lbrda_Current folio_10Q

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2014

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                to                

Commission File Number 001-36713

LIBERTY BROADBAND CORPORATION

(Exact name of Registrant as specified in its charter)

 

 

 

 

State of Delaware

 

47-1211994

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

12300 Liberty Boulevard
Englewood, Colorado

 

80112

(Address of principal executive offices)

 

(Zip Code)

 

Registrant's telephone number, including area code: (720) 875-5700

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes     No 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes     No 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

 

 

 

Large accelerated filer 

 

Accelerated filer 

 

Non-accelerated filer 
(do not check if smaller
reporting company)

 

Smaller reporting company 

 

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

The number of outstanding shares of Liberty Broadband Corporation's common stock as of November 30, 2014 was:

 

 

 

 

Series A common stock

 

26,119,116 

Series B common stock

 

2,467,647 

Series C common stock

 

57,174,643 

 

 

 

 


 

Table of Contents

Table of Contents

 

 

 

 

 

 

 

 

 

    

Page No

 

 

    

LIBERTY BROADBAND CORPORATION Condensed Consolidated Balance Sheets (unaudited)

 

 

 

 

LIBERTY BROADBAND CORPORATION Condensed Consolidated Statements Of Operations (unaudited)

 

 

 

 

LIBERTY BROADBAND CORPORATION Condensed Consolidated Statements Of Comprehensive Earnings (Loss) (unaudited)

 

 

 

 

LIBERTY BROADBAND CORPORATION Condensed Consolidated Statements Of Cash Flows (unaudited)

 

 

 

 

LIBERTY BROADBAND CORPORATION Condensed Consolidated Statement of Equity (unaudited)

 

 

 

 

LIBERTY BROADBAND CORPORATION Notes to Condensed Consolidated Financial Statements

 

 

Item 2. 

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

22 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk.

 

29 

 

Item 4.

 

Controls and Procedures.

 

30 

 

 

 

 

 

 

 

 

 

Part II - Other Information

 

 

 

Item 1.

 

Legal Proceedings

 

30 

 

Item 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

30 

 

Item 6.

 

Exhibits

 

31 

 

 

 

 

 

 

 

 

 

SIGNATURE

 

32 

 

 

 

EXHIBIT INDEX

 

33 

 

 

 

1


 

Table of Contents

LIBERTY BROADBAND CORPORATION

Condensed Combined Balance Sheets

(unaudited)

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

 

2014

 

2013

 

 

 

(amounts in thousands)

 

Assets

    

 

    

    

    

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

47,411 

 

9,251 

 

Trade and other receivables, net

 

 

478 

 

523 

 

Deferred income tax assets

 

 

23,922 

 

17,598 

 

Derivative instruments (note 3)

 

 

113,080 

 

97,847 

 

Note receivable from former parent (note 9)

 

 

 —

 

19,060 

 

Other current assets

 

 

5,797 

 

10,515 

 

Total current assets

 

 

190,688 

 

154,794 

 

Investments in available-for-sale securities (note 4)

 

 

340,826 

 

326,700 

 

Investments in affiliates, accounted for using the equity method (note 5)

 

 

2,373,627 

 

2,402,024 

 

Property and equipment, net

 

 

3,775 

 

4,660 

 

Goodwill (note 6)

 

 

45,600 

 

20,669 

 

Intangible assets subject to amortization, net (note 6)

 

 

31,527 

 

429 

 

Deferred income tax assets

 

 

22,188 

 

 

Other assets, at cost, net of accumulated amortization

 

 

73 

 

103 

 

Total assets

 

$

3,008,304 

 

2,909,379 

 

Liabilities and Equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

12,848 

 

9,335 

 

Deferred revenue

 

 

21,329 

 

3,260 

 

Derivative instruments (note 3)

 

 

64,984 

 

54,600 

 

Other current liabilities

 

 

10,034 

 

2,912 

 

Total current liabilities

 

 

109,195 

 

70,107 

 

Deferred revenue

 

 

37,617 

 

35,740 

 

Deferred income tax liabilities

 

 

 

24,338 

 

Total liabilities

 

 

146,812 

 

130,185 

 

Equity

 

 

 

 

 

 

Parent’s investment

 

 

3,156,394 

 

2,986,079 

 

Accumulated other comprehensive earnings, net of taxes

 

 

7,674 

 

7,890 

 

Retained earnings (accumulated deficit)

 

 

(302,576)

 

(214,775)

 

Total equity

 

 

2,861,492 

 

2,779,194 

 

Commitments and contingencies (note 10)

 

 

 

 

 

 

Total liabilities and equity

 

$

3,008,304 

 

2,909,379 

 

 

See accompanying notes to the condensed combined financial statements

2


 

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LIBERTY BROADBAND CORPORATION

Condensed Combined Statements of Operations

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

    

2013

    

2014

 

2013

 

 

 

 

(amounts in thousands, except per share amounts)

 

Revenue:

    

 

 

 

 

 

    

    

    

 

Service

 

$

14,589 

 

15,451 

 

43,840 

 

45,575 

 

Product

 

 

2,856 

 

2,176 

 

7,672 

 

14,874 

 

Total revenue

 

 

17,445 

 

17,627 

 

51,512 

 

60,449 

 

Operating costs and expenses

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

207 

 

2,896 

 

713 

 

14,132 

 

Operating, including stock-based compensation (note 8)

 

 

1,701 

 

1,937 

 

4,970 

 

6,087 

 

Selling, general and administrative, including stock-based compensation (note 8)

 

 

8,006 

 

9,779 

 

37,932 

 

25,602 

 

Research and development, including stock-based compensation (note 8)

 

 

4,688 

 

4,430 

 

13,884 

 

13,118 

 

Gain on legal settlement

 

 

(6,000)

 

 —

 

(6,000)

 

 —

 

Depreciation and amortization

 

 

2,479 

 

1,065 

 

6,583 

 

3,374 

 

 

 

 

11,081 

 

20,107 

 

58,082 

 

62,313 

 

Operating income (loss)

 

 

6,364 

 

(2,480)

 

(6,570)

 

(1,864)

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

Dividend and interest income

 

 

1,228 

 

1,766 

 

4,231 

 

5,203 

 

Share of earnings (losses) of affiliates (note 5)

 

 

(34,542)

 

(38,400)

 

(95,968)

 

(65,666)

 

Realized and unrealized gains (losses) on financial instruments, net (note 3)

 

 

(12,532)

 

9,167 

 

23,745 

 

68,029 

 

Gain (loss) on dilution of investment in affiliate (note 5)

 

 

(10,953)

 

(52,163)

 

(61,162)

 

(55,219)

 

Other, net

 

 

 

(8)

 

(60)

 

(45)

 

Net earnings (loss) before income taxes

 

 

(50,427)

 

(82,118)

 

(135,784)

 

(49,562)

 

Income tax benefit (expense)

 

 

18,437 

 

30,098 

 

47,983 

 

16,683 

 

Net earnings (loss) attributable to Liberty Broadband shareholders

 

$

(31,990)

 

(52,020)

 

(87,801)

 

(32,879)

 

Unaudited Pro Forma basic net earnings (loss) attributable to Series A, Series B and Series C Liberty Broadband shareholders per common share (note 2)

 

$

(0.37)

 

(0.61)

 

(1.02)

 

(0.38)

 

 

See accompanying notes to the condensed combined financial statements

3


 

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LIBERTY BROADBAND CORPORATION

Condensed Combined Statements of Comprehensive Earnings (Loss)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

    

2013

    

2014

 

2013

 

 

 

 

(amounts in thousands)

 

Net earnings (loss)

    

$

(31,990)

 

(52,020)

 

(87,801)

    

(32,879)

 

Other comprehensive earnings (loss), net of taxes:

 

 

 

 

 

 

 

 

 

 

Unrealized holding gains (losses) arising during the period

 

 

(307)

 

1,196 

 

(2,909)

 

2,776 

 

Share of other comprehensive earnings (loss) of equity method affiliates

 

 

806 

 

1,275 

 

2,693 

 

2,620 

 

Other comprehensive earnings (loss), net of taxes

 

 

499 

 

2,471 

 

(216)

 

5,396 

 

Comprehensive earnings (loss) attributable to Liberty Broadband shareholders

 

$

(31,491)

 

(49,549)

 

(88,017)

 

(27,483)

 

 

See accompanying notes to the condensed combined financial statements

4


 

Table of Contents

LIBERTY BROADBAND CORPORATION

Condensed Combined Statements of Cash Flows

(unaudited)

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

 

 

September 30,

 

 

 

2014

 

2013

 

 

 

(amounts in thousands)

 

Cash flows from operating activities:

    

 

    

    

    

 

Net earnings (loss)

 

$

(87,801)

 

(32,879)

 

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

 

 

 

 

 

 

Depreciation and amortization

 

 

6,583 

 

3,374 

 

Stock-based compensation

 

 

735 

 

1,082 

 

Share of (earnings) losses of affiliates, net

 

 

95,968 

 

65,666 

 

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

 

 

(23,745)

 

(68,029)

 

(Gain) loss on dilution of investment in affiliate

 

 

61,162 

 

55,219 

 

Deferred income tax expense (benefit)

 

 

(54,427)

 

(29,344)

 

Other, net

 

 

(716)

 

(680)

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Current and other assets

 

 

1,623 

 

4,231 

 

Payables and other liabilities

 

 

23,106 

 

20,389 

 

Net cash provided by operating activities

 

 

22,488 

 

19,029 

 

Cash flows from investing activities:

 

 

 

 

 

 

Capital expended for property and equipment

 

 

(1,117)

 

(489)

 

Proceeds (payments) from issuances or settlements of financial instruments, net

 

 

 

(59,612)

 

Cash paid for acquisitions, net of cash acquired

 

 

(48,088)

 

 

Investments in equity method affiliates

 

 

(124,492)

 

(2,565,149)

 

Amounts loaned to parent

 

 

(60,952)

 

(58,927)

 

Repayments by parent on loan receivable

 

 

80,012 

 

47,591 

 

Other investing activities, net

 

 

(6)

 

(6)

 

Net cash used in investing activities

 

 

(154,643)

 

(2,636,592)

 

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from issuances of financial instruments

 

 

68,019 

 

44,398 

 

Payments from settlements of financial instruments

 

 

(68,019)

 

(44,398)

 

Contribution from (distribution to) parent, net

 

 

170,315 

 

2,620,151 

 

Net cash provided by financing activities

 

 

170,315 

 

2,620,151 

 

Net increase in cash

 

 

38,160 

 

2,588 

 

Cash and cash equivalents, beginning of period

 

 

9,251 

 

10,031 

 

Cash and cash equivalents, end of period

 

$

47,411 

 

12,619 

 

 

See accompanying notes to the condensed combined financial statements

5


 

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LIBERTY BROADBAND CORPORATION

Condensed Combined Statement of Equity

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

Retained

 

 

 

 

 

 

 

 

other

 

earnings

 

 

 

 

 

Parent’s

 

comprehensive

 

(accumulated)

 

 

 

 

 

Investment

 

earnings

 

deficit

 

Total equity

 

 

 

(amounts in thousands)

 

Balance at January 1, 2014

    

$

2,986,079 

    

7,890 

    

(214,775)

    

2,779,194 

 

Net earnings (loss)

 

 

 

 

(87,801)

 

(87,801)

 

Other comprehensive earnings (loss)

 

 

 

(216)

 

 

(216)

 

Contribution from (distribution to) parent

 

 

170,315 

 

 

 

170,315 

 

Balance at September 30, 2014

 

$

3,156,394 

 

7,674 

 

(302,576)

 

2,861,492 

 

 

See accompanying notes to the condensed combined financial statements

 

6


 

Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Combined Financial Statements

(unaudited)

 

(1) Basis of Presentation

During May 2014, the board of Liberty Media Corporation and its subsidiaries (“Liberty,” formerly named Liberty Spinco, Inc.) authorized management to pursue a plan to spin-off to its stockholders common stock of a newly formed company to be called Liberty Broadband Corporation (“Liberty Broadband” or the “Company”), and to distribute subscription rights to acquire shares of Series C Liberty Broadband common stock (the “Broadband Spin-Off”). Liberty Broadband is comprised of, among other things, (i) Liberty’s former interest in Charter Communications (“Charter”), (ii) Liberty’s former wholly-owned subsidiary TruePosition, Inc. (“TruePosition”), (iii) Liberty’s former minority equity investment in Time Warner Cable, Inc. (“Time Warner”), (iv) certain deferred tax liabilities, as well as liabilities related to the Time Warner written call option and (v) initial indebtedness, pursuant to margin loans entered into prior to the completion of the Broadband Spin-Off.

At 5:00 p.m., New York City time, on November 4, 2014 the Broadband Spin-Off was completed and shares of Liberty Broadband common stock were distributed to the shareholders of Liberty as of a record date of 5:00 p.m., New York City time, on October 29, 2014. The Broadband Spin-Off is intended to be tax-free to stockholders of Liberty. In the Broadband Spin-Off, record holders of Liberty Series A, Series B and Series C common stock received one-fourth of a share of the corresponding series of Liberty Broadband common stock for each share of Liberty common stock held by them as of the record date for the Broadband Spin-Off, with cash in lieu of fractional shares.

In addition, it is expected that on December 10, 2014, Liberty Broadband will distribute to its stockholders subscription rights to acquire one share of Series C Liberty Broadband common stock for every five shares of Liberty Broadband common stock held as of 5:00 p.m., New York City time, on December 4, 2014, the record date for the distribution of these subscription rights (irrespective of the series of common stock held). The subscription rights are being issued to raise capital for general corporate purposes of Liberty Broadband and will enable the holders to acquire shares of Series C Liberty Broadband common stock at a 20% discount to the 20-trading day volume weighted average trading price of the Series C Liberty Broadband common stock following the completion of the Broadband Spin-Off. The subscription rights will become publicly traded following establishment of the exercise price and the commencement of the rights offering, and the rights offering will expire on the 20th trading day following its commencement. The rights offering is intended to be tax-free to stockholders of Liberty Broadband and the distribution of the subscription rights is subject to various conditions, including the receipt of an opinion of tax counsel.

The accompanying (a) condensed combined balance sheet as of December 31, 2013, which has been derived from audited financial statements, and (b) interim unaudited condensed combined financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and represent a combination of the historical financial information of TruePosition, Liberty’s interest in Charter, Liberty’s minority equity investment in Time Warner and certain deferred tax liabilities, as well as liabilities related to the Time Warner call option. These financial statements refer to the combination of the aforementioned subsidiary, investments, and financial instruments, as “Liberty Broadband,” “the Company,” “us,” “we” and “our” in the notes to the combined financial statements. The Broadband Spin-Off will be accounted for at historical cost due to the pro rata nature of the distribution to holders of Liberty common stock. All significant intercompany accounts and transactions have been eliminated in the condensed combined financial statements.

In May 2014, the FASB issued new accounting guidance on revenue from contracts with customers. The new guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated guidance will replace most existing revenue recognition guidance in GAAP when it becomes effective and permits the use of either a retrospective or cumulative effect transition method. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15,

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Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Combined Financial Statements (Continued)

(unaudited)

 

2016. The Company has not yet selected a transition method and is currently evaluating the effect that the updated standard will have its financial statements and related disclosures.

 

Spin-Off of Liberty Broadband from Liberty Media Corporation

Following the Broadband Spin-Off, Liberty and Liberty Broadband operate as separate, publicly traded companies, and neither has any stock ownership, beneficial or otherwise, in the other. In connection with the Broadband Spin-Off, Liberty and Liberty Broadband entered into certain agreements in order to govern certain of the ongoing relationships between the two companies after the Broadband Spin-Off and to provide for an orderly transition. These agreements include 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 Broadband Spin-Off, certain conditions to the Broadband Spin-Off and provisions governing the relationship between Liberty Broadband and Liberty with respect to and resulting from the Broadband Spin-Off. The tax sharing agreement provides for the allocation and indemnification of tax liabilities and benefits between Liberty and Liberty Broadband and other agreements related to tax matters. Among other things, pursuant to the tax sharing agreement, Liberty Broadband has agreed to indemnify Liberty, subject to certain limited exceptions, for losses and taxes resulting from the Broadband Spin-Off to the extent such losses or taxes result primarily from, individually or in the aggregate, the breach of certain restrictive covenants made by Liberty Broadband (applicable to actions or failures to act by Liberty Broadband and its subsidiaries following the completion of the Broadband Spin-Off). Pursuant to the services agreement, Liberty provides Liberty Broadband with general and administrative services including legal, tax, accounting, treasury and investor relations support. Under the facilities sharing agreement, Liberty Broadband shares office space with Liberty and related amenities at Liberty’s corporate headquarters. Liberty Broadband will reimburse Liberty for direct, out-of-pocket expenses incurred by Liberty in providing these services and for costs that will be negotiated semi-annually.

 

Acquisition of Skyhook Wireless, Inc.

On February 14, 2014, TruePosition acquired 100% of the outstanding common shares of Skyhook Wireless, Inc. (“Skyhook”), a Delaware corporation, for approximately $57.5 million in cash. Skyhook is a provider of hybrid wireless positioning technology and contextual location intelligence. Acquisition related costs of $958 thousand are included in selling, general and administrative expenses for the nine months ended September 30, 2014. TruePosition used its cash plus a capital contribution of $49.4 million from Liberty during 2014 to fund the acquisition. TruePosition has placed $6.0 million of the cash consideration into an escrow account for use to settle any indemnification claims made by TruePosition during the 12 months subsequent to closing the acquisition. After 12 months, any remaining funds will be paid to the selling parties.

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LIBERTY BROADBAND CORPORATION

Notes to Condensed Combined Financial Statements (Continued)

(unaudited)

 

The initial purchase price allocation for Skyhook is as follows (amounts in thousands):

 

 

 

 

 

 

Cash and cash equivalents

    

$

9,442 

 

Tradename

 

 

4,500 

 

Goodwill

 

 

24,931 

 

Amortizable intangible assets

 

 

31,098 

 

Other assets

 

 

1,353 

 

Accounts payable and accrued liabilities

 

 

(6,905)

 

Deferred revenue

 

 

(5,000)

 

Deferred taxes

 

 

(1,889)

 

 

 

$

57,530 

 

 

Amortizable intangible assets acquired include tradenames, customer relationships, and software. The fair value of these assets was determined using projected cash flows based on Level 3 inputs, and the remaining useful life of these assets was determined to be 5 years. Accordingly, the amortizable intangible assets acquired will be amortized straight-line over this period. 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 and non-contractual relationships. The initial purchase price allocation is subject to change upon receipt of the final valuation analysis for Skyhook.

Assuming the Skyhook transaction took place on January 1, 2013, the statement of operations data for the three and nine months ended September 30, 2013 would have been as follows on a pro forma basis:

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

 

Nine months ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2013

 

 

2013

 

 

 

(amounts in thousands)

 

Revenue

 

$

19,833 

 

 

66,408 

 

Operating income (loss)

 

$

(5,230)

 

 

(10,319)

 

Other income (expense), net

 

$

(82,783)

 

 

(47,891)

 

Income tax benefit (expense)

 

$

31,207 

 

 

16,655 

 

Net income (loss) attributable to Liberty Broadband stockholders

 

$

(56,806)

 

 

(41,555)

 

 

 

 

 

 

 

 

 

Proforma basic net earnings (loss) per share attributable to Liberty Broadband stockholders

 

$

(0.66)

 

 

(0.48)

 

 

The previous amounts were determined using historical results of Liberty Broadband and Skyhook, including purchase accounting amortization. Such amounts are not indicative of what actual amounts might have been had the transaction occurred as of that date.

In mid November 2014, Skyhook was notified that one of its significant customers is not expected to renew its contract for 2015.  Negotiations are still ongoing but approximately 30-40% of Skyhook’s revenue may not be recurring for 2015.  Management is working to understand the ultimate impact of the decrease in Skyhook revenue but a decline in Skyhook’s future operating results is expected unless further discussions with the customer are successful.  Since the impact of the nonrenewal of the contract could be significant to Skyhook projected cash flows, an impairment of intangibles at TruePosition may be possible in the fourth quarter of 2014 based on further analysis.

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LIBERTY BROADBAND CORPORATION

Notes to Condensed Combined Financial Statements (Continued)

(unaudited)

 

 

(2) Pro Forma Earnings per Share (EPS)

Unaudited pro forma earnings (loss) per common share for all periods presented is computed by dividing net earnings (loss) for the respective period by 85,761,332 common shares, which is the aggregate number of shares of Series A, Series B and Series C common stock that were issued upon completion of the Broadband Spin-Off on November 4, 2014.

(3) Assets and Liabilities Measured at Fair Value

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

The Company’s assets and liabilities measured at fair value are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2014

 

December 31, 2013

 

 

 

 

 

 

Quoted prices

 

Significant

 

 

 

Quoted prices

 

Significant

 

 

 

 

 

 

in active

 

other

 

 

 

in active

 

other

 

 

 

 

 

 

markets for

 

observable

 

 

 

markets for

 

observable

 

 

 

 

 

 

identical assets

 

inputs

 

 

 

identical assets

 

inputs

 

Description

 

Total

 

(Level 1)

 

(Level 2)

 

Total

 

(Level 1)

 

(Level 2)

 

 

 

(amounts in thousands)

 

Available-for-sale securities

    

$

340,826 

    

340,826 

    

    

326,700 

    

326,700 

    

 

Charter warrants

 

$

113,080 

 

 

113,080 

 

97,847 

 

 

97,847 

 

Time Warner written call option liability

 

$

64,984 

 

 

64,984 

 

54,600 

 

 

54,600 

 

 

The fair value of Level 2 derivative assets were obtained from pricing sources for identical or comparable instruments, rather than direct observations of quoted prices in active markets. The fair value of Level 2 derivative liabilities were derived from a typical model using observable market data as the significant inputs.

Other Financial Instruments

Other financial instruments not measured at fair value on a recurring basis include trade receivables, trade payables, accrued and other current liabilities. The carrying amount approximates fair value due to the short maturity of these instruments as reported on our combined balance sheets.

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Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Combined Financial Statements (Continued)

(unaudited)

 

Realized and Unrealized Gains (Losses) on Financial Instruments

Realized and unrealized gains (losses) on financial instruments are comprised of changes in the fair value of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

(amounts in thousands)

 

Charter warrants

    

$

(7,976)

    

9,435 

    

 

15,233 

    

35,738 

 

Time Warner investment and call option

 

 

(4,556)

 

(268)

 

 

8,512 

 

32,291 

 

 

 

$

(12,532)

 

9,167 

 

 

23,745 

 

68,029 

 

 

 

 

 

(4) Investments in Available-for-Sale Securities

All marketable equity and debt securities held by the Company are classified as available-for-sale (“AFS”) and are carried at fair value generally based on quoted market prices. GAAP permits entities to choose to measure many financial instruments, such as AFS securities, and certain other items at fair value and to recognize the changes in fair value of such instruments in the entity’s statements of operations. The Company has elected to account for those of its AFS securities which it considers to be nonstrategic (“Fair Value Option Securities”) at fair value. Accordingly, changes in the fair value of Fair Value Option Securities, as determined by quoted market prices, are reported in realized and unrealized gains (losses) on financial instruments in the accompanying condensed combined statements of operations.

Investments in AFS securities, including our interest in Time Warner Cable, Inc. which is our only Fair Value Option Security, are summarized as follows:

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

 

2014

 

2013

 

 

 

(amounts in thousands)

 

 

    

 

    

    

    

 

Time Warner Cable Inc.

 

$

339,347 

 

320,452 

 

Other equity securities

 

 

1,479 

 

6,248 

 

Total investments in available-for-sale securities

 

$

340,826 

 

326,700 

 

Unrealized Holding Gains and Losses

As of September 30, 2014 and December 31, 2013, the gross unrealized holding gains related to investment in AFS securities were $1.2 million and $5.9 million, respectively. There were no gross unrealized holding losses related to investment in AFS securities for the periods presented.

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

In May 2013, Liberty completed a transaction with investment funds managed by, or affiliated with, Apollo Management, Oaktree Capital Management and Crestview Partners to acquire approximately 26.9 million shares of common stock and approximately 1.1 million warrants in Charter for approximately $2.6 billion, which represented an

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Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Combined Financial Statements (Continued)

(unaudited)

 

approximate 27% beneficial ownership (including the warrants on an as if converted basis) in Charter at the time of purchase and a price per share of $95.50. Liberty funded the purchase with a combination of cash of approximately $1.2 billion on hand and new margin loan arrangements. Liberty allocated the purchase price between the shares of common stock and the warrants acquired in the transaction by determining the fair value of the publicly traded warrants and allocating the remaining balance to the shares acquired, which resulted in an excess basis in the investment of $2,532.3 million. The investment in Charter is accounted for as an equity method affiliate based on the ownership interest obtained and the board seats held by individuals appointed by Liberty.

Due to the amortization of amortizable assets acquired, losses due to warrant and stock option exercises at Charter (as discussed below) and the acquisition of additional shares of Charter, the excess basis has decreased to $2,349 million as of September 30, 2014 and has been allocated within memo accounts used for equity accounting purposes as follows (amounts in millions):

 

 

 

 

 

 

Property and equipment

    

$

417 

 

Customer relationships

 

 

636 

 

Franchise fees

 

 

1,359 

 

Trademarks

 

 

33 

 

Goodwill

 

 

933 

 

Debt

 

 

(215)

 

Deferred income tax liability

 

 

(814)

 

 

 

$

2,349 

 

 

Upon acquisition, Liberty ascribed remaining useful lives of 7 years and 13 years to property and equipment and customer relationships, respectively, and indefinite lives to franchise fees, trademarks and goodwill. Outstanding debt is amortized over the contractual period using the effective interest rate method. Amortization related to debt and intangible assets with identifiable useful lives is included in the Company’s share of earnings (losses) from affiliates line item in the accompanying combined statements of operations and aggregated $21.1 million and $20.3 million, net of related taxes, for the three months ended September 30, 2014 and 2013, respectively, and $62.0 million and $24.0 million, net of related taxes, for the nine months ended September 30, 2014 and 2013, respectively.

During the nine months ended September 30, 2014, Liberty purchased 897 thousand Charter shares for approximately $124.5 million. As of September 30, 2014, the carrying value of Liberty Broadband’s ownership in Charter was approximately $2,374 million. The market value of Liberty Broadband’s ownership in Charter as of September 30, 2014 was approximately $4,201 million, which represented an approximate ownership of 25%  and a beneficial ownership interest (including warrants on an as if converted basis) of 26% of the outstanding equity of Charter as of that date. During November 2014, subsequent to the Broadband Spin-Off, Liberty Broadband borrowed $51.3 million to fund the exercise of the Charter warrants (see note 7).

Due to dilution from Charter warrant and stock option exercises by outside investors (employees and other third parties) at prices below Liberty Broadband’s book basis per share, the Company had losses of $11.0 million and $52.1 million during the three months ended September 30, 2014 and 2013, respectively, and losses of $61.2 million and $55.2 million during the nine months ended September 30, 2014 and 2013, respectively.

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Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Combined Financial Statements (Continued)

(unaudited)

 

Summarized unaudited financial information for Charter is as follows (amounts in millions):

Charter consolidated balance sheet

 

 

 

 

 

 

 

    

September 30, 2014

 

Cash and cash equivalents

 

$

10 

 

Accounts receivable, net

 

 

270 

 

Property and equipment, net

 

 

8,305 

 

Goodwill

 

 

1,170 

 

Intangible assets, net

 

 

7,184 

 

Other assets

 

 

4,011 

 

Total assets

 

$

20,950 

 

Accounts payable and accrued liabilities

 

$

1,586 

 

Debt

 

 

17,595 

 

Deferred income tax liability

 

 

1,610 

 

Other liabilities

 

 

62 

 

Equity

 

 

97 

 

Total liabilities and shareholders’ equity

 

$

20,950 

 

 

Charter consolidated statement of operations

 

 

 

 

 

 

 

 

    

Three months

    

Nine months

 

 

 

ended

 

ended

 

 

 

September 30, 2014

 

September 30, 2014

 

Revenue

$

2,287 

 

6,748 

 

Operating costs and expenses

 

(1,518)

 

(4,444)

 

Depreciation and amortization

 

(535)

 

(1,568)

 

Other operating expenses

 

(16)

 

(42)

 

Interest expense, net

 

(217)

 

(638)

 

Gain (loss) on derivative instruments, net

 

 

(3)

 

Income tax expense, net

 

(59)

 

(188)

 

Net loss

$

(53)

 

(135)

 

 

 

 

 

 

 

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Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Combined Financial Statements (Continued)

(unaudited)

 

(6) Goodwill and Other Intangible Assets

Goodwill

Changes in the carrying amount of goodwill are as follows (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

    

Corporate

    

 

 

 

 

TruePosition

 

Charter

 

and Other

 

Total

 

Balance at January 1, 2014

 

$

20,669 

 

 

 

20,669 

 

Acquisitions(1)

 

 

24,931 

 

 

 

24,931 

 

Balance at September 30, 2014

 

$

45,600 

 

 

 

45,600 

 


(1)

As discussed in note 1, TruePosition acquired Skyhook during the nine months ended September 30, 2014.

Intangible assets subject to amortization are comprised of the following (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2014

 

December 31, 2013

 

 

 

Gross

 

 

 

Net

 

Gross

 

 

 

Net

 

 

 

Carrying

 

Accumulated

 

Carrying

 

Carrying

 

Accumulated

 

Carrying

 

 

 

Amount

 

Amortization

 

Amount

 

Amount

 

Amortization

 

Amount

 

Patents

    

$

18,610 

    

(5,025)

    

13,585 

    

3,110 

    

(3,085)

    

25 

 

Customer relationships

 

 

15,500 

 

(1,937)

 

13,563 

 

 

 

 

Tradename

 

 

4,500 

 

(563)

 

3,937 

 

 

 

 

Capitalized software

 

 

10,961 

 

(10,519)

 

442 

 

10,694 

 

(10,290)

 

404 

 

 

 

$

49,571 

 

(18,044)

 

31,527 

 

13,804 

 

(13,375)

 

429 

 

 

TruePosition’s patents are amortized straight-line over three years. TruePosition’s capitalized software intangible assets are amortized straight-line over three to five years. TruePosition’s customer relationships and tradename are amortized straight-line over five years. Amortization expense was $2.0 million and $552 thousand for the three months ended September 30, 2014 and 2013, respectively, and $4.7 million and $1.1 million for the nine months ended September 30, 2014 and 2013, respectively.

The estimated future amortization expense for the next five years related to intangible assets with definite lives as of September 30, 2014 is as follows (amounts in thousands):

 

 

 

 

 

Remainder of 2014

    

$

1,842 

 

2015

 

$

7,324 

 

2016

 

$

7,230 

 

2017

 

$

7,122 

 

2018

 

$

7,104 

 

 

 

 

 

 

(7) Debt

TruePosition had a $4 million line of credit, which expired on December 25, 2013, covering standby letters of credit issued for the benefit of TruePosition. Pursuant to the terms of the line of credit, upon its expiration, any issued

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Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Combined Financial Statements (Continued)

(unaudited)

 

and outstanding letters of credit remain in effect through the remainder of their respective terms. $634 thousand in letters of credit were outstanding and those letters of credit remain outstanding as of December 31, 2013 and September 30, 2014.

The line of credit bore interest at the rate of four-tenths of 1% per annum on the balance available for issuance of letters of credit. Letters of credit issued under the line of credit bear interest at an annual rate of 1.75%, payable quarterly. Interest expense related to the line of credit was not material for the three or nine months ended September 30, 2014 and 2013.

Letters of credit issued under the line of credit prior to its expiration remain collateralized by a cash deposit maintained by the bank, which will remain in place during the remaining terms of the outstanding letters of credit.

On October 30, 2014, in connection with and prior to the effectiveness of the Broadband Spin-Off, a wholly-owned special purpose subsidiary of the Company (“BroadbandSPV”) entered into two margin loan agreements (the “Margin Loan Agreements”) with each of the lenders party thereto. The Margin Loan Agreements permit BroadbandSPV, subject to certain funding conditions, to borrow term loans up to an aggregate principal amount equal to $400 million (the “Margin Loans”), of which BroadbandSPV borrowed $320 million on October 31, 2014. $300 million of the amount borrowed pursuant to the Margin Loan Agreements (less certain expenses incurred in connection with the Margin Loans) was distributed to Liberty prior to the Broadband Spin-Off. During November 2014, subsequent to the Broadband Spin-Off, Liberty Broadband borrowed an additional $51.3 million to fund the exercise of Charter warrants. Liberty Broadband’s current borrowings under the Margin Loan Agreements are $371.3 million, with an additional $28.7 million available to be drawn. The maturity date of the Margin Loans is October 30, 2017. Borrowings under the Margin Loan Agreements bear interest at the three-month LIBOR rate plus 1.55%. Interest is payable quarterly in arrears beginning on December 31, 2014. The Margin Loan Agreements contain various affirmative and negative covenants that restrict the activities of BroadbandSPV. The Margin Loan Agreements do not include any financial covenants. The Margin Loan Agreements also contain restrictions related to additional indebtedness.

 

BroadbandSPV’s obligations under the Margin Loan Agreements are guaranteed by the Company. In addition, BroadbandSPV’s obligations are secured by first priority liens on a portion of the Company’s ownership interest in Charter, sufficient for BroadbandSPV to meet its loan to value requirement under the Margin Loan Agreements. Each agreement contains language that indicates that Liberty Broadband, as borrower and transferor of underlying shares as collateral, has the right to exercise all voting, consensual and other powers of ownership pertaining to the transferred shares for all purposes, provided that Liberty Broadband agrees that it will not vote the shares in any manner that would reasonably be expected to give rise to transfer or other certain restrictions. Similarly, the loan agreements indicate that no lender party shall have any voting rights with respect to the shares transferred, except to the extent that a lender party buys any shares in a sale or other disposition made pursuant to the terms of the loan agreements. Upon entering into the Margin Loan Agreements, 7 million shares of Charter with a value of $1.1 billion were pledged as collateral pursuant to the Margin Loans.

 

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Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Combined Financial Statements (Continued)

(unaudited)

 

(8) Stock-Based Compensation

Included in the accompanying condensed combined statements of operations are the following amounts of stock-based compensation for the three and nine months ended September 30, 2014 and 2013 (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months

 

Nine months

 

 

 

ended

 

ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Operating expense

    

$

 —

    

10 

    

10 

    

31 

 

Selling, general and administrative

 

 

126 

 

278 

 

494 

 

799 

 

Research and development

 

 

64 

 

79 

 

231 

 

252 

 

 

 

$

190 

 

367 

 

735 

 

1,082 

 

 

Liberty Incentive Plans

Pursuant to the Liberty Media Corporation 2013 Incentive Plan, as amended from time to time (the 2013 Plan), and the Liberty Media Corporation 2013 Nonemployee Director Incentive Plan, as amended from time to time (the 2013 NDIP), Liberty granted to certain employees and directors of Liberty stock options and SARs (collectively, Awards) to purchase shares of Liberty common stock. The 2013 Plan and 2013 NDIP provided for Awards to be issued in respect of a maximum of 25 million shares and 1.5 million shares, respectively, of Liberty common stock. Awards generally vest over 4-5 years and have a term of 7-10 years. Liberty issues new shares upon exercise of equity awards. Options to purchase shares of Liberty common stock, stock appreciation rights with respect to shares of Liberty common stock and restricted shares of Liberty common stock have been granted to various directors, officers and employees of Liberty pursuant to the various stock incentive plans administered by the Liberty board of directors or the compensation committee thereof.

On November 4, 2014, the holder of an outstanding option to purchase shares of Liberty common stock as of 5:00 p.m., New York City time, on October 29, 2014 (the record date) (an original Liberty option) received an option to purchase an equivalent number of shares of the corresponding series of our Liberty Broadband common stock and an adjustment to the exercise price and number of shares subject to the original Liberty option (as so adjusted, an adjusted Liberty option). The exercise prices of and number of shares subject to the new Liberty Broadband option and the related adjusted Liberty option were determined based on the exercise price and number of shares subject to the original Liberty option, the distribution ratio of 0.25, the pre Broadband Spin-Off trading price of Liberty common stock (determined using the volume weighted average price of the applicable series of Liberty common stock over the three consecutive trading days immediately preceding the Broadband Spin-Off) and the relative post-Broadband Spin-Off trading prices of Liberty common stock and Liberty Broadband common stock (determined using the volume weighted average price of the applicable series of common stock over the three consecutive trading days beginning on the first trading day following the Broadband Spin-Off on which both the Liberty common stock and the Liberty Broadband common stock trade in the regular way (meaning once the common stock trades using a standard settlement cycle)), such that the pre-Broadband Spin-Off intrinsic value of the original Liberty option is allocated between the new Liberty Broadband option and the adjusted Liberty option.

Except as described above, all other terms of an adjusted Liberty option and a new Liberty Broadband option (including, for example, the vesting terms thereof) are, in all material respects, the same as those of the corresponding original Liberty option. New Liberty Broadband options were granted following the determination of the pre- and post-Broadband Spin-Off trading prices of Liberty and Liberty Broadband common stock. Liberty had outstanding

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Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Combined Financial Statements (Continued)

(unaudited)

 

approximately 3.5 million Liberty Series A options at September 30, 2014 with a weighted average exercise price of $30.70 per share. Approximately 2.3 million of those options were exercisable at September 30, 2014 with a weighted average exercise price of $30.11 per share. Liberty had outstanding approximately 6.9 million Liberty Series C options at September 30, 2014 with a weighted average exercise price of $30.72 per share. Approximately 4.7 million of those options were exercisable at September 30, 2014 with a weighted average exercise price of $30.14 per share.

TruePosition equity incentive plans

There were no phantom stock appreciation rights or phantom stock units granted during the nine months ended September 30, 2014. As of September 30, 2014, the fair value of outstanding PARs and PSUs was approximately $4.1 million. As of September 30, 2014, $2.2 million is included in other liabilities for the fair value of TruePositions vested long-term incentive plan obligations.

(9) Related Party Transactions

During the nine months ended September 30, 2014 and 2013, certain of TruePosition’s costs and expenses were charged to TruePosition by Liberty. The amounts due to Liberty and the activities for the nine months ended September 30, 2014 is summarized as follows (amounts in thousands):

 

 

 

 

 

 

    

2014

 

Receivable at beginning of year

 

$

(5,953)

 

Cost and expenses charged by Liberty

 

 

3,900 

 

Amounts due under the tax- sharing arrangement

 

 

2,071 

 

Transfer of related party receivable to (from) note receivable

 

 

5,306 

 

Payments to Liberty

 

 

(3,867)

 

Payable at end of period

 

$

1,457 

 

 

The above amount is included in other current liabilities as of September 30, 2014 in the accompanying condensed combined balance sheets.

Historically, TruePosition also had an intercompany note arrangement with Liberty under which funds could be advanced to Liberty and remitted back to TruePosition as needed. As of December 31, 2013, the outstanding note receivable from Liberty plus accrued interest was $19.1 million. The note bore interest at the three-month LIBOR plus 2%. During September 2014, prior to the Broadband Spin-off, Liberty reimbursed TruePosition for any amounts outstanding on this intercompany note and this arrangement was extinguished. Accordingly, no amounts are outstanding pursuant to this arrangement at September 30, 2014.

TruePosition has been a party to certain tax sharing arrangements with Liberty (or its former affiliate). Under these tax-sharing arrangements, TruePosition has been obligated to make cash payments to Liberty (or its former affiliate) in each year TruePosition generated positive taxable income, determined as if TruePosition filed a separate tax return. The amount of such payment has been equal to the amount of TruePosition’s taxable income (as so determined) multiplied by the highest corporate tax rate in effect for the applicable tax jurisdiction. If on a separate return basis, TruePosition would have a net operating loss or net tax credit for a particular year, and such loss or credit could be utilized on the actual tax returns filed by Liberty (or its former affiliate), then TruePosition would be entitled to reduce current and future payments to Liberty (or its former affiliate) by the amount of such tax benefit. During the nine months ended September 30, 2014 and 2013, $5.3 million and $11.1 million, respectively, due to TruePosition from Liberty was transferred to the note receivable from Liberty under this arrangement. As of September 30, 2014, $4.8 million was due

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Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Combined Financial Statements (Continued)

(unaudited)

 

to Liberty, and as of December 31, 2013, $6.4 million was due from Liberty under this arrangement. During October 2014, prior to the Broadband Spin-Off, the net income tax payable of TruePosition to Liberty was contributed by Liberty to the capital of TruePosition.

(10) Commitments and Contingencies

Leases

TruePosition leases various properties under operating leases expiring at various times through 2017. TruePositions principal facility is under lease through December 2017. Total rental expense was $2.4 million and $2.3 million for each of the nine months ended September 30, 2014 and 2013, respectively.

General Litigation

In the ordinary course of business, the Company and its combined companies are parties to legal proceedings and claims involving alleged infringement of third-party intellectual property rights, defamation, and other claims. Although it is reasonably possible that the Company 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 combined financial statements.

On July 21, 2011, TruePosition filed an antitrust lawsuit in the U.S. District Court for the Eastern District of Pennsylvania against LM Ericsson Telephone Company (Ericsson), the Third Generation Partnership Project (3GPP) and certain other defendants arising from the standard setting processes for LTE wireless data communication technology as it pertains to location technology. The case has been settled, with a cash payment to TruePosition of approximately $6 million and non-monetary considerations, and was formally dismissed in its entirety on July 30, 2014. Defendants 3GPP and Ericsson did not contribute to the cash portion of the settlement. With respect to the defendants that contributed to the cash settlement, such cash was provided with no finding or implication of liability to avoid the expenditure of litigation costs exceeding the settlement amount, and in consideration for TruePositions withdrawal of accusations of wrongdoing.

Certain Risks and Concentrations

The TruePosition business is subject to certain risks and concentrations including dependence on relationships with its customers. TruePosition has one significant customer, the loss of which would have a material adverse effect on the Companys business. For the nine months ended September 30, 2014 and 2013, this customer accounted for 83% and 82%, respectively, of the Companys total revenue.

Off-Balance Sheet Arrangements

Liberty Broadband did not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on the Companys financial condition, results of operations, liquidity, capital expenditures or capital resources.

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Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Combined Financial Statements (Continued)

(unaudited)

 

(11) Segment Information

Liberty Broadband identifies its reportable segments as (A) those combined companies that represent 10% or more of its combined annual revenue, annual Adjusted OIBDA or total assets and (B) those equity method affiliates whose share of earnings represent 10% or more of Liberty Broadbands annual pre-tax earnings.

Liberty Broadband evaluates performance and makes decisions about allocating resources to its operating segments based on financial measures such as revenue and Adjusted OIBDA. In addition, Liberty Broadband reviews nonfinancial measures such as subscriber growth.

Liberty Broadband defines Adjusted OIBDA as revenue less cost of sales, operating expenses, and selling, general and administrative expenses (excluding stock-based compensation). Liberty Broadband believes this measure is an important indicator of the operational strength and performance of its businesses, including each businesss ability to service debt and fund capital expenditures. In addition, this measure allows management to view operating results and perform analytical comparisons and benchmarking between businesses and identify strategies to improve performance. This measure of performance excludes depreciation and amortization, stock-based compensation, separately reported litigation settlements and restructuring and impairment charges that are included in the measurement of operating income pursuant to GAAP. Accordingly, Adjusted OIBDA should be considered in addition to, but not as a substitute for, operating income, net earnings, cash flow provided by operating activities and other measures of financial performance prepared in accordance with GAAP. Liberty Broadband generally accounts for intersegment sales and transfers as if the sales or transfers were to third parties, that is, at current prices.

For the nine months ended September 30, 2014, Liberty Broadband has identified the following combined company and equity method investment as its reportable segments:

·

TruePositiona wholly-owned company of the Company that develops and markets technology for locating wireless phones and other wireless devices on a cellular network, enabling wireless carriers and government agencies to provide public safety E-9-1-1 services domestically and services in support of national security and law enforcement worldwide.

·

Charteran equity method investment of the Company that is one of the largest providers of cable services in the United States, offering a variety of entertainment, information and communications solutions to residential and commercial customers.

Liberty Broadbands 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 segments that are also combined companies are the same as those described in the Companys summary of significant accounting policies in the Companys annual financial statements.

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Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Combined Financial Statements (Continued)

(unaudited)

 

Performance Measures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  September 30,

 

 

 

 

2014

 

2013

 

 

 

 

 

 

Adjusted

 

 

 

Adjusted

 

 

 

 

Revenue

 

OIBDA

 

Revenue

 

OIBDA

 

 

 

 

(amounts in thousands)

 

TruePosition

    

$

17,445 

    

3,033 

    

17,627 

    

(1,048)

 

Charter

 

 

2,287,000 

 

750,000 

 

2,118,000 

 

710,000 

 

Corporate and other

 

 

 —

 

 —

 

 —

 

 —

 

 

 

 

2,304,445 

 

753,033 

 

2,135,627 

 

708,952 

 

Eliminate equity method affiliate

 

 

(2,287,000)

 

(750,000)

 

(2,118,000)

 

(710,000)

 

Combined Liberty Broadband

 

$

17,445 

 

3,033 

 

17,627 

 

(1,048)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30,

 

 

 

2014

 

2013

 

 

 

 

 

 

Adjusted

 

 

 

Adjusted

 

 

 

Revenue

 

OIBDA

 

Revenue

 

OIBDA

 

 

 

(amounts in thousands)

 

TruePosition

    

$

51,512 

    

(5,252)

    

60,449 

    

2,592 

 

Charter

 

 

6,748,000 

 

2,303,000 

 

6,007,000 

 

2,056,000 

 

Corporate and other

 

 

 

 

 

 

 

 

 

6,799,512 

 

2,297,748 

 

6,067,449 

 

2,058,592 

 

Eliminate equity method affiliate

 

 

(6,748,000)

 

(2,303,000)

 

(6,007,000)

 

(2,056,000)

 

Combined Liberty Broadband

 

$

51,512 

 

(5,252)

 

60,449 

 

2,592 

 

 

 

 

Other Information

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2014

 

 

 

Total

 

Investments

 

Capital

 

 

 

assets

 

in affiliates

 

expenditures

 

 

 

(amounts in thousands)

 

TruePosition

    

$

175,302 

    

    

1,117 

 

Charter

 

 

20,950,000 

 

 

1,678,000 

 

Corporate and other

 

 

2,833,002 

 

2,373,627 

 

 

 

 

 

23,958,304 

 

2,373,627 

 

1,679,117 

 

Eliminate equity method affiliate

 

 

(20,950,000)

 

 —

 

(1,678,000)

 

Combined Liberty Broadband

 

$

3,008,304 

 

2,373,627 

 

1,117 

 

 

 

 

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Table of Contents

LIBERTY BROADBAND CORPORATION

Notes to Condensed Combined Financial Statements (Continued)

(unaudited)

 

The following table provides a reconciliation of segment Adjusted OIBDA to earnings (loss) before income taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months

 

Nine months

 

 

 

ended September 30,

 

ended September 30,

 

 

 

2014

 

2013

 

2014

    

2013

 

 

 

 

(amounts in thousands)

 

Combined segment Adjusted OIBDA

    

$

3,033 

    

(1,048)

    

(5,252)

    

2,592 

 

Stock-based compensation

 

 

(190)

 

(367)

 

(735)

 

(1,082)

 

Depreciation and amortization

 

 

(2,479)

 

(1,065)

 

(6,583)

 

(3,374)

 

Gain on legal settlement

 

 

6,000 

 

 —

 

6,000 

 

 —

 

Dividend and interest income

 

 

1,228 

 

1,766 

 

4,231 

 

5,203 

 

Share of earnings (loss) of affiliates, net

 

 

(34,542)

 

(38,400)

 

(95,968)

 

(65,666)

 

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

 

 

(12,532)

 

9,167 

 

23,745 

 

68,029 

 

Gain (loss) on dilution of investment in affiliate

 

 

(10,953)

 

(52,163)

 

(61,162)

 

(55,219)

 

Other, net

 

 

 

(8)

 

(60)

 

(45)

 

Earnings (loss) before income taxes

 

$

(50,427)

 

(82,118)

 

(135,784)

 

(49,562)

 

 

 

 

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Table of Contents

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

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

·

Charter’s ability to sustain and grow revenues and cash flow from operations by offering video, Internet, voice, advertising and other services to residential and commercial customers, to adequately meet the customer experience demands in its markets and to maintain and grow its customer base, particularly in the face of increasingly aggressive competition, the need for innovation and the related capital expenditures and the difficult economic conditions in the United States;

 

·

the impact of competition from other market participants, including but not limited to incumbent telephone companies, direct broadcast satellite operators, wireless broadband and telephone providers, DSL providers, and video provided over the Internet;

 

·

general business conditions, economic uncertainty or downturn, high unemployment levels and the level of activity in the housing sector;

 

·

Charter’s ability to obtain programming at reasonable prices or to raise prices to offset, in whole or in part, the effects of higher programming costs (including retransmission consents);

 

·

the development and deployment of new products and technologies, including in connection with Charter’s plan to make its systems all-digital in 2014;

 

·

failure to protect the security of personal information about the customers of our operating subsidiary and equity affiliate, subjecting us to costly government enforcement actions or private litigation and reputational damage;

 

·

changes in, or failure or inability to comply with, government regulations, including, without limitation, regulations of the FCC, and adverse outcomes from regulatory proceedings;

 

·

the effects of governmental regulation on our business or potential business combination transactions;

 

·

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 the nature of key strategic relationships with partners, vendors and joint venturers;

 

·

the availability and access, in general, of funds to meet debt obligations prior to or when they become due and to fund operations and necessary capital expenditures, either through (i) cash on hand, (ii) free cash flow, or (iii) access to the capital or credit markets;

 

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Table of Contents

·

the ability of Charter and our company to comply with all covenants in our respective debt instruments, any violation of which, if not cured in a timely manner, could trigger a default of other obligations under cross-default provisions;

 

·

the ability to successfully integrate and recognize anticipated efficiencies and benefits from the acquisitions;

 

·

the ultimate outcome of any possible transaction between Charter and Comcast and/or TWC including the possibility that Charter will not pursue any transaction; and if a transaction were to occur, the ultimate outcome and results of integrating the operations, the ultimate outcome of Charter’s pricing and packaging and operating strategy applied to the acquired systems and the ultimate ability to realize synergies; 

 

·

our ability to successfully complete the rights offering or otherwise monetize certain of our assets; and

 

·

our ability to successfully deploy the use of proceeds from the rights offering, including the availability of investment opportunities.

For additional risk factors, please see Amendment No. 3 to the Registration Statement on Form S-1 (File No. 333-199428) filed on December 1, 2014. These forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this Quarterly Report, and we expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein, to reflect any change in our expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based.

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

Overview

During May 2014, the board of Liberty Media Corporation and its subsidiaries (“Liberty,” formerly named Liberty Spinco, Inc.) authorized management to pursue a plan to spin-off to its stockholders common stock of a newly formed company, Liberty Broadband, and to distribute subscription rights to acquire shares of Liberty Broadband Series C common stock pursuant to the Broadband Spin-Off. Liberty Broadband is comprised of, among other things, (i) Liberty’s former interest in Charter Communications (“Charter”), (ii) Liberty’s former wholly-owned subsidiary TruePosition, Inc. (“TruePosition”),  (iii) Liberty’s former minority equity investment in Time Warner Cable, Inc. (“TWC”), (iv) certain deferred tax liabilities, as well as liabilities related to the TWC written call option and (v) initial indebtedness, pursuant to margin loans entered into prior to the completion of the Broadband Spin-Off. .