 |
| | — |
|
| Accrued stock compensation | 3,598 |
| | 6,999 |
|
| Debt | 13,948 |
| | — |
|
| Other accrued liabilities | — |
| | 362 |
|
| Other future deductible amounts | 39,183 |
| | 63 |
|
| Deferred tax assets | 230,571 |
| | 56,322 |
|
| Valuation allowance | (1,326 | ) | | (433 | ) |
| Net deferred tax assets | 229,245 |
| | 55,889 |
|
| Deferred tax liabilities | | | |
| Investments | 573,016 |
| | 697,393 |
|
| Fixed assets | 232,899 |
| | — |
|
| Intangible assets | 215,394 |
| | 1,892 |
|
| Other | — |
| | 30 |
|
| Deferred tax liabilities | 1,021,309 |
| | 699,315 |
|
| Net deferred tax liabilities | $ | 792,064 |
| | 643,426 |
|
At December 31, 2017, we have tax net operating loss carryforwards of $361.9 million that will begin expiring in 2020 if not utilized. Our utilization of remaining acquired net operating loss carryforwards is subject to annual limitations pursuant to Internal Revenue Code section 382 which could reduce or deferDuring the utilization of these losses.
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| GCI, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements | |
Our tax net operating loss carryforwards are summarized below by year of expiration (amounts in thousands):
|
| | | | | | |
| Years ending December 31, | Federal | | State |
| 2020 | $ | 1,530 |
| | 1,505 |
|
| 2021 | 25,556 |
| | 24,149 |
|
| 2022 | 14,081 |
| | 13,850 |
|
| 2023 | 3,968 |
| | 3,903 |
|
| 2024 | 722 |
| | 710 |
|
| 2025 | 1,536 |
| | 1,511 |
|
| 2026 | 663 |
| | 652 |
|
| 2027 | 1,010 |
| | 994 |
|
| 2028 | 39,879 |
| | 39,226 |
|
| 2029 | 46,537 |
| | 45,756 |
|
| 2031 | 104,101 |
| | 102,640 |
|
| 2033 | 5,073 |
| | 4,968 |
|
| 2034 | 38,561 |
| | 37,312 |
|
| 2035 | 13,416 |
| | 12,510 |
|
| 2036 | 282 |
| | 268 |
|
| 2037 | 64,949 |
| | 61,798 |
|
| Total tax net operating loss carryforwards | $ | 361,864 |
| | 351,752 |
|
Tax benefits associated with recorded deferred tax assets are considered to be more likely than not realizable through taxable income earned in carryback years, future reversals of existing taxable temporary differences, and future taxable income exclusive of reversing temporary differences and carryforwards. The amount of deferred tax assets considered realizable, however, could be reduced if estimates of future taxable income during the carryforward period are reduced.
We file federal income tax returns in the U.S. and in various state jurisdictions. We are not subject to U.S. or state tax examinations by tax authorities for years 2013 and earlier except that certain U.S. federal income tax returns for years after 2001 are not closed by relevant statutes of limitations due to unused net operating losses reported on those income tax returns.
We recognize accrued interest on unrecognized tax benefits in interest expense and penalties in selling, general and administrative expenses. We did not have any unrecognized tax benefits as of December 31, 2017, 2016 and 2015, and accordingly, we did not recognize any interest expense. Additionally, we recorded no penalties during the years ended December 31, 2017, 2016 and 2015.
We adopted ASU 2016-09 as2018 there was an increase in the valuation allowance of January 1, 2017 on a modified retrospective basis. As a result$893,000 of this adoption, we have recorded a $7.1 million adjustment to Retained Earnings (Deficit) as of January 1, 2017. We recorded an excesswhich $189,000 affected tax benefit generated from stock based compensation duringexpense. During the year ended December 31, 2017, there was an increase in the valuation allowance of $3.4 million. We did not record any excess$384,000 of which all of the increase affected tax benefit generated from stock based compensation during the years endedexpense.
At December 31, 2018, the Company had federal and state net operating losses and interest expense carryforwards for income tax purposes aggregating approximately $150 million (on a tax effected basis). Of the $150 million, $35 million are carryforwards with no expiration. The future use of the remaining carryforwards of $115 million are subject to limitation and expire at certain future dates. Based on current projections, $1 million of these carryforwards may expire unused and accordingly are subject to a valuation allowance. The carryforwards that are expected to be utilized will begin to expire in 2021.
As of December 31, 2018, the Company had not recorded tax reserves related to unrecognized tax benefits for uncertain tax positions.
As of December 31, 2018, none of GCI’s tax years prior to the HoldCo Split-Off are under audit. Qurate Retail’s tax years prior to 2015 are closed for federal income tax purposes and the IRS has completed its examination of Qurate Retail’s 2015, 2016 and 2015, since we were in a net operating loss carryforward position and2017 tax years. Qurate Retail’s 2018 tax year is being examined currently as part of the IRS's Compliance Assurance Process program. Various states are currently examining Qurate Retail’s prior years’ state income tax deduction would not yet reduce income taxes payable.returns.
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| | GCI, INC.LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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(9) | Fair Value Measurements |
December 31, 2018, 2017 and 2016
Recurring Fair Value Measurements
Assets measured at fair value on a recurring basis as of December 31, 2017 and 2016 are as follows (amounts in thousands):
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| | | | | | | | | | | | |
| December 31, 2017 | Level 1 (1) | | Level 2 (2) | | Level 3 (3) | | Total |
| Assets: | | | | | | | |
| Deferred compensation plan assets (mutual funds) | $ | 1,323 |
| | — |
| | — |
| | 1,323 |
|
| | | | | | | | |
| December 31, 2016 | Level 1 (1) | | Level 2 (2) | | Level 3 (3) | | Total |
| Assets: | | | | | | | |
| Deferred compensation plan assets (mutual funds) | $ | 1,477 |
| | — |
| | — |
| | 1,477 |
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| | | | | | | | |
(1) Quoted prices in active markets for identical assets |
(2) Observable inputs other than quoted prices in active markets for identical assets |
(3) Inputs that are generally unobservable and not corroborated by market data |
The fair value of our mutual funds is determined using quoted market prices in active markets utilizing market observable inputs.
Current and Long-Term Debt
The carrying amounts and approximate fair values of our current and long-term debt, excluding capital leases at December 31, 2017 and 2016 are as follows (amounts in thousands):
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| | | | | | | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
| | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
| Current and long-term debt | $ | 1,323,317 |
| | 1,379,850 |
| | 1,280,133 |
| | 1,317,222 |
|
The following methods and assumptions were used to estimate fair values:
The fair values of the 6.75% Senior Notes due 2021 and the 6.875% Senior Notes due 2025 are based upon quoted market prices for the same or similar issues (Level 2).
The fair value of our Senior Credit Facility and Wells Fargo note payable are estimated to approximate their carrying value because the instruments are subject to variable interest rates (Level 2).
Common Stock
We were incorporated in 1997 and issued 100 shares of our no par Class A common stock to GCI in our initial capitalization. We received all ownership interests in subsidiaries previously held by GCI and proceeds from GCI’s August 1, 1997 common stock offering. We recorded $206.6 million associated with our initial capitalization. All of our issued and outstanding Class A common stock is owned by GCI.
Shared-Based Compensation
GCI's Amended and Restated 1986 Stock Option Plan ("Stock Option Plan"), provides for the grant of restricted stock awards for a maximum of 15.7 million shares of GCIClass A-1 common stock, subject to adjustment upon the occurrence of stock dividends, stock splits, mergers, consolidations or certain other changes in corporate structure or capitalization. If an awardexpires or terminates, the shares subject to the award will be available for further grants of awards under the Stock Option Plan. The Compensation Committee of GCI’s Board of Directors administers theStock Option Plan. Substantially all restricted stock awards granted vest over periods of up to three years. The requisite service period of our awards is generally the same as the vesting period. New shares of GCI Class A-1 common stock are issued when restricted stock
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| GCI, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements | |
awards are granted. We have 1.2 million shares available for grant under the Stock Option Plan at December 31, 2017.(11) Variable Interest Entities
A summary of nonvested restricted stock award activity under the Stock Option Plan for the year ended December 31, 2017, follows (share amounts in thousands):
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| | | | | | |
| | Shares | �� | Weighted Average Grant Date Fair Value |
| Nonvested at January 1, 2016 | 1,465 |
| | $ | 14.41 |
|
| Granted | 607 |
| | $ | 23.24 |
|
| Vested | (894 | ) | | $ | 16.22 |
|
| Forfeited | (5 | ) | | $ | 18.48 |
|
| Nonvested at December 31, 2016 | 1,173 |
| | $ | 17.58 |
|
The weighted average grant date fair value of awards granted during the years ended December 31, 2017, 2016, and 2015 were $23.24, $17.87 and $15.06, respectively. The total fair value of awards vesting during the years ended December 31, 2017, 2016, and 2015 were $29.9 million, $13.5 million and $17.0 million, respectively. We have recorded share-based compensation expense of $17.5 million, $11.0 million, and $10.9 million for the years ended December 31, 2017, 2016, and 2015, respectively. Share-based compensation expense is classified as Selling, General and Administrative Expense in our Consolidated Statements of Operations. Unrecognized share-based compensation expense is $11.3 million as of December 31, 2017. We expect to recognize share-based compensation expense over a weighted average period of 1.6 years for restricted stock awards.
GCI 401(k) Plan
In 1986, GCI adopted an Employee Stock Purchase Plan (“GCI 401(k) Plan”) qualified under Section 401 of the Internal Revenue Code of 1986. The GCI 401(k) Plan provides for acquisition of GCI’s Class A-1common stock at market value as well as various mutual funds. We may match a percentage of the employees' contributions up to certain limits, decided by GCI’s Board of Directors each year. Our matching contributions allocated to participant accounts totaled $11.0 million, $11.0 million and $9.8 million for the years ended December 31, 2017, 2016 and 2015, respectively. We used cash to fund all of our employer-matching contributions during the years ended December 31, 2017, 2016 and 2015.
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(11) | Industry Segments Data |
We operate our business under a single reportable segment. Effective in the first quarter of 2017, we reassessed and reorganized our management and internal reporting structures in order to make our operations more efficient, which triggered an analysis of our reportable segments. As a result of our assessment, we merged our former Wireless and Wireline segments into one operating segment. We realigned our external financial reporting to support this change. Our chief operating decision maker assesses our financial performance as follows:
•Capital expenditure decisions are based on the support they provide to all revenue streams
•Revenues are managed on the basis of specific customers and customer groups
Costs are generally managed and assessed by function and generally support the organization across all customer groups or revenue streams
•Profitability is assessed at the consolidated level
Prior to 2017, we operated our business under two reportable segments - Wireline and Wireless. As a result of the reorganization of our reporting structure, assets, including goodwill, and liabilities were reassigned to a single reporting unit.
Revenues summarized by customer and service type for the years ended December 31, 2017, 2016, and 2015 follows (amounts in thousands):
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| GCI, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements | |
|
| | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| | Consumer | Business | Total | | Consumer | Business | Total | | Consumer | Business | Total |
| Revenues | | | | | | | | | | | |
| Wireless | 167,733 |
| 104,614 |
| 272,347 |
| | 177,801 |
| 105,355 |
| 283,156 |
| | 199,862 |
| 151,710 |
| 351,572 |
|
| Data | 145,757 |
| 308,480 |
| 454,237 |
| | 140,196 |
| 296,202 |
| 436,398 |
| | 130,213 |
| 269,472 |
| 399,685 |
|
| Video | 99,609 |
| 18,039 |
| 117,648 |
| | 107,305 |
| 20,102 |
| 127,407 |
| | 115,074 |
| 18,819 |
| 133,893 |
|
| Voice | 23,783 |
| 51,189 |
| 74,972 |
| | 26,734 |
| 60,117 |
| 86,851 |
| | 30,110 |
| 63,274 |
| 93,384 |
|
| Total | 436,882 |
| 482,322 |
| 919,204 |
| | 452,036 |
| 481,776 |
| 933,812 |
| | 475,259 |
| 503,275 |
| 978,534 |
|
We earn all revenues through sales of services and products within the United States. All of our long-lived assets are located within the United States of America, except approximately 82% of our undersea fiber optic cable systems which transit international waters and all of our satellite transponders.
We had no major customers for the years ended December 31, 2017 and 2016. We earned revenues from a major customer, net of discounts, of $130.8 million or 13% of total consolidated revenues for the year ended December 31, 2015.
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(12) | Related Party Transactions |
We entered into a long-term capital lease agreement in 1991 with the wife of GCI’s CEO for property occupied by us. The leased asset was capitalized in 1991 at the owner’s cost of $0.9 million and the related obligation was recorded. The lease agreement was amended in April 2008 and our existing capital lease asset and liability increased by $1.3 million to record the extension of this capital lease. The amended lease terminates on September 30, 2026.
In January 2001 we entered into an aircraft operating lease agreement with a company owned by GCI’s CEO. The lease was amended several times, most recently in May 2011. The lease term of the aircraft may be terminated at any time by us upon 12 months’ written notice. The monthly lease rate of the aircraft is $132,000. In 2001, we paid a deposit of $1.5 million in connection with the lease. The deposit will be repaid to us no later than six months after the agreement terminates.
ACS was a related party for financial statement reporting purposes through the date of the Wireless Acquisition on February 2, 2015. Included in our related party disclosures were ACS' provision to us of local service lines and network capacity in locations where we did not have our own facilities, our provision to ACS of wholesale wireless services for their use of our network to sell services to their respective retail customers, and our receipt of ACS' high cost support from USF for its wireless customers. For the period January 1, 2015 to February 2, 2015, we paid ACS $6.2 million and received $8.1 million in payments from ACS. We also have long-term capacity exchange agreements with ACS for which no money is exchanged.
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(13) | Variable Interest Entities |
New Markets Tax Credit Entities
We have
GCI entered into several arrangements under the NMTCNew 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, wethe Company loaned money to the investment fund and US Bancorp invested money in the investment fund. The investment fund would then contribute the funds from ourthe Company's loan and US Bancorp's investment to a CDE. The CDE, in turn, would loan the funds to ourthe Company's wholly owned subsidiary, Unicom, Inc. ("Unicom") as partial financing for the projects.
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| GCI, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements | |
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 $15.4 million and $0.9$0.8 million was held by Unicom at December 31, 2017, and 2016, respectively,2018 and is included in our Consolidated Balance Sheets. Wethe Company's consolidated balance sheets. The Company completed construction of the projects partially funded by these transactions.
These transactions include put/call provisions whereby wethe Company may be obligated or entitled to repurchase US Bancorp’s interestsinterest in theeach investment funds. We believefund for a nominal amount. The Company believes that US Bancorp will exercise the put options at the end of the compliance periods for each of the transactions. The NMTCs are subject to 100% recapture for a period of seven years as provided in the Internal Revenue Code. We areCode of 1986, as amended. The Company is required to be in compliance with various regulations and contractual provisions that apply to the NMTC arrangements. Non-compliance with applicable requirements could result in projected tax benefits not being realized by US Bancorp. We haveThe Company agreed to indemnify US Bancorp for any loss or recapture of NMTCs totaling $35.1 million until such time as ourits obligation to deliver tax benefits is relieved. There have been no credit recaptures as of December 31, 2017.2018. The value attributed to the put/calls is nominal.
We haveThe Company has determined that each of the investment funds are VIEs.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 usthe Company to deliver tax benefits and provide various other guarantees to US Bancorp; US Bancorp’s lack of a material interest in the underlying economics of the project; and the fact that we arethe Company is obligated to absorb losses of the VIEs. WeThe Company concluded that we areit is the primary beneficiary of each and consolidated the VIEs in accordance with the accounting standard for consolidation.
On September 14, 2018, US Bancorp’s contributions, net of syndication fees and other direct costs incurred in structuringBancorp exercised its put option for the NMTC arrangements, are included#1 transaction that was entered into on August 30, 2011 resulting in Non-controlling Interests on the Consolidated Balance Sheets. Incremental costs to maintainCompany obtaining ownership of the structure duringinvestment fund. Upon obtaining ownership of the compliance period are recognized as incurred to selling, generalinvestment fund, the Company settled the loans and administrative expense.dissolved the VIEs associated with the August 30, 2011 NMTC transaction.
The assets and liabilities of ourthe consolidated VIEs were $165.9$89.0 million and $121.2$63.0 million, respectively, as of December 31, 2017, and $140.9 million and $104.2 million, respectively as of December 31, 2016.2018.
The assets of the VIEs serve as the sole source of repayment for the debt issued by these entities. US BankBancorp does not have recourse to usthe Company or ourits other assets, with the exception of customary representations and indemnities we haveit has provided. We areThe Company is not required and dodoes not currently intend to provide additional financial support to these VIEs. While these subsidiaries are included in ourits consolidated financial statements, these subsidiaries are separate legal entities and their assets are legally owned by them and not available to ourthe Company's creditors.
The following table summarizes the key terms of each of the NMTC transactions:
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| | | | | | | | | |
| 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 30, 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 | $55.2 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 |
Equity Method Investment
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| | GCI, INC.LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018, 2017 and 2016 | |
We owned a 40.8% interest in a next generation carrier-class communications services firm that we accounted for usingThe following table summarizes the equity method and due to a reconsideration event determined that the entity was a VIE. During the second quarterkey terms of 2015, it became apparent that we would not recover the carrying value of our investment. We determined that the fair valueeach of the equity investment was $0 and subsequently wrote-off the entire value of our investment resulting in an impairment loss of $12.6 million for the year ended December 31, 2015 that is recorded in Other Income (Expense) in our Consolidated Statement of Operations. The fair value determination was based upon market information obtained during the second quarter of 2015, the estimated liquidation value of the entity's assets and the amount of senior secured debt at the valuation date. The entity has subsequently closed its operations. We do not have a contractual obligation to provide additional financing and we have no exposure to loss related to our involvement with the VIE.NMTC transactions: |
| | | | | | | | | |
| Financing Arrangement | Investment Funds | Transaction Date | Loan Amount | Interest Rate on Loan to Investment Fund | Maturity Date | US Bancorp Investment | Loan to Unicom | Interest Rate on Loan(s) to Unicom | Expected Put Option Exercise |
| NMTC #2 | TIF 2 & TIF 2-USB | October 3, 2012 | $37.7 million | 1% | October 2, 2042 | $17.5 million | $52.0 million | 0.71% to 0.77% | October 2019 |
| NMTC #3 | TIF 3 | December 11, 2012 | $8.2 million | 1% | December 10, 2042 | $3.8 million | $12.0 million | 1.35% | December 2019 |
| NMTC #4 | TIF 4 | March 21, 2017 | $6.7 million | 1% | March 21, 2040 | $3.3 million | $9.8 million | 0.73% | March 2024 |
| NMTC #5 | TIF 5-1 and TIF 5-2 | December 22, 2017 | $10.4 million | 1% | December 22, 2047 | $5.1 million | $14.7 million | 0.67% to 1.24% | December 2024 |
| |
(14) | Commitments and Contingencies |
On April 4, 2017, General Communication, Inc.,(12) Stock-Based Compensation
GCI Liberty Interactive Corporation, a Delaware corporation (“Liberty”) and Liberty Interactive LLC, a Delaware limited liability company and a direct wholly-owned subsidiary of Liberty (“Liberty LLC”), entered into an Agreement and- Incentive Plan of Reorganization (as may be amended from time to time, the “Reorganization Agreement” and the transactions contemplated thereby, the “Transactions”).
Pursuant to the Reorganization Agreement, General Communication, Inc. amended and restated its articles of incorporation resulting in General Communication, Inc. being renamed GCI Liberty, Inc. and a reclassification and auto conversion of its common stock. Following these events, Liberty will acquire GCI through a reorganization in which certain interests, assets and liabilities of2018 Omnibus Incentive Plan, the Liberty Ventures Group (“Liberty Ventures”) will be contributed to GCI Liberty in exchange for a controlling interest in GCI Liberty. The assetsCompany may grant Awards to be contributed to GCI Liberty are expected to include Liberty’s equity interestsmade in Liberty Broadband and Charter Communications, Inc., along with certain other equity interests, together with the operating businessrespect of Evite, Inc. and certain other assets and liabilities, in exchange for (a) the issuance to Liberty LLCa maximum of (i) a number of8.0 million shares of GCI Liberty Class A Commoncommon stock. Awards generally vest over 1-5 years and have a term of 7-10 years. GCI Liberty issues new shares upon exercise of equity awards.
GCI Liberty - Grants of Stock Options
During the fourth quarter of 2017, prior to the HoldCo Split-Off, Qurate Retail entered into a series of transactions with certain of its officers, associated with certain outstanding stock options, in order to recognize tax deductions in 2017 versus future years (the "Option Exchange"). On December 26, 2017 (the "Grant Date"), pursuant to the approval of the Compensation Committee of its Board of Directors, Qurate Retail effected the acceleration of (i) each unvested in-the-money option to acquire shares of LVNTA and (ii) each unvested in-the-money option to acquire shares of LVNTB, in each case, held by certain of its officers (collectively, the "Eligible Optionholders"). Following this acceleration, also on the Grant Date, each Eligible Optionholder exercised, on a net settled basis, all of his outstanding in-the-money vested and unvested options to acquire LVNTA shares and LVNTB shares (the "Eligible Options"), and:
with respect to each vested Eligible Option, Qurate Retail granted the Eligible Optionholder a vested new option with substantially the same terms and conditions as the exercised vested Eligible Option, except that the exercise price for the new option was, in the case of options to acquire shares of LVNTA, the closing price on the Grant Date per LVNTA share and, in the case of options to acquire shares of LVNTB, the fair market value on the Grant Date of the LVNTB shares as determined pursuant to the incentive plan under which the awards were granted; and
with respect to each unvested Eligible Option:
in satisfaction of the exercise, on a net settled basis, of the unvested Eligible Options, Qurate Retail granted the Eligible Optionholder a number of restricted LVNTA or LVNTB shares (the "Restricted Shares") with a vesting schedule identical to that of GCI Liberty Class B Common Stockthe unvested Eligible Options so exercised, and the Eligible Optionholder made an election under Section 83(b) of the Internal Revenue Code with respect to such Restricted Shares; and
Qurate Retail granted the Eligible Optionholder a new option (the "Unvested New Option") to acquire the same series of common stock and with substantially the same terms and conditions, including with respect to vesting and expiration, as the unvested Eligible Option exercised as set forth above, except that the number of LVNTA or LVNTB shares subject to such Unvested New Option was equal to the number of outstanding shares subject to the unvested Eligible Option minus the number of Series A Liberty Ventures common stock and Series B Liberty Ventures common stock outstandingRestricted Shares received upon exercise of such unvested Eligible Option. The exercise price of such new option was, in the case of a LVNTA option, the closing price on the closing date of the contribution, respectively, and (ii) cash, and (b) the assumption by GCI Liberty of certain liabilities attributed to Liberty Ventures.
Following the contribution and acquisition of GCI Liberty, Liberty will then effect a tax-free separation of its controlling interest in GCI Liberty to the holders of Liberty Ventures common stock in full redemption of all outstanding shares of such stock. As a result of the Transactions, holders of GCI common stock (regardless of class) each will receive (i) 0.63 of a share of GCI Liberty Class A common stock and (ii) 0.20 of a share of new GCI Liberty Series A Cumulative Redeemable preferred stock in exchange for each share of their existing GCI stock. The exchange ratios were determined based on total consideration of $32.50 per share in respect of each share of existing GCI common stock, comprised of $27.50 per share in GCI Liberty Class A common stock and $5.00 per share in newly issued GCI Liberty Series A Cumulative Redeemable preferred stock, based upon a Liberty Ventures reference price of $43.65 (with no premium paid for shares of GCI Class B common stock) and an initial liquidation price of $25.00Grant Date per share of GCI Liberty Series A Cumulative Redeemable preferred stock. The GCI Liberty Series A Cumulative Redeemable preferred stock will accrue dividends at an initial rateLVNTA, or, in the case of 5% per annum (which would increase to 7% in connection with a future reincorporation of GCI Liberty in Delaware) and will be redeemable uponLVNTB option, the 21st anniversaryfair market value on the Grant Date of the closing. The closing of the Transactions are expected to be consummated on March 9, 2018, subjectLVNTB shares as determined pursuant to the satisfaction of customary closing conditions.
On April 12, 2017, we announced our solicitation of consents fromincentive plan under which the holders of our outstanding Notes to effect certain amendments to the indentures governing the Notes (the “Indentures”) to facilitate the Transactions, upon the terms and subject to the conditions set forth in the Consent Solicitation Statement, dated April 12, 2017, and the related Letter of Consent. The consent solicitation expired on April 24, 2017 and we received consents from holders of: (a) $312,418,000 in aggregate principal amount of the 2021 Notes, representing 96.13% of the total principal amount outstanding of the 2021 Notes, and (b) $443,538,000 in aggregate principal amount of the 2025 Notes, representing 98.56% of the total principal amount outstanding of the 2025 Notes. The consent of holders of at least a majority in aggregate principal amount of a series of Notes then outstanding was required to approve the proposed amendment with respect to that series of Notes.
On April 26, 2017, we paid to the tabulation agent for the benefit of registered holders of Notes as of the record date for the Consent Solicitation that validly delivered (and did not validly revoke) a properly completed letter of consent (a “Consent”) on or prior to the expiration date (x) with respect to the proposed amendment relating toUnvested New Options were granted.
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| | GCI, INC.LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018, 2017 and 2016 | |
The Option Exchange was considered a modification under ASC 718 — Stock Compensation, with the 2021 Notes, an aggregate consent feefollowing impacts on compensation expense. The unamortized value of $812,500 payablethe unvested Eligible Options that were exercised, which was $13.5 million for LVNTA and LVNTB combined, will be expensed over the vesting period of the Restricted Shares attributable to the holdersexercise of 2021 those options. The grant of new vested options resulted in incremental compensation expense in the fourth quarter of 2017 of $9.2 million for LVNTA and LVNTB combined. The grant of Unvested New Options resulted in incremental compensation expense totaling $6.4 million for LVNTA and LVNTB combined, which will be amortized over the vesting periods of those options.
During the year ended December 31 2018, GCI Liberty granted to its directors 10,000 options to purchase shares of GCI Liberty Series A common stock. Such options had a weighted average grant-date fair value ("GDFV") of $14.09 per share and generally cliff vest in one year. During the years ended December 31, 2017 and 2016, Qurate granted to its directors and employees 188,000 and 114,000 options, respectively, to purchase shares of LVNTA. Such options had a weighted average GDFV of $16.52 and $12.25 per share, respectively, and vest between three and five years for employees and in one year for directors.
Also during the years ended December 31, 2018, 2017 and 2016, and in connection with GCI Liberty's current CEO's employment agreement, the Company granted 143,000, 269,000 and 209,000 options, respectively, to purchase shares of LVNTB to the Company's current CEO. Such options had a weighted average GDFV of $16.55, $15.41 and $12.48 per share, respectively, and cliff vested at the end of their respective grant year.
In connection with the Option Exchange, the Company granted 946,000 and 1.1 million options to purchase shares of LVNTA and LVNTB, respectively. Such options have an incremental weighted average GDFV of $8.53 and $6.94, respectively.
In addition to the stock option grants to GCI Liberty's current CEO, the Company granted 16,000 performance-based RSUs of LVNTB in 2016. The RSUs had a fair value of $38.79 per share at the time they were granted and cliff vested in one year, subject to the satisfaction of certain performance objectives and based on an amount determined by the compensation committee.
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. For grants made in 2018, 2017 and 2016, the range of expected terms was 4.9 to 6.3 years. 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. For grants made in 2018, 2017 and 2016 the range of volatilities was 25.9% to 31.6%. The Company uses a 0 dividend rate and the risk-free rate for Treasury Bonds with a term similar to that of the subject options.
GCI Liberty - Outstanding Awards
The following tables present the number and weighted average exercise price ("WAEP") of Awards to purchase GCI Liberty common stock granted to certain officers, employees and directors of the Company, as well as the weighted average remaining life and aggregate intrinsic value of the Awards. 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.
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| GCI, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018, 2017 and 2016 | |
|
| | | | | | | | | | | | | | |
| | | Series A |
| | | | | | | Weighted | | Aggregate |
| | | | | | | average | | intrinsic |
| | | Awards | | | | remaining | | value |
| | | (000's) | | WAEP | | life | | (millions) |
| Outstanding at January 1, 2018 | | 1,670 |
| | $ | 47.12 |
| | | | | |
| Granted | | 10 |
| | $ | 44.32 |
| | | | | |
| Exercised | | (27 | ) | | $ | 16.23 |
| | | | | |
| Forfeited/Cancelled | | (3 | ) | | $ | 55.81 |
| | | | | |
| Outstanding at December 31, 2018 | | 1,650 |
| | $ | 47.61 |
| | 1.7 | years | | $ | 6 |
|
| Exercisable at December 31, 2018 | | 1,316 |
| | $ | 47.99 |
| | 1.3 | years | | $ | 6 |
|
|
| | | | | | | | | | | | | | |
| | | 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 December 31, 2018 | | 1,223 |
| | $ | 56.10 |
| | 4.0 | years | | $ | — |
|
| Exercisable at December 31, 2018 | | 905 |
| | $ | 56.01 |
| | 4.4 | years | | $ | — |
|
As of December 31, 2018, the total unrecognized compensation cost related to unvested options and RSAs was approximately $9.4 million and $24.2 million, respectively. Such amounts will be recognized in the Company's consolidated statements of operations over a weighted average period of approximately 1.2 years and 2.0 years, respectively.
As of December 31, 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.
GCI Liberty - Exercises
The aggregate intrinsic value of all options exercised during the years ended December 31, 2018, 2017 and 2016 was $814,000, $71.9 million and $6.6 million, respectively. The aggregate intrinsic value of options exercised for the year ended December 31, 2017 includes approximately $56.3 million related to the intrinsic value of options exercised as a result of the Option Exchange.
GCI Liberty - Restricted Shares
As of December 31, 2018, GCI Liberty had approximately 885,000 and 138,000 unvested RSAs and RSUs of GCI Liberty common stock and preferred stock, respectively, 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 $46.21 per share.
The aggregate fair value of all restricted shares of GCI Liberty common and preferred stock that vested during the years ended December 31, 2018, 2017 and 2016 was $21.9 million, $2.3 million and $1.3 million, respectively.
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| GCI, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018, 2017 and 2016 | |
(13) Employee Benefit Plans
Subsidiaries of the Company sponsor 401(k) plans, which provide their employees an opportunity to make contributions to a trust for investment in GCI Liberty common stock, as well as other mutual funds. The Company's subsidiaries make matching contributions to their plans based on a pro rata basis, who validly delivered (and did not validly revoke) a properly completed Consentpercentage of the amount contributed by employees. Employer cash contributions to all plans aggregated $11.0 million, $0.2 million and (y) with respect tozero, respectively, for the proposed amendment relating to the 2025 Notes, an aggregate consent fee of $1,125,000 payable to the holders of 2025 Notes, on a pro rata basis, who validly delivered (and did not validly revoke) a properly completed Consent. The proposed amendments will be effected by supplemental indentures to the Indentures.years ended December 31, 2018, 2017 and 2016, respectively.
(14) Commitments and Contingencies
Operating Leases as Lessee
We lease
The Company leases business offices, have entered intooffice space, site leases, satellite transponder lease agreements, and use satellite transponder and fiber capacity, and certain equipment pursuant to operating lease arrangements. Many of ourthe Company's leases are for multiple years and contain renewal options. Rental costsexpense under such arrangements amounted to $58.8$46.7 million, $58.9$1.9 million and $51.5$1.1 million for the years ended December 31, 2018, 2017 2016 and 2015,2016, respectively.
Capital Leases as Lessee
We
The Company entered into a long-term capital lease agreement in 1991 with the wife of GCI’s Presidentleases for property occupied by us as further described in Note 12 of this Form 10-K.
We have a capital lease agreement foran office building, certain retail store locations, and transponder capacity on Intelsat, Ltd.’s (“Intelsat”) Galaxy 18 spacecraft. The Intelsat Galaxy 18 C-band
Tower Sale and Ku-Band transponders are beingLeaseback
In 2016 and 2017, certain tower sites were sold by GCI Holdings to Vertical Bridge II, LLC ("Vertical Bridge"). GCI Holdings entered into a master lease agreement in which it leased overback space at the tower sites for an expectedinitial term of 14ten years, followed by the option to renew for eight additional five year periods, for a total possible lease term of 50 years. AtEach lease inceptionis subject to a 2% annual increase in lease payments throughout the present valuelife of the initial lease and all subsequent lease renewals.
Per the master lease agreement, GCI Holdings has the right to cure land lease defaults on behalf of Vertical Bridge and has negotiated fixed rate lease renewals as described above. Due to this continuing involvement with the Tower Sites, GCI Holdings determined it was precluded from applying sale-leaseback accounting. GCI Holdings recorded long-term financial obligations (“Tower Obligations”) in the amount of the net proceeds received and recognized interest on the Tower Obligations at a rate of 7.1% using the effective interest method. The Tower Obligations are increased by interest expense and amortized through contractual leaseback payments excluding telemetry, trackingmade by GCI Holdings to Vertical Bridge. GCI Holdings' historical tower site asset costs continue to be depreciated and command servicesreported in Property and back-up protection, was $98.6 million.Equipment, net. The Company has property of $32.0 million included in Property and Equipment, net on the consolidated balance sheets at December 31, 2018 that had been conveyed to Vertical Bridge as part of the tower sale.
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| GCI, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018, 2017 and 2016 | |
A summary of future minimum lease payments under noncancelable operating, capital leases and tower obligations
follows (amounts in thousands):
| | | Years ending December 31: | Operating | | Capital | Operating | | Capital | | Tower Obligations |
| 2018 | $ | 48,409 |
| | 13,440 |
| |
| 2019 | 38,293 |
| | 13,450 |
| $ | 40,487 |
| | 13,450 |
| | 7,644 |
|
| 2020 | 27,566 |
| | 13,459 |
| 33,225 |
| | 13,459 |
| | 7,797 |
|
| 2021 | 19,806 |
| | 12,044 |
| 23,563 |
| | 12,044 |
| | 7,953 |
|
| 2022 | 11,715 |
| | 5,293 |
| 13,177 |
| | 5,293 |
| | 8,112 |
|
| 2023 and thereafter | 28,298 |
| | 2,411 |
| |
| 2023 | | 8,652 |
| | 678 |
| | 8,274 |
|
| 2024 and thereafter | | 21,326 |
| | 1,734 |
| | 142,812 |
|
| Total minimum lease payments | $ | 174,087 |
| | 60,097 |
| $ | 140,430 |
| | 46,658 |
| | 182,592 |
|
| Less amount representing interest | | | 9,781 |
| | | 4,162 |
| | 90,273 |
|
| Less current maturity of obligations under capital leases | | | 10,028 |
| |
| Long-term obligations under capital leases, excluding current maturity | | | $ | 40,288 |
| |
| Less current maturity of obligations | | | | 11,636 |
| | 934 |
|
| Long-term obligations under capital leases and tower obligations, excluding current maturity | | | | $ | 30,860 |
| | 91,385 |
|
The leases generally provide that we paythe Company pays the taxes, insurance and maintenance expenses related to the leased assets. Several of ourthe leases include renewal options, escalation clauses and immaterial amounts of contingent rent expense. We expectThe Company expects that in the normal course of business leases that expire will be renewed or replaced by leases on other properties.
Guaranteed Service Levels
Certain customers have guaranteed levels of service with varying terms. In the event we arethe Company is unable to provide the minimum service levels, weit may incur penalties or issue credits to customers.
Self-Insurance
Through December 31, 2017, we were self-insured for losses and liabilities related to health and welfare claims up to $750,000 per incident per year above which third party insurance applied. A reserve of $4.8 million and $4.0 million are recorded at December 31, 2017 and 2016, respectively, to cover estimated reported losses, estimated unreported losses based on past experience modified for current trends, and estimated expenses for settling claims. We are self-insured for all losses and liabilities related to workers’ compensation claims in Alaska and have a workers compensation excess insurance policy to make claims for any losses in excess of $500,000 per incident. A reserve of $3.2 million and $2.9 million are recorded at December 31, 2017 and 2016, respectively, to cover estimated reported losses and estimated expenses for open and active claims. Actual losses will vary from the recorded reserves. While we use what we believe are
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| GCI, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements | |
pertinent information and factors in determining the amount of reserves, future additions or reductions to the reserves may be necessary due to changes in the information and factors used.
We are self-insured for damage or loss to certain of our transmission facilities, including our buried, undersea, and above-ground transmission lines. If we become subject to substantial uninsured liabilities due to damage or loss to such facilities, our financial position, results of operations or liquidity may be adversely affected.
Litigation, Disputes, and Regulatory Matters
We are
The Company is involved in various lawsuits, billing disputes, legal proceedings, and regulatory matters that have arisen from time to time in the normal course of business. Management believes there are no proceedings from asserted and unasserted claims which if determined adversely would have a material adverse effect on ourthe Company's financial position, results of operations or liquidity other than as discussed below.
Rural Health Care Program
GCI Holdings receives support from various Universal Service Fund USF programs including the USF Rural Health Care ("RHC") Program. The USF programs are subject to change by regulatory actions taken by the FCC, interpretations of or compliance with USF program rules, or legislative actions. Changes to any of the USF programs that GCI Holdings participates in could result in a material decrease in revenue and accounts receivable, which could have an adverse effect on GCI Holdings' business and the Company's financial position, results of operations or liquidity. The following paragraphs describe certain separate matters related to the RHC Program that impact or could impact the revenue earned and receivables recognized by the Company.
In November 2017, the Universal Service Administrative Company ("USAC") requested further information in support of the rural rates charged to a number of GCI Holdings' RHC customers in connection with the funding requests for the year that runs July 1, 2017 through June 30, 2018. On October 10, 2018, GCI Holdings received a letter from the FCC's Wireline Competition Bureau (“Bureau”) notifying it of the Bureau’s decision to reduce the rural rates charged to RHC customers for the funding year that ended on June 30, 2018 by approximately 26% resulting in a reduction of total support payments of $27.8 million. The FCC also informed GCI Holdings that the same cost methodology used for the funding year that ended on June 30, 2018 would be applied to rates charged to RHC customers in subsequent funding years. In response to the letter from the Bureau, GCI Holdings filed an Application for Review of the Bureau’s decision with the FCC. In the third quarter of 2018, GCI Holdings recorded a $19.1 million reduction in its receivables balance as part of its acquisition accounting and recorded a
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| GCI, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018, 2017 and 2016 | |
reduction in revenue in the current period for the funding year that ended on June 30, 2018 of approximately $8.6 million. GCI Holdings expects to reduce future RHC program revenue by a similar rate as to the funding year that ended on June 30, 2018, which based on a current run rate would approximate $7 million per quarter until it can reach a final resolution with the FCC regarding the funding amounts.
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 million 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, aggregate funding was available to pay in full the approved funding under the RHC program for the funding year ended on June 30, 2018.
In addition, on March 23, 2018, GCI Holdings received a separate letter of inquiry and request for information from the Enforcement Bureau of the FCC, to which it is in the process of responding. This inquiry into the rates charged by GCI Holdings is still pending, and presently it is unable to assess the ultimate resolution of this matter. The ongoing uncertainty in program funding could have an adverse effect on its business, financial position, results of operations or liquidity.
Tribal Mobility Fund I Grant
In February 2014,On November 30, 2018, GCI Holdings received multiple funding denial notices from USAC, denying requested funding from the FCC announced our winning bids inRHC Program operated by a rural health customer (the “Customer”) for the Tribal Mobility Fund I auction for a $41.4 million grant to partially fund expansion of our 3G wireless network, or better, to locations in Alaska where we would not otherwise be able to construct within our return-on-investment requirements. We received $16.8 million, $0 million and $13.8 million in 2017, 2016, and 2015, respectively, and expect to receive $10.8 million in additional grant fund disbursements infunding year that ended on June 30, 2018. At the future depending on the timing of upgrades completed and test results submitted to andrates approved by the Bureau in a letter received on October 10, 2018, the funding at issue under the denials is approximately $13 million. In November 2017, USAC requested information from the Customer related to bidding process documentation for two separate service contracts GCI Holdings has with the Customer. Although the Customer timely responded, USAC found that bids previously received were not submitted with the original funding request and/or that bidding information submitted was related to the wrong bidding year. The Customer filed an appeal with USAC on January 29, 2019. At this time, GCI Holdings has no reason to believe that there was any violation of the FCC’s competitive bidding rules, but without further information from the Customer and/or USAC, it cannot assess whether the USAC denials will be overturned. If the denial notices are upheld for reasons relating to the Customer’s competitive bidding process, funding issued under one or both contracts for prior years could be subject to further review, as well as funding for services already being delivered or to be delivered for the period from July 1, 2018 through June 30, 2019. GCI Holdings has accounts receivable of approximately $18 million outstanding as of December 31, 2018 associated with these two service contracts. The outstanding accounts receivable includes the approximate $13 million of funding at issue as discussed above and additional amounts for services provided for the period from July 1, 2018 through December 31, 2018. Given the uncertainty of whether the USAC denials will be overturned, it is reasonably possible that GCI Holdings may incur a loss. The amount of a potential loss could range from zero to the full amount of the accounts receivable balance as of December 31, 2018. No amount within this range of a potential loss is a better estimate than any other amount. Accordingly, no loss was recorded as of December 31, 2018 given the minimum amount in the range is zero.
In addition, on December 4, 2018, the FCC issued a public notice seeking further comment on an earlier proposal to determine the rural rates for services supported by the RHC Program in a different manner than it does today. GCI Holdings and others submitted comments on January 30, 2019, but GCI Holdings cannot assess at this time the substance, impact on funding, or timing of any future rule changes that may be adopted by the FCC.
(15) 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.
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(15) | Software ImpairmentGCI, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018, 2017 and 2016 | |
During the years ended December 31, 2013 and 2014, we internally developed computer software to replace our wireless, Internet, video, local service, and long distance customer billing systems. In early 2015, we completed a detailed assessment of our progress to date and determined it was no longer probable that the computer software being developed would be completed and placed in service. Our assessment concluded that the
The Company defines Adjusted OIBDA as revenue less cost of continuingsales, operating expenses, and selling, general and administrative expenses (excluding stock‑based compensation). The Company believes this measure is an important indicator of the development wouldoperational strength and performance of its businesses, including each business’s ability to service debt and fund capital expenditures. In addition, this measure allows management, including the chief operating decision maker, 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 much higher than originally estimated, and the timing and scope risks were substantial. We identified development work, hardware, and software recordedconsidered in addition to, but not as Construction in Progress in early 2015, that may be applicable to our replacement customer billing solution, future internally developed software,a substitute for, operating income, net income, cash flow provided by operating activities and other system needs and therefore should remain capital assets. We considered the remaining capital expenditures for this billing system to have a fair valuemeasures of $0 and recorded an impairment charge of $20.7 million duringfinancial performance prepared in accordance with GAAP.
For the year ended December 31, 2015 by recording an expense which2018 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 Software Impairment Chargethe segments are the same as those described in our Consolidated Statementthe Company’s summary of Operations.significant accounting policies.
Performance Measures
|
| | | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | Revenue | | Adjusted OIBDA | | Revenue | | Adjusted OIBDA | | Revenue | | Adjusted OIBDA |
| | amounts in thousands |
| GCI Holdings | $ | 715,842 |
| | 217,832 |
| | — |
| | — |
| | — |
| | — |
|
| Liberty Broadband | 22,256 |
| | (3,528 | ) | | 13,092 |
| | (16,416 | ) | | 30,586 |
| | (11,442 | ) |
| Corporate and other | 23,920 |
| | (19,461 | ) | | 23,817 |
| | (25,762 | ) | | 22,552 |
| | (16,063 | ) |
| | 762,018 |
| | 194,843 |
| | 36,909 |
| | (42,178 | ) | | 53,138 |
| | (27,505 | ) |
| Eliminate Liberty Broadband | (22,256 | ) | | 3,528 |
| | (13,092 | ) | | 16,416 |
| | (30,586 | ) | | 11,442 |
|
| | $ | 739,762 |
| | 198,371 |
| | 23,817 |
| | (25,762 | ) | | 22,552 |
| | (16,063 | ) |
In early 2015, we reassessed our plans for our internally developed machine-to-machine billing system and decided to no longer market this system to third parties. Accordingly, we recognized an impairment of $7.1 million during the year ended December 31, 2015 by recording an expense which is included in Software Impairment Charge in our Consolidated Statement of Operations. |
| | |
| GCI, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018, 2017 and 2016 | |
In late 2015, we evaluated user management software we purchased in 2014Other Information
|
| | | | | | | | | | | | | | | | | | |
| | December 31, 2018 | | December 31, 2017 |
| | Total | | Investments | | Capital | | Total | | Investments | | Capital |
| | assets | | in affiliates | | expenditures | | assets | | in affiliates | | expenditures |
| | amounts in thousands |
| GCI Holdings | $ | 3,331,717 |
| | 719 |
| | 131,029 |
| | — |
| | — |
| | — |
|
| Liberty Broadband | 12,098,437 |
| | 12,004,376 |
| | 41 |
| | 11,931,789 |
| | 11,835,613 |
| | 70 |
|
| Corporate and other | 4,894,452 |
| | 176,311 |
| | 3,323 |
| | 6,172,213 |
| | 114,655 |
| | 3,488 |
|
| | 20,324,606 |
| | 12,181,406 |
| | 134,393 |
| | 18,104,002 |
| | 11,950,268 |
| | 3,558 |
|
| Eliminate Liberty Broadband | (12,098,437 | ) | | (12,004,376 | ) | | (41 | ) | | (11,931,789 | ) | | (11,835,613 | ) | | (70 | ) |
| Consolidated | $ | 8,226,169 |
| | 177,030 |
| | 134,352 |
| | 6,172,213 |
| | 114,655 |
| | 3,488 |
|
The following table provides a reconciliation of segment Adjusted OIBDA to operating income and determined that we would not be able to use the software. Accordingly we recognized an impairment of $1.0 million during the year ended December 31, 2015 by recording an expense which is included in Software Impairment Charge in our Consolidated Statement of Operations.earnings (loss) from continuing operations before income taxes:
|
| | | | | | | | | |
| | Years ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | amounts in thousands |
| Consolidated segment Adjusted OIBDA | $ | 198,371 |
| | (25,762 | ) | | (16,063 | ) |
| Stock‑based compensation | (28,207 | ) | | (26,583 | ) | | (16,128 | ) |
| Depreciation and amortization | (206,946 | ) | | (3,252 | ) | | (2,964 | ) |
| Impairment of intangibles and long-lived assets | (219,595 | ) | | — |
| | — |
|
| Operating income (loss) | (256,377 | ) | | (55,597 | ) | | (35,155 | ) |
| Interest expense | (105,215 | ) | | — |
| | — |
|
| Share of earnings (loss) of affiliates, net | 25,772 |
| | 7,001 |
| | 11,831 |
|
| Realized and unrealized gains (losses) on financial instruments, net | (758,836 | ) | | 637,164 |
| | 1,309,365 |
|
| Other, net | (8,100 | ) | | 2,467 |
| | 30,773 |
|
| Earnings (loss) from continuing operations before income taxes | $ | (1,102,756 | ) | | 591,035 |
| | 1,316,814 |
|
|
| | |
| | GCI, INC.LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018, 2017 and 2016 | |
| |
(16) | Selected Quarterly Financial Data (Unaudited) |
(16) Quarterly Financial Information (Unaudited)
The following is a summary of unaudited quarterly results of operations for the years ended December 31, 20172018 and 2016 (amounts in thousands):2017:
|
| | | | | | | | | |
| | First Quarter | Second Quarter | Third Quarter | Fourth Quarter |
| 2017 | | | | |
| Total revenues | $ | 228,115 |
| 224,346 |
| 231,214 |
| 235,529 |
|
| Operating income | $ | 15,346 |
| 11,031 |
| 24,174 |
| 20,699 |
|
| Net income (loss) | $ | 1,999 |
| (25,481 | ) | 2,188 |
| 52,609 |
|
| Net income (loss) attributable to GCI, Inc. | $ | 2,116 |
| (25,363 | ) | 2,306 |
| 52,732 |
|
| | | | | |
| 2016 | | | | |
| Total revenues | $ | 231,098 |
| 233,766 |
| 236,655 |
| 232,293 |
|
| Operating income | $ | 20,019 |
| 19,531 |
| 26,368 |
| 13,185 |
|
| Net income (loss) | $ | 326 |
| (422 | ) | (973 | ) | (607 | ) |
| Net income (loss) attributable to GCI, Inc. | $ | 443 |
| (305 | ) | (857 | ) | (488 | ) |
|
| | | | | | | | | | | | |
| | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| | amounts in thousands |
| 2018 | | | | | | | |
| Revenue | $ | 61,204 |
| | 233,490 |
| | 210,146 |
| | 234,922 |
|
| Operating income (loss) | $ | (7,169 | ) | | 1,798 |
| | (19,558 | ) | | (231,448 | ) |
| Net earnings (loss) | $ | (191,549 | ) | | (311,612 | ) | | 353,001 |
| | (767,721 | ) |
| Net earnings (loss) attributable to member | $ | (191,510 | ) | | (311,458 | ) | | 353,128 |
| | (767,690 | ) |
| | | | | | | | |
| 2017 | | | | | | | |
| Revenue | $ | 3,969 |
| | 6,177 |
| | 5,493 |
| | 8,178 |
|
| Operating income (loss) | $ | (11,351 | ) | | (11,617 | ) | | (10,469 | ) | | (22,160 | ) |
| Net earnings (loss) | $ | 450,654 |
| | 31,601 |
| | 287,290 |
| | (44,988 | ) |
| Net earnings (loss) attributable to member | $ | 450,654 |
| | 31,602 |
| | 287,362 |
| | (45,032 | ) |
PART III
Items 10, 11, 12 and 13 are omitted per General Instruction I(2)(c) of Form 10-K.
Item 14. Principal Accountant Fees and Services
For the fiscal year ending December 31, 2017, our independent auditor was Grant Thornton LLP (“GT”). On March 9, 2018, GT was replaced as our independent registered public accounting firm by KPMG LLP. The replacement of GT and approval of the appointment of KPMG LLP as our independent registered public accounting firm was approved by the audit committee of GCI Liberty’s board of directors on March 9, 2018 in connection with the closing of the Transactions and on May 11, 2018 following the completion of the Reincorporation Merger.
Fees for professional audit services relating to our consolidated financial statements are incurred by GCI Liberty in connection with the audit of their consolidated financial statements. GCI, LLC incurs an insignificant amount of additional fees specific to the audit of its financial statements.
(17) The following table presents (i) fees for professional audit services rendered by GT for the audit of GCI’s consolidated financial statements for 2017 and fees billed for other services rendered by GT and (ii) an estimate of fees for professional audit services rendered by KPMG LLP for the audit of our parent company’s consolidated financial statements for 2018 and fees billed for other services rendered by KPMG LLP:Subsequent EventsOn February 2, 2018, |
| | | | | | |
| | | 2018 | | 2017 |
Audit fees(1) | | $ | 3,265,550 |
| | 1,435,101 |
Audit related fees(2) | | — |
| | 134,750 |
| Audit and audit related fees | | 3,265,550 |
| | 1,569,851 |
Tax fees(3) | | — |
| | 124,693 |
| Total fees | | $ | 3,265,550 |
| | 1,694,544 |
(1) Consists of fees for annual financial statement audit, quarterly financial statement reviews, reviews of other filings by the company with the SEC, audit of internal control over financial reporting and for services that are normally provided by an auditor in connection with statutory and regulatory filings or engagements.
(2) Consists of fees for Form S-4 filings and the audit of the GCI held401(k) Plan and review of the related annual report on Form 11-K filed with the SEC.
(3) Consists of fees for review of GCI's state and federal income tax returns and consultation on various tax advice and tax planning matters.
GCI Liberty’s audit committee has considered whether the provision of services by KPMG LLP to our company other than auditing is compatible with KPMG LLP maintaining its independence and believes that the provision of such other services is compatible with KPMG LLP maintaining its independence.
POLICY ON PRE-APPROVAL OF AUDIT AND PERMISSIBLE NON-AUDIT SERVICES OF INDEPENDENT AUDITOR
GCI Liberty’s audit committee has adopted a special shareholder meeting where its shareholderspolicy regarding the pre-approval of all audit and permissible non-audit services provided by our independent auditor. Pursuant to this policy, GCI Liberty’s audit committee has approved the Transactions with Liberty.engagement of our independent auditor to provide the following services (all of which are collectively referred to as "pre-approved services"):
On February 28,•audit services as specified in the policy, including (i) financial audits of our company and our subsidiaries, (ii) services associated with registration statements, periodic reports and other documents filed or issued in connection with securities offerings (including comfort letters and consents), (iii) attestations of management reports on our internal controls and (iv) consultations with management as to accounting or disclosure treatment of transactions;
•audit related services as specified in the policy, including (i) due diligence services, (ii) financial statement audits of employee benefit plans, (iii) consultations with management as to the accounting or disclosure treatment of transactions, (iv) attest services not required by statute or regulation, (v) certain audits incremental to the audit of our
consolidated financial statements, (vi) closing balance sheet audits related to dispositions, and (vii) general assistance with implementation of the requirements of certain Securities and Exchange Commission rules or listing standards; and
•tax services as specified in the policy, including federal, state, local and international tax planning, compliance and review services, and tax due diligence and advice regarding mergers and acquisitions.
Notwithstanding the foregoing general pre-approval, if, in the reasonable judgment of GCI Liberty’s Chief Financial Officer or Senior Vice President and Controller, an individual project involving the provision of pre-approved services is likely to result in fees in excess of $50,000, or if individual projects under $50,000 are likely to equal or exceed $250,000 during the period between the regularly scheduled meetings of the audit committee, then such projects will require the specific pre-approval of GCI Liberty’s audit committee. GCI Liberty’s audit committee has delegated the authority for the foregoing approvals to the chairman of the audit committee, subject to his subsequent disclosure to the entire audit committee of the granting of any such approval. Gregg Engles currently serves as the chairman of GCI Liberty’s audit committee. In addition, the independent auditor is required to provide a report at each regularly scheduled audit committee meeting on all pre-approved services incurred during the preceding quarter. Any engagement of our independent auditors for services other than the pre-approved services requires the specific approval of GCI Liberty’s audit committee.
GCI Liberty’s pre-approval policy prohibits the engagement of our independent auditor to provide any services that are subject to the prohibition imposed by Section 201 of the Sarbanes-Oxley Act.
All services provided by our independent auditor during 2018 we amended our Senior Credit Facility to increasewere approved in accordance with the revolving credit facility from $200.0 million to $300.0 million. Additionally, we increasedterms of the maximum secured leverage ratio permitted under the Senior Credit Facility from 3.00:1.00 to 3.50:1.00.
policy in place.
PART IV
Item 15(b)15. Exhibits and Financial Statement Schedules.
(a)(1) Financial Statements
Included in Part II of this report: |
| | |
| | Page No. |
| GCI, LLC | | |
| Report of Independent Registered Public Accounting Firm | | |
| Consolidated Balance Sheets, December 31, 2018 and 2017 | | |
| Consolidated Statements of Operations, Years ended December 31, 2018, 2017 and 2016 | | |
| Consolidated Statements of Cash Flows, Years ended December 31, 2018, 2017, and 2016 | | |
| Consolidated Statements of Equity, Years ended December 31, 2018, 2017, and 2016 | | |
| Notes to Consolidated Financial Statements, December 31, 2018, 2017, and 2016 | | |
(a)(2) Financial Statement Schedules
(i) All schedules have been omitted because they are not applicable, not material or the required information is set forth in the financial statements or notes thereto.
(ii) The audited consolidated financial statements of Liberty Broadband Corporation as of December 31, 2018 and 2017, and for each of the years ended December 31, 2018, 2017 and 2016, as well as the accompanying notes thereto and the related Report of Independent Registered Public Accounting Firm, are contained in Liberty Broadband Corporation's Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 8, 2019 and are incorporated herein by reference as Exhibit 99.1.
(a)(3). Exhibits
Listed below are the exhibits that are filed as a part of this Report (according to the number assigned to them in Item 601 of Regulation S-K):
|
| | | |
| 2 - Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession: |
| 2.1 | |
Description | | Where Located3 - Articles of Incorporation and Bylaws: |
| 3.1 | | | IncorporatedLLC, dated as of March 2, 2018 (incorporated by reference to GCI's Form S-3 Registration Statement (File No. 333-28001) dated May 29, 1997.Exhibit 3.1 to the March 2018 8-K). |
| 3.2 | | | Incorporated with and into GCI, LLC, dated as of March 8, 2018 (incorporated by reference to GCI's Form S-3 Registration Statement (File No. 333-28001) dated May 29, 1997.Exhibit 3.2 to the March 2018 8-K). |
| 3.3 | | | IncorporatedLLC, dated as of March 8, 2018 (incorporated by reference to GCI, Inc.'s Annual Report on Form 10-K forExhibit 3.3 to the year ended December 31, 2014.March 2018 8-K). |
| 4 - Instruments Defining the Rights of Securities Holders, including Indentures: |
| 4.1 | | | Incorporated (incorporated by reference to Exhibit 4.4 to the Company'sRegistrant's Current Report on Form 8-K for the period May 20, 2011 filed on May 25, 2011.2011 (File No. 000-05890) (the “May 2011 8-K”)). |
| 4.2 | | | Incorporated (incorporated by reference to Exhibit 4.1 to the Company'sRegistrant's Current Report on Form 8-K for the period May 20, 2011 filed May 25, 2011.on April 6, 2015 (File No. 000-05890)). |
| 4.3 | | | Incorporated (incorporated by reference to Exhibit 4.1 to GCI Liberty, Inc.’s Current Report on Form 8-K filed by GCI on May 2, 2017.2017 (File No. 000-15279) (the “May 2017 8-K”)). |
|
| | | |
| 4.4 | Second Supplemental Indenture, dated as of March 8, 2018, between GCI, LLC, as issuer, and MUFG Union Bank, N.A., as Trustee (6.75% Senior Notes) (incorporated by reference to Exhibit 4.3 to GCI Liberty, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018 filed on May 10, 2018 (File No. 001-38385) (the “GCI Liberty 2018 Q1 10-Q”)). |
| 4.5 | | | Incorporated (incorporated by reference to Exhibit 4.2 to Form 8-K filed by GCI onthe May 2, 2017.2017 8-K). |
10.14.6 | | | IncorporatedLLC, as issuer, and MUFG Union Bank, N.A., as Trustee (6.875% Senior Notes) (incorporated by reference to GCI’s Annual Report on Form 10-K forExhibit 4.4 to the year ended December 31, 1995.GCI Liberty 2018 Q1 10-Q). |
10.24.7 | | | |
10.3 | | | IncorporatedBorrower, Various Lenders, JPMorgan Chase Bank, N.A., London Branch, as Calculation Agent, and JP Morgan Chase Bank, N.A., London Branch, as Administrative Agent (incorporated by reference to the Company’s AnnualExhibit 4.1 to GCI Liberty, Inc.’s Current Report on Form 10-K for the year ended December 31, 2002.8-K filed on March 14, 2018 (File No. 001-38385)). |
10.44.8 | | | IncorporatedOctober 5, 2018, by and among Broadband Holdco, LLC, as Borrower, Various Lenders, JPMorgan Chase Bank, N.A., London Branch, as Administrative Agent, and JPMorgan Chase Bank, N.A., London Branch as Calculation Agent (incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002. |
10.5 | | | Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002. |
10.6 | | | Incorporated by reference to the Company’s’s Quarterly Report on Form 10-Q for the period ended March 31, 2006. |
10.7 | | | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2008. |
|
| | | |
Exhibit No. | Description | | Where Located |
10.8 | | | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the periodquarter ended September 30, 2009.2018 filed on November 8, 2018 (File No. 001-38385)). |
10.9 | | | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2009.10 - Material Contracts: |
10.10 | | | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2009. |
10.11 | | | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2009. |
10.12 | | | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2009. |
10.13 | | | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2009. |
10.14 | | | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2009. |
10.15 | | | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2009. |
10.16 | | | Incorporated by reference to the Company's Report on Form 8-K for the period January 29, 2010 filed February 3, 2010. |
10.17 | | | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2010 filed August 5, 2010. |
10.18 | | | Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2010, filed March 15, 2011. |
10.19 | | | Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2010, filed March 15, 2011. |
10.20 | | | Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2010, filed March 15, 2011. |
|
| | | |
Exhibit No. | Description | | Where Located |
10.21 | | | Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2010, filed March 15, 2011. |
10.22 | | | Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2010, filed March 15, 2011. |
10.2310.1 | | | Incorporated (incorporated by reference to Exhibit 10.190 to the Company’sRegistrant’s Quarterly Report on Form 10-Q for the periodquarter ended June 30, 2011 filed on August 9, 2011.2011 (File No. 000-05890)). |
10.24 | | | Incorporated by reference to the Company's Report on Form 8-K for the period August 30, 2011 filed September 6, 2011. |
10.25 | | | Incorporated by reference to the Company's Report on Form 8-K for the period October 3, 2012 filed October 9, 2012. |
10.26 | | | Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2012, filed March 8, 2013. |
10.27 | | | Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2012, filed March 8, 2013. |
10.28 | | | Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2012, filed March 8, 2013. |
10.29 | | | Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2012, filed March 8, 2013. |
10.30 | | | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2013 filed November 8, 2013. |
10.31 | | | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2013 filed November 8, 2013. |
10.32 | | | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2013 filed November 8, 2013. |
|
| | | |
Exhibit No. | Description | | Where Located |
10.33 | | | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2014 filed May 8, 2014. |
10.34 | | | Incorporated by reference to the Company's Annual Report on Form 10-K for the year ending December 31, 2014 filed March 5, 2015. |
10.35 | Fourth Amended and Restated Credit Agreement dated as of February 2, 2015 by and among GCI Holdings, Inc., GCI, Inc., the Subsidiary Guarantors party thereto, the Lenders party thereto, Union Bank, as Syndication Agent, Suntrust Bank, as Documentation Agent and Credit Agricole Corporate and Investment Bank, as Administrative Agent | | Incorporated by reference to the Company's Annual Report on Form 10-K for the year ending December 31, 2014 filed March 5, 2015. |
10.36 | | | Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period ended March 31, 2015 filed May 8, 2015. |
10.37 | | | Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2015 filed August 5, 2015. |
10.3810.2 | | | Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2015 filed August 5, 2015. |
10.39 | | | Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2015 filed November 5, 2015. |
10.4010.3 | | | Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2015 filed November 5, 2015. |
10.41 | | | Incorporated by reference to the Company's Annual Report on Form 10-K for the year ending December 31, 2015 filed March 3, 2016. |
10.42 | | | Incorporated27, 2018 (incorporated by reference to Exhibit 4.2 to the Company's Annual Report on Form 10-K for the year ending December 31, 2015 filed March 3, 2016.GCI Liberty 2018 Q1 10-Q). |
10.4310.4 | | | Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period ended March 31, 2016 filed May 5, 2016. |
10.44 | | | Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2016 filed August 3, 2016. |
|
| | | |
Exhibit No. | Description | | Where Located |
10.45 | | | Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2016 filed November 4, 2016. |
10.46 | Third Amendment to the Fourth Amended and Restated Credit Agreement, dated as of November 17, 2016December 27, 2018, among GCI, LLC, the subsidiary guarantors party thereto, the lenders party thereto, Credit Agricole Corporate and Investment Bank, as administrative agent, and the other parties thereto* |
| 16.1 | Incorporated |
10.47 | | | Incorporated by reference to the Company's Report on Form 8-K for the period November 17, 2016 filed November 23, 2016. |
10.48 | | | Incorporated by reference to the Company's Annual Report on Form 10-K for the year ending December 31, 2016 filed March 2, 2017. |
10.49 | | | Incorporated by reference to Exhibit 4.1 to Form 8-K filed by GCI on May 9, 2017. |
10.50 | | | Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2017 filed August 3, 2017. |
10.51 | | | Incorporated by reference to the Company's Report on Form 8-K for the period August 14, 2017 filed August 18, 2017. |
10.52 | | | Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2017 filed November 2, 2017. |
10.53 | | | Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2017 filed November 2, 2017. |
10.54 | | | Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2017 filed November 2, 2017. |
10.55 | | | |
10.56 | | | |
14.1 | | | |
21.1 | | | |
| 31.1 | | | |
| 31.2 | | | |
|
| | | |
Exhibit No. | Description | | Where Located |
| 32.1 | |
| 99.1 | | | |
32.2 | | | |
101 | The following materials from GCI, Inc.'sLiberty Broadband Corporation's Annual Report on Form 10-K for the year ended December 31, 2017, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of December 31, 2017 and 2016; (ii) Consolidated Statements of Operations for the years ended December 31, 2017, 2016 and 2015; (iii) Consolidated Statements of Stockholder's Equity for the years ended December 31, 2017, 2016 and 2015; (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015; and (v) Notes to Consolidated Financial Statements * | | |
2018 (File No. 001-36713), filed on February 8, 2019). |
| 99.2 | |
| 101.INS | XBRL Instance Document. * |
| 101.SCH | XBRL Taxonomy Extension Schema Document. * |
| 101.CAL | XBRL Taxonomy Calculation Linkbase Document. * |
| 101.LAB | XBRL Taxonomy Label Linkbase Document. * |
| 101.PRE | XBRL Taxonomy Presentation Linkbase Document. * |
| 101.DEF | XBRL Taxonomy Definition Document. * |
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# | CONFIDENTIAL PORTION has been omitted pursuant to a request for confidential treatment by us to, and the material has been separately filed with, the SEC. Each omitted Confidential Portion is marked by three asterisks. | |
| * | Filed herewith. |
| ** | Furnished herewith. |
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Item 16. Form 10-K Summary.
Not applicable
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
GCI, INC.
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| | By: | /s/ Gregory F. Chapados | | GCI, LLC |
| | | Gregory F. Chapados, President
(Chief Executive Officer) | |
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| Date: | February 28, 20182019 | By: | /s/ Gregory B. Maffei |
| | | Gregory B. Maffei |
| | | Chief Executive Officer and President |
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| Date: | February 28, 2019 | By: | /s/ Mark D. Carleton |
| | | Mark D. Carleton |
| | | Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrantRegistrant and in the capacities and on the date indicated.
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| Signature | | Title | | Date |
| | | | | |
/s/ Gregory F. ChapadosB. Maffei | | President and Director
(Chief Executive Officer | | February 28, 2019 |
| Gregory B. Maffei | | | | |
| | | | |
| | Chief Financial Officer (Principal Financial Officer and | | |
| /s/ Mark D. Carleton | | Principal ExecutiveAccounting Officer) | | February 28, 20182019 |
Gregory F. ChapadosMark D. Carleton | | | | |
| | | | | |
/s/ Peter J. PoundsMark D. Carleton | | Chief Financial Officer Secretary, Treasurer, and Director (Principal Financial Officer)of GCI Liberty, Inc., as | | February 28, 20182019 |
Peter J. PoundsMark D. Carleton | | Sole Member-Manager of the Registrant | | |
| | | | | |
/s/ Lynda L. Tarbath | | Vice President, Chief Accounting
Officer (Principal Accounting Officer) | | February 28, 2018 |
Lynda L. Tarbath | | | |